Saas is Different

8/6/2019 Saas is Different

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SaaS is DierentLeveraging specialists to support

operaonal eciency

An InfoStretch White PaperSeptember 2009

2009 InfoStretch Corporaon. All rights reserved. | www.infostretch.com


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About this White PaperThis white paper addresses the primary dierences in business models between tradional sowareproduct vendors and SaaS providers, and discusses opportunies that exist to achieve operaonal

excellence in support of SaaS providers success.

SaaS is Dierent

A disrupve market force altering the industry dynamics of tradional soware vendors.

Business, operaonal and nancial challenges are dierent.

Success for Many is Sll Elusive

70% of exisng SaaS providers will fold shop within next 12 months.

SaaS providers failure rate is higher than that of tradional soware product vendors (ISVs).

Cognizance of the Dierences is Key e of

SaaS providers team structures and composion will be dierent.

Financials and revenue models will demand higher operaonal excellence.

Revenue ow will be slower and in the form of annual subscripons backed by mul-year contracts.

Inial capital investment will be much higher and gestaon periods much longer.

Focus on Core Competencies

Focus on and invest in core competencies, and leverage partners for areas requiring experse and

specializaon to minimize operaonal costs.

SaaS is Dierent

Success for Many is Sll Elusive

Focus on Core Competencies

Table of Contents:

ABOUT THIS WHITE PAPER

Execuve Summary 3

Introducon 4

SaaS is Dierent 5

SaaS Business Model Demands a Paradigm Shi in Execuon 7

How to Bring in Operaonal Eciencies 9

Conclusion 11


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EXECUTIVE SUMMARY

SaaS companies are 40% more likely to go out of business when compared to tradional product

based soware companies (aka, ISVs or Independent Soware Vendors). These are oen the very

same companies that customers love, have the best ideas and hold the most potenal to signicantly

grow. Such brutal failure rates are surprising, especially in light of the fact that the market craves

SaaS-based business models, there is low resistance to SaaS adopon, upfront capital investments to

use SaaS models are minimal and even switching costs are low.

SaaS has been touted as the waterloo of tradional soware business models. The reasons for failures

point not to the market, but to ineciencies in nance and operaons that can be addressed through

improving operaonal eciency, ghter cost management and leveraging the experse of specialists

for non-core competencies that require knowledge, skill and prociency that is not realized internally.

SaaS is dierent. Where tradional soware product vendors thrive on recurring licensing fees

and direct sales of their products, the SaaS business model is faced with nancial, operaonal and

technology challenges that are markedly dierent. Achieving operaonal eciency, while reducing

costs, is crical to SaaS providers success. To harness these operaonal eciencies while driving

down internal costs, SaaS providers must consider the merits of involving specialist vendors, and

evaluate these vendors from the SaaS perspecve, because the criteria for tradional soware

development life cycles will not suce in the SaaS model.

TABLE OF CONTENTS

SaaS IS DIFFERENT

Leveraging specialists to support operaonal eciency.


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Business Needs Financial Needs Operaonal Needs

Higher customer

sasfacon and loyalty

is required since

customers have lower

switching costs.

Overcome customer

inhibions to adopt by

providing data security

and high performance.

Focus eorts on building

core competencies

and leverage partners

for experse and

specialized skills to

increase eciencies.

Alternave nancing

models that support higher

cash ow due to lower

revenue and protability

during the early stages.

Capital funding requires

larger inial capital

investment and longer

gestaon to achieve

protability.

Beer managed cash ows

required due to longer

cycles for SaaS companies

to be liquid.

Reduce operaonal

costs to drive overall

eciencies.

Build exible teams and

operaons catering to

scalability needs.

Reduce cycle me

for mulple product

releases.

SaaS providers are a disrupve force in the market place. They oer services that established soware

product vendors oer but at signicantly reduced costs for their customers. SaaS providers have

unique business models and dierent technology needs, and in order to revoluonize the availability

and reach of their applicaons, the challenge to succeed is with none other than the SaaS providers.

This white paper describes the specic and unique requirements of SaaS providers as they face

challenges across operaonal, business and nancial perspecves. This white paper denes

components of building business models that are essenal to the success of SaaS providers, especiallyin idenfying opportunies for experts and specialists to round-out SaaS providers teams and

complement in-house experse and skill.

INTRODUCTION

Unique Business Challenges of SaaS Providers


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SAAS IS DIFFERENT

In response to business needs and market trends, the Soware-as-a-Service (SaaS) market is growing

rapidly. The increased acceptance and adopon of these services has provided a unique opportunity

for new and exisng market players to disrupt the industry dynamics of established tradional

soware product vendors. However, SaaS providers face signicant challenges, especially in the

areas of capital investment and cash ow, in order to be ahead of the game.

To be successful, new and exisng SaaS providers must understand the unique requirements needed

to create a viable SaaS business model, while ISVs who reinvent themselves into SaaS providers

require a restructuring of exisng operaons, redistribuon of exisng budgets and realignment

within exisng teams. There are several key areas that must be addressed that highlight thedierences between product soware businesses and SaaS providers. These key areas apply to SaaS

providers, as well as ISVs that are transioning some or all of their licensed soware product oers

to a SaaS business model.

PROJECT FINANCESSimilar to SaaS companies, tradional soware product companies incur upfront costs while

developing their product oers. But thats where the similarity between the two ends. Soware

product companies are usually able to obtain the necessary nancing for running their operaons

and realize a return on this investment sooner than SaaS providers because they charge their

customers an upfront perpetual license fee. This fee is backed by annual maintenance charges which

depend on the mutual agreements between the soware product company and its customers.

SaaS vendors, on the other hand, derive revenues primarily from user-based license fees, or a

combinaon of product and customizaon fees, which is a lower revenue ow amount than ISVs. To

support this business model, there is a signicant inial capital investment oulow for procurement

and upkeep of the hosted environment a cost of doing business that is not incurred by tradional

soware product companies. The revenues SaaS providers obtain from user-based license fees

inially fall short of covering their costs, making the me to prot realizaon a much longer cycle.

Addionally, the hybrid nancing models/opons which some SaaS providers use will require they

keep closer tabs on overall costs.

Finance is a challenge for SaaS rms because revenue is realized over a longer period of me

compared to tradional soware product vendors.

ORGANIZATIONAL IMPACTSSoware product vendors typically acquire more customers and retain exisng customers by

launching new features in their soware. The focus is clearly on gathering more new customers,

since once a customer buys a license, the costs for the customer to switch to another vendor is

high, so fewer customers will channel their eorts in the direcon of switching. This is automacally

reected in the product vendors team structure as well product development and engineering

teams usually have more members than the customer support or IT operaons groups to ensure that

they are maintaining and enhancing strong product oers.


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Contd...SAAS IS DIFFERENT

Here also the SaaS business model is dierent. SaaS providers need more strength in their support

teams to deliver high customer sasfacon and build customer loyalty. Monthly subscripon charges,

with lower inial investment and low switching costs for the customer, demand that these customers

are highly content with the service and will remain loyal customers. To ensure that higher performance,

system upme, security requirements and business connuity needs are all met, a stronger operaons

team will be needed. Concurrently, the SaaS providers engineering team needs to be strong in order to

focus on building new features to drive new revenue growth. The extent of experse and specializaon

that will be required for some aspects of the SaaS providers oer can present itself as a barrier to

entry for both newer and established SaaS companies, as well as ISVs considering transforming to aSaaS business model.

DEPENDENCE ON PARTNERS

SaaS providers have an opportunity to integrate highly skilled partners into their teams as an integral

way of managing the business and reducing costs. Economies of scale and the associated specialized

skills needed to create these will inuence cost/control decisions, which should be made while dening

medium- and long-term plans. Because of the challenges with project nances overall, SaaS providers

need to decide between building capabilies in-house vs. leveraging partners who have experse and

specializaon in key areas. This is a reecon of the project nances available to SaaS providers vs. the

nimbleness that the SaaS business models demand.

A focus on managing a partner ecosystem to harness respecve synergies, while keeping a ght

control on customer interfaces, is oen an ideal approach for driving eciency and reducing costs to

support long-term success. As an example, having a specialist partner work with the SaaS providers

professional services team to provide core services, while the internal team manages the client

project, supports a lean internal team and reliance on partners to provide the scale needed to grow

the business.

SaaS Environment Demands

Distribuon of SaaS Eorts vs. Tradional Product Soware Enterprise ISVs

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SAAS BUSINESS MODEL DEMANDS A

PARADIGM SHIFT IN EXECUTION

While SaaS opens mulple opportunity windows for reaching new customers, managing operaons

also presents unique challenges. The leaders must be cognizant of the following key factors that play

a crucial role in determining a higher probability of execuon excellence, which can result in higher

customer sasfacon, lower costs and higher revenue.

INTEGRATED BUSINESS PLANNING OWN VS. COLLABORATETo determine whether or not to acquire the human resources, infrastructure and supporng tools/

applicaons needed or to seek external soluons, these three important criteria apply:

a) INVESTING IN ASSETS: Use the medium- to long-term view of the business forecast when

deciding to invest in assets. Achieving scalability is inherent to SaaS providers success and this

includes both infrastructure and engineering teams.

b) OPERATIONS: Sieve the operaonal acvies from a core competency perspecve. The

acvies that contribute to strategic anks and dierenators should qualify for the

investments decisions with non-core operaons being ideal candidates for outsourcing.

c) SERVICE LEVEL AGREEMENTS: Build the organizaon around exibility and service level

agreements. Vendors need to be managed with clearly dened SLAs. This requires strictdue diligence on the part of SaaS providers to understand the vendors business connuity

pracces and scalability, and opons to use alternave vendors should always exist.

STRENGTHEN INTERNAL PILLARS EMPOWER THE NEW DEPARTMENTSSaaS providers need to consider opportunies to include addional team members to:

a) MAINTAIN EQUILIBRIUM OF TEAMS: The leadership team has to ensure that the also

important teams, like support and operaons, have adequate budgets. A recommended

empirical rao for budget distribuon across Engineering, Support and Operaons teams doesnot exist this will vary with the product maturity, customer breadth, end-customer service

level agreements and several other factors. When making budget decisions and allocaon,

consider where the opportunies exist to have specialists with experse manage specic

components of the project and product.

b) ROTATE TALENT: Key team members should be interspersed across teams for increased

collaboraon and communicaon. This supports cross-training and encourages members to

appreciate the experse, needs and limitaons of fellow team members.

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Contd...

BRING IN SPECIALISTS REDUCE COSTS AND TIME TO MARKETReducing cycle mes for soware releases can lead to more favorable revenue streams and stronger

protecon against compeon. While SaaS providers need stronger focus and control on product

roadmaps and features, it can help to leverage the specic skills of partners to reduce the me to

market for new releases. Ensure that the lean internal resources focus on mission crical projects

and engage specialists to take care of the adjunct acvies like product vericaon, customizaon,

integraon, hosng and other areas that require experse not available from internal resources.

These specialists bring immense value by improving the operaonal eciencies and reliability

because they have deep experse and understanding of the technological and business needs.

INTEGRATE VENDORS INTO THE TEAMRelaonships with vendors are most successful when they are leveraged as an integral part of the

internal team. Vendors that bring experse and specializaon should be integrated into the team

and viewed as an extended team for the SaaS provider, and not as members from a dierent rm or

team. This paradigm shi is the threshold of forging a successful relaonships and ensuring long-

term success.

SAAS BUSINESS MODEL DEMANDS A

PARADIGM SHIFT IN EXECUTION


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Managing operaonal eciencies is more crical for SaaS providers because of the longer me to

realize eecve cash inow and ROI. As these providers move from SaaS level 0 to SaaS level 2

project eciencies should alone contribute an addional 6 10% towards prot margin. This can

be coupled with oshoring related benets. This supports the approach of allocang more budget

for internal teams like support and operaons, and then managing the partner from an ROI metrics

perspecve.

HOW TO BRING IN OPERATIONAL EFFICIENCIES

LEVERAGE SPECIALISTS EXPERTISE AND EXPERIENCE

Specialist partners can help improve operaonal eciency that results in cost savings, speedto market and access to specialist experse and skills in a medium- to long-term perspecve.

Management should take the rst step towards building a robust business case by clarifying how

acvies are performed in-house and the people and assets currently involved, and then assess the

outsourcing opons available that will deliver on improved operaonal eciency. When deciding

on the candidate vendors for outsourcing, they should be evaluated from a core competency

perspecve.

Across all types of SaaS providers, the following areas can be outsourced from perspecves of

scalability, cycle me, core competency and cost benets:

Quality Assurance both product and implementaons

Product customizaon, conguraon and system integraon

Applicaon management

Infrastructure management

Customer support contact centers

Professional services organizaon

Improving Eciency - Leverage Outsourcing


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HOW TO BRING IN OPERATIONAL EFFICIENCIES Contd...

Decisions related to outsourcing should

involve educang the teams involved

about the expected cost benets, since

they are not usually fully realized in the

rst year. As companies move up the

learning curve with their partners, the

benets of outsourced soluons come

over me. ROI metrics should sll be at the

foundaon of measuring results, however,

it should be clear the meframe in which

results will be achieved. The benets

expected should include cost arbitrage,

process eciencies, cycle me reducon,

leveraging best pracces and other factors

that contribute to an overall improved

customer experience.

CELEBRATE MEMBERS WHO DELIVER OPERATIONAL SAVINGSOen SaaS providers do not focus internally when tasking their execuves with reducing costs. The

SaaS revenue model requires closer focus on internal processes for reducing operaonal costs. While

execuves are entrusted to realize these savings ensure that these champions are acknowledged

and rewarded in the same vein as the sales team. These iniaves oen start a chain reacon as

more members/teams jump in with soluons for reducing costs.

PROCESS REALIGNMENT REMOVE BARRIERS TO ENSURE CUSTOMER IS THE CENTERThe rst focus area for increasing the eciencies of the internal teams should be to eliminate and/

or minimize iteraons. This should cover all processes, from customer requirements gathering

to system development. Iteraons to a large extent can be aributed to dened processes as

well as the internal organizaon structure. As the organizaon grows, members form teams for

higher eciency and beer management. Unfortunately these teams oen focus internally for

management and are not always aligned towards servicing customers beer. At the core of realizing

process eciencies is the determinaon from the senior management to communicate and ensure

that all the teams are aligned with business goals.

SaaS Providers Best Pracces

Focus on core products, not customizaons.

Provide consistent performance and reliable

user experience as customer base grows.

Cut costs to improve and manage cash ows.

Ensure customers data is safe.

Remain exible to support growth.

Rely on independent teams to validate

frequent release cycles.


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CONCLUSION

SaaS providers constute a potent market disrupng force who are changing the rules of the game

and are beer posioned to address the emerging needs of enterprise IT and their customers. These

SaaS providers have the opportunity to provide beer soluons on the other side of the rewall.

Reinvenng the wheel and building an internal team of experts and specialist is a costly, ineecve

and me intensive process. Through the support of partnership with SaaS experts and specialists,

shorter me spans for bringing new features to market will enable SaaS providers to derive an

addional compeve edge. The non-core operaonal tasks that require experse are ideal for

outsourcing and specialists can provide maximum value while allowing SaaS providers to focus ontheir core products and competencies. These specialist vendors should form an integrated loci,

managing non-core operaons as they help drive eciencies while reducing costs. The internal

teams should view the specialists as a part of the larger team and should integrate them into the

extended team. This approach is essenal for aligning vendors with the strategic direcon the SaaS

provider has dened.

Managing taccal and strategic challenges, coupled with challenging cash ow models that require

long-term strategy and planning, can be overwhelming for SaaS providers. This has been further

complicated by changes in nancial markets, squeezed credit and turbulent economies. All of these

inuences require that SaaS providers are capable of driving ever leaner operaons and execuvesare required to channel investments towards building strategic dierenators. Their focus should

be on creang core product dierenators that enable them to beer compete in challenging

markets. A stronger organizaonal mindset, structure and business approach to these challenges will

enable a transformaon to lean and ecient operaons, thus delivering operaonal excellence and

strengthening a compeve advantage.


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ABOUT INFOSTRETCH

InfoStretch is a leader in soluons to Soware as a Service (SaaS) providers, Mobile Applicaon

Development and Tesng, and Quality Assurance and Process Opmizaon Services. We specialize

in delivering outsourced business soluons that command deep technology knowledge, process

prociency and domain experse. InfoStretch helps our customers protect their brand by delivering

high-quality, reliable and cost eecve services. Our unbiased soluons use objecve quality metrics

as an independent, third-party, Validaon & Vericaon (IV&V) company, achieving unprecedented

levels of quality for outsourced projects. Our integrated network of oshore facilies in India is

supported by onsite and osite capabilies in the U.S. InfoStretch helps our customers succeed

through innovaon, technology, processes and exceponal customer service. InfoStretch servescustomers in North America, Europe and Asia-Pac countries.

To learn more about InfoStretch services

Call us at: (408) 727-1100 or email [email protected]

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