The following discussion studies the value proposition of the Software as a Service (SaaS) business and licensing model. Additionally we’ll look at the sales, marketing and cultural and operational challenges it presents for corporations looking to deploy such a model.
Part I in this series evaluates the Value Proposition, or “what makes this business model interesting to the customer”. Part II considers the Revenue Model and Operating Expenses and III concludes with the Challenges faced.
For ease of consideration, many of the arguments are contrasted against the traditional ISV licensing and business model.
As a final note this article is not an endorsement of SaaS, but a (hopefully) thoughtful examination; as such many comments express “less” or “more” - the specific quantities will of course depend on your circumstances. Additionally, the following does make use of mba-jargon; I hope the usage of such does not interfere with readability.
Part I - Value Propositions of SaaS
In ASP, SaaS’s original incarnation, the reasons for contracting with a service provider largely mirrored the motivation for any other outsourcing relationship: more predictable costs and a greater ability to focus on core competencies while leveraging the expertise of a specialist service provider. These core propositions are quite similar software as a service value proposition where an affordable, “pay-as-you-go” relationship provides organizations with a service ensuring ongoing value.
The following contrasts SaaS and the ISV model.
Lower cash outlays for enterprise-class software purchases by replacing large, upfront licensing expenditures with a smaller, subscription based pricing model that is much more frequent but at a fraction of the cost; shifting expenditures from variable to fixed costs.
Ease of implementation and quicker time-to market. With enterprise software deployments (CRM/ERP/BPM) generally requiring less than three months compared to six to 18 months with traditional software; while non-enterprise applications the implementation time approaches zero(Basecamp/Google Apps). The focus of a deployment is on end-user training and acceptance, since customers do not have to install or maintain servers, networking equipment, security products, or other hardware.
Reduced technology investment risk and higher ROI with lower upfront investment(capital and resource). The customer avoids the risk of additional ‘hidden costs’ that creep up over the application life-cycle such as ongoing support and maintenance costs, upgrades, user acceptance risks, etc. Many on-demand providers are able to provide a breakeven point in six months or less while licensing models require a longer payback period.
Lower total cost of ownership (TCO) with licensing, implementation, customization, maintenance, upgrades, and hardware & support costs being bundled into an on-demand service relationship. The first year total cost of ownership can be five to ten times less expensive than enterprise software with the majority of savings resulting from the elimination of upfront integration and customization projects.
The following table looks at the TCO of a traditional CRM ISV(Siebal/Oracle/etc) solution versus SalesForce.com’s SaaS (note: this is from a salesforce/Yankee Group study, so likely represents a particular view of reality):
Frees up internal resources by reducing internal IT staff required to manage applications, keep track of upgrades, maintain performance, etc. Internal IT resources can focus on less ‘risky’ tasks and more strategically focused on bring core value to the enterprise.
Full application lifecycle involvement, from initial deployment through ongoing support, maintenance and upgrade, that ensures that there is a complete alignment of interests with the SaaS firm having a vested stake in the success of the application beyond initial deployment(see *Shared Risk). Clients are a key value to the SaaS organization, whereby Customer Service is as a conduit to Product Development. When was the last time you felt that a Service call would be directed to the development team?
Continuous support & seamless upgrades with new features and functionality, upgrades, customer support, and other operational services all included instead of being treated as incremental costs.
Shared risks and single-source accountability with customers demanding a different vendor relationship that results in more accountability and flexibility in the actual execution of the software. Just as importantly, the SaaS firm ‘shares’ in the execution risk of the application, since the SaaS provider also earns their own return over the term of the relationship and consequently loses in the equation when customers seek alternatives.
New functionality and improved application performance with on-demand firms receiving continual client feedback in a service-based relationship and often interacting with end-users in the application environment itself to determine priorities for new features and to fix bugs. A critical differentiator is that new product revisions are made more frequently. Consequently, software as a service providers are able to continually refine the product with new releases that add customer-driven functionality that can be utilized by all clients in a shared application and across a multi-tenant model.
That’s the end of Part I. In Part II we’ll take a look at the SaaS revenue model and operating expenses.
Hopefully the above examination provides some benefit to the budding SaaS venture.