I am now in the seventh law in Bessemer’s Top 10 Computing Laws and law is about the change of how SaaS companies needs to view software. In the past, it was all about delivering a package using CD/DVD and the software was installed and the software vendor typically had no idea how it would be eventually deployed and used. Today, in the SaaS world, the SaaS vendor can potentially have access to everything that the user is doing and this type of intelligence is something that we could only dream of in the past. Let’s view this seventh law and how it relates to the Business Model Canvas.
Law #7: The most important part of Software-as-a-Service isn’t “Software” it’s “Service”! Support, Support, Support!
The biggest mindset change that software vendors have to make is not to think about software, but to treat the SaaS solution as service to clients. In my blog entry of Bessemer’s Law #5 of building employee software, I concluded that the biggest mistake that software developers can do is to ignore the client and fall in love with the solution from either technology perspective of some other perspective that has nothing to do with the client needs or wants. SaaS solutions are built for end users and the success of the solution will be based on the adoption of the solution. The question that each SaaS vendor needs to pose is how to minimize the customer churn and how to really understand how the software is used? A good sales person can sell anything for a year, but it is another question whether the customer will continue the use of the solution if it does not find the value for that. A good comparison to this is from my own business intelligence domain.
Throughout the years, business intelligence vendors have sold user seats that have never been used and these software vendors have kept billing for the annual maintenance fees even though these seats are never used. In the new SaaS world, nobody can escape this scenario anymore. If a seat is not being used, the company will not renew the seat for following years. This is where the customer churn kicks in.
In the SaaS world, the software vendor can build in usage statistics of the solution and this information will then be used as foundation for really understanding how the solution is used. In the old enterprise software world, software vendors tried to build similar functions, but as most of these solutions are installed and run from client’s own data center, the software vendor do not have access to the usage data. With a SaaS solution, the vendor is able to see all of the usage patterns such as how many times each user logs into the system and even automate report generation of cases where a user has very low usage pattern. This could be a result of having usage issues with the solution, or even worse, not having any use of the solution. This type of user will then turn into churn statistics when it is time to renew the contract.
In my past, I have built business intelligence software solutions and we used to build different types of tracking mechanisms of software use, but as these solutions were run at client sites, we as software vendor did not benefit from this. The client/customer got intelligence of what report/cube was used and what could be demolish due to non-use. In today’s SaaS world, software vendors can use this information also internally to see how each client/consumer uses the solution and whether some part of the solution stack is getting less usage.
Bessemer’s Cloud Computing Law #7 gives advice for SaaS vendors to be very open and transparent when there is a system outage of the system. My company is running everything from the cloud and sometimes there are outages whether you want it or not. Recently, Quickbooks Online has been down multiple times with an outrage from users in forums and it was also widely reported in the news. The emails that we got from Intuit were apologetic, but did not really give options to the ones that use their Quickbooks Online Payroll service. This is what I received in my email:
“If you normally pay your employees via direct deposit, we have extended the direct deposit deadline for today only, Wednesday, 7/14/2010, until 7 p.m. Pacific time. If you are unable to process your direct deposit payroll by 7 p.m. Pacific time on 7/14/2010, you will need to pay your employees with paper checks in order to pay them on or before Friday. Otherwise, you can process a direct deposit payroll when the system becomes available and your employees will be paid two banking days later.”
When you really think about it, many organizations had to scramble to go back to the regular check payment routine, which is both antiquated and cumbersome. According to one user, 17 hours of not having access to QuickBooks Online was just not acceptable and I do understand that if QuickBooks Online is used to service clients. Even in our case, we had to postpone some invoicing the day when QuickBooks Online was down.
Any software vendor working in the SaaS world has to manage the client relationships in a different manner when compared with the traditional world. In the past, a client that was not satisfied did not have that many options to do anything about it as they had already paid for the solution. In the new SaaS subscription-based world, the software vendor could lose a client easily when compared to on-premise solutions. However, if the client is happy with the solution, moving to something else is not that simple as everything lives in the cloud and moving the data from cloud to either on-premise or another cloud is as easy or difficult as with any changes of solution.
Based on a recent Information Management article, SaaS adoption is increasing and end user organizations are less concerned about security, response time, and service availability according to Gartner. Business and computing models have matured and adoption has become more widespread. A recent press release from IDC state that SaaS Revenue is growing five times faster than traditional packaged software through 2014. What is interesting in the press release is that by 2012, nearly 85% of net-new software firms coming to market will be built around SaaS service composition and delivery. Furthermore, according to IDC, SaaS-derived revenue will account for nearly 26% of net new growth in the software market in 2014.
Metrics in the SaaS world are still evolving as we discussed in my blog entry about Cloud Financials. Besides the more traditional cloud metrics, cloud vendors are constructing efficiency metrics for account management where the Bessemer cloud computing law #7 states that the most favorable metric is the margin renewed in the quarter divided by the costs of those renewals. The overall equation of this is as follows: MRR dollars renewed/grown in the quarter x GM x 12 (to annualize the revenue), divided by all account management costs incurred in the quarter for these renewals.
I am pretty sure that the metrics will evolve for the next few years as more SaaS vendors get exposure to the best practices and it becomes “business as usual”. The next question for me to pose is how this law can be seen in the light of Business Model Canvas from Dr. Osterwalder.
Summary of our findings in respect to Business Model Canvas
In the SaaS world, software vendors should view the software as service with excellent support. The main criterion for success is about usability of the solution that reflects in the customer churn (Customer Relationship-CR). It will also impact of how appealing the solution is for a possible Channel (C) that would like to market the solution. With this, we obviously take it for granted that the solution has the right kind of Value Proposition (VP) for the given or selected Customer Segment (CS)
The Channel (C) needs to know why it should be interested, how much it will make money and how the solution will benefit anything else that the channel prospect is doing. The churn impacts the Revenue Streams (RS) of the company, as bad SaaS solution leads to high customer churn and this will eventually be a downward spiral for the SaaS vendor as online forums and other viral social media mechanism will destroy the reputation of the vendor.
The reliability of the solution reflects also how the customer sees the vendor ability to provide service, not only short term, but also long-term. During the past 5 years, I have used a few SaaS-based services to only realize later on that all of the data and work put into the cloud has disappeared, either by the vendor going belly up or other reasons such as the company being sold to somebody else.
A good example of a service that I am no longer that much interested is Jigsaw as they are now part of Salesforce.com and I can forget the dream that I had to have an integrated solution for our Microsoft Dynamics CRM that we use internally. I am sure Salesforce.com won’t be supporting any competitive solutions even if Jigsaw is a subsidiary of Salesforce.com. The list of CRM partners does not do any good for Microsoft Dynamics partners.
One could also argue that this law #7 (Bessemer’s Top 10 Cloud Laws #7) has an impact on Key Resources (KR) and Key Activities (KA). The reason for this argument is that any SaaS company has to have the right kind of DNA to be able to build software in the SaaS world with the attitude that is different from the more traditional enterprise software sales world. Building software into cloud environment is not the same as traditional on-premise as there are factors that has to be taken into consideration such as latency etc. Whatever your ambitions, do not treat SaaS as business as usual if you currently work for an established software vendor. It is not business as usual, there are many factors that have changed and you have to change with it.