I have been working with a SaaS provider to help them define metrics that should be measured, monitored and correlated to business metrics. Thought it would be useful for others who might be in SaaS business. There is no denying the fact that follow critical metrics

• Annual Contract Value (ACV),
• Total Contract Value (TCV),
• Monthly Recurring Revenue (MRR),
• Average Monthly Revenue per Customer (AMR)
• Churn Rate
• Customer Acquisition Cost (CAC)

should be tracked and measured from a finance/profitability point of view, but in this post, I will focus on operational metrics that help you build customer success.

Usage Metrics

• Application Logins: it is always a critical statistic to measure how many users are signing onto the application. It not only talks to the scale of the application, it also demonstrates the critical nature of the application. If you broke down the logins by the role of users in the application – for example a HR Manager versus a VP of Talent Management, and individual usage patterns should help drive focus areas in your product roadmap. Marketing can use this same information to create day-in-a-life documents or case studies on the critical nature of the application. Operations can use the metric # of logins as a way to demonstrate the scale, SLA and also determine peak/off-peak usage patterns for performance benchmarking, planning scheduled downtime etc.

• Time Spent in the application: Time spent in the application is something a company should always be proud of. It talks to the stickiness of the application. While that is something marketing can use to demonstrate the value of the product, product teams should inspect the same metric to identify potential areas for optimization. In this day and age, users seek smart business processes that are not click-hungry and easy to accomplish. So users spending longer time on a given process could imply productivity loss and in the long run could lead to unhappy users. Client Services should look at this metric to identify opportunities for training (or lack thereof). It is always critical to benchmark a typical lifecycle of a business process and see if there are reasons to be concerned if deviation from the benchmark is large.

• Access Mechanisms: As such most SaaS applications are accessed using a browser. But with the browser wars looming again it is important for a product team to measure and compare the different browser usage – Firefox, Chrome, Safari and the Goliath – Internet Explorer. Besides the different browsers, it is critical to measure the versions of each. With effective logging of sessions, this information should be easy to capture. Besides browser, it is also important to capture information around
  • Desktop Operating System (Windows, Mac, Linux)
  • Monitor Resolution
  • Platform (Desktop Vs Mobile)
  • Languages used
  • Bandwidth used (DSL, T1, Dial-up)

  Product teams can use this information to improve testing coverage,   support for specific browsers (versions). Marketing can use this same information to highlight to the broad capabilities of the product/platform. Sales will require this information for the RFP they complete as part of a sales deal.

• Source of Users: Where your users are accessing your application from is a key important metric from multiple angles. If you are in Sales, you probably know your customers in various geographies. Facts about the density of users from a particular geography might indicate better adoption rates and need for increased sales efforts. For product team, this might drive decisions around caching strategies, internationalization or localization needs, increase in latency based tests. If you are in marketing you will now be able to leverage customers from various geographies to provide you localized references in marketing efforts.  Operations can factor this information to gauge the coverage of the redundant data centers created to cater to global users.  For those with one active data center, this could provide insights to support that second data center plans you were putting in place.

• Business Transaction Density (Quotes created, Search conducted): Capturing metrics around the key activities performed in the application like creating orders, creating versions, search conducted, user roles created, projects created, surveys conducted, documents uploaded are all great ways to measure the coverage of usage of the application. The product team can use this information to crosscheck with the roadmap and identify the cause for lack of usage in certain areas. Follow that up with discussions with customers that requested those features to better understand the effectiveness of the product feature. For instance a large number of document uploads might indicate companies using documents in lieu of  structured business process and identify opportunities for expansion of product footprint. Operations can use the same metric of large number of document uploads to determine if storage configuration should be optimized or potential for using de-duplication technology.

Operational Metrics provide additional insights in the user behavior and indicate hidden opportunities to improve.

• Tickets logged: Not the most favorite metrics for any constituents in the service provider company.  But I have a bright side. It is much better than not have any tickets at all – atleast you know your product is used. While it is standard to bucket tickets into product areas, I recommend you break down tickets into those logged by new users, critical areas of business process and specifically those logged during critical dates (month end, quarter end and year end). The easier you make new users to adopt the application, reduce the instances of fall-over the more purpose with which they will use the application. The more they will talk about your application. Conversely, the more troubling it is to get accustomed to the application the sooner they will desert it. Critical areas in business process and critical dates need no highlighting as to why they are important.
• Time outs: Timeouts in my opinion are the worst kind of issues. In addition to creating a bad perception of the product, they also could point to infrastructure issues, missed test cases. They also put client services in a bad spot where they cannot explain the cause unlike a product deficiency. Considering that it is not always possible to root out all time out issues due to the varying nature of access (cable, dsl etc), it a great idea for client services to have a “Have you checked this?” list. Worst of all are those that happen during crucial demos to prospects.
• Downtime: While unplanned downtime is bad and puts your CEO in the news for the wrong reasons, planned downtime is equally painful from the customer point of view. Given the round-the-clock nature of world we live in, people extend their work lives to evenings and weekends. So having excessive downtime and more so, those that went over the announced window need to analyzed. No one likes to work on weekend and if you cancel plans to work on weekends only to find out that downtime window has been extended would not make for a happy user on Monday.
• User growth over time: This is a no-brainer of a metric. Tracking user base growth and charting the patterns gives you a view of buying habits, correlation of success of campaigns and what you do well. It also show the times when you should increase thrust on your sales/marketing campaigns.

This was a representative sample of long list of metrics we identified and started tracking. The list extended to sales, marketing and implementation to track success in converting leads, success in converting trial users, investment done in implementation cycles, training cycles etc – I am sure you catch the drift. If you have channels, then you will need another set of metrics to measure the effectiveness of channels and give you insights into what does (not) work.

All these metrics once identified and tracked, can be part of a dashboard that all employees in the company has access to. Make sure to include those as discussion items in company meetings and goal settings for each executive.

In an on-demand business, the risk is heavily tilted towards the software vendor. It is incumbent on the company to automated, measure, monitor key statistics and adapt the business based on those insights. Any/All decisions made in roadmap, client services, market can critically impact the success/failure of the company.

This provides further evidence to what I alluded to in one of my earlier posts about SaaS stealing Open Source‘ thunder. It would not come as a  surprise to me if more open source application vendors were to get acquired in the coming days.

Consona is a privately (and venture partner) held software company which has come about on the back of a series of small acquisition. In some ways it is  smaller version of Infor or Epicor having indulged itself in consolidating the low-end solutions in the ERP, CRM and a few industry vertical applications.

Compiere, although carrying the tag of being the largest open source ERP application vendor, has had a history of  relationship issues with its open  source community. We all know how much successful a open source product would be without its community which invests time and resources to test, adopt, improve the product. The founder Jorge Janke was criticized as being not-so community friendly and this friction resulted in the community forking  the code into what became Adempiere (and to some extent also a step-child OpenBravo). It is said this very issue with community, eventually led to Janke’s ouster from the company he founded. Investors then brought in Don Klaiss, a senior Oracle executive and a strong product team along with him. The goal was to mend the broken marriage with community and improve sales into small and medium businesses who were being priced out of the market by the larger ERP vendors.

In the last few years, Compiere had broadened its product footprint, moved to a pure HTML stack based on Google Web Toolkit (GWT) and to model-driven development methodology. The reviews on the new product version has been significantly better although the community did not hide the dissatisfaction around the fact that the new HTML version was only available in Professional Edition and its code was not released under open source.

On the business front things looked brighter as they even struck a large ERP deal with La Poste in France to replace their sales, purchasing, inventory, and payment processing systems. A few strategic initiatives like integration with Salesforce.com and moving to a have-it-your-way, in-cloud or on-premise model also helped matters.

As if to throw a monkey wrench into Compiere’s plans, SaaS increasingly started becoming the application delivery of choice and at the same time the relationship with community not improving must have throw Compiere into the arms of Consona. Interestingly enough, Consona is a fully proprietary software vendor. If the community was irked about Compiere not being truthful with its open source beliefs then with Consona it ain’t going to become any better.

In it’s press release the CTO of Consona said, that this acquisition will position them well in their plans to move their products to cloud. The Compiere platform with multi-tenancy baked in was one of the key reasons for their acquisition. All the Cloud-Open source mangling aside, I a not fully convinced that this acquisition would in some way them cloud ready.  Will have to wait and see. Personally, I always thought RedHat would have been a better company to acquire Compiere. They have got the whole open source thing figured out pat.

In my discussion with Sinclair Schuller, the CEO of Apprenda, a couple of weeks ago, it became clear that they were going to do everything at their end to move the needle in terms of getting increased SaaS adoption. He strongly felt that this would encourage the ISV community looking to build SaaS applications to take the plunge. I think it is a great strategy accelerate the adoption of this platform and validate their offering.

SaaSGrid over the last year has continuously demonstrated their agility in making the necessary course corrections to their strategy inline with the evolution of the nascent Cloud Computing world.They started out as a pure-play SaaS Platform-as-a-Service for .NET applications. They then went on to add robust multi-tenancy capability, usage tracking and billing to the core platform. ISVs could then just focus on their core competency – i.e., building their product and serving their customers. To accommodate the varying needs across ISVs they expanded the delivery to model to include a platform-to-go. In doing so they have essentially made their platform agnostic to the underlying Infrastructure provider and affording their clients the ability to switch infrastructure providers (Amazon EC2, Rackspace or even Azure) without having to change their code. And for those that are not yet ready or have constraints using Public Cloud, they could take the same platform and build a SaaS application run it in their Private Cloud until such time.

The goal behind releasing SaaSGrid Express, as Schuller tells me, is to allow small companies start building their product, do private betas and start generating revenue with no overhead of platform licensing costs. And then when they think they are ready to support a large customer base they can transition to the flagship SaaSGrid platform.

One of the big challenges with Platform-as-a-Service offerings has been the lack of easy migration path for the existing applications to Cloud without rewriting a significant chunk of it. Vendors like SaaSGrid seem to have recognized the issue, and the consequential resistance to adoption, and are fast bridging that gap with capabilities around multi-tenancy conversion, in-built usage tracking, infrastructure vendor neutrality and providing them with ability to deploy existing on-premise in cloud.

What next?

While Apprenda has been primarily focused on ISVs in their messaging and focus, I think the whole legacy applications owned by IT organizations presents a large opportunity in the non-COTS applications world. Application Platform on the .NET side has been the sole domain of Microsoft until now. But as Microsoft continues to struggle to get meaningful traction on its Azure strategy, Apprenda would do well to take a leaf out of the books of the open source vendors like SpringSource and JBoss and build an engaging community around the platform. Starting with this community edition product announcement foster an ecosystem that will accelerate, evangelize and add to the footprint of the platform.

Download SaaSGrid Express on the Apprenda site.

Take a look at Microsoft, Oracle, SAP, IBM and CA, the top 5 pure play software companies (granted IBM is a little service heavy still). That’s just not it, look at the next set of companies Epicor, BMC, Sage and Intuit to some extent, they are not that different either.

GM in its prime, or should I say when it was working itself towards the cliff, was a mishmash of a lot of acquired companies/products, some cannibalizing their own step-brethren. If it was not Saturn going against Buick it was Chevy going against Pontiac or GMC going against Chevy SUVs. GM countered every external competitive threat with financial incentives and/or 0% financing whilst continuously eroding its brand and market share. While it was overloaded with all the bloat (and a heavily draining UAW contract), GM had no semblance of innovation or leadership in its industry. Something had to give. Eventually GM threw up.

Look at the leading software companies now. Each of them has a portfolio of offerings that even the sales force within those companies have a tough time rationalizing and positioning. I still remember a meeting that we had with the alliance team in Microsoft. We were exploring the possibility of integrating our industry vertical focused application to the back-office ERP. Given that we were in the mid-market segment, we thought Great Plains would be a good fit. Having a couple of customers already using Great Plains might have influenced our thinking. But when we met the alliance team, we found that they were as confused as we were on which product line would be the right one to integrate – MS-Dynamics, Great Plains, Navision.The last thing I remember from those discussions was that based on the size of a company one could chose a different product line – not sure how a company would graduate to another product line when they grow – upgrades? migration? Would there be feature parity between those different lines? Anyway that is a discussion for another time.

I don’t mean to pick on Microsoft specifically – I still like their dividend every quarter. I am sure the story is not any different if I were to go to Oracle, SAP or CA for that matter. I can almost picture a restaurant-like menu being dished out to the CIO looking for a particular solution. Granted, there would be nuances between each of those offerings but those very differences might mean the customer being required to buy more than one solution to meet all their needs.

How does a company of that proportion innovate? As the software industry is going through some seismic shifts, across technology, architecture, business models, in the form of Cloud Computing, SaaS, Open Source, how would companies with such large footprints adapt? Technology companies have for the longest time made mockery of auto manufacturers, of what not do, but over time it seems like are following the same beaten path.

GM went for market share and in the process accumulated many businesses that they had no reason to acquire. Eventually Toyota, recent challenges not withstanding, caught up and surpassed GM on the market share. With innovation, product quality and business smarts, I might add. The only innovation we saw coming out of GM on the product front during that time were gas guzzling large SUVs and very large SUVs.  To be fair they did innovate on the financing side – 0% financing, 0% financing + $2000 cash, No payment for 2 years. Finally it came to realize that the only way to survive was to scale down to a meaningful size and create products that it can truly manage.

Software companies on the other hand have gone on acquisition binges to garner vast customer bases and consequently the lucrative maintenance revenue. While in some cases, it is great to have a more stable company acquire a failing one – (case in point Siebel, Sun acquisition by Oracle), what it has done is reduce the leverage customers get with adequate competition in the market. Customers are also increasingly becoming vary of customer support for the acquired products.

Given the similarities, an interesting question to ask is would the same fate befall the large software conglomerates?. Ned Lily of ERP Graveyard has an interesting way to look at it on his scorecard. Large companies as it is are swamps of bureaucracy. With acquisitions, the politics and land grab soon become a way of life in the merged company. The last thing on anybody’s mind would be innovation. Adaptability to new challenges amounts to making an elephant dance.The one thing the technology companies have going for them, and be thankful for, is they are not subject to the same recalls as in the case of car companies.

In a seemingly strange irony, customer’s seem to be answering that question by their increasing adoption of SaaS. It seems like they are saying “I don’t need to buy a car after all, when all I need is to get from Point A to Point B. I will just rent a cab.”

SaaS companies, it seems like, took the easy route and started using the model that has been a staple of hardware industry (100GB hard disk costs $50 and 500GB costs $100) or the Storage Container vendors (100sqft – $10/month, 250sqft – $25/month). It worked great for hard-disk vendors as they operate in volume business, the more SKUs they sell the more money they make. Hard-disks have limited shelf-life, SaaS software is different. Also it is fine if you want to be in the commodity storage business like the cloud-based storage vendor Amazon S3. With SaaS, it is not so much the software that your are selling, it is the relationship. You are essentially a trading partner who the client relies on to run his business. The last thing SaaS vendors want to do is to look like wireless service providers – bargain basement prices for initial storage quota then the overages kicking in.

With that said, what should the SaaS company do with all the costs incurred? Should they absorb them as Cost-of-Goods Sold (COGS)?

Tactically, yes. They are COGS that need to be absorbed, but I take a different view and look at it as an investment. For one, you take one thing off the contract that the client has to constantly keep track of to avoid being slammed by overages. This, if anything, will allow them to use the system unfettered. The SaaS sales is predicated on the land-and-expand model, where you sign customers up for a small subset of use-cases that you can solve, while continuing to sell the long term vision. This keeps your sales cycle small and also affords a quick ROI for customers. With that as key focus, the last thing you want is, for customers to use your system partially and conduct business offline or in another application.

I would strongly encourage SaaS vendors to take a leaf out of the large malls operators’ thinking – they ensure abundant free parking and let customers spend as much time at the mall as they wish. The more time they spend at the mall, the more the cash counters ring. Last thing they want is customers going to another mall just because they could not find parking space.

So how could a SaaS vendor benefit from relaxing space quotas ? ( Did I mention I have a particular disgust for this word? Coming from India where every job opportunity, school admission, membership has caste based quotas perpetuated by politicians in lieu of vote banks) .

Here are some strategies to adopt.

1. One of the key advantages of going to a SaaS model is the continuous access to the user behavior that it affords. If you have lived through the old on-premise build-and-throw-across-the-wall model, you can appreciate the value of having access to the end customer without filters. You are not just going to have access to customers, you are also going to see what they are doing as opposed to what they think they are doing. This is a product manager’s dream. To draw upon the user’s behavior to determine the roadmap. So measure, monitor and rationalize the usage. You will find nuggets of information that will help you identify revenue opportunities in your product that will more than compensate for the lost space costs.
2. As an extension to 1, based on the data insights, introduce features like Surveys, Viral marketing opportunities to increase engagement, increase demand for your products. Your marketing team might be paying millions to get this kind of information to base their campaigns. No better source that the user community that is already using the system. Engage with the users based on the view you get to conduct Day-in-a-life, Case Studies, ROI studies. All these are real proof for the value your system delivers resulting in increased demand.
3. Companies are still document happy as it is the most easily transportable container of information. So don’t be surprised if you see companies consuming a lot of space quota (spare the itch to bill them for it) using documents in lieu of using the application to its fullest. Identify the causes and there might be additional opportunities to expand your product footprint.
4. Identify the value that your customers can derive from aggregate information across their industry or target industry. The more the usage, the more diversity in the data you will see. Unless you are one of those expense or task management applications (sorry no disrespect). Diverse data gives you good basis to make product decisions.
5. Guess what people would want when the data gets un-manageable?. Tools and capabilities to mine them. There is the opportunity to build out new high value capabilities (and upsell – Ka-Ching!) that could bring new user-base into your application. Think Executive Dashboards. If you did not know, the corner offices pay big bucks for everything. If you don’t believe me ask – Dennis Kozlowski and John Thain.

That is my rant on this topic. Would love to hear what others think. I would be happy to discuss more in detail with anyone interested.

Let us start with examining the raison d’etre of Open Source. Open Source made its entry with a bang with the introduction of Linux operating system. These were the days when Unix vendors and Microsoft were doing very little innovation besides suing each other and banking large license deals. Linux represented the rebellion against the proprietary operating system vendors and put the power in the hands of the masses to innovate and contribute towards a larger goal that each of them by themselves would not have been able to accomplish. The appeal of a free operating system with inexpensive support (or no support if you were brave enough to lean on the community) was just what the doctor had ordered. It was the equivalent of generics in the world of pharmaceuticals – just-as-good but at one-third the cost. The fact that Linux would work on commodity hardware amounted to double dipping for companies. Cost Reduction++.

Despite starting off as a low-end pretender to the incumbents, thanks to the rate of innovation Linux has caught up with all the high end operating systems – some would even say it is better. The success of linux opened the floodgates of open source offerings in all area like databases (MySQL, PostgreSQL), System Management Tools (Nagios, Zenoss), Content Management (Alfresco, Drupal) and even to mission critical business applications (Compiere, SugarCRM, Apache OFBiz). Not limiting itself to end products, Open Source has since moved into platforms (Apache, JBoss, LAMP, Zend) upon which ISVs or IT shops have built their products.

So far so good. Open Source was on cruise-control seemingly crossing more frontiers.

Then came the SaaS wave. SaaS posited that it was absurd for companies in the non-technology business to each spend large amounts of resources and manage their own IT infrastructure. Companies were better off focusing on their core business and leave IT Management to the experts. They also proposed hosting and managing software and letting companies use them in a subscription-based model, thereby helping companies manage their ballooning IT spend. After the initial spurn, the world seems to have come around and accepted the notion of SaaS. Armed with economies of scale through multi-tenancy, virtualization (the coincidental wide adoption of broadband), SaaS is now providing solutions ranging from edge apps like Email (Google Apps), Sales Management (Salesforce.com) to business critical applications like Financial Management (Intacct), ERP(Netsuite), Human Capital Management(SuccessFactors,Workday, Taleo), Product Lifecycle Management (Arena Solutions), Security(Symantec), Identity Management (Symplified).

With SaaS, companies/customers need to concern themselves only with the service availability and forgo the IT nightmare. No more software license, upgrades, maintenance, army of IT people, backups. All that is packaged into a single subscription fee paid on a as-used basis.

Riding on the coattails of SaaS, its brethren – Infrastructure-as-a-Service and Platform-as-a-Service are now wooing outlier custom projects onto pay-as-you-go, focus-on-your-core-business platforms. They take away the complexity in the infrastructure and technology platform giving you the similar benefits as SaaS.

What does all this mean to Open Source? Does this mean the target customer base for open source companies would soon be dwindle down to the SaaS ISVs, PaaS vendors?

The biggest challenge dealt to Open Source by SaaS would be that with Open Source, while the costs of licensing and maintenance are reduced, companies will still bear the responsibilities of building their own solutions and maintenance. This would mean that companies need to continue to spend on maintaining large IT resource pool and deal with the vagarities of complex technology integration. The entire premise of SaaS hits at this very pain.

That said, if you are a CEO of a Open Source company, you should not be immediately concerned about customer base seemingly dwindling with every gain of market share by SaaS/PaaS vendors. At the same time here are three things to think about

1. Open Source represents the single biggest large collaboration, crowd-sourcing based successful innovation models of our times. There are many other industries trying to borrow what-has-worked in Open Source and apply it to their industries. So while many open source companies are looking to cash out selling themselves to proprietary vendors (MySQL, Xen, SpringSource.. the list goes on), it serves you well to keep expanding the engagement with community and serving their interests. There will be a open source shakeout – lot of “gimmicky” open source vendors who just have a useless community edition product will wither away. The longer you can keep your innovation going, the more longer you will be viable.
2. Consider having a SaaS (or atleast a hosted subscription service) for your Open Source application. Software technologies will only be delivered through subscription in 5-10 years from now. Use this time to establish that presence while you still have a license business.
3. Join hands with other Open Source vendors and create platforms/applications that are integrated and easy to consume and maintain. This should not just be limited to technology integration but also in the areas of upgrades, support and documentation. RedHat has done a great job in integrating all their offerings into the JBoss Suite and reducing the complexity for their customers. Doing this will address both the value delivered by PaaS and the overhead requirements that customers have today in stitching together multiple open source offerings. I see a future where co-operative platforms where multiple vendors contribute to make up the platform and its ongoing success.

The idea of this is to create discussion from both the Open Source and SaaS/PaaS die-hards. Like it or not, if you look further ahead, this is head-to-head is going to happen, no way around it.

The challenge of coming up with a SaaS incarnation when you have a established on-premise customer base is nothing short of what the Big Three Auto manufacturers are going through in re-inventing themselves. The entire thinking software design to delivery and maintenance changes. I will take a look at some of the key challenges and potential solutions.

Lay of the Land

Let us start with a look at a the footprint of a typical large on-premise application deployment.

• Global 2000 company with global deployment of a suite or integrate set of applications covering Financial Management, Supply Chain Management, Human Capital Management and Customer Relationship Management besides some industry specific vertical applications.
• Extensive customizations, localizations, integrations to other applications
• Reporting infrastructure supported by a large data warehouse or some form of redundant data store with aggregated data from one or more sources.
• Company specific security implementation to meet the governance mandates.
• Scalability related deployments like WAN Optimization, Caching, Replication.
• 5-10yrs of historical data.
• All of these managed over private hardware infrastructure that needs large upfront investment and ongoing care-and-feeding.

Just so we get a true sense for what they are up against by establishing the key characteristics of a SaaS application. Granted, the definition of SaaS along with Cloud Computing, Web 2.0 form the troika of terms that have had a hundred interpretations, if not more. But in my mind a true SaaS application would have the following characteristics

1. Single Code base shared across all customers
2. Multi-Tenancy architecture to host all customers in a single instance.
3. Blue-prints/Templates to facilitate rapid on-ramp of new customers.
4. Self Service Administration model
5. Framework to easily integrate external applications
6. Framework to move data from existing applications in bulk

The Challenge

The incumbents see the on-coming SaaS train shaking the very foundation of guaranteed maintenance revenues. In the face of mounting pressure from customers to reduce TCO and also to combat lost sales to upstart SaaS vendors, are responding to this challenge is different ways.

• Some have gone onto create a new product, albeit scaled down version with limited success.
• Some have sprinkled some web-based services to their on-premise offering and claimed victory with some marketing around it.
• Some have just plain made claims that their products have been designed as SaaS from the ground.

To me all this is posturing in deferring the inevitable. They all know SaaS is here to stay (Sorry for ruining your wish Harry) and the on-premise gravy train has run its course and entering its last leg. If the recent customer pushback to a SAP’s one-price-fits-all maintenance contract (driven increase) is any indication, customers are clearly sending the message that they are tired of bearing all the risks, overheads and whims of software vendors.

The Journey

Different companies have embarked on this journey in different ways. There are companies like SAP and Callidus who have created a alternate line of products for SaaS and along with it came a parallel organization who will invariably end up competing against each other. Then there are companies like Oracle, Infor who are re-architecting existing products or new version of their products to support both models. While this seems like nirvana, it is rife with challenges.

Business Model: The foundation of any business is its business model. Moving from a license model based company to a subscription based model creates ripples in the business model. It creates challenging questions around the R&D budgets, revenue streams, revenue recognition and cost of sales as they are going to be dramatically different from what it is in the on-premise world. It is easy to just hope that this Cloud/SaaS stuff would go away.

Sales: Of all people, Sales will have a rude awakening. There will no longer be those front loaded large contracts that will bring in big commissions. SaaS deals are going to be much smaller in size to begin with and then ramp over time. Save for some exceptions like Flextronics deal for Workday or GE deal for Aravo, deal sizes are going to come down a notch from millions to thousands. Just so SaaS sales does not cannibalize the maintenance revenue “gravy train” from existing on-premise customers, they will be out of bounds for SaaS sales team. Hunter & Farmer model, if adopted, will create more heartache for sales guys. They will not be able to engage with customers after the initial sale as they do now.

Marketing: Marketing will no longer be the “all vapor no results” and now unwillingly be bed fellows with sales. Their activities will be scrutinized and tied to ROI more so than ever before. Budgets will be constrained unlike days of the past. As I explained in my post scope of marketing will now expand from demand gen activities to lead qualification and the primary goal would be reduce sales cycle. Webinars, online marketing campaigns, customer/partner communities, customer engagement assume critical nature.

Partners: System Integrators in the good old days would take a product that does not really fit the real needs of the customer would make it work by customizations, integrations, migrations – all for a lowly price of some million dollars. If you had just recovered from the sticker shock of the product, the after shock from SI would enough to make you dig deep into your IT budgets. Now with SaaS, the provider takes onus for many a activity that a SI would have performed. Customers expect the try-before-you-buy deal during which they expect to spend very little, if at all. As a SaaS vendor, you are expected to have integration APIs, Web Services that connect to their in-house apps or other Cloud based apps. This also puts onus on you to have a more finished product and eliminates a shield that SIs provided for product issues in the past.

Product Architecture: This to me is the most under-estimated issue. To say,  “Our architecture is designed from ground up to work for on-premise as well as SaaS” is gross underestimation of the challenge. Just stripping the database for multi-tenancy architecture while essential, makes not a product SaaS ready. Here are things you need to factor in

• You are now going to be responsible for scaling of the application, fail-over, almost zero-downtime maintenance, all this while one issue is enough to cause most, if not all, customers to be at your throat.
• You will have to continuously tweak a single deployment to adapt to the varying workloads in terms of volume, user habits, areas of the application usage, geography.
• If you said, same product will work for both sets of customers, on-premise and SaaS, brace yourself. You will have two sets of customers each expecting different rates of change. Having a product team go full throttle once and hunker down another time is easier said that done. Remember – they say in Good Driver guide – Rapid Acceleration and Sudden Slow Down might not get you where you want to go faster, but it guarantees damage to the engine.
• If you had two different teams for building SaaS and On-premise, then you are dealing with fragmentation of knowledge and skills. Domain experts will now need to stretch themselves to meet the needs of two teams.

Operations: This is a completely new area for a software company. If internal Development Operations was challenging enough, now you are dealing with Data Center challenges, Redundancy, Disaster Recovery, Intrusion Detection, SAS-70 Audits and constant demands from sales team to support them in sales cycle allaying fears of customers. The SLAs asked of you would put you on the hot seat while the budget constraints will continue to ask more of your for less.

Support: In general, the customer support of most enterprise software companies is ordinary at best. Customers are left to fend for themselves and at the mercy of System Integrators, IT Consultants and Community Q&A forums. This in addition to the small army of IT resources in-house. With SaaS, the support tiers suddenly collapse. Vendor is now becomes the helpdesk for not just product issues but also for its availability and performance SLAs. It would be in your own interest to make the product as much self-service as possible to alleviate the strain it is going to put on your support. Fostering a vibrant community to support itself via community owned product documentation, how-tos, case studies would go a long way.

Roadmap: No not the product roadmap, the company roadmap. There is no way a company can keep going with two product lines that demand such divergent needs of the company. There should be plans for the product lines to converge and so also the plan to move customers over to SaaS. While SaaS would continue to drain a lot of money upfront for infrastructure investments while on-premise gravy train continues to fund it. But this can go only for so long. Ask Callidus Software that embarked on such journey as to the amount of (financial) stress it put on them for some quarters.

A few companies like Infor, Plex seem to have made the transition or almost there. It will be interesting to see how this journey shapes up for SAP, Oracle and how they transition from old to new.   While the ever growing list of upstart brand new SaaS startup with no baggage keep creeping into their customer base.

Anyway I digress. Now that we have had a successful year of market share gains for SaaS vendors behind us, it is time for CEOs of SaaS companies to make their new year resolutions. Having spent some time meeting CEOs of SaaS companies and their clients, I thought the least I could do is to create a new year resolution template to help them out. So here goes.

Resolution #1: Improve Customer Service: My customers have been incessantly complaining of lack of adequate customer service. This coming year we will spend enough money and resources to provide A+ service, excellent documentation and foster a community that can support itself. After all, we will need customer references to gain new customers now that we have cornered the easy pickings. The last thing we want when the economy recovers is for the customers to move in droves, to a competitor.

Resolution #2: Provide better on-ramp process: We managed to get a bunch of customers online – kicking and screaming. Not to mention, our profit margins on those customers went down the toilet. Considering that we do not need to spend all that money on cross-platform porting/certifications, on supporting multiple versions concurrently, we should make it easy to get new customers online and using the product.

Resolution #3: Provide a real integration framework: Following up on my previous resolution, we should make sure the engineering team designs the product with the knowledge that we will not be an island onto ourselves. Companies require that the information loop is closed with their other cloud applications or existing on-premise (or do those fall under the category- Clunkers now?) applications. Standard APIs/Web Services should be moved from nice-to-have bucket to must-have bucket early this year. In fact, we should be working with our customers to identify the adapters that we should be providing out of the box. This will then make good on all the blabber we made about TCO during the sales cycle.

Resolution #4: Be the best customer advocate I can be: I MUST become the biggest customer advocate in the company. I don’t need to be the great visionary all the time. Customers have made big commitments by taking a chance on us and signing up to our service. Now it is my job to support them and help them succeed in their business. While I am at it, I should make it a point to ensure my entire organization makes only those commitments that they can follow through. Memo to Sales team – “SaaS is not a hit-and-run sale, we will be engaging with the customers for a long time, so let us not start on a wrong footing by promising the impossible/non-existent.”

Resolution #5: Be Transparent: Every time we had service outage this year, we have had to have a embarrassing meeting to customers/press. This year invest in being transparent. Trust builds when we are transparent. Do what Intacct and Big Dog Salesforce.com has done with their service level dashboards. We definitely do not want to have a public boo-boo day like Workday did. While am at it,  I must put in place a process to share the audit certification and governance reports as well with our customers.

As a CEO if I follow-through on all these resolutions and we execute we  should be able to have another great growth year ahead while keeping the customer churn down. Now that I have captured my resolutions, it is MBO time for VP of Products, Service and Sales !!

For the longest time, customers have borne all the growing pains, quality issues, large capital expenditures in licensing, managing, updating and maintaining enterprise software. Now the tables are turned. With SaaS, the vendor is now saying, “You the customer, just pay for the use and we will take the responsibility of providing the same software on my premise and we will be responsible for upkeep, upgrade and up-time. All for a flat fee that comes out of your OPEX.” The statistics of SaaS adoption bear out that the customers have liked the message and acknowledged with a resounding “YES”. Vendors not embracing this SaaS movement are slowly seeing the truism of Richard Waters’  “The end of Software gravy train“.

With the economies of scale, the costs SaaS vendor incurs in managing the application will eventually trump the costs the customer incur if they did it themselves. But in the tough climate we are in, revenues hard to come by, coupled with the ongoing customer’s concerns around outage, data breaches and coincidentally, broader adoption of Cloud Services like Infrastructure-as-a-Service (IaaS) from Amazon EC2, Rackspace etc,  a new hybrid model of delivering SaaS applications seems to be emerging and gaining interest.

SaaS vendors who support this hybrid model where the customer now has the option of subscribing to their service but choosing a cloud based infrastructure to host it.

Bruce Richardson of AMR Research wrote a post recently on his discussion with Don Klaiss CEO of Compiere around SaaS and Cloud Computing.

Don makes his observation about how Cloud Computing with its lower TCO, flexibility would become the next generation on-demand software delivery model. Specifically he went on to say

“Cloud computing is the next-generation of software-as-a service, in which a complete software environment is licensed as a subscription from a software vendor and low-cost, secure, and dependable IT hardware infrastructure is ‘rented’ from a utility-computing provider on demand. The customer has complete control over its own secure and private IT environment at a very low cost and without the hassle of procuring and managing its own data center. It can quickly scale IT resources up or down as computing needs change. And [the customer] has complete freedom to customize the solution as it sees fit and complete control over upgrade cycles and all other aspects of its IT environment.”

This symbiosis of Cloud Services and SaaS applications will definitely have arguments on both sides. So let us look at the merits and demerits of what this means, to customers, considering this model.

Merits

1. As a customer you will no longer need to be concerned about losing control of the your critical applications, data and management. You will own the environment.
2. If the vendor goes bust, you already have your application, data and hopefully with your IT resources already trained, you will be able to mitigate most of the risks to business continuity.
3. Unlike a on-premise solution, you get the infrastructure that you can control at a fraction of the cost with Amazon Web Services (AWS), Rackspace or any other cloud based infrastructure provider – so you get the benefit of lower TCO. So all the benefits of your own environment minus the painful part of negotiating technology contracts with hardware vendors.
4. One of the biggest challenges in most SaaS offerings is around business intelligence and reporting. Most offerings around reporting are merely a shadow of what you can do with your own data. Your end users who might have been trained on a corporate standard tool like Business Objects/Micro Strategy/Cognos would have had to get trained on the new reporting tool of the SaaS vendor. Customers typically work around this by negotiating the ability to get copies of their slice of data from SaaS multi-tenancy so they can run their own reports on-premise. With customer-owned cloud based infrastructure, and data under your control, now you get to use your own Business Intelligence, Reporting tool.
5. With the source code being available to you, you will have luxury (depends on who you speak to) of making customizations which are not available in a true SaaS model. In true SaaS model you are limited to configuring business processes, UI changes/branding using the switches and knobs provided by the vendor.

Demerits

1. As a customer you now have to worry about EVERYTHING outside of application changes. You will be responsible for all the maintenance, security, data management and the costs. The economies of scale that SaaS vendors achieve doing it for many many customers is not available to you.
2. You will now be responsible for updates, change management to the application. This will over time introduce the need for SaaS vendor supporting multiple releases, considering that realistically, left to themselves customers would define their own schedule to upgrade. With that need comes additional costs that SaaS vendor will incur and that costs will be transferred over to the customer.
3. Irrespective of what your corporate standard for hardware/IT is, you will have to make do with what the Cloud provider supports.
4. You will now have train your IT to manage cloud infrastructure and include that under your corporate IT governance guidelines.
5. You will be responsible to implement Disaster Recovery environment on your  own. This almost doubles your cloud infrastructure cost. With a SaaS provider this would have (in most cases) been included as part of the service.

This short list should give you a frame of reference to evaluate this model.

To me, there are definitely slices of benefits when compared to the on-premise purely based on the transfer of management overhead and upfront costs to Cloud service provider and some benefits from agility of a SaaS vendor. But that said, one of the benefits of SaaS is if things went wrong you know who to go to but with a hybrid approach now you will invariably get ping-ponged between the two vendors.

A better model would be for the SaaS vendor to use cloud and also provide access to the data, ownership to the customer but still be responsible for the management, maintenance.

Would love to know what you think about this? Send me a note and I would be happy to discuss this more.

Business intelligence (BI) refers to skills, technologies, applications and practices used to help a business acquire a better understanding of its commercial context.

In researching SaaS solutions for Business Intelligence, PrudentCloud had a chance to meet and talk with Rob Winner, Co-Founder and President of HardMetrics and talk about his company, their offering and how they help their customers. Here is an excerpt.

SM: Rob, Let us start with a little bit of history on the company. when was it founded, a little bit on the journey so far.

RW: HardMetrics was founded in 2003 and headquarters in the Greater Philadelphia area. The founders and the management team have been focused on the commercial software related to Performance Management Software and Measurement Solutions business for over 25 years and specifically in the Call Center business since 1998.  Our key goal has been to provide a solution that allows organizations to monitor, measure, score and analyze all facets of the business i.e, people, places and things.

Our customer base are primarily in the North America region but we do have companies that have global business footprint.

SM: Call Center focused businesses. Tell us a little bit more on why this focus and what specifically in Call Center do you focus on?

RW: We focus on the processes that involve customer interactions such as Sales, Service and Operations. As we all know, the need for managing the customer interactions and dialog in all aspects of business is a critical need. It is also a major contributor to the business performance across Sales, Service and Operations Support. We provide solutions to all businesses that utilize call centers as well as other forms of multi-channel communications (email, web, chat, call center, direct marketing etc). We specialize in complex, diversified businesses with multiple locations, multiple LOBs, products, geographies.

SM: There are lot of Business Intelligence solutions – IBM Cognos, Oracle Hyperion, MicroStrategy. Why would a customer choose HardMetrics?

RW: We deliver solutions that can be used both inside the Call Center for operational efficiency optimization and outside the Call Center to combine with data from other platforms for business optimization. Our goal has always been to deliver Business Analytics to end users without requiring an elaborate IT effort. In our view, the customer experience in buying a BI technology has been like building a house. They buy the technology and go through a protracted costly implementation project with no near term ROI. Our customers have been able to implement our purpose-built solution in a matter of weeks. In fact, we are rated by Gartner as a Best of Breed in the Contact Center Performance Management (CCPM) and Marketing Performance Measurement (MPM).

Note: According to Gartner Research, CCPM solutions are most often used by contact center management to automate the supervision and coaching of an agent and to improve the overall performance of the organization.In their January 2008 report they say – “These solutions integrate an organization’s established contact center technologies, CRM systems, and other data sources to provide a transparent picture of performance through role-specific dashboards and reports, and they drive actions through embedded alerting and workflow capabilities.”

SM: Who would be the typical audience of your solution in companies?

RW: As I mentioned earlier, our solution focused on organizations supporting Sales, Service and Operations Support to measure performance of business processes. We service two facets of the company. Our technology is deployed primarily to business analysts, business stakeholders and business end users. That said, we find that organizations deploy our technology across the entire spectrum of the company from the furthest front-lines starting with the call center agents to field service representatives or it could be a remote sales person or a branch office. In other words from front-line transactional concept of the business all the way to the executive branch of the business including all levels of management in between.

SM: Can you share some representative organizations that use your technology in this way?

RW: We are very proud of our customer base. Some of the large substantive blue chip customers include Sallie Mae, AAA, Time Warner Cable, Motorola, Insight Communications, Telerex Marketing and  a number of other marketing and telemarketing outsourcing companies. These companies are structurally diverse and fraught with challenges inside their organizations to get a grip on what is actually going on in the organization versus what needs to happen from a business performance perspective.

SM: Going back to your typical user base in organization can you elaborate on how and why the usage across call center analysts to business users.

RW: Sure. The analysts and end user community is typically the most attracted to this solution. As you know, those are the areas of the organizations, that have the greatest impact potential on the business, in terms of identifying what is going on in the business, comparing it with the goals and performance measures of the organization.  They also determine the root cause of bad performance and identifying the remedial measures. The key reasons why our customers find it advantageous to scale the use of software are

1. Built-in flexibility of the software itself. The software has been architected to scale. In fact, at Sallie Mae, they have gone beyond the executive stakeholders and are now deploying it to the desktops of 3000 of their 5000 call center agents. They think providing the visibility is the key and it provides the capability for users to identify the good and bad things. It is our belief that visibility promotes improved performance and most importantly the opportunity for behavioral change. Visibility, in itself, is not a new concept, but the ability to enable organizations to provide it at necessary levels at scale is the key. Our key focus has all along been to eliminate technology as the barrier for adoption.
2. Comprehensive and Accessible: One of the key challenges for any company implementing a analytics solution is to define the solution specification. In most cases you are talking about IT groups, primarily comprised of developers and not business aware resources trying to define specifications. They rely heavily on someone from business doing the discovery and defining the requirements or the blue print for the solution.  A business makes a best effort to provide the blue print of the requirement at any given point in time. But by the time the solution is delivered, it will, invariably, be out of date as the requirements blue print would have evolved during the same time. So it is paramount that we define the greater universe of data needed and give the business community the access to it to get a closer look at what is going on and make timely course corrections. Data availability and accessibility in a time effective manner is the key. One of the common things our customers attest to is that they find things about their business that they did not know existed and did not know how to get them.

SM: I completely agree. Having the information at the fingertips of the larger user community fosters a behavior change and critical thinking. Let us talk a little bit about the product architecture and choices for customers. Is the solution available in both on-premise and SaaS?

RW: Most of the solutions out there have the same classical look and feel. An OLAP solution or a Data Warehouse. That in itself is not a bad choice but if you are in a constantly changing, need-to-know-now kind of environment, those solutions have proven historically that they are inflexible to meet the immediate demands. You need a IT driven, protracted project to meet each new demand. So keeping that in mind our approach has been a little different. You could argue that there are many out of the box tools ranging from 5K-10k and host of sophisticated BI tools. With the help of developers to develop and maintain one can get to a solution. We have architected our solution to meet all those needs out of the box. Our architecture includes three main layers

• Robust Database environment – that contains the analytical model we ship to each customer. The uniqueness of this analytical model is its ability to consume customer produced data without requiring specific modeling to a business requirement or require a cracking open by DBAs. The model is horizontally scalable across any kind of data. The product is easy to install (can be done in minutes) and easy of load data. You can be done installation, configuration, data loaded and ready for end user use in a matter of hours. The key is to consume raw and native data as close to its original form and put it in a storage state for near real time and historical analysis. Then be able to manipulate, massage and cleanse data, if necessary.You cannot analyze data from where it is produced and do not want to manipulate data on the fly and change the original signature footprint of the data.
• A Middleware layer in front of the database to facilitate the simplified integrations and relieve the customer of the need to worry about any data pre-processing or formatting requirements. It takes the data from the source in its original format and take it through the transport and enable the customer to perform any actions on it as necessary through an administrator user interface such mapping, simple transformations to cater to the end users, calculations etc. It is not a commercial ETL (Extract, Transform and Load) product but is a purpose built toolset to cater to the needs of data acquisition, transport and storage needs of this architecture. This really positions us as the leader in the data acquisition and storage marketplace with simplified integration, removing all the technical hurdles needed and eliminating the need for any custom development. In reality, the administrator could be a IT resource or possibly a power user from business community.
• Web Application: A zero client footprint, web-based, enterprise caliber application available to be used from anywhere, anytime. In fact, we have a couple of customers porting the application output to platforms they have standardized on such as the Apple iPhones. The application itself allows companies to view various Dashboards, Scorecards and Key Performance Indicators (KPIs) by combining financial data and call center data.

Our goal has been to constantly put customer in control of what they need to do and how they need to accomplish that.

SM: Talking about the hybrid model (supporting both SaaS and On-premise) how do you tackle the overheads, challenges around making your product compatible/certified with all the standard hardware configurations.

RW: Here is our approach towards that. Our application is designed using Java and in doing so we take the platform out of the equation. Those days of corporations being reluctant to go with a platform not part of their standardized technology(J2EE/.NET) is long gone. Companies are more accepting of the technologies.

In terms of hardware, we publish the minimum required specifications of hardware configurations to support our software. From a platform perspective we support Windows, Linux and Unix and in more ways we are platform agnostic.

The main thing for customer to decide in terms of licensing besides HardMetrics is to decide which database they would like to base the analytical solution on. We support both ends of price-performance spectrum from Oracle to Microsoft SQL Server. We also have a database agnostic architecture in that the solution does not utilize anything vendor specific feature and hence even if a customer chooses IBM or MySQL as their database of choice – we can easily support it.

The application server engine etc. are all bundled into our application. We  have some Open Source components like Tomcat and few other solutions packaged into our application. If the customer has some standard portal like Sharepoint we will need some configurations at the time of implementation.

The other component we have is the security infrastructure. In cases where customers do not have their own corporate identity management, provisioning infrastructure, our in-built role based security model provides a way to provision and manage the access to the application by the end users. The security model encompasses the role-functions and also the data security in terms of what they can see and how. In cases, where the customer already has corporate security infrastructure like Active Directory, Single Sign-on, we integrate and delegate the jurisdiction to the corporate security infrastructure.

Additionally, the architecture is a n-tier architecture and allows for distribution of components across different nodes as deemed appropriate by the customer.

In a way, consciously we have maintained a standards based application across all tiers so customers get the flexibility of choosing the platform of their choice.

SM: Data Security. How does that work in the SaaS model? Do you as part of data acquisition also bring in the data security already in place in the host application in terms of who can see what at a granular transaction level on a drill-down?

RW: Yes we do support that. It is a built-in feature of the product. We inherit the security access to data at multiple levels of access chain and can be controlled based on source designation, actual or derived metric. The data access can be controlled at element level. In fact, we do support acquisition of the Org Chart models from HR and Workforce systems too.

And this works in the SaaS model as well. The tenants in a SaaS model can have their corporate identity management solutions integrated and manage their security and access control.

SM: When you talk about SaaS, with all the flexibility you are affording to the customers – are you talking about a truly multi-tenant configuration for customers where each customer becomes a tenant and shares the instance with others or is it a shared-code, db-per-tenant model?

RW: We are a truly multi-tenant architecture. One of the key things customers ask as part of their due diligence is “Am I going to have a new instance or my own environment?. Depending on the size and nature of the business of the customer we can run multiple instances of the same software partitions. So for customers that are not in financially oriented or regulated industries we can run multiple customers in the same instance. But in reality, for large customers like Motorola, Sallie Mae or AAA, prefer the multi-tenancy with a caveat that they would use it inside their own instance. It is specially useful for customers who have hierarchical businesses. For example in service based companies like the call center outsourcing companies, they would compare and contrast performance measures across customers. In some cases, the services based customers offer additional reporting packages on top of our application as part of their offering.

SM: What is your pricing model? How is it different across SaaS and on-premise models?

RW: We offer our product in both SaaS and on-premise model. In fact, a vast majority of our customer base use the hosted on-demand model. Given the browser based application, we crack the end-user licensing problem that customers don’t like.

Everything we do is based on data. So is our pricing – we have boundaries around pricing based on data. We don’t charge based on the number of users. We instead charge customers based on the number of data sources. An example would be, in a customer contact environment, a dialer would be a data source. Similarly IVR, ACD, Supported back office systems like time management, workforce management, scheduling. In some large implementation we have number of data sources anywhere from 14 to 16. If you take into account all the customer interaction activities happening across the Sales, Service, Marketing, Support, Call Centers, Web based interactions, Page search information, Google Adwords campaign data you get a good idea of all the data sources/platforms that feed into the HardMetrics analytics platform.

We have received an overwhelming appreciation of the simplicity of the pricing model. They feel that this pricing model provides good value for both us (the vendor) and them and gets them out of the chaos of managing end-user based licensing based on the expand-contract nature of the workforce.

It is the same in SaaS model. Pricing is still determined by a data centric approach.

In a on-premise model, the pricing is made up of three components

1. a license fee
2. a annual maintenance fee, in return for a 24 hour live support, software updates and
3. a professional services rider. This I think is a key differentiation for us. A typical BI implementation is fraught with undelivered promises and cost overruns. Software always has to tweaked, custom implemented at each customer environment. In our case, we have never had to customize our application. All the customizations have been limited to the configurations done through the administrator console. Our professional services rider is very small and driven by data source and typically a all-inclusive fixed fee in the range of  $25K fixed or $50k fixed for a large implementation. The fee covers installation assistance, implementation assistance, first production implementation, formal staff training for administrators and end-users,

SM: I completely agree with the challenges of a user-based licensing model. Especially given the world of acquisition, divestitures, layoffs, outsourcing there is a perennial churn in the workforce in every company.

RW: One of the benefits we are reaping with that is we have a tremendous list of customer references and some of the things we are proud of is when customers say “This is a great organization to work with” and “Software actually works as advertised”.

SM: Rob, I would like to thank you for your taking time and talking to us about your company, product and views on the world of BI. I would like to wish you the very best with your company.

Company Profile

Name:
Product	On-Demand Analytics for Call Center based businesses
Key Customers	Sallie Mae, AAA, Motorola, Time Warner Cable
Critical Problem Solved	Provide ability to get a single view to all the call center, customer interaction related data Quick implementation of analytics with out of the box data acquisition capabilities with no IT involvement Ability to combine financial and call center data to review business performance metrics Also read – 9 ways HardMetrics can help you
Case Studies

Shelf ware to those who are not acquainted with software licensing is a term used to identify licenses bought but not used. It is not uncommon these days to think of many companies being saddled with licenses that are rendered useless either due to staff reductions, business unit shut down or acquisitions. While they are not used and paid for, companies are continued to be charged for their maintenance/support.

This is the last thing software vendors would like to hear while the discussion about increasing support charges from both SAP and Oracle is still fresh in their mind.

Software vendors who are already facing a wave of on-demand /SaaS offerings, open source alternatives will no doubt oppose this vehemently.  A string of third party support options surfacing for the large software is also threatening what was considered their gravy train (the maintenance revenue).

Given the change in the business dynamics and increased power vested in the customer in this bad economic climate, this concept of re-sale of unused licenses, if it came to pass, would definitely present a great opportunity to reduce the overall spend.

But with all the wishful thinking by customers, if the software vendors relent, this process is rife with challenges. Here are things I see as necessary actions that should happen involving the software vendor, original buyer and new prospective buyer (of the unused license).

1. The software vendor now needs to amend the original license contract verbiage to allow for such secondary market transaction with caveats. I am sure it is not free for all.
2. The software vendor also has to create process for migrations/transfers to be recorded in their service contract system so the new customer has to be recognized. The entire client services (sales, account management, support) process needs to align and recognize the new customer.
3. A new license transfer transaction need to be recorded between the three parties along with the transfer of obligations to the new buyer.
4. The new buyer should now make all the additional overhead payments (did you think the software vendor would do 1, 2, 3 for free?) and ensure compliance.

If both the seller of unused license and the buyer are lucky they will have the same hardware platform, processor configurations that the seller had or will need to make necessary investments to accommodate the newly acquire license.

Finally, there needs to be a marketplace to make this transaction. Logically you would think the software vendor themselves would provide a marketplace for a secondary market transaction. But then again why would they when they can sell anew.

As a Craigslist junkie I could not help but let my imagination go wild – think companies going to Craigslist and posting ads for selling unused licenses or shrink wrapped SAP CRM.

Wonder what others think about it? As a SaaS evangelist, I would beat the drum for such a process to happen, in the interest of the customer. As with anything commodity (and software is turning into one) there has to be a way for owner of the asset, a very expensive one at that, to salvage some value.

This clearly highlights another virtue of SaaS and pay-as-you-go metering model, where you can just as easily expand and throttle your usage based on the prevailing conditions in your company.

Ray’s Software Insider Blog

Late last year, I was working on a deal to sell our SaaS software to federal government. Being a SaaS company, naturally we were in a quandary. Up until then we had stuck to the core SaaS edict – i.e, maintain a single code base and all customers hosted on a multi-tenancy based deployment. Despite all the challenges we ran into from technology, architecture and operational issues, we had persisted. There were times when we debated on the question of  segregating customers into Small, Medium, Large multi-tenant instances. But we resisted and persisted. We invested large amounts of time and resource required to put out all the fires/challenges, make the requisite scalability related improvements and kept going with a single instance.

But this deal with the government was different. It was a large multi-million dollar deal which was tough to walk away from. What with the financial meltdown upon us and the prospect of a bleak 2009 being forecast.

As we had imagined, the federal government agency required their own instance and a on-premise installation at that. Considering the information they were going to manage in our product, I could see why it made sense for them host it and not co-mingle (their words) their data in a publicly accessible internet based application.

The deal we were trying to secure was with one particular agency and the usage was going to be limited to that agency. We had an elaborate RFP process that ran for more than couple of months – many many spreadsheets to fill with information and multiple demos to the primary contractor and in-house staff.

But with all the recent focus/news on Federal IT, federal CIO/CTO nominations, Recovery.gov and the talk about government agencies better leveraging technologies, I could not help but think of how SaaS would be the PERFECT model for deploying applications within the government. Various agencies can form tenants of the single instance and derive the inherent benefits. While there could be numerous other benefits here are 4 clear ones I could see federal government agencies could gain from by having their own SaaS deployment.

Master Data Management
As with the multiple business units in a large conglomerates, different federal agencies share common information across multiple agencies. Real Estate Properties, Approved Vendors, Approved Items, Locations, Technology Sourcing and the list can go on. With a multi-tenant SaaS model, all these master information entities and the related transaction can be managed in a single database, with appropriate access controls. This would eliminate all the redundant integration and data replication needs between different agencies and it could serve as a master data repository. All the reporting needs can be met from this single repository for a single agency and rolled up across all agencies.

Provisioning and Identity Management

While in recent times, government agencies have increasingly adopted Identity Management solutions, they still manage the identities in disparate directories. An internal on-demand solution hosted by a central IT agency under the Federal CIO can effectively streamline the identity management needs across agencies and serve as the provisioning clearinghouse for all the applications. If and when a agency employee transfers across agencies, it would merely be a change in access control as opposed to the entire provisioning work done across both the agencies (to revoke and grant access).

Collaboration

A single multi-tenant collaboration solution would not only standardize the way processes are followed across agencies, it will allow them to leverage best practices across agencies. I would put Project Management, Document Management, Communication under this bucket.

IT Infrastructure and Operations

Having a single instance would eliminate the need for redundant infrastructure needs for backup, recovery, redundancy infrastructure (for fail-over), hardware, software licenses, security assessments. All the upgrades, quality tests, user acceptance can all be conducted under a single installation.

All the management applications needed for governance i.e., change management, configuration management will also need to be done once.

Last but not least, the resources required to manage multiple implementations of software across agencies can now be deployed to perform incremental IT needs.

Who else would benefit from this?

SaaS Technology Vendors: Government sector has been off limits due to the resistance of government agencies to use any software outside their premise. With a dedicated instance hosted for government agencies or a hosted version on their premise (hardware), now the 70B+ spend is a new market segment SaaS vendors can go after.

Prime Contractor: You should strategize with a SaaS vendor to become the reseller of their SaaS offering with a government flavor. You can be a turnkey operator to manage hosting, provide managed services for provisioning, upgrades, custom integrations. Also being knowledgeable of the government processes, government contractors can now turn their knowledge into best practices for agencies.

What should a SaaS vendor be prepared for?

Brace for discussions that will question the very premise of your business model. While NIST comes up with the standards for SaaS security and performance, each RFP will be onerous to say the least. The numbers will be large. Government does not understand the monthly subscription business. They throw money once and buy things they want and as is their wont and would look to customize the application. It will take some time before they digest the fact that they are buying usage and not custom application capabilities as in the past.

Be prepared to hear the following

1. “Government does not want to store its data outside their firewall.” This should not come as a surprise to you considering all the critical data they seem to store. So to counter this you have three options
   • Create a hosted instance or an appliance on government network and you manage it just like your commercial offering. This might mean you need to have dedicated resource managing that instance and in some cases they will need security clearance. So factor that in your quote.
   • Host the application with database managed inside the government network. This entirely depends on how your Multi-tenancy architecture or product architecture is designed.
   • Let government host and support a copy of your product. You provide updates. (this has caveats based on 2 below)
2. Government would like to customize the product to their need. This customization could be anything for changing the application flow to building extensions in the form new UI+ Data capture or security model changes. To accomplish this they would need access to the source code or you exposing all the underpinnings of your application in the form of a SDK or API. Government is big on SOA so have your SOA story ready.  I would strongly urge you to push back on any request for source code. If you are working with a prime contractor, chances are they might be the ones perpetuating this need for source code more than the government. SIs make their living by customizations and long implementation cycles so it is their DNA. Eventually you might have to succumb and agree to part with your source – part of doing business with Uncle Sam.
3. Source Code and Who owns it: Extending the point from 2, if you do part with your source code, get your legal to draft verbiage around who, where and how the source code can be used and what if any, attributions you need out of the code changes they make. Also highlight the fact that if they make changes to the core product, they will do that at the risk of precluding themselves from getting further updates from you. At a minimum they will require a source code escrow.
4. Accreditation with government standards like FISMA, NIST.
5. Location specific storage: If you manage to convince government to use a hosted instance owned by you, then you will run into requirements like storage being done within the boundaries United States.
6. Preferred Customer pricing

SaaS is based on the premise that deals come in short sales cycles. A government deal is a anti-thesis to that – long drawn out and expensive. If you have gone through a similar process, shoot me an email, I would love to compare notes with you.

In the past SAP has always portrayed Business ByDesign as its on-demand offering albeit making it available only in a small subset of countries. It was a positioned as a complete on-demand suite counterpart for its on-premise SAP Business Suite. It was also targeted primarily at SMB customers.

But going by what John has outlined in his interview it seems like this new strategy is going to be different. To quote from his interview – “Here’s what SAP customers can expect in the coming months: function-specific software applications, available by subscription, that plug into customers’ on-site SAP Business Suite systems, and that SAP will host for customers using a multi-tenant architecture.” He also goes on to say “SAP won’t develop software services that compete directly, as independent SaaS applications, with companies such as Salesforce.com, Concur, and Ariba. Rather, all of SAP’s on-demand apps will be designed as extensions of Business Suite.“

This strategy is unique as Wookey says, and more complementary to the Business Suite. It is based on the platform multi-tenant architecture acquired from acquisition of Frictionless.

At the outset, based on these comments, it is easy to assume SAP is missing the plot or that it is just making some noise about SaaS yet again. Vinnie Mirchandani felt it was a “moat” strategy. Although it has been received with skepticism I have an alternate theory on why this might turn out to be a smart strategy.

Successful SaaS vendors in the business applications area, barring CRM as a category, have been primarily building solutions in three areas

1. the in-between areas where ERP vendors don’t have a solution and homegrown solutions are cannot scale or are tough to maintain.
   
2. Advanced solutions like predictive analytics, Talent Management, Performance Management, collaboration solutions that sit on top of ERP/CRM solutions.
   
3. Horizontal solutions with scaled down common ERP flows focused on SMB segment.
   

SAP already has about 25% of ERP, CRM and Supply Chain market – depending on whose numbers you go by. So SAP can do one of two things –

1. Entrust their product teams to enhance Business ByDesign to effectively compete with  nimble SaaS vendors. We all know who will win that race. It seems like SAP Management also knows that and hence it is not the strategy-of-choice they are pursuing. Add to that the financial dilemma of spending on BBD as Bob Warfield outlines.
   
2. Go after the up-sell opportunities in existing accounts and build industry vertical specific, value-added functions to sell into their existing accounts. This will serve two purposes. This will provide a way to slowly ease the existing customers into SaaS and considering that these are add-ons on top the Business Suite, it is conceivable that SAP can compete with nimble startups in this area.
   

While the SaaS meal is cooking in the SAP kitchen, Wookey would well to use a trick or two he learned from Uncle Larry’s M&A University and tuck-in a few more smaller SaaS vendors to kick start the closed-loop application ecosystem.

While this strategy looks good from the SAP point of view, John and his team should work out – the small matter of partners. SAP has long been known to be partner friendly in nurturing partners in building ancillary applications to augment the Business Suite. This has played a large role in the partner ecosystem. Now with SAP entering their turf, it remains to be seen how the partners will react to this announcement.

While large deals Data Domain, Sun Microsystems, WindRiver, seem to be taking the center stage, I think Sramana is spot on with her take on the SaaS industry.

If you look around there are a handful of SaaS companies that are profitable (and a few others are lucky to land large follow on rounds of investments like Workday). There are some great technologies that could be bought at some attractive terms.

The business model in SaaS is predicated on companies making large upfront investments to build up infrastructure, product and team. In addition, with the Customer Acquisition Costs (CAC) being front loaded to a large extent, it is supposed that over a period of time, ideally ranging from 1yr to 3yrs, a customer would prove to be profitable. All subsequent customers are expected to be acquired at a lower cost and faster profitability based on an evolving on-boarding program, best practices, templates etc, as I alluded to in an earlier post. But in this climate, without cash and luxury to make investments for growth SaaS companies present some great opportunities.

There are two constituents who might and should be active in this.

Firstly, larger companies like Intuit, ADP, Amdocs, Autodesk and I will add SAP, HP and Microsoft to the mix (Oracle, IBM, EMC, Cisco already being in a acquisitive mood) can get ready made entry into an already established, risk reduced opportunities. Acquiring SaaS vendors will also give them a low- barrier-of-entry solutions that will complement their existing on-premise solutions already used in most companies.This will also give them an influx of innovative products which are more in tune with today’s user demands and easier to implement. In this tough economy, when net new sales are tough to come by, these larger companies can use SaaS offerings to get into new accounts.

Secondly, SaaS companies themselves should look and consider merging with complementary offerings thereby providing a integrated offerings to customers. This would make a lot of sense from a customer point of view. I know companies that use SuccessFactors for Human Capital Management, SalesForce.com for CRM and Intacct for Financials. While the SaaS companies themselves amplify the rhetoric of  “the days of integrated suite of products in numbered”, the reality is far from that. If you talk to a IT executive  they will tell you that, one of the biggest hindrances for SaaS adoption is integration. They are continuously trying to make things works in an integrated fashion, thereby reducing the point of failures, share data and be able to map to their business process. Going to point solutions from different vendors is definitely not going to get them there.

In an ideal world, it would be great, if SaaS companies formed consortia where they innovate independently but fit into an overarching framework so their solutions works in unison. But that would be nirvana and asking for too much from technology vendors.

This downturn might provide an opportunity for companies to find suitable partners and willingly merge so they have a much more compelling broader solution. It will also allow them cross-sell into each other’s accounts.

The new round of funding was led by New Enterprise Associates. The current investors Greylock Partners (Aneel is a partner there) and Duffield also participated.

Workday to date claims around 80 customer, of which a few are Fortune 500 companies. It made a splash with the large 200,000 user deal it stuck with Flextronics. But if you look at the list of customers it has on its site, all are small and medium businesses. There is no marquee customer it can boast of. Especially when Duffield says he is going after Oracle and SAP.  While Workday seems to have all the stars and getting the headlines, its main competitor in the SaaS HCM space SuccessFactors in the meanwhile seems to have great traction. Its customers list is 2700 customers long and includes large Fortune 500 customers.

So what would Workday do with $75 million dollars?

The press release on the company website says it will use the funds for product footprint expansion and supporting the companies expansion. If you go by the jobs listed on their website there are not that many positions open. So I am guessing the expansion would come in the way of some a yet-to-be-started hiring spree or some small acquisitions.

If you are an IT Executive
One of the first things you will see that is different, is the primary application management is not your main imperative. That said, while your team might not be directly responsible for managing the actual infrastructure and its upkeep, they will still be responsible for the following

• Program Management of on-boarding business community
• Planning and Uptake of upgrades
• Managing and Certifying integration with the back-office (on-premise) applications
• Provisioning of Access to the applications
• Service Levels to the business community

Once it is established that the application and the data is going to be hosted outside your premise and managed by others, three things that pop into your mind should be data security, scalability, vendor lock-in. Besides those, a company should understand many nuances of buying a SaaS solution before they ink the contract.

Being on the receiving end of these questions myself for the last couple of years, helping key deals at a SaaS vendor, I thought it would be useful to put together a reference guide for the buyer to help them procure a SaaS solution.

Let us start with the high level vendor qualification stuff

Financial Stability

Given all the turbulence in the market, ensuring that the vendor of your choice is financially stable is paramount. Outside of Salesforce, RightNow, Omniture and handful of others, most SaaS vendors are private and hence there will not be much financial information available to you publicly. So as a proxy to that I would look for some of these characteristics -

• Check up on the VCs that are backing the company. The key thing to  check is to see if those VCs have a good track record in guiding companies in similar space. Good VCs back their investment to a hitch. If you can get information on how the funding levels are, revenue run rate etc that would give you a better idea. As much as you prohibit, nothing is out of bounds to a sales guy trying to close the deal so go ahead and ask anything else you need about the company – off the records, obviously.

Management Team

Any vendor is only as good as its management team. While the product fit is critical to ascertain, ensuring the vendor has a good management team should give you more comfort. Having a good team should give you the assurance that they will execute on the vision they are selling you on despite where it is at the moment.

While looking at the management of the company, here are some things to look for

• A team that includes executives from the industry domain.
• A industry leader as a CEO. As goes the leader, so goes the company.
• A passionate leader of customer support. Insist on talking to the executive in-charge of Support as part of your finalization process. An executive with no passion for serving customers in not someone you would want to deal with. As IT organization responsible for the support you don’t want to be caught between rock-and-a-hard-place. A angry business user and a non-compassionate support team from vendor.

Focus

SaaS model works best when the solution is purpose built, niche with a set of configurable options to tailor to specific nuances at each company. Any (small) vendor that claims that their solution can meet the needs of large and small companies alike clearly highlights the lack of strategy on their part and should throw a caution flag. There is no way a smaller, leaner SaaS company can afford or be able to meet all the needs of small and big companies alike. A General Electric and a small electronic parts manufacturer operate completely differently and so will be their needs. If you are the smaller electronic parts manufacturer then the vendor better be focusing on smaller customers like you or you will be in the queue behind the big customer who contributes to more than 30% of the revenue.

In terms of the target market, the needs of multiple industries might be similar to an extent, but the business demands will eventually diverge. So it is important to ensure that the current customer base of the software vendor has enough names that belong to your industry to ensure your industry will continue be a focus area.

Organization Structure

While understanding the vendor also try and understand how their organization is structured – # of engineers, # of support analysts, # quality engineers. Each of those point to the value a company puts in those corresponding disciplines.

Here are somethings to put things in perspective. For example:

• if the # qa engineers are less, guess what, you are going to be their qa. Vendors across the board are trying to cut costs and stay slim and if you know software vendors guess who they cut first – you are right – it will be QA.
• Less support engineers would mean you will have to compensate by having a team on your end to answer to your business.

Pricing Terms and Billing

Typical pricing in SaaS is by subscription. Vendors usually require customers to sign a one year or three year contracts. Based on the unit price, be it a user-based, transaction-based or tiered price or some combination of user+module price you should make sure the terms are elastic. The turnover in people, mergers-divestitures-layoff can create changes in usage so pay special attention to escalation clauses. Also ensure the billing/payment terms are clearly outlined in the contract. If the you plan to put uptime guarantees in the SLA terms, service credits, penalties should also be accounted for in the billing.

One of the things you will need to look at would be the switching costs. You should also make sure termination process is clearly worked out as part of identifying the vendor. More of that later in the Governance part.

Technology

Majority of the SaaS solutions are built on some flavor of Multi-Tenancy architecture. That is the only way the vendor can establish economies of scale and provide you a all-wrapped-in-one subscription fees. You will hear a lot about web services, but check to make sure it is the flavor you are looking for. Most of them would involve you buying additional paid IT services to adapt them instead of working out of the box. To effectively integrate the technology into your business process, including customizations on your end, you should also look at the technology being used by the vendor. Specifically, you should have your architects look at the architecture, redundancy infrastructure, scalability considerations, provisioning made by the vendor.

Customers

Checking who uses the solution before making your decision is absolutely critical. As the first order of business, check the news and events section of a site to check the press releases. Any company worth its salt would do press releases when they sign new customers (or a set of new customers). Check for the quotes from those customers in those press releases. The names there would serve as good reference checks. If you are lucky you might already have them in your network. Besides throwing names, a vendor should be able to provide references and case studies of successful implementations. While you are at it, also check for customers who have renewed their contract at least once. A customer who has renewed the contract (after the initial term of 1 or 3 years) is much more convincing reference than a new customer just couple of months old.

Product Roadmap

Evaluating a product fit to your business need no doubt would be the first thing you look for. Granted that you would verify and ensure the product meets most of your current needs. A product roadmap with concrete list of items for at least the next six months and candidates for future releases are a good measure of a quality vendor. That said, you will also want to ensure that the vendor is agile enough to change course and priorities as business needs demand.

Governance

If you thought the imposition of regulatory mandates in recent times in onerous already, implementing them with a bunch of SaaS vendors might create some additional challenges. The governance processes implemented by the SaaS vendor should be of particular interest to you. Who manages the application, backups, upgrades, change management, infrastructure, security model, data center resiliency, data retention policies, disaster recovery all should be high in your criterion while considering a vendor. Most small vendors, understandably, have some form of ad-hoc processes but it is important for you to vet that against your own SOX-404 process needs. Despite the fact that software is hosted outside your premise, the burden of proof of compliance rests with you. Your auditors might not have yet gotten their arms around how to audit SaaS applications in their audits, but rest assured it is coming. So stay ahead of the curve. Ensuring your vendor has SAS 70-Type II certification done – regularly – should also be something you should insist on – and incorporate in your SLA terms.

The Technology Evaluation and Governance areas around buying a SaaS solution merit their own posts and I will cover more details in their own posts.

Update:

You can read them at

Part II: SaaS Buyer’s Guide: Technology Considerations

Part III: SaaS Buyer’s Guide: Governance Controls