THE HOLY GRAIL OF SOFTWARE
Anyone who is paying attention knows the software industry that emerges from the post-2000 recession will be unrecognizable from the one that went in. Mergers, acquisitions and failures have, of course, changed the roster. Beyond that, the future winners will have overhauled their business models and left behind the problems that have plagued the industry. They will have responded to customer demand and adapted their products, support and delivery mechanisms to a new service-focused paradigm. As a result, they will have broad and deep product lines, profitable recurring revenue streams, and loyal customers that regard them as valuable partners.
The most successful will propel change, mindful of their customers’ requirements and Albert Einstein’s admonition that “the significant problems we face cannot be solved at the same level of thinking we were at when we created them.” Those companies whose business models remain stuck in the bygone good-old-days will be overpowered by their reinvigorated competitors.
Serious Business
Software company executives that are serious about their businesses and their customers already are actively refining their plans for incorporating true Software-as-a-Service (SaaS) offerings. Their less focused competitors are getting bogged down in day-to-day tactical particulars and the semantics of SaaS versus “ASP model” or “On-Demand” or “Utility” software.
Fundamental business model changes are exactly the point, no matter what the underlying dynamic is called. And “dynamic” it is. In his April 22nd column, Sand Hill Group’s M.R. Rangaswami discussed customer demand for SaaS in the context of the four “seismic shifts” coming to the industry. For the record, seismic = earthshaking, momentous, devastating.
The coming shifts do not have to be devastating, as the serious execs know well. Their companies will not be merely responding. The most significant difference between them and their less successful competitors will be that they listened to their customers, something for which software vendors are not generally well known. Almost as important, the winners will have incorporated what they were told into their plan. Momentous changes require planning, and planning is not a tactical exercise.
Pricing & Other Delusions
The development of SaaS (or “pivot” toward it, as suggested by the name of Jamcracker’s cornerstone enabling product) requires more than just a pricing model change. As one industry CEO put it, subscription pricing – absent true service-oriented delivery – is “a head fake” many software execs give to their customers. These vendors know IT budgets are more closely monitored than ever before, and they recognize their customers’ need for more flexibility. They figure if they can offer their standard licensed product for a monthly or quarterly fee over a fixed term, they will have solved the problem. And they may – for a while.
But pricing changes are almost always tactical, and a closer examination reveals other issues not so easily resolved: What dedicated resources are required of customers’ IT departments to install, operate and maintain the product? What responsibility does the vendor have for ensuring proper configuration and performance? What services (both technical and non-) does the customer expect during the term of the contract, and at what cost? What does the SLA mean? Not “What does it say?”, but “What does it mean?”
The answers to these questions certainly will differ from company-to-company or product-to-product, but they also will be more revolutionary than anything vendors have been delivering to date. The questions represent critical issues because they – not just pricing – are driving increasing customer demand for SaaS, where “service” is the operative word.
On the other hand, there are those software execs who are convinced their applications are not compatible with or their customers are not interested in SaaS; some claim IT managers’ are unwilling to commit to SaaS and use that as an excuse for their sluggishness. These positions fail to recognize market data that clearly show escalating demand across virtually all sectors for almost any kind of software, to say nothing of the plethora of SaaS start-ups over the past year or two.
Demand & The “Holy Grail” Model
If rising demand for new services was not enough (especially at the tail-end of such a deep and long recession), one would expect the SaaS revenue model to gain broad-based industry attention. Serious software execs understand that the industry’s end-of-quarter price slashing game will not work over the long term, and they are not interested in customers’ growing tendency to treat negotiations as if they were buying a new car at the close of the model year.
Instead, they recognize monthly recurring revenue (MRR) as the Holy Grail it is. Businesses with committed MRR sufficient to cover fixed costs can realize an escalating relationship between sales expense and highly profitable revenue. There is no quarterly panic to “make the number,” because the number is accumulating month over month with dramatically shortened sales cycles. This is true particularly with enterprise products that no longer need to be installed on the customers’ IT stack. Downward pricing pressures are imposed primarily by competitors and product substitutes, as opposed to customers’ negotiating tactics.
Most of the industry’s start-ups and many of its future winners are already well-positioned to capture this multi-faceted prize. At question is how many (and which) of the rest of the traditional, license-based vendors will embrace the coming change.
Bifurcated Problem
For legacy software companies, the pivot into a SaaS model is difficult from two different perspectives: The technical and the commercial.
Technologically, the solutions exist. Many SaaS vendors have already developed products for scalable on-demand delivery. Servers are cost-effective, and their supporting multi-tenancy solutions work. One positive outcome of the telecommunications crash is that bandwidth rates are more than competitive; they are downright cheap. Data center floor space is ubiquitously available at rates that are one-third (or less) than those demanded four years ago. Hardware, infrastructure and service providers are hungry for new business, and demand has yet to match their appetites growth.
Software vendors that do not prefer the do-it-yourself approach have many enabling options from which to choose. Jamcracker’s Pivot Path, OpSource’s Optimal On-Demand, and NaviSite’s SaaS Enablement Platform all offer robust – and sometimes complimentary – solutions for the customer-facing technological problem. By using one (or more) of these, the software vendor can focus on what software vendors do best: writing code.
On the business side, software execs will find that Sales, Marketing and Finance are as different as Operations under a SaaS model. What does the quarterly revenue growth curve look like? In what ways are revenue recognized and treated differently? How do they define, plan for and manage churn? What additional customer-facing services need to be and can be provided? Will lead generation work differently? How will the sales pipeline change, and thus, how will sales quotas and compensation need to change? What will success look like?
The Dirty Word Repeated
In future posts, many of these questions will be examined in more detail. For now, suffice it to say that most of the answers will present themselves through rigorous planning.
Most executives shrink from that idea because they can develop tactical solutions that are effective in the short term. The word “planning” represents a process that can be agonizing, cumbersome, boring and time-consuming, but it does not need to be any of those things. A good plan can be developed quickly and with minimal pain as long as it concentrates on the company’s core competencies in the context of prevailing market forces.
Currently, those forces are demanding higher quality services from software vendors. Based on that demand, the SaaS model was developed. From that model should come the plan, then the strategy, and then the tactics. These are things that any good executive already knows; the only things left to do are define success and draw the map.
The most successful will have not only remembered Einstein’s words but also Lewis Carroll’s Cheshire Cat: “If you do not know where you are going, any road will take you there.”
The most successful will propel change, mindful of their customers’ requirements and Albert Einstein’s admonition that “the significant problems we face cannot be solved at the same level of thinking we were at when we created them.” Those companies whose business models remain stuck in the bygone good-old-days will be overpowered by their reinvigorated competitors.
Serious Business
Software company executives that are serious about their businesses and their customers already are actively refining their plans for incorporating true Software-as-a-Service (SaaS) offerings. Their less focused competitors are getting bogged down in day-to-day tactical particulars and the semantics of SaaS versus “ASP model” or “On-Demand” or “Utility” software.
Fundamental business model changes are exactly the point, no matter what the underlying dynamic is called. And “dynamic” it is. In his April 22nd column, Sand Hill Group’s M.R. Rangaswami discussed customer demand for SaaS in the context of the four “seismic shifts” coming to the industry. For the record, seismic = earthshaking, momentous, devastating.
The coming shifts do not have to be devastating, as the serious execs know well. Their companies will not be merely responding. The most significant difference between them and their less successful competitors will be that they listened to their customers, something for which software vendors are not generally well known. Almost as important, the winners will have incorporated what they were told into their plan. Momentous changes require planning, and planning is not a tactical exercise.
Pricing & Other Delusions
The development of SaaS (or “pivot” toward it, as suggested by the name of Jamcracker’s cornerstone enabling product) requires more than just a pricing model change. As one industry CEO put it, subscription pricing – absent true service-oriented delivery – is “a head fake” many software execs give to their customers. These vendors know IT budgets are more closely monitored than ever before, and they recognize their customers’ need for more flexibility. They figure if they can offer their standard licensed product for a monthly or quarterly fee over a fixed term, they will have solved the problem. And they may – for a while.
But pricing changes are almost always tactical, and a closer examination reveals other issues not so easily resolved: What dedicated resources are required of customers’ IT departments to install, operate and maintain the product? What responsibility does the vendor have for ensuring proper configuration and performance? What services (both technical and non-) does the customer expect during the term of the contract, and at what cost? What does the SLA mean? Not “What does it say?”, but “What does it mean?”
The answers to these questions certainly will differ from company-to-company or product-to-product, but they also will be more revolutionary than anything vendors have been delivering to date. The questions represent critical issues because they – not just pricing – are driving increasing customer demand for SaaS, where “service” is the operative word.
On the other hand, there are those software execs who are convinced their applications are not compatible with or their customers are not interested in SaaS; some claim IT managers’ are unwilling to commit to SaaS and use that as an excuse for their sluggishness. These positions fail to recognize market data that clearly show escalating demand across virtually all sectors for almost any kind of software, to say nothing of the plethora of SaaS start-ups over the past year or two.
Demand & The “Holy Grail” Model
If rising demand for new services was not enough (especially at the tail-end of such a deep and long recession), one would expect the SaaS revenue model to gain broad-based industry attention. Serious software execs understand that the industry’s end-of-quarter price slashing game will not work over the long term, and they are not interested in customers’ growing tendency to treat negotiations as if they were buying a new car at the close of the model year.
Instead, they recognize monthly recurring revenue (MRR) as the Holy Grail it is. Businesses with committed MRR sufficient to cover fixed costs can realize an escalating relationship between sales expense and highly profitable revenue. There is no quarterly panic to “make the number,” because the number is accumulating month over month with dramatically shortened sales cycles. This is true particularly with enterprise products that no longer need to be installed on the customers’ IT stack. Downward pricing pressures are imposed primarily by competitors and product substitutes, as opposed to customers’ negotiating tactics.
Most of the industry’s start-ups and many of its future winners are already well-positioned to capture this multi-faceted prize. At question is how many (and which) of the rest of the traditional, license-based vendors will embrace the coming change.
Bifurcated Problem
For legacy software companies, the pivot into a SaaS model is difficult from two different perspectives: The technical and the commercial.
Technologically, the solutions exist. Many SaaS vendors have already developed products for scalable on-demand delivery. Servers are cost-effective, and their supporting multi-tenancy solutions work. One positive outcome of the telecommunications crash is that bandwidth rates are more than competitive; they are downright cheap. Data center floor space is ubiquitously available at rates that are one-third (or less) than those demanded four years ago. Hardware, infrastructure and service providers are hungry for new business, and demand has yet to match their appetites growth.
Software vendors that do not prefer the do-it-yourself approach have many enabling options from which to choose. Jamcracker’s Pivot Path, OpSource’s Optimal On-Demand, and NaviSite’s SaaS Enablement Platform all offer robust – and sometimes complimentary – solutions for the customer-facing technological problem. By using one (or more) of these, the software vendor can focus on what software vendors do best: writing code.
On the business side, software execs will find that Sales, Marketing and Finance are as different as Operations under a SaaS model. What does the quarterly revenue growth curve look like? In what ways are revenue recognized and treated differently? How do they define, plan for and manage churn? What additional customer-facing services need to be and can be provided? Will lead generation work differently? How will the sales pipeline change, and thus, how will sales quotas and compensation need to change? What will success look like?
The Dirty Word Repeated
In future posts, many of these questions will be examined in more detail. For now, suffice it to say that most of the answers will present themselves through rigorous planning.
Most executives shrink from that idea because they can develop tactical solutions that are effective in the short term. The word “planning” represents a process that can be agonizing, cumbersome, boring and time-consuming, but it does not need to be any of those things. A good plan can be developed quickly and with minimal pain as long as it concentrates on the company’s core competencies in the context of prevailing market forces.
Currently, those forces are demanding higher quality services from software vendors. Based on that demand, the SaaS model was developed. From that model should come the plan, then the strategy, and then the tactics. These are things that any good executive already knows; the only things left to do are define success and draw the map.
The most successful will have not only remembered Einstein’s words but also Lewis Carroll’s Cheshire Cat: “If you do not know where you are going, any road will take you there.”
posted by Ken Boasso at 00:07
<< Home