The key thing to remember when transitioning a software business from on-premise to the hosted, Software as a Service (SaaS) model is simple: think like a landlord. And just like a landlord who rents out that dazzling corner unit with the view, you need to be prepared to provide for the upkeep, deal with neighbors (read: applications) who are causing problems, and handle requests at odd hours in order to properly service this "rented" software.
Complications aside, SaaS is no longer considered just a wave of the future; it's here today and here to stay. Major players like Salesforce.com, WebEx, and NetSuite have already proven that the model is successful, while traditional providers of licensed software (e.g., Microsoft) are now announcing better-late-than-never forays into the world of hosted applications.
As a software provider, embracing SaaS is first and foremost a strategic business decision.
For licensed software providers that add hosted deployment to their portfolios, coexistence can be a smart strategy. Supporting both approaches recognizes the value of legacy relationships, the importance of offering choice to a diverse customer base, the varying needs of organizations and their discrete implementations — and the power of the future.
The marketing and technology implications can be significant, of course. Minimizing the impact to existing customers and staff while keeping the revenue stream at least intact (the ultimate goal is growth, of course) is crucial. Proper due diligence and market analysis, coupled with a broad understanding of the impact a new product delivery model will have on the organization, all factor into the decision about whether to go the SaaS route.
Depending on the industry sector or corporate culture, some of your clients may still prefer installed software for the control, customization, and/or security and privacy advantages it offers — making it essential that you do your homework first. Here are ten tips for planning and ensuring a successful transition to SaaS.
1. Be prepared to redesign your software architecture
As in designing a house, architecture and software function are tightly coupled. In an ideal world, SaaS architecture should be built from the ground up as a "multi-tenant" environment; this contrasts with the single-company orientation of most on-premise software.
Because entering the SaaS sphere could involve a substantial redesign of your software platform, it is wise to start by examining your customer base and the market forces affecting your business before taking the plunge.
2. Short-term, rethink how you can leverage your existing software
If you decide to make the transition to the hosted model, in whole or in part, you can do certain things in the interim to make the process a smooth one. Consider providing your services as a "managed hosted" platform. This approach places the existing installed software on your company's servers, hosted in a co-location environment.
By offering this service, you can begin to migrate larger clients and company infrastructure to the hosted model — without requiring the customer to make wholesale changes. As a short-term solution, the managed hosted alternative enables providers to leverage their core architecture and existing software code-base — and thereby generate multiple revenue streams while making the full transition to a SaaS-based architecture.
3. Decrease the number of operating systems your licensed platform will support
If you plan to offer both licensed and hosted software, consider limiting the number of licensed software operating systems and other environments your company supports. The gradual elimination of support and R&D for some licensed software operating systems, coupled with the concurrent development and growth of the customer base for the SaaS platform, make for a more gradual transition.
While dropping an operating system or two may cause some clients to fall away, this strategy may actually increase profit margins by reducing the level of engineering required to support multiple licensed platforms.
4. Designate a different engineering team for each software model
Ideally, you'll want to move toward separate and distinct engineering teams, with each assuming responsibility for design and development tasks relevant to the given platform.
Besides architectural differences, SaaS development tends to be faster and updates occur more frequently than with installed software. Likewise, the nature of the competitive space and interactions with customers are typically more intense. That being said, however, you may find it more practical to leverage the same team and development cycle across both platforms in the near term.
5. Sales reps may need greater functional expertise
When selling SaaS solutions, the buyers are almost exclusively the end users, with minimal involvement from IT except for large or complex deals. As such, your marketing and sales teams may need to adjust their approaches to better fit with less technical buyers.
The selling vocabulary must shift from tech specs to product functionality and usability. The audience is no longer the CTO or the IT department (except, of course, for hosted IT solutions), but the VP of marketing, the head of human resources, or the VP of sales, for example. This shift in customer expertise / experience requires that sales teams be even more sensitive to the needs of these non-technical buyers
6. Direct sales becomes the dominant channel
Traditionally, channel partners can be vital to companies selling licensed software. In a SaaS world, customers simply log in to your software solution directly and can be up and running in minutes or hours. If the channel was a significant part of your business, you'll likely have to gear up your direct sales, marketing and support functions to match SasS buying model.
That doesn't mean your channel goes away for hosted deployment. In the SaaS model, partners and resellers tend to take on more of the functional expertise — such as interactive agencies for marketing solutions — than an IT or integration role.
Other types of partnerships may take on a new importance, such as integrations with related solutions and value-added service providers.
7. Remember: the second 'S' in SaaS stands for service
And what a service it is. 24/7/365. No down time; no excuses. Your clients may work from home, around the world, in different time zones and with different needs. Because the SaaS application is hosted on your company's servers, the buck stops with you; complaints will come to rest at your door.
Unlike packaged software, new considerations affect your decision-making and your bottom line — where are the co-location servers housed, for example? How much capacity do you need to host all your clients? How robust is your communications infrastructure?
Seemingly every facet of the business needs to be reviewed and, as appropriate, strengthened to meet new client demands: accounting practices, maintenance schedules, product update procedures, and more.
8. Expect more clients, shorter decision times — but smaller contracts
The biggest change involved in embracing the SaaS model is also its biggest selling point: the recurring revenue stream. Unlike licensed software, clients don't invest in a system marked by an often lengthy sales cycle and a frequently protracted installation phase. Compared to SaaS, licensed software fees are high up front and usually are accompanied by annual maintenance and support fees as well.
The hosted software sales cycle represents a different dynamic entirely. By its very nature, the SaaS "buy decision" attracts non-technical decision-makers. These decision-makers may have less to spend and much less time with which to select a vendor. Individual deals are much smaller but the sales cycle is shorter (and the cost of sales usually substantially lower). The fees your company receives remain constant, month to month, or increase if a client adds new users or additional services or functionality.
9. Develop a long-term business plan for the transition — and stick to it
The downside to transitioning from a licensed software company to SaaS is the same as the upside — fewer big one-time deals and, on a monthly basis, accounts are smaller. So anticipate accordingly: design a long-term plan, adhering to goals and benchmarks set for the duration of the transition.
Until SaaS represents "significant" business, it will be almost impossible to become a 100 percent hosted provider and still maintain positive cash flow. Don't be surprised if that transition plan looks out five or more years — but with virtually everything being dictated by the competitors and customer acceptance of the hosted model in your space.
10. Don't evict your current tenants
Even though embracing a new business model can be intoxicating, transition responsibly. Don't leave your existing clients behind. If you're a frequent communicator by nature, ratchet up customer communications a few more notches. Existing software clients need to be reassured that the pace of new versions and technical support they've historically received won't change.
If your endgame is to exit the licensed software business entirely, you need to evaluate your existing customer base and ask some tough questions. Who are the important clients? Can some licensed software clients move to a hosted platform? Will some clients be willing beta-testers for the new SaaS model? Can the company's financials sustain an exodus of licensed customers?
Answering these questions, following these tips, and executing that strategic business plan will help you determine what you want your software company to be: hosted, licensed – or both?