Some ISVs are Adapting their Applications to Software-as-a-Service (“SaaS”), but Others are Not. Why?
October 21st, 2011 by Ed Lucente Twitter “@edlucente”
Many Independent Software Vendors (ISVs) are considering whether or not to SaaS-enable, or “SaaS-ify”, their application services and business models, especially since some high profile SaaS ISVs have succeeded wildly . For example, Salesforce.com, the best known SaaS company, has over 100,000 customers, nearly $2 billion in revenue, and offers compelling value propositions and ROIs to IT departments that make purchasing decisions no-brainers.
Some common application characteristics have surfaced among ISVs that have pivoted successfully to SaaS. It turns out that “self-service, employee-facing” applications are relatively easy to migrate to the cloud. These include applications like Salesforce.com’s CRM, Concur’s travel and expense management, or Taleo’s skills management solutions, where the SaaS purchaser is comfortable implementing specific, subscription-based application services for their employees. Other kinds of SaaS applications usually don’t require a lot of customization, legacy integration, and are not considered mission-critical.
SaaS-ification, however, is not appropriate for many ISVs. A recent report by Forrester Research found that only 25% of the global software market would be disrupted by SaaS. This makes sense since many of today’s on-premise applications would require a good amount of customization or legacy integration. Other applications are considered too mission-critical or must comply with industry regulations and laws. So it seems that customers want to avoid lengthy or risky migrations yet don’t mind straight-forward, SaaS-based add-ons.
The SaaS Business Model Is About Services
Even when applications are well-suited to SaaS delivery, an ISV’s transition to a profitable subscription-based business is risky and can take several years. SaaS marketing and business models differ from those of the traditional, license/on-premises ISVs. Entirely new challenges must be met for an ISV to achieve SaaS market success. Since SaaS applications are viewed as on-demand services, ISVs need to deliver value on a weekly or even daily basis. Examples include a delightful end user “experience” and customer care services like metering, billing, contract management, and SLA assurances. An ISV is also expected to provide more frequent application updates.
Perhaps the biggest challenge is that an ISV can no longer “install and run” and then expect a 20%+ annual maintenance fee in perpetuity. In the SaaS model, upfront revenue at the initial sale is much smaller since it is billed monthly, so carefully managing operating costs is crucial. New forms of creative financing, like a line of credit contingent upon future SaaS revenue streams, may be required from leasing companies to provide necessary working capital — and many ISVs may not qualify.
Don’t Count ISVs Out Of SaaS Just Yet
In spite of data compliance and security concerns, I suspect that many customers are asking ISVs about SaaS since there has been so much industry hype. As these concerns get resolved through new contractual agreements and industry standards, why wouldn’t customers want to take advantage of SaaS benefits like frequent updates, easier deployments, “pay-as-you-grow” flexibility, and lower CapEx?
My bet is that many license/on-premise ISVs will take a second look at SaaS over the next few years. Also, don’t be surprised to see ISVs SaaS-ify their applications as cloud service providers (CSPs) continue to improve their capabilities in areas like security and regulatory compliance. In other words, as more ISVs “trust the cloud” and strive to meet customers’ self-service demands, they will choose the SaaS model to remain competitive.
About the Author
Edward J. Lucente is Sr. Product Marketing Manager in As-a-Service for AT&T. Formerly, V.P. of Business Development at Data Center Rebates, Inc., an IT efficiency company based in Carlsbad, CA, whose professional services focus on data center energy efficiency (DCEE), leasing integrated with technology refreshes, and negotiation of IT energy rebates. Please feel free to email comments to email@example.com or twitter: @edlucente