Introduction

With cloud and mobile technologies taking root, Software as a Service (SaaS) is mushrooming. Wipro’s research indicates that more than half of the business software acquisitions by 2014 will be cloud or SaaS basedⁱ. The speedy SaaS momentum can not only be attributed to a tight economy but also to the associated low Total Cost of Ownership (TCO). SaaS implies zero upfront investment in IT infrastructure, making it attractive.

Applications such as CRM, financial accounting and management, marketing and demand generation, lead and order management, web analytics, digital content creation and ERP are among the early movers to the SaaS model. Estimates suggest that the global SaaS market was $16.7 billion in 2013 growing to $21.3 billion by 2015ⁱⁱ. The latest industry projections indicate that the global spending on SaaS applications will increase significantly over the next two years.

In this article, we will discuss the key challenges facing Independent Software Vendors (ISVs) in their SaaS journey.

The ISV Imperative: Adapt to SaaS or Die

Independent Software Vendors (ISVs) must move fast to get in front of this trend if they are to retain their clients and protect revenues. The challenge for them is evident. For decades, ISVs have focused on creating and selling software. Now, given the SaaS model, they must run it too. This implies being on top of the customer’s business and creating an ecosystem around products.

It is interesting to note that the traditional leaders in global software markets have quickly jockeyed into position with financial engineering providing an op-ex model to clients. They have hastily invested in smaller companies offering SaaS products so that their clients can leverage SaaS models. However, these large ISVs are now in the unenviable position of selling disparate solutions to retain clients. The end result is growing complexity. It makes it very difficult for their clients to on-board and get off just as easily – which is quite the opposite of what SaaS is meant to enable.

There are five key SaaS delivery related challenges before ISVs today:

1. Product Evolution

The SaaS model is as promising as it is challenging for ISVs. The primary challenge is product evolution. ISVs are not very keen to re-engineer their products because they still contribute to the bottom line. Their clients need to use their core solutions which have been built over years if not decades. To align themselves with evolving customer needs is an uphill task for most ISVs.

They have either multiple products acquired inorganically or products that have been developed by diverse teams. The skills required to re-engineer these products may no longer exist within the company, thus hampering the ISVs’ ability to remain competitive. Typically, an ISV may take anywhere between 18 and 36 months to re-engineer a package. This is an unacceptable time frame in an era where cloud and mobile technologies are changing businesses overnight.

What about the fact that ISVs have bought smaller companies to meet the SaaS demand? Doesn’t this solve the problem? To an extent it does; but each of their products is a different business line. The challenge before them is to integrate these heterogeneous products in an easy-to-consume op-ex model.

2. Customer Retention

Customer retention in a SaaS delivery model is possibly the biggest nightmare before an ISV. Customers don’t want to get locked in by an ISV. They want solutions that make it easy for them to switch products as well as migrate from a provider when necessary. This means an ISV must adhere to standards that enable a quick switch or migration. In such an environment, how can an ISV retain customers? The only way is to demonstrate continuous improvement in the service and to guarantee product and service innovation. For ISVs, long used to selling entire technology stacks with all components and licenses, this is a dramatic change. On one hand they need to ensure that if a customer wants to switch, the cost is extremely low, and on the other, they must continuously add value to the product and force customers to continue with their service.

3. Building Customer Insight

ISVs develop solutions through a wide understanding of industry needs. They don’t have access to individual customer usage patterns and therefore they are unable to build customer insights. This has left them feature-focused rather than business-focused. In a SaaS universe this handicap doesn’t exist: ISVs can track customer usage patterns and make rapid adjustments to their product and service to match customer needs. This means building real-time analytics capabilities. However, analytics may not be their core competency. In such cases, the ISV needs assistance from an SI – in fact, SIs build their business through an understanding of clients’ needs.

4. Business Agility

SaaS is not about selling a product; it is about service delivery. Traditionally, ISVs have been used to selling features and product upgrades. In a SaaS model, they must contend with stringent SLAs to be successful. How do they respond to customers quickly? What kind of tools do they need to support customers instead of assigning people to each customer? What kind of automation do they need to effectively service clients? In other words, how do ISVs become more agile in a SaaS model for their products?

For pure play SaaS providers this is a volume game. They sell faster to customers, on-board faster and boost margins by keeping costs in control. Larger players are unable to match these characteristics.

5. Customer Experience

ISVs have, for long, depended on product features to entice clients. They have to work continuously to improve client experience. The ISV must maintain a high level of transparency so that the client knows what was used, how much of it was used and at what cost. In addition, the ISV must provide the necessary services (support, maintenance and upgrades) and ensure that clients want to come back for more.

In the SaaS model, an ISV sells subscriptions and pay-as-you-go solutions. Therefore, revenues are tied to returning clients. A customer’s experience can spell the difference between success and failure.

The Inevitable Transformation for ISVs

The solution for an ISV is to bundle products effectively for different markets. SIs have been traditionally bundling products to create holistic solutions. They know how to package technologies so that features tie in to customer-specific values. How these bundles are delivered to the client is a business and not a technological problem. It is obvious that SIs can play a decisive role here. A good SI partner can be the stepping stone to a great customer experience. However, there are three distinct reasons why an ISV should partner with a competent SI to create effective SaaS models:

1. Service delivery: With data management and analytical capabilities, an SI is able to map customer needs and create a service that fits in well with business needs. The SI can then ensure smooth on boarding of customers; deliver easy-to-use self-service models through appropriate tools, mechanisms and automation; and create the appropriate subscription models.

2. Customer experience: The key to customer retention in a SaaS model is customer experience. Underlying great customer experience is the ability to build insights into how a customer uses an application, innovate around those insights and deliver value through domain-specific expertise for the ’wow’ factor. An SI is well-positioned to deliver the kind of experience that is central to retaining valuable customers.

3. Maximize profit: An ISV doesn’t need to build the complete SaaS infrastructure. Instead, ISVs should leverage the expertise and infrastructure of an SI to keep service delivery costs low and maximize profit.

Conclusion

ISVs are beginning to realize that selling a service is vastly different from selling a product. The entire ecosystem around a service comprises client needs, building business intelligence, bundling products, managing SLAs and improving customer experience. For SaaS success, an ISV must innovate around this ecosystem. One of the ways to address the challenge is to partner with an SI who specializes in automation and has the tools and point solutions to deliver a service.

The lines between product, licences, implementation, integration, upgrades, suppor t and other ser vices are being blurred by SaaS. ISVs that recognize this change and work with SIs at being service oriented will find that they are able to tap into the growing SaaS opportunity.

References

i. ISV-to-SaaS Business and Technology Success: Partnering for Speed and Innovation, research report by Saugatuck Technology/ publishing sponsor Wipro

ii. http://www.centerbeam.com/news/Cloud-Computing/U.S.-leads-in-SaaS-adoption-CBOID122491912-GRPOID50590013/View.aspx