The ISV Transition to SaaS

Cloud computing has challenged and transformed the traditional on premise delivery model of independent software vendors. Many ISVs are transitioning from delivering packaged software to a Software as a Service (SaaS) model. Typically, teams of fewer than 50 people working on less complex projects were certainly the proving ground for SaaSification, since smaller establishments weren’t likely to invest in an on premise solution.  However, there’s been a huge reversal of this trend and SaaS has become a standard for any company implementing business applications or services. Today, it is well established in the ISV community as well as the larger IT Ecosystem that SaaS and cloud are the new standard delivery models for almost any new application.

This major trend presents major challenges to ISVs business and their technology infrastructure. For instance, performance, scalability, availability, and security become much more crucial as a SaaS vendor will be supporting many users and customers on their platform. This requires an entirely new approach – and to be economically feasible, needs to be accomplished in a way that the process scales without posing budgetary issues.

Partnering Along the Way to the Cloud

For legacy software companies, perpetual licensing is very dear to their core business model. That said, most legacy providers are well into the process of shifting their focus to SaaS. For instance, Oracle saw their SaaS revenue grow by 50% year on year in 2013. SaaS is going mainstream in many major market segments and solution categories, proving that it is the future of software delivery.

For quite some time now, ISVs have moved away from being their own host and relied on specialized cloud (infrastructure) providers to run efficient IaaS and PaaS platforms. This is clearly evident from the go to market strategies of powerful vendors such as Salesforce, IBM, and Oracle. These major enterprise vendors are competing for the ISV and developer market to support their respective platforms and build powerful ecosystems. While there are several platforms and routes to market, with varied choices of cost, and support, the onus is on each ISV to choose the right model for their business.

Secret Sauce to SaaS Pure Play

In many instances, ISVs may choose to build their own solution on borrowed infrastructure, and sell it through their channels or sell it directly to end users. This allows them substantial control — and often substantial margins on the appliance — that the ISV partnership option doesn’t offer.

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, travel and expense management, or Taleo’s skills management solutions, where it is easy to implement specific, subscription-based application services for users/customers. Other kinds of SaaS applications usually don’t require a lot of customization, legacy integration, and are not considered mission-critical.

So, how can an ISV become a pure play SaaS provider and scale like Salesforce.com?

Product Engineering for a new Business Model

From agile development to multi-platform redesign, the application must be able to meet the new demands of SaaS, mobile communications, and cloud computing.

All aspects of running a business will have to change when moving from a licensing model to a subscription-based model: from direct sales to inbound marketing, onsite customer service to online training and documentation, smaller projects with lean trials that get rolled out in stages and so on. Agile, mobile and social add to growth and will help achieve scale.

Demonstrate Value and Segment Customers

Differentiation is the key to providing better overall customer value and better price. It is here that building a clear value proposition and communicating it to customers is all the more important – value perception varies with customers, if a product sounds important, its specially differentiated features and benefits come to the buyers’ notice. Also, not all customers have the same needs and the willingness to pay. Targeting your entire customer base with one product and one price is not the way toward optimum financial performance.

Managing Operating Costs

Perhaps the biggest challenge is that an ISV can no longer host their solution, have it “install and run” at their customers’ end and then expect a 20%+ annual maintenance fee year on year. In the SaaS model, upfront revenue at the initial sale is much smaller since it is billed monthly or even annually, so carefully managing operating costs is crucial.

SaaS! = Monthly Recurring Payments

Alternate forms of financing, for instance a line of credit extended depending on future SaaS revenue streams may be required to provide necessary working capital.

Summary

In a nutshell, a successful transition to the cloud necessitates compliance with service agreements, versatile packaging, dexterity to address emerging opportunities and revenue models that make the most business sense apart from strong back-office support to deliver an integrated on premise and SaaS offering. However, the most important step toward building a SaaS strategy is to understand that customer success will play the most crucial role in establishing the legitimacy of SaaS as a delivery model.

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