Transition to SaaS:

Promises, Pitfalls, and Planning for

Success V 1.0

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Software is eating the world.

- Marc Andreessen

50% of ISV's will FAIL ONCE before rolling out a successful SaaS

strategy.

- Montclair Advisors

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Table of Contents 1 Executive Summary ................................................................................................................ 4

2 Background and Context for Making Decisions about SaaS .................................................. 5

3 SaaS: Understanding the Case For Change ............................................................................ 6

4 “SaaS-ification” Models .......................................................................................................... 8

4.1 Simple Software ........................................................................................................... 9

4.2 Customized Software ................................................................................................... 9

5 Why Move to SaaS Now? Drivers. ........................................................................................ 11

6 Transition Archetypes ......................................................................................................... 13

6.1 Traditional .................................................................................................................. 13

6.2 Hybrid ......................................................................................................................... 14

6.3 Cross-Over .................................................................................................................. 14

6.4 Pure SaaS .................................................................................................................... 14

7 The 5 Steps of a Successful Transition to SaaS ..................................................................... 15

7.1 #1 – Start with the End in Mind ................................................................................. 15

7.2 #2 – Think Customers First ......................................................................................... 17

7.3 #3 – Build a Lead Machine ......................................................................................... 19

7.4 #4 - Sell a Service, Not a Product ............................................................................... 21

7.5 #5 – Drive Customer Success ...................................................................................... 22

8 More than Subscriptions ...................................................................................................... 24

9 Summary .............................................................................................................................. 25

10 About Avangate .................................................................................................................... 26

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1 Executive Summary

Traditional software firms are in a bind. The software business model and technology delivery

models that they once knew and cherished are undergoing massive shifts due to the rise of the

Cloud, and subsequently Software as a Service (SaaS). And SaaS is clearly a trend, not just a fad.

The choice that emerges for traditional software firms is stark: adapt or slowly fade away.

While there is plenty of software industry guidance regarding SaaS practices, most of this

advice is primarily applicable for companies that were “born in the cloud” and have used SaaS

since their inception. This paper is designed to help existing software firms who may be

struggling to become SaaS providers develop a proactive plan for a successful transition to

SaaS.

This whitepaper details the broad trends that are driving the software industry toward SaaS;

provides an objective framework to determine what shifts may be necessary for a particular

company; and outlines the critical questions that will help define the end-state of any SaaS

project. The paper also clarifies that the end-state of a project cannot always be pre-

determined because it is dependent on the readiness of the software firm in question.

Finally, the paper provides pragmatic, customer-focused tips for making the shift to SaaS. The

best practices provided in this paper have been gleaned from our collective experience

providing eCommerce services to several thousand independent software vendors (ISVs).

The software industry is undergoing a massive shift to SaaS. Your customers’ success and your

success are much more closely linked than ever before. Adaptable competition, high customer

expectations, and low barriers to moving are disrupting software markets. The need exists, and

the time to start seriously considering a shift to SaaS is now.

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2 Background and Context for Making Decisions about SaaS

Is it time for my company to make the shift from traditional software delivery methods (such as physical and electronic downloads) to providing SaaS and Cloud Services?

If you are in the software business, the amount of press and buzz around SaaS can make you

feel left behind and raise questions about the effectiveness of your current software delivery

strategies. You’re likely asking yourself whether it’s time to make the switch to SaaS.

It’s clear that the SaaS revolution has

already started. Leading analyst firms

are actually forecasting an increase in

cloud services spending, even in the

face of a global economic slowdown.

This means that the need to decide

whether to use SaaS is more pressing

than ever.

In the onslaught of pressure on current business models, some companies retrench in

optimizing current business models, whereas others seek a framework for making an objective

decision about SaaS. Making this decision involves weighing various aspects of a company:

current state of maturity, organizational readiness, business model and profitability,

technology disruption, and more. It’s a complicated decision to make, but understanding some

SaaS basics will help immensely.

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3 SaaS: Understanding the Case For Change

What larger changes are resulting from the industry shift to SaaS?

Companies that haven’t already made an

informed decision about SaaS must do so

quickly, or risk being left behind the

competition. The pace of industry

disruption is rapid for software delivery:

distribution for the entire market is

expected to flip, from two-thirds physical

software delivery to two-thirds non-

physical delivery in just 4 years! This

significant shift will require careful planning to accommodate.

There are several important ripple effects of this accelerated industry disruption:

Customer expectations are changing

Today, software vendors are dealing with a highly sophisticated buyer who is much more

aware of the many products and services available than ever before. Buyers are in control.

They demand to purchase software when they want it, and have it delivered by their preferred

method. Vendors that can instantly gratify buyers with instantaneous purchase and delivery

across multiple channels are in the best position to succeed.

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Pay up front is being replaced by “pay-as-you-go”

Another fundamental change involves the shift from perpetual licenses to usage-based

subscriptions, a core feature of SaaS companies. Irrespective of the macroeconomic drivers for

this shift, subscription-based service is a reality that needs to be factored into the profitability,

sales models, and cash flow of any software company adopting SaaS.

New distribution is complicating discovery

Distribution becomes another critical issue as the many factors involved in getting a software

product to market are democratized. It is cheaper to start a software business now than at any

other time in history, due to affordable computing power, storage, and bandwidth, as well as

open source development tools. With so much competition, the hard part mostly lies in the

ability to be “found” by customers. Companies may leverage marketplaces, affiliates, app

stores, direct eCommerce, channel partners, or a combination of all of the above to sell and

promote their products.

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4 “SaaS-ification” Models

What challenges and opportunities will my company face as we work toward a

SaaS model?

To better understand the process and challenges of putting SaaS in place, let’s create a model

to help frame the current trends and players. As shown in the figure above, the “SaaSification”

model has two axes:

Software Type: Simple Software <--> Customized Software

Delivery Type: SaaS <--> ESD/On-Premise Software

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The companies shown in each quadrant provide some context for understanding the

characteristics of the various software types, which are defined in more detail below.

4.1 Simple Software

Simple software has the ability to solve specific problems very well. Simple software is

typically:

Focused on B2C services: mail, storage, productivity, entertainment, etc.

Sold online via application stores

First to be SaaS oriented

Key Challenges for Simple Software

Getting attention in a world of exploding competition and channels

Monetizing the product

4.2 Customized Software

Customized software tends to solve complicated, enterprise-wide problems. Think of the

solutions offered by companies such as Oracle and SAP. Customized software is usually:

Focused on B2B issues such as Enterprise Resource Planning (ERP), Customer Relationship

Management (CRM), Human Resources (HR), or Finance

Distributed by a combination of direct sales force and Systems Integrators (SIs) or Value Added

Resellers (VARs) that form a complex, interdependent sales ecosystem

Installed “on-premise” in target enterprises’ data centers by IT staff

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Key Challenges for Customized Software

“Consumerization of IT”: buyers expect to consume applications with the ease of simple

software while getting the results of customized software

Disruption by simple software moving “up the stack” to serve the needs of the lower end of the

business spectrum with benefits such as increased configurability and simpler pricing

Ability to offer a customized platform, which usually involves a big investment in customizing

SaaS tools

Software vendors have to choose where to position themselves to maximize opportunities

within the quadrants shown: simple or customized software, delivered by SaaS or ESD/on-

premise.

A growing separation of customized and simple software is happening at all levels of the

software industry. Simple software reflects widespread growth in online access as well as the

lower costs of development, delivery (ESD or SaaS), and distribution. Online distribution has

significantly opened up the simple software markets to include:

App(lication) stores

Affiliate programs

Search

Marketplaces

Simple software is a growing market that doesn’t benefit only consumers. The

“consumerization of IT” has opened up enterprises to using simple applications that can be

purchased online, whether directly on the vendor’s website or an enterprise app store.

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The customized software market, which consists largely of platforms extended by SIs for uses

specific to a particular company, is just beginning to open up to SaaS models.

These customized platforms reflect growing bi-modal markets that raise questions about how

companies can participate in the growing ecosystems of solution providers. Options may

include

Becoming a platform, which requires substantial upfront capital investments in frameworks

Playing in another ecosystem, and investing in distribution for “discoverability”

Both simple and customized software companies can benefit greatly from moving to SaaS, but

each type of company faces different challenges when making the transition.

5 Why Move to SaaS Now? Drivers.

The SaaS model has been proven and is maturing rapidly. Some general drivers of the

immediate need for transition for SaaS include:

Customer readiness

Ability to accelerate product evolution in fast changing markets with fast deployment

Benefit of scale economics in high growth markets

Disrupt new markets – no implementation or hardware requirements

Potential to improve company valuation: the multiples accorded to SaaS companies are higher

than traditional software firms

In a recent survey, software vendors using the Avangate platform confirmed the popularity and

effectiveness of the shift to new business models:

Over 45% use subscriptions

23% made more than 50% of their revenue from subscriptions

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Other companies are in various modes of transition – some using SaaS, some experimenting

with hybrid models that incorporate subscriptions and ESD

Perhaps surprisingly,

many companies are still

trying out subscriptions

to evaluate different

SaaS-based business

models, such as free

trials, paid trials, yearly

renewals, and even

monthly renewals. The

move towards SaaS has

almost mandated the

model of trial with a

widespread expectation

of being able to “try before you buy.” The free trial model can be a good first step toward

implementing SaaS, but requires careful planning to ensure that it boosts business.

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6 Transition Archetypes

Transitioning to a SaaS model starts with choosing the end state you want to achieve. It’s

important to note at this point that SaaS may not be the best end state for every scenario.

There are 4 key end states that we have developed based on some excellent work done by our

industry colleagues. These states are: Traditional, Hybrid, Cross-Over and Pure SaaS.

Inspired by Montclair Advisors with further interpretation by Avangate

6.1 Traditional

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Most traditional software companies remain concentrated on perpetual license sales in an on-

premise delivery model. This is especially common among mission-critical applications and in

highly regulated verticals such as Finance, Insurance, and Pharmaceuticals. There is limited, if

any, incentive to transition to SaaS for entrenched players, and any such transition will be

complex. However, deregulation offers many opportunities for disruptive players to emerge,

and SaaS always remains a possibility for future developments.

6.2 Hybrid

The primary driver for considering a hybrid state is to extend the value of the current platform

investments. The hybrid model exists when there are no distinct products for both the existing

customer base and net-new prospects. Customization capabilities remain limited in this model,

which is applicable in very few scenarios. Some infrastructure vendors promote this model

from a perspective of creating virtual appliances, and a hybrid structure may also be popular

for hardware cost savings programs.

6.3 Cross-Over

An advanced end-state is the cross-over, which involves a conscious decision to make a

business model shift toward SaaS. In this case, all new customers are on-boarded to the SaaS

version, but current customers are not immediately migrated over. The primary driver for this

state is, of course, competition, which may or may not be nipping at a company’s heels and

impacting real revenues. It is critical in this state to ensure current customer satisfaction while

simultaneously ensuring that cash flow is not impacted by the transition. In addition, cross-over

can be an interim state for companies looking to improve company valuations by using SaaS.

6.4 Pure SaaS

Pure SaaS firms are, by definition, young companies that are “born in the cloud.” These firms

are not encumbered by legacy architectural decisions with costs being paid by other firms in

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the previous states. While pure SaaS companies may enjoy more flexibility to deploy their

products, they may also face larger challenges in finding a reliable customer base and in

achieving efficient channel operations.

7 The 5 Steps of a Successful Transition to SaaS

What steps can I take to ensure that my SaaS transition is successful?

7.1 #1 – Start with the End in Mind

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Choose the model that best fits your need

See the previous section of this paper to determine whether your company should use a

traditional, hybrid, cross-over, or pure SaaS model, and understand the implications of each.

Segment your customers

1. What segment makes the most sense to begin the transition: current customers, new segments,

or current customers with different needs? It is usually agreed that new customers are easier

than existing ones to move to a new platform without incurring expensive migration costs.

2. What are the well-defined, repeatable parts of your current solution that can move to SaaS and

are common over a wide range of customers? How could that component of your solution be

offered as a SaaS add-on? Start to experiment and see what works for your customers.

Understand your costs

You must understand the costs of both tangible and intangible processes before you decide to

move to SaaS. Decide on and relentlessly measure your key process metrics with the benefit of

real-time feedback to the organization during the transition, allowing for recalibration and

improvement.

Leverage other ‘aaS to outsource non-core components

Outsource hosting, and plan to exit from the on-premise delivery model, as this cannot be

maintained over the longer term. Even some of the largest enterprise software vendors in the

world have not been able to sustain a dual investment in SaaS and on-premise delivery.

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Automate support

As the number of customer touch points increase, it will be imperative to invest in a self-

service or community network to enable customers to help one another. Otherwise, the cost of

customer contact may outweigh the cost savings or increased revenue of SaaS.

7.2 #2 – Think Customers First

In SaaS, remember that renewals and increased usage become the lifeblood of the business. It

can be difficult to make the shift from one-time licenses to maintaining a continuous, ongoing

customer relationship, but the “service” part of SaaS is more important than the “software”

part. Providing excellent service at every touch point is required, even when handling many

more support cases than usual.

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Plan specific communication paths with customers, not only for support purposes, but also for

education. The increased frequency of product releases with SaaS makes it critical to notify

users what to expect from new features and how to use them. With every release, be sure you

can track what features the customers are using by building instrumentation and analytics into

the platform.

Many new business metrics come into play in SaaS. Some of these include:

CAC (customer acquisition cost)

MRR (monthly recurring revenues)

ACV (annual contract value)

CSR (customer satisfaction rate)

Ensure you are not only tracking these metrics, but setting goals to improve them for each

buyer profile.

Build a customer community with an internal customer champion (providing the voice of the

customer) to ensure customer requests are assigned the right priority and resources are

allocated appropriately.

Additional suggestions for driving customer success in the long-term are found in step 5 of the

SaaS transition process.

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7.3 #3 – Build a Lead Machine

With most SaaS companies, the deal sizes tend to be smaller. The imperative shifts from

focusing on just a few large deals to emphasizing the efficient execution of a greater number of

deals with a shorter sales cycle. This requires building a full sales funnel through an ultimately

automated “Lead Machine” program. Some characteristics of this program include:

1. Freemium model

Allow new prospects to use some version the product for free, if possible. In the new paradigm,

usage is the new way to engage, and engagement leads to monetization. Trials and test drive

programs are a good way to get early feedback and ensure that a more focused approach to

conversion can follow.

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2. Land and expand

This strategy refers to building on the trust established by the initial engagement in order to

win additional business with the same customer. This approach is no different from the

traditional software world, but can be fine-tuned and accelerated in the SaaS model when you

are armed with usage data. This enables the pinpointing items of value that can be targeted for

up-sell and customer retention.

3. Make friends

The best SaaS firms create ecosystems that engage and retain customers. Identifying key

partners for customer acquisition (e.g., companies selling into the same markets and targets),

retention, and distribution (channel partners) improves lead flow and ensures a greater degree

of market coverage.

4. Put lead generation on auto-pilot

Auto-pilot is the holy grail for software companies, the point when new qualified leads keep

coming in from the established lead generation system. In order to reach this state, you must

clearly identify the buyer personas, the purchase path, and the content arc that prevents

prospects from leaving you for the competition. Segment your treatment of customers to

ensure that each type of customer gets the appropriate level of interaction, from self-service to

inside sales or telesales to direct sales. The sales model will depend upon the lead qualification

criteria established for each channel.

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7.4 #4 - Sell a Service, Not a Product

As noted, the “service” part of “SaaS” matters more than the “software” part. This is a

departure from the traditional software world. A key part of the shift in mindset for SaaS

involves thinking about application programming interfaces (APIs) from day one, leading to

faster, easier to use and purchase components. Customers who use the web and APIs to

“mash-up” apps are becoming increasingly common.

Services not only allow for new partnerships to be created with exposed APIs, but can also be

bundled to create a whole solution for customers. This is reflected also in the shift that VARs

and marketplaces are making (creating bundles and additional services) to avoid being

commoditized. In general, it is impossible to predict which parts of your platform will see

demand and the opening up of key pieces of the platform will ensure that the widest net is cast

in terms of driving usage and adoption.

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7.5 #5 – Drive Customer Success

SaaS shifts the profile of customer advocates from the traditional framework by emphasizing

different value points, the most crucial of these being education and communication.

Education

To drive customer adoption of SaaS products, the first step is to educate your prospects about

product benefits and capabilities. There are several popular educational vehicles to choose

from: ongoing webinars with a content arc that matches your buyer interests, free initial

training sessions, online resources such as blogs and whitepapers, and sharing best practices of

the industry during events and tradeshows.

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Self-service portals

The SaaS model requires that customer support organizations be turned on their head to

become more market-friendly and encourage knowledge exchange between customers.

Increased communication empowers customers to solve their own problems. This can be

facilitated by self-service customer portals or communities, several of which are available in

the market (often as SaaS solutions). In addition, creating content to address frequently asked

questions (FAQs) and improving search capabilities will help decrease load into the support

organization. It is also necessary to proactively and regularly measure customer satisfaction,

which also enables rapid identification and resolution of issues. In the process of creating a

self-service support community, don’t forget to reach out to the developer community,

especially to promote API adoption. This includes creating dedicated forums, code samples,

test stubs, and other technical guides that can help drive further adoption among new

customers.

Customer success teams

In addition to managing customer self-service portals, consider creating dedicated customer

success teams that are responsible for ensuring product adoption, particularly in strategic

accounts. This additional investment will prove instrumental in ensuring a long-term customer

relationship, as well as improving renewal and revenue predictability. The customer success

team should typically be a cross-functional team that incorporates support, implementation,

and documentation staff.

Social media monitoring and incentives

Recognize the impact of social media, which is favored by vocal advocates (and detractors), and

set up programs for social monitoring. This is a good opportunity to leverage customer success

teams to gather social data about customer satisfaction and product usage. Incentive planning

for advocates that involves non-monetary items such as marketing materials, event passes, and

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customer testimonials can help both parties gain knowledge and advocates in the industry.

Leverage case studies and nurturing programs on your website to continuously add to the lead

funnel by recognizing customer successes.

8 More than Subscriptions

So does moving to SaaS just mean adding renewable subscription capability to a product and

that’s it? Not at all. As you think about your SaaS strategy, remember that the ability to invoice

on a recurring timeline is just one step in a larger process.

Here are a few other items that you need to factor in:

Product catalogs;

Merchant of Record v/s Service Provider;

Payment processor integration;

Risk Management;

Fraud Screening;

Taxation and VAT;

Commerce expertise ;

Channel enablement;

Integrated solution;

Cost of integration for a complete business process flow;

24X7 support.

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9 Summary

This paper has clarified the reasons for and challenges of transitioning to a SaaS model, defined

SaaSification models and transition archetypes, as well as provided step-by-step instructions

for ensuring customer adoption and success in SaaS. By understanding the opportunities and

difficulties inherent in SaaS, defining your company’s SaaS model and transition archetype, and

taking the appropriate steps to create robust lead generation and customer support systems,

you can set your company up for initial and continued success in SaaS delivery.

Even as you find your foothold in SaaS, return often to these models, and fundamental steps in

the SaaS transition process. Never forget that customer success on the new model will play the

most critical role in establishing the legitimacy of SaaS as a delivery model, and constantly

strive for new ways to find, educate, and convert customers to ongoing SaaS usage.

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10 About Avangate

Avangate is the agile eCommerce solutions

provider trusted by Software and SaaS

companies to grow their business worldwide

through any channel, any model.

Specifically designed for software markets, Avangate's scalable and integrated solution

includes a full-featured, modular and secure eCommerce platform, a partner order and

revenue management system, as well as a constantly expanding worldwide affiliate network.

Avangate's market-proven eCommerce solution enables software companies to rapidly

embrace industry shifts, reach customers effectively, and adopt new business models with a

view to optimizing profitable revenue across online and offline channels.

More information can be found on www.avangate.com

Avangate Inc.

Redwood City CA., USA

Tel: (650) 249 - 5280

Avangate B.V.

Amsterdam, The Netherlands

Tel: 31 20 890 8080

info@avangate.com

www.avangate.com