SaaS Entrepreneur: The Definitive Guide to Succeeding in Your Cloud Application Business
Committed monthly revenue spreadsheet
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The Indispensable Book for the SaaS Entrepreneur and Startup
SaaS Entrepreneur provides your company:
- Critical information and numbers that ensure you build a successful SaaS business.
- Updated case studies that provide templates to success.
- An extensive toolbox of checklists, sample files, and spreadsheets to help you reach your goals
Only $49.99; includes Virtual DVD
SaaS Entrepreneur, Second Edition: The Deﬁnitive Guide to Succeeding in Your Cloud Application Business is the most comprehensive guide you will ﬁnd to understanding and succeeding in building SaaS (Software as a Service) businesses and services. Its case studies, operations analyses and timely data provide critical insights and information that will help you build and grow a successful new SaaS business. Its focus is on those areas of community and product management, sales, marketing, compensation, customer service, and operations and infrastructure where SaaS B2B companies sharply diverge from their on-premise counterparts.
The Second Edition incorporates updated key and critical numbers and benchmarks from Softletter’s SaaS Survey and reports, new information on Generation Z, developing for the portable workspace and transparent cloud, new case studies and much more.
What is in SaaS Entrepreneur?
SaaS Entrepreneur is divided into the following chapters:
- Special Foreword: An Interview with Zach Nelson, CEO of NetSuite
- SaaS and the Power of Communities (and the Death of Traditional Software Product Management)
- Positioning, Marketing, and Pricing Your SaaS System
- Sales Organization and Compensation in SaaS
- SaaS Business Metrics
- Operations and Infrastructure in SaaS
- Development and SaaS
- Customer Service and SaaS
- Professional Services in SaaS
- Legal Issues, SLAs, Taxes and VAT in SaaS
- International Markets
Click Here and Read excerpts
from all 10 chapters now
SaaS Entrepreneur’s appendices are broken into:
- Appendix A: The SaaS Entrepreneur Checklists
- Appendix B: Glossary of Terms
- Appendix C: The SaaS Resources Directory
- Appendix D: Further Important Reading for SaaS Companies
Each chapter in the book contains detailed descriptions of the speciﬁc operational issues and challenges you may face, as well as appropriate and helpful case studies, all of which are based on actual events and challenges faced by SaaS companies and are reinforced by over 200 tables, charts, and figures. We would like to take a moment to personally thank the company executives and staff personnel who participated in our research and provided us their valuable industry insights.
Format: Kindle, PDF and epub (SaaS Entrepreneur is no longer available in print)
Price: $49.99 if purchased alone; free to Softetter Subscribers and Partner Subscribers
Print Length: 400+ (approx)
Publisher: Aegis Resources, January
Sold by: Softletter Language: English
Started reading the book last night – it’s an excellent resource. You’re doing great work for the industry.
Mnive Nhiabathi, Founder and CEO Brandpark
Rick’s book is a must. There has been a need for a resource like this for quite a while, so I am very pleased to see SaaS Entrepreneur brought to the market. What makes this book different from so many others is that it combines extensive and fresh statistical data on the current SaaS market combined with well written, practical text. I would highly recommend this book to anybody that is considering entering the SaaS market and for the firms who need to improve their business operations and processes. The included Virtual DVD includes a huge amount of valuable material for anybody working in the SaaS domain.
Dr. Petri I. Salonen, CEOTELLUS International, Inc
We received your book. Wow! I showed it to our marketing person and he has not given it back! Love it.
Siamak Farah, CEO
Marketing Goals Checklist
The SaaS Entrepreneur 2nd Edition Checklists and Virtual DVD
SaaS Entrepreneur’s narratives and case studies are backed up by more than 650 Goals and Success checklists contained on The SaaS Entrepreneur Virtual DVD. These checklists are in Excel files and are color coded, indented, and commented for easy organization and use. They are not locked in any way and can be extended to fit your particular market and business challenges.
The checklists are divided into two types: goals and success. The goals lists outline the results you need to achieve to succeed. The success checklists outline in detail the different steps you must take to reach their goals.
Both types of checklists are broken into 10 sections that mirror the structure of SaaS Entrepreneur. The over 650 separate items in the checklists provide you with a framework for action and measurement. Combined with the book’s extensive case studies, narratives, and hard data, SaaS Entrepreneur is a comprehensive system that guides you to business success. The indispensable text book for all SaaS companies and attendees to SaaS University Online.
Chapter One Excerpt
SaaS—The Software is the Social Network
In many respects, this is most important chapter in the book. If you decide to read nothing else, read this chapter thoroughly and implement its suggestions as soon as possible. Failure to do so will first damage, then destroy, your ability to compete successfully in SaaS.
When pundits and analysts argue over what is the single most important point of differentiation between SaaS and on-premise, licensed software, they usually point to:
- The recurring revenue nature of SaaS. In SaaS, you do not purchase licenses; rather you subscribe for X amount over X period for the right to use the software. But some software companies allow you to subscribe to their on-premise software.
- The fact that SaaS applications are run in an Internet browser. But in some cases, SaaS applications are provided via terminal services and in other cases a ‘thin client’ desktop version of the software is installed on a PC and can both access a remote server and/or run on your PC locally. (And many mobile applications run the same way.)
- The fact that SaaS applications are not installed on a company’s servers. But a significant number of companies do license and install SaaS products on their internal servers. This is often referred to as the hybrid model and while we urge SaaS companies to avoid it, customer and financial demands sometimes require you license your products.
There are other issues and technologies that are discussed: multi-tenancy; virtualization; agile development. The ‘cloud.’
While these can indeed be differentiators, they miss the crucial point of SaaS. And that is that SaaS systems, by their very nature, create communities of customers who can collectively interact with each other and your company on a 24/7/52. In SaaS, the application is the social network. But to benefit from it, you must prepare to manage and leverage the application network to the maximum extent.
While these can indeed be differentiators, they miss the crucial point of SaaS. And that is that SaaS systems, by their very nature, create communities of customers who can collectively interact with each other and your company on a 24/7/52. In SaaS, the application is the social network. But to benefit from it, you must prepare to manage and leverage the application network to the maximum extent.
What Creates the Application Network?
What comprises the application network? Two inherent elements of SaaS:
- The first is that if your SaaS system is properly architected, you should be able to monitor, capture and analyze every aspect of a subscriber’s interaction with your product. This includes keystrokes, functions accessed, functions not accessed, browser usage, etc.
- The second is that because SaaS applications inherently concentrate subscribers with a common set of interests in one virtual ‘place,’ the foundation for a community is already in place. If you provide the right infrastructure, your community of customers will grow, thrive and transmit information about your product and their usage of it to your company on a constant basis at an ever increasing bandwidth.
Chapter Two Excerpt
Marketing and Pricing Your SaaS Product
What is Different about Marketing SaaS
The advent of SaaS has meant the end of the tried-and-true 12-to-18 month release on which software companies have relied for nearly forty years. As we have seen in chapter one of SaaS Entrepreneur, the rapid pace of SaaS development and innovation means that your first SaaS product launch will usually be your last. This means you must rethink your fundamental approach to marketing a SaaS product.
To do this, SaaS companies need to think in terms of their marketing programs as an ongoing narrative with both current and prospective subscribers. The current buzzword surrounding this concept is ‘content marketing.’ What is meant by this is that SaaS marketing becomes heavily dedicated to creating a steady stream of interesting and valuable content that encourages potential customers to interact with your product. In the words of Ken Rutsky, a SaaS marketing consultant who has worked with a number of SaaS companies, “An on-premise product is evaluated, a SaaS product is experienced.” Another way to think of the difference between the two marketing models is that on-premise marketing most resembles skywriting. It is very compelling, many people see it for a short time, and it is not very persistent. By contrast, SaaS marketing most closely resembles the world-famous Time Square news ticker, which is persistent (it debuted in 1928), never turns off, and constantly provides fresh information on current events with the expectation that you will engage with another news source to learn more.
Another key aspect of SaaS marketing is that your prospects will tend to be very knowledgeable about your product before they contact you about a prospective subscription. They will have spent considerable time on the Internet researching your products and the competition. They may have talked to members of your community about the product. They may have used an alias to sign up for trial or freemium subscription. Expect that if your marketing has done its job, you will close sales more quickly.
Key Areas in Which Your Marketing Must Change
It is beyond the scope of this book to deep dive into the details of how to successfully launch E-mail marketing campaigns, setup inbound links to your site, discuss the details of how to write a successful press release, etc. For assistance in this area, consider purchasing a copy of The Product Marketing Handbook for Software, 5th Edition, which is due for release in the summer of 2012; at over six hundred pages, it is a comprehensive guide on the topic of the tactical marketing of software. Instead, we will focus on where the SaaS model changes key aspects of how you use the various marketing tools and techniques available to you.
The areas of greatest change include:
Press relationships. This is still an effective way of developing awareness of your system, but the nature of your relationships changes from a transactional to an educational model. Previously, the primary ‘coinage’ software companies provided the press was information on new releases, a valuable commodity as press organizations rely on fresh news to sell their services. The availability of this particular medium of exchange is limited in SaaS. You can, however, supply new information about developments in the industry you service.
Identifying and working with domain experts. This is particularly important for companies in niche and vertical markets and a very under-used marketing approach. In practically any industry there will be individuals and/or organizations that are acknowledged experts in their field and have widespread credibility. Smart SaaS companies in vertical and niche markets will reach out to the extent possible to these experts to educate them on your product. Nothing establishes thought leadership more quickly than having thought leaders endorse you as a thought leader yourself. We know of one smart SaaS company in the project management market who engaged the author of a well-received book on the history of project management. That association helped the company’s marketing efforts considerably.
Creating and leveraging the information created by the capture, aggregation and analysis of data created by the interaction of your subscribers with your system. The information developed may be monetizable but in all cases will provide you with a steady stream of valuable information you can provide the press, analysts and your customers. We discuss this topic in greater detail later in this chapter. Do not neglect to continually survey your subscribers on industry trends and best practices and provide the results back to the community.
Chapter Three Excerpt
Sales Organization and Compensation in SaaS
SaaS Sales Force Organization
Sales Engineers in SaaS
Sales Engineers (SEs) in the software industry have traditionally been technically oriented individuals with good social skills. They are typically assigned to work in the field alongside a direct sales force (the author’s first job in the software industry was as an SE), often on a one-on-one basis, especially in major sales scenarios. SEs are typically paid a base salary with a variable component that ranges from 10% to 25% of their base. This variable compensation is often tied to sales team overall performance, as well as such measurements as customer satisfaction ratings, technical proficiency and other criteria.
In SaaS, the SE title is surviving, but the function they play in your organization is changing (as the upcoming Varicent case study helps illustrate). In the future, the SaaS SE will:
- Not work with individuals but with sales groups, most often on a remote basis. An SE may visit onsite at the end of a sales cycle to perform such tasks as configuring a new subscriber’s system to their specifications and in some cases provide on-site training.
- In some organizations, transform into sales people. Again, the Varicent case study demonstrates this process in action.
- Work as community managers. The needs of this position are often a perfect fit to the SE skill set. (In on-premise software, an equivalent dynamic is often present as many product managers are former SEs.)
Hunters and Farmers in SaaS
Traditionally in software (and other industries), sales forces are often divided into two types of personnel, ‘Hunters’ and ‘Farmers.’ In this model, sales force hunters are charged with tracking and closing new business. After the customer prey has been bagged, the supine corpus is handed over to farmers — friendly types who presumably mulch and compost the corpse, then grow new revenue flowers from the remains. (This colorful interpretation of the model was provided to us by a friend who works in IT in New York. He told us he never much cared for being hunted.)
We suggest that this model is going to be obsolete in SaaS. There are several reasons we reach this conclusion:
As already noted, many customers are educating themselves about SaaS systems and services in advance of contacting your company. Traditional methods of contacting customers, such as cold calling, are falling into obsolescence (though there are still industries in which a person will pick up the phone if they do not recognize your caller ID). But the question arises of ‘who is hunting whom.’
The method of engagement and interaction with both potential and current subscribers is very different in SaaS. As we have learned, SaaS creates a persistent relationship between a company and its subscribers. If a SaaS company has created and nurtured a vibrant customer community, up sells and cross sells will most likely come from community interaction and promotions managed by community managers. And in such an environment, the concept of ‘passing off’ a customer from one person to another seems off the point.
The best SaaS sales people do not seem to be a good psychological match to the profile of the on-premise hunter. The stereotype of an on-premise sales person is best exemplified by an old high tech joke: “How do you tell the difference between a car salesman and a software salesman? The car salesman knows when he’s lying.” But in a SaaS environment, good sales people often have to mix strong product knowledge with good people skills. A good SaaS sales person is often also a strong business problem solver and can develop a trusted relationship with a customer. It is not an asset that can be handed over to another person or group easily.
Chapter Four Excerpt
When the SaaS comeback began in the 2004/2005 timeframe, the place of channels was hotly debated. Among some, it still is. After all, no shipping or installation of products is required in SaaS. All customers share a common set of capabilities and services. Customer recruitment, sign up and services are administered and carried out at a common portal, or portals, managed by the SaaS provider. The on-demand model seems particularly well-suited to a direct sales model.
Also, in SaaS the balance of power shifts in key areas from the channel to the vendor. Providers enjoy the following:
- No prospect of disintermediation from the customer. The on-demand model inherently provides the SaaS vendor with complete access to all users of its system. By contrast, with on-premise software, companies frequently wrestle with their resellers over access to customers; there have even been cases when software publishers have been contractually prevented from identifying or contacting a reseller’s clients.
- The ability to aggregate, package, and potentially resell data and insights on best practices and trends across the full spectrum of a company’s subscribers and its resellers’ subscribers, regardless of their market or geographic location.
- Much tighter control over service levels, billing cycles and payments. This is another inherent part of the SaaS model. There will be far fewer cases where a reseller does not pay their bills on time, as the SaaS provider controls the underlying application platform.
- Decreased channel support and services overhead. With on-premise products, the two-tier reseller model introduces, by necessity, more complexity and overhead into customer and technical service, as the software publisher must learn about and support a vast array of reseller hardware and software environments. SaaS aggregates all environments into a single platform updated and managed by the SaaS provider.
The Future of the Channel
But despite the jostling, questions, and shifts in how much money changes hands over time, for many SaaS firms channel development makes sense. And as we saw in the case of DonorCommunity in the Marketing chapter of the book, the SaaS model opens up new channel opportunities unavailable to on-premise software firms. But in addition to new opportunities, SaaS companies have also discovered that the traditional reasons to implement a channel still apply. These are:
- The ability to reach new market segments outside the reseller’s core expertise and sales bandwidth. In markets such as document management, compliance, nonprofit management, small business marketing and sales portals, CMS and many others, SaaS firms are continually discovering that channels bring new market segments and revenues into reach faster than if the SaaS provider attempted to build a direct sales force to address the myriad of potential niches and market sectors. This also applies to international markets and opportunities. And channels are still powerful qualifiers. If there are no resellers present in a market, it can mean there is no market there.
- The amplifier effect provided by a channel. This is of particular value to companies selling lower end and broadly horizontal products. In project management, E-commerce, website templating and creation, etc., SaaS firms have learned that an expanding channel both increases revenues and helps fend off the competition, a lesson the desktop software market learned in the 1980s. (Fortunately for SaaS firms, they don’t have to endure the legendary levels of piracy that companies such as Lotus, Microsoft, Ashton-Tate and others suffered as their products fought for market supremacy.)
- The network effect created by channels. SaaS products open up new channel opportunities not normally accessible to on-premise products. In DonorCommunity’s case, the company discovered it could build a channel via large corporate givers who purchased subscriptions to the product on behalf of their donees. Similar instances of this effect have been found in government and the supply chain markets. In the case of supply chain products, larger retailers and distributors have been either encouraging or insisting that their vendors purchase SaaS-based software in order to integrate their entire supply networks into integrated purchasing and inventory management entities. In some cases, larger retailers and discounters have been able to purchase subscriptions for their providers at attractive discounts from the SaaS vendor, thus encouraging quick adoption of the product and speeding the integration process.
- The operational ease and speed of the SaaS model. With SaaS, time-consuming installation and setup processes and delays do not exist, nor, as noted, do resellers have to worry in most cases about adjusting the system to conform to a customer’s computing environment. This does not mean, however, that providing reseller training programs is not an important component of a SaaS reseller program — it is. It does mean, however, that such programs must focus more on teaching reseller customers best practices in using the system and assisting them in providing professional services such as data integration and advanced product training.
Chapter Five Excerpt
SaaS Business Metrics
A variety of different metrics have been developed to assist SaaS companies in tracking and measuring their financial progress and performance. Some of these numbers, such as optimal churn rates, trial and freemium conversion rates, sales close rates and others are covered in different chapters of SaaS Entrepreneur. To assist you even further in this area of your business, a spreadsheet created by SCIO Development as part of our ongoing Softletter SaaS Survey project is provided on the SaaS Entrepreneur Virtual DVD that you will download after purchasing this book. The spreadsheet will enable you to plug in your own numbers and model your metrics in a large variety of ways. The spreadsheet comes in both a populated and blank version and can be edited to fit your needs.
Common SaaS Operational Metrics
Average Revenue per User (ARPU). This metric is valuable in business models where customers subscribe to different application levels, modules or service levels. When multiple income streams are generated, it can be useful to track these income sources separately and use that data to determine what types of subscribers contribute the most revenue.
Cost of Service (CoS) or Cost to Maintain (CtM). The cost of services and operations to maintain the application and client instances. This can include hosting charges, hardware and software renewals (though we think these should be broken out of this metric and tracked in their own ‘bucket’), support, staff operations, and outside services—all of which are operations costs. The running change calculated in the spreadsheet is a key indicator because it can offer insight into trends you might not see otherwise.
In the 10-K section of this chapter note the general and administrative percentages (G&A) and research and development (R&D) percentages for SaaS companies; these provide more insights into cost of services numbers. Also note the information on what percentage of revenues SaaS firms dedicate to running and maintaining their infrastructure provided later in this chapter.
Average Customer Acquisition Cost (ACAC) or Average Cost to Acquire (AtC). This is a ‘front-loaded’ cost because you normally must spend money on sales and marketing programs before you generate revenue. In SaaS sales, it is hard to know the ‘lead-time’ from the first moment a prospect comes in contact with your company through to closing the sale (metrics on this topic are provided in the Sales chapter of the book). Only in the case of metered marketing campaigns that include promotional tracking can you begin to analyze your sales. In the spreadsheet example, we have taken the simplistic approach of counting the previous period sales and marketing costs as the contributing factor for the sales in the following period. You can modify this to set a period that better reflects your sales model, but until you actually know the cycle, this is a good starting point on which to model your assumptions.
This metric also points out another factor: most business-to-business sales models for SaaS include different subscription periods so you cannot assume a uniform renewal rate. Subscribers may be renewing on a monthly, quarterly, yearly or multi-year basis. In those cases, a separate report that tracks renewal period choices made by different market segments will be very valuable. These reports can answer questions such as, ‘Are larger enterprises actually subscribing at the longer subscription lengths?’ ‘Is this an SMB market with subscribers picking monthly and quarterly subscription lengths?’
Chapter Six Excerpt
Development and SaaS
Customization and SaaS: Drawing a Line in the Sand
One piece of criticism constantly aimed at SaaS is that it is not as ‘customizable’ as on-premise software. Before examining this claim further, we need first to define ‘customization’ from the perspective of licensed software in order to provide the proper context. Traditionally, ‘customization’ meant a change to the application source code or the creation of modules for a specific client, often with the result that the vendor ended up maintaining a branch of source code to support each client. With custom modules, the vendor would maintain only the modules’ source code but had to ensure that subsequent releases of the core product did not break compatibility with these one-off components. If they did, the modules had to be rewritten or the customer could choose not to upgrade from the version for which their one-offs were built. This strategy works for on-premise software vendors because all they need to do is to maintain customer-specific source code and/or modules. This complicates the software development life-cycle, but it also creates massive barriers to exit for the client since their customizations are owned by the vendor. And since the vendor usually charges annual maintenance fees, plus time and materials for customizations and module compatibility upgrades, this approach is often profitable.
By contrast, SaaS vendors should regard customization as a Cardinal Sin that, once committed, brings retribution that stretches into Subscriber Eternity as customization requests break the SaaS model. This includes any request for running a ‘private version’ behind a customer’s firewall or in a ‘hosted’ environment. By adopting this mindset, SaaS vendors will have an easier time saying ‘No!’ to the customer or asking for significant premiums to fulfill customization requests. Put succinctly, there is no way to handle one-off customizations within a SaaS business architecture.
But the reality is customers will still request customizations without considering if they truly need them. Some potential subscribers may refer to a checklist every time they buy a new accounting package. The original checklist included a requirement for a custom widget that no one has used in 10 years, but it is still a ‘must have.’ ‘Why’ may have been forgotten. The department or person who originally made the request may be long gone. Yet the widget is still on the ‘must have’ list. When the company comes to your virtual door with that same checklist and asks for that widget, what are you going to say?
Before answering, it is necessary to stop thinking like a software company and think like a service firm instead. Ask yourself how a CPA would handle a client who asked to use an outdated IRS form. The CPA would say, ‘No.’ One of the reasons we’ve emphasized integrated analytics and community development so strongly is that if you are able to back your assertions with hard data and customer agreement, your credibility as market experts grows tremendously.
Many SaaS vendors will argue that one-off customizations will help them generate cash in the short term, which will in turn help them through the lean times while they grow recurring revenue. It is true that the custom design-and-build business can be lucrative and tempting in the short run, but over time it can do tremendous damage to your business by:
- Distracting your developers from making rapid and high-quality improvements to your core product.
- Interfering with your sales group’s process of learning how to accelerate sales processes and shorten buying cycles by encouraging them to hunt for other big-dollar customization ‘opportunities.’
- Taking your company’s focus off the task of continually refining a nimble, fast and responsive business architecture.
The Flexible Solution
Flexibility is the answer to the customization dilemma for a SaaS vendor. At an implementation and configuration level, you must plan in advance what amount of flexibility will be built into your system. Ultimately, all of this should be dictated by your target market’s needs. Your goal when rolling out the ‘1.0’ version of your system should be able to meet at least 65% of the needs of majority of your target market. As subsequent versions of the system are released, your goal should be to increase that number to 80% and enable the 20% of specialized requirements to be met through inherent flexibility. This flexibility, including the user interface, reports, workflows, templates, etc., should be meta-data driven, where the underlying application does not change for each client. Being meta-data driven, each client, or even each individual user, can make changes to the elements on their own without going outside of the sandbox created by the system flexibility model.
When considering flexibility and your SaaS business architecture, remember that the more horizontal the product, the more flexibility will be required to meet the majority of the needs of the target market. As the focus becomes vertical or on a tighter niche, more can be built into the core product to meet a market’s needs. With a tighter vertical focus, it is also easier for the SaaS vendor to be thought of as the industry expert who understands the market’s requirements and best practices.
Chapter Seven Excerpt
On Premise vs. SaaS Customer Support and Service Expectations
For enterprise class, on-premise software, support is typically bundled into a service and maintenance contract, but the model is inevitably shaped by the realities of the situation. In the licensed model, a program will be installed on hardware and expected to work in a customized environment over which the software provider has no control and often incomplete knowledge of the operating parameters. It is no surprise, then, that in most cases the support for an on-premise software product must be provided by the customer’s IT department.
In SaaS, this dynamic changes radically. Subscribers typically have ‘white glove’ support expectations, and failing to meet them will have a strong impact on both customer satisfaction and re-subscription rates. Unlike on-premise software sales, which follow a ‘sell and go’ trajectory (i.e. you send a CD or install a product for a customer, then return only when it is time to upgrade), SaaS is a ‘sell and grow’ paradigm. Once a subscriber accesses the system, their interaction with the product and with your company is a 24/7/52 proposition. You are always in contact with the customer and they, in turn, become intimately acquainted with your firm’s support and service policies. And the more your customers pay for their subscriptions, the higher their expectations. That, in turn, drives the need for SaaS companies to provide levels of support and assistance that are far more comprehensive and responsive than those in on-premise markets. It is often easier for customers to move on to other service providers if they are unhappy. The resulting subscription churn will damage your company’s economics, and as churn drops to 90% or lower, maintaining profitability and revenue growth becomes very difficult.
Customer Support and Service Levels
Free vs. Paid Support
Depending on the product and the market, your company may or may not offer paid support. Firms that rely on free support programs typically address broad or ‘horizontal’ markets such as low-end project management, file uploading and storage, casual video and graphics storage and presentation, and large file transportation.
If your company has a substantial freemium subscriber base, it will be somewhat atypical to provide them with paid support; this option will normally be offered when the freemium subscriber purchases a paid subscription package.
Chapter Eight Excerpt
Professional Services in SaaS
The Perception of Professional Services by Your Customers
In professional services , the change in revenues generated is driven by several factors:
- The perception that SaaS is quick and easy for a company to subscribe to, implement, and train staff on new on-demand solutions. Contradicting this belief are expensive bills received for professional services; these introduce serious ‘cognitive dissonance’ in the buyer’s mind. Upper management is not interested in seeing swarms of sales engineers and implementation specialists camped in company cubicles and empty offices after a SaaS subscription has gone into effect.
- Subscribers have expectations that the value of their subscriptions flows directly from the software, not from the professional services rendered. The mindset of the typical SaaS customer is that professional services ‘tidy up’ the subscription commitment, not provide its ultimate value.
- Maintenance is almost impossible to charge in a SaaS environment. In and around 2005, as the SaaS industry began to revive, some firms attempted to include maintenance fees in their pricing models but quickly did a turnaround in the face of fierce subscriber pushback. Why? Because there is nothingto ‘maintain’ in a SaaS system. Annual usage fees are possible, but they should not be associated with the word ‘maintenance,’ which must be eliminated from the corporate billing vocabulary.
- Increasingly, SaaS subscribers expect that advanced support will be delivered from a customer community that coalesces around the SaaS system.
- Many corporations have subscribed to SaaS systems because they wish to regard the expenditure as an OpEx and not a CapEx expense. Large expenditures in professional services confuse CFOs, who are the ones that tend to monitor CapEx vs. OpEx calculations.
Key Differences in Professional Services Teams and Practices
Traditional classroom training for SaaS subscribers is disappearing. Empty classrooms are now the norm. Training has become an online entity, often with both instructor-led and self-paced delivery options.
Many SaaS companies are choosing to provide customized training through partner organizations that have specialists on staff.
Professional Services Delivery
Today with SaaS, the delivery of professional services is far more commoditized and standards-based. Contracts are typically a fraction of the length found in larger on-premise implementations, and terms are far easier to understand. Key areas of differentiation are comprised of the following:
- After initial set up, companies offer simple packaged services with increased functionality.
- A typical project timeline may include four weeks of billable work accomplished over an eight-week time span.
- Initial fees are often only 25% of traditional on-premise implementation; plan for revenue from ongoing managed services, business, consulting and training.
- There is no single rule of thumb to determine the initial implementation and set-up fees for the services package.
- Projects are normally measured in weeks, not months.
- In terms of meeting budgets and timelines, project goals often shift to focus more on increasing subscriber satisfaction and utility of the software.
Chapter Nine Excerpt
Legal Issues, SLAs, Taxes and VAT in SaaS
(Disclaimer: The advice and information offered in this chapter is intended to provide a useful guide to complex legal issues surrounding doing business as a SaaS firm. Do not rely upon this chapter for formal legal advice regarding the different issues being discussed. It is not intended as and should not be taken as legal advice. To obtain that, we recommend you contact an attorney who specializes in issues and operations of particular interest to you and your company. The Resource section of this book provides legal contacts experienced in SaaS issues.)
Ambulance Chasing and SaaS (and Cloud)
Ambulance chasing: A derogatory phrase sometimes used to describe the conduct of trial lawyers who specialize in representing accident victims. It typically refers to attorneys soliciting business from accident victims or their families at the scene of an accident or disaster (or immediately thereafter).
That, of course, is ambulance chasing in the traditional sense. In the high-tech world, there’s a much more refined version of ambulance chasing going on. It involves lawyers latching onto a new technological development and scaring the wits out of everyone about the legal hazards that the technology supposedly presents. The subliminal message is this: hire my law firm, and we’ll protect you from the legal dangers of the new technology.
Cloud computing, being the ‘new new thing’ in the tech world, is particularly susceptible to this kind of scare mongering. (No one can actually agree on exactly what Cloud computing is, but that’s another issue.) Put ‘Cloud’ and ‘legal issue’ into a Google search and you will see what we mean.
The Top Three Legal Challenges Facing SaaS Companies
There are three major legal challenges that many lawyers claim the Cloud poses. Let’s attempt to separate fact from fantasy.
The first claim is that the Cloud raises novel data protection/privacy concerns. It is true that whenever data is stored remotely, as it is with SaaS applications, data protection and privacy issues are going to appear. But remote storage of data is hardly something new. In fact, it was becoming the norm long before people were thinking in terms of data clouds.
The irony is that data, both business and personal, is probably safer with a SaaS service provider than it is behind most corporate firewalls. Think about this as an example: for a SaaS company to attract customers, it has to demonstrate that it offers iron-clad protection against data leaks. If there is one publicized failure of that protection, its reputation will be ruined and its business will sink into the toilet. Only infrastructure/cloud companies taking extraordinary measures to safeguard data will thrive. So it is only logical to assume that the best place to store data is with a proven, reliable SaaS service provider. Naturally, customers of Cloud services should demand that strong data protection promises be written into their service contracts. Customers will rightfully insist that the service providers accept full liability for any data breaches. Service providers may resist accepting that liability, but it comes down to a question of which party is in the best position to avoid the risk of data loss: the one supplying the data, or the one storing it? Obviously, the latter.
This issue is presented under a number of guises: data protection, privacy, security and so forth. They all amount to the same thing. Whether the data is comprised of business trade secrets or personal information, is this information secure? These concerns did not arise with the Cloud, although the Cloud has heightened the risks exponentially by increasing the number of players with data protection responsibilities.
The second claim is that the Cloud creates jurisdictional uncertainty and confusion. In other words, just where is the Cloud located? From a legal perspective, that is not a philosophical question. In the event of a legal dispute between the parties or a legal enforcement action by a public authority, it has to be determined what law will apply and what courts will have decision-making power. The Cloud subscriber may not even know where the data is being stored, and the same data may be stored in multiple locations at the same time. In theory, this could lead to a jurisdictional tug of war.
However, this challenge is more an issue of perception than reality. Any competently written contract between Cloud subscriber and service provider will specify exactly what law and court jurisdiction will apply if legal issues arise. Furthermore, the Cloud service provider can be contractually prohibited from any storage or transfer of data in violation of any state, federal or overseas law (e.g., the EU Data Protection Directive restricting the transfer of the personal information of EU residents). Similar clauses prohibiting exports in violation of legal prohibitions are standard in most tech- and software-related contracts.
A related concern involves what happens when a third party claimant or government enforcer comes armed with a subpoena to seize data in the Cloud. The Cloud service provider may not be as adamant as the data owner in resisting such seizure attempts. Once again, a well-written contract comes to the rescue: the service provider can be required to notify the data owner of any claims on the data and provide the data owner a chance to intervene with any defenses to such claims.
The final claim is that the Cloud poses daunting regulatory hurdles. More to the point, existing regulations have to be interpreted in light of the Cloud. For example, health records are subject to the Health Insurance Portability and Accountability Act (HIPAA). Student records are subject to the Family Educational Rights and Privacy Act (FERPA). Parallel legislation governs release of data relating to private records in the finance, securities and other industries.
But the Cloud did not create these hurdles; it just complicates the task of compliance. The first obvious step for the Cloud customer is to perform thorough due diligence on the Cloud owner. If you are a SaaS firm offering student-related services such as Blackboard Inc., you must be able to demonstrate that you understand and comply with FERPA. Standardization of data protection measures in certain industries, and certifications such as SAS 70 Type II (now SSAE 16), will become methods with which Cloud service providers can distinguish themselves from the competition. In short, the market will provide.
While the law will always struggle to keep up with evolving technology, the Cloud has not resulted in a new legal minefield through which subscribers and service providers must tiptoe in order to avoid being blown to smithereens. There is certainly nothing to justify the emergence of a new breed of ambulance chasers in pursuit of Cloud clients.
Chapter 10 Excerpt
SaaS and International Markets
The Most Favorable SaaS Markets
Several English-speaking countries rank as top SaaS markets outside the U.S. These are the U.K. and Ireland (2nd largest SaaS market in the world when treated as one combined region), Canada (5th), Australia/New Zealand (11th) and Singapore (15th). These are the most promising locales for U.S. SaaS companies to consider first for international expansion, as they have a high number of internet users and well-developed internet infrastructure for web marketing. None of these locales require extensive translation and localization efforts, and sales can be conducted in English in each of them. (You will need to account for British spelling and vocabulary differences in the U.K. and Ireland and some minor tweaking for Canadian conventions may be advisable in your marketing materials.) These are the best territories to develop and test a U.S.-based SaaS vendor’s international growth strategy. Even if your company is not located in the U.S., there is a strong tendency to move into these markets because English has increasingly become the international language of business, travel and commerce, allowing you to internationalize once and then appeal to the world’s strongest markets.
Benelux and Scandinavia/Finland
Next on the list of strong potential markets are Benelux (Belgium/Holland/Luxembourg) and Scandinavia Norway/Sweden/Denmark/Finland. (The Finnish language is distinct from the various Scandinavian tongues.) Both are highly receptive towards the use of English as a language for business, have a relatively high percentage of English-speaking professionals, and possess very high national Internet usage.
Israel and South Africa
Two smaller countries that you may want to target as you open up new markets are Israel and South Africa. English is widely spoken and used in both countries. Israel is a first-world country, equivalent to a mid-tier European nation, surrounded by turbulent third-world Islamic populations. The country is also a miniature software development powerhouse given its population of 7.5 million and its penchant for creating new software and SaaS companies, many of which end up relocating to the U.S.
In South Africa, despite the end of apartheid and the ascension of a majority black government, there is a stark contrast between the country’s two major racial groupings. White GDP per person stands at the level of the second-tier Western European countries while blacks live close to third-world standards. While there is an expanding market for SMB SaaS products in South Africa, in the near future SaaS vendors will not be selling many subscriptions for enterprise-class applications outside the few large institutions such as government, major banks, and larger manufacturers.
Mid Opportunity Markets
Germany and France are large markets, ranked third and fourth in terms of SaaS market size. Italy and Spain are medium-sized markets, ranked 12th and 13th. These four large European countries — which combined with the U.K. account for 65% of total European GDP — have a high number of Internet users and excellent to good Internet infrastructure to support web marketing. However, translating software and websites into German, French, Italian and Spanish are required to initiate distribution of SaaS products. Also, the organizations and businesses that will be SaaS target markets tend to be slower to innovate and to accept new technologies than businesses in the countries listed in the previous sections.
Later Opportunity Markets
Unless special circumstances apply, the following markets should be saved for exploration after your company has established international opportunities in the top venues.
The fifth largest SaaS market in the world (tied with Canada), Japan is notoriously difficult for non-Japanese software vendors because of language and cultural barriers and resistance to businesses from outside the country. In addition, despite the success of a few large SaaS vendors, there are significant cultural barriers to sales because Japanese software customers insist on buying through Japanese resellers. This requires a software vendor to establish relationships with Japanese partners, who extract higher commissions than partners from other countries. Software and web-site translation into Japanese, a double-byte character set (DBCS) language, is vital.