Service provider takeaway: Selling SaaS successfully will require service providers to rethink their development and delivery strategies.
First, it's important to understand how far-reaching SaaS is. Many industry observers believe that SaaS will only appeal to small and medium-sized businesses (SMBs) that lack the money to afford traditional, on-premise enterprise applications or the staff to keep those applications up and running. They also believe that SaaS will only be adopted by larger enterprises to address non-mission-critical needs such as worker productivity and collaboration.
THINKstrategies has found that both of these assumptions are wrong. Our research and consulting work shows that companies of all sizes are using or evaluating SaaS solutions spanning the full range of enterprise applications. And a 2007 McKinsey & Co. survey found that 61% of North American CIOs at companies with sales over $1 billion plan to adopt one or more SaaS applications over the next year, compared with 38% in 2005.
THINKstrategies' research has found similar adoption rates among SMBs. We've also seen a rapid growth of our online directory of SaaS solutions, the SaaS Showplace, which now includes more than 600 SaaS vendors offering more than 2,500 Web-based software services across 80 application and industry categories.
The success of Salesforce.com's customer relationship management (CRM) software service in companies of all sizes is a clear indication of the growing acceptance and adoption of SaaS enterprise applications. Even the founder of PeopleSoft, Dave Duffield, has founded a SaaS company, Workday, which will offer an on-demand alternative to traditional, on-premise enterprise resource planning (ERP) applications.
Many value-added resellers (VARs) and systems integrators are concerned that SaaS will disintermediate them because of its direct sales and delivery capabilities. As I've written previously in this space, this is not necessarily the case. However, succeeding in SaaS will require service providers to rethink how they operate and to re-evaluate their staffing resources.
Operationally, SaaS will fundamentally change the way a service provider's software development, delivery, sales and support units work. The primary premise of SaaS is that every customer relies on the same multitenant source code and can make only minor modifications to this code. This means that service providers working with SaaS must shift the focus of their software developers from creating new code to developing specialized solutions based on the SaaS source code, such as industry-specific configurations.
On the delivery side, SaaS places the onus on the software vendor to ensure the availability and performance of the application rather than shifting this burden to the customer as in the past. Therefore, service providers must work with the SaaS vendor to proactively manage the application rather than react to customer emergencies.
In truth, most SaaS vendors have already achieved a high level of service availability and performance. So, the support focus shifts from helping customers with technical issues to helping them maximize the business value of the SaaS solutions via training and change management services.
This is also true for selling SaaS solutions. The focus should be on demonstrating how the customer can fully utilize the application rather than how they can simply get it up and running. This means that traditional software salespeople who are accustomed to selling the technical features of software products to the IT or application development team within a customer organization must now focus their sales efforts on convincing the business decision maker that a solution can meet their needs.
There is another layer of changes that the service provider's developers, support staff and salespeople must accept. Unlike traditional software, which is updated every 18 to 24 months, SaaS solutions are continuously enhanced based on customer feedback. This means that developers and support staff must keep abreast of these changes on an ongoing basis. On the flip side, it also means that they can provide feedback to the SaaS vendor, which can produce more rapid results.
SaaS sales commissions will also be quite different than for traditional, on-premise applications. SaaS solutions sell at a lower price point, which means salespeople must accept lower commissions; therefore, service providers and their salespeople must sell a higher volume of SaaS contracts to match their legacy application business. This requires salespeople who are comfortable in a high-volume, transaction-oriented sales environment in which the size of the deals and commission checks are smaller than those in the legacy application business. As a result, salespeople who are accustomed to long sales cycles, rely on a consultative sales style and expect big paychecks may have a tough time selling SaaS.
For these reasons, many service providers seeking to participate in the SaaS market will have to undergo a "DNA change," fundamentally changing their thinking and swapping out personnel who can't make the transition.
About the author
Jeffrey M. Kaplan is managing director of THINKstrategies, an independent consulting firm focused on the business implications of the on-demand services movement. He is also the founder of the SaaS Showplace.
This was first published in February 2008