Introducing SaaS at an Enterprise Software Company

Software companies that started out with a license business model are now scrambling to catch up with all the Software-as-a-Service vendors that have emerged in the market.  Early SaaS players such as Salesforce.com that started in 1999 have a huge lead, but many more have appeared over the years, and even investors are taking notice by driving up valuations, with record-setting acquisitions of Github and Mulesoft in 2018.  What does it take for an enterprise software company to introduce SaaS and compete?

Commitment.  Executive team must buy into the SaaS business model with full knowledge that revenue & profit will dip in the short term as customers elect to purchase a SaaS subscription instead of a perpetual license.  SaaS can be challenging for public companies where investors expect near-term profitability. When Adobe switched their portfolio to subscription, they saw a revenue dip and the stock traded lower, but now Adobe enjoys record revenue and stock price.

Approach.  There are two ways of starting a SaaS business.  Either by forming a SaaS organization or converting the whole company to subscription and leading with SaaS.  A separate SaaS organization is often the more successful approach because the value networks are different in an emerging business (outlined in detail by Clayton Christensen in his book: The Innovator’s Dilemma).  Expect the organization to develop its own culture and processes to compete effectively vs. SaaS competitors. The all-in approach is doable, but fewer companies have succeeded. Strong leadership is required because employees have to deal with competing priorities and usually the established business wins when it’s serving more mature and demanding customers at a higher margin.

Service Capability.  The company will have to invest and develop service capabilities to deliver a SaaS business.  New roles will be introduced such as Customer Success that is essential to retaining and growing customer subscriptions.  New IT systems and processes will be added to support subscription orders and customer management. The approach can be to leverage existing talent in partnership with experts or to outsource the operation.  In reality, it’s going to be a combination of the two. For example, Public Cloud providers have become very capable at managing infrastructure, and there is little reason for you to do it yourself, especially at the beginning where pay a pay per use business model makes sense.  You will also be surprised how much existing capability you already have when you tap into product management, marketing, engineering, services & support staff. As long as your talent can focus on the SaaS business model, they will quickly develop hands-on experience in winning deals and servicing customers.

Perseverance.  Companies that have been in business for a while may not appreciate how long it takes to turn a profit.  The fastest way to achieve growth is to adapt existing products in the portfolio that lend themselves to the web and to create SaaS offerings around them.  The assumption being the product already has market success, a compelling addressable market and can be operated on Public Cloud with a reasonable investment.  If the SaaS strategy is right, within a couple of years the offering(s) will have robust revenue growth and will serve as a foundation for additional expansion.  The key is to give the business time to grow. I have seen cases where not enough time was afforded to make SaaS a success. That does not mean there will be no experimentation, there absolutely should, to find the right sales, marketing, and pricing strategy.  Figure out what is not working and keep on trying. Once the SaaS business starts growing, develop new products that are cloud-optimized but expect a longer revenue ramp to find a product-market fit. Having a successful foundation with existing products will build confidence to establish a long-term sustainable business.

Differentiation.  Look carefully at what your competitors are doing.  If you have a considerable lead, then you have time to build out a SaaS capability.  If a SaaS competitor has become a significant player in the market, you will have a tough time breaking through, and it will cost a lot to promote and sell your offering.  Plus you will be challenged to enter multiple markets requiring a substantial investment before you have figured out the go to market strategy. In such a situation you may want to compete defensively, by offering your existing customers the SaaS option as a way to retain them.  Your advantage is the customer relationship. Just don’t become overly protective of the maintenance revenue stream, as it’s in your best interest to convert customers before the competition approaches them with a more compelling SaaS proposal.

@FilipSzymanski is a Silicon Valley business leader, visionary, technologist and advisor, with two decades of Enterprise Software experience. Most recently, he led a SaaS transformation at HP / HPE creating a $100m+ business to compete with emerging Cloud vendors. He also advises startups in creating compelling business plans, taking new products to market and implementing operations with solid financial discipline. Formerly he held a variety of positions in Strategy, Product Management and Technical Sales that shaped his interest and passion for technology and Software as a Service.