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| Home - Industry Article -
December 08 Issue |
Benefits and Risks of the SaaS Model – A Case Study |
By Sam Santhosh, Chief Executive Officer, Calsoft
Software as a Service (SaaS) is a concept whose time has come – after
the early hype and disillusionment the model has matured and is here to stay.
Contrary to initial perception that it was something for large software
companies to leverage; small companies and even startups have started moving
from traditional application software to the SaaS model. In this article, I will
illustrate a real life example of a small software company that has become very
successful by moving to the SaaS model and highlight the new business risks that
arise.
ABC Inc.
The company that I cover here (whom I shall call ABC Inc.) was one of the many
small US-based software companies with a product catering to a niche vertical
market segment. The company catered to a market size of about 4500 potential
business customers who in turn serviced about 16 million users within the
country. ABC Inc. sold the product in the traditional license model to their
business customers at an average price of about $200,000 and an annual
maintenance fee of about 15%.
The company over 15 years had developed a base of 60 customers. It seldom lost
any customer, but could add only 4 to 5 customers a year. The sales life cycle
would usually take about 12 to 18 months. Their market penetration was further
limited to include only large customers who had the IT Team to implement and
manage the deployed product.
The Shift to SaaS
About 3 years back, ABC Inc. decided to move their product to the SaaS model.
They developed and transitioned to a new, hosted version of the product that
could be made available to any number of customers online. The license-pricing
model was changed to an annual subscription price, with a one-time deployment
and training fee and a small fee per end user transaction. The subscription
contract was for 5 years, with the customer having the option to cancel it at
the end of every year. They would pay the first year’s subscription fee in
advance on placing the order. It took ABC Inc. about one year to fully deploy
the SaaS solution.
The Incredible Payback
The results were much better than what the management team expected. It created
an enthusiastic response from customers in the existing market segment, but more
importantly it opened up the full potential of the market for ABC Inc. With a
SAAS model their offering appealed not just to the bigger customers, but the
smaller ones started signing up too!
With a smaller upfront cost commitment and without the hassles associated with
the installation and maintenance of traditional software, the smaller customers
were happy to buy the solution. Further, even for the bigger customers, the
sales cycle came down to 4 to 6 months as with a lower upfront commitment,
customers were able to take a decision faster and at lower levels of their
hierarchy.
Over the last two years, the company increased its customer base from 60 to 140
and is currently signing up 4 to 5 customers a month! The company saw its
revenue grow triple fold, generate healthy cash balance and project predictable,
profitable growth and an increasing, positive cash flow for the next 5 years.
Business Challenges
Though a great success, the move was not without its challenges. In order to
service the large number of inquiries and interested prospects, a quick ramp up
of the Sales and Pre-Sales Team was needed. The resulting orders demanded a
larger deployment and Customer Support Team. Though a hosted model, the
Deployment Team was critical to set up each customer, integrate the solution for
data exchange with the customers’ ERP package and train the users. Fortunately
for ABC Inc. all this growth could be funded internally through the cash
generated from the customers who paid the first year’s subscription fee on
placing the order.
Risks
Though definitely a superior business model, as ABC Inc. discovered the SaaS
model also brings in new risks. Let me cover the more obvious ones first:
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One Problem Affects All: If the hosted solution fails due to some reason all the
customers are affected. This is seldom the case in a license model. Initially,
ABC was not prepared for the volume and intensity of the support calls during a
failure.
- Bug Fixing and Updating Patches: In the license model, the process of fixing
bugs and updating patches were more predictable and linear. Often the customers
had the choice of delaying or speeding up the patch updation depending on how
the specific problem affected them. For important customers, ABC also had the
ability of sending a quick patch just to address their problem. In the SaaS
model, a single hosted version for all customers took away this flexibility. One
update would affect all and the company had to become more agile and extremely
process and quality conscious.
Awareness of more severe risks came later:
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Back up & Disaster Recovery: Without fully realizing it, ABC had now morphed
from a software product company to a total solution provider. ABC was
responsible for the customer’s data and their business continuity.
- Susceptibility to Viruses & Hackers: A successful SaaS model provider is now a
global target for hackers. They can either bring your system down (best case
scenario) or penetrate your system to steal data and create havoc.
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Dependence on Third Parties: In the SaaS model you are very dependent on third
parties such as your hosting service provider, communication network providers
and other partners in the ecosystem who may or may not be directly visible to
the customer. Any failure on the partner’s part reflects fully on you as far as
the customer is concerned. And sometimes the failure may be very serious. For
example, consider what a disgruntled employee at your hosting service provider
can do. You may not even know the problem, since there would be a tendency among
the service providers not to reveal issues for fear of losing your business.
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Legal Liability: The normal Errors & Omissions Liability Insurance that software
companies typically have will not cover the enormous new liabilities that can be
created by any of the above scenarios. Moreover, the disruptions or losses that
may be caused by the actions of one of your providers may also create
liabilities for you, if you get sued by your customer for their business
disruption.
Welcome to The New World!
In this age of intense competition and fast changing opportunities it is
imperative for companies to continuously evolve to perform better. In this
context, if the right benefits are provided to the customer, SAAS is a very
compelling and rewarding business model. However, one should bear in mind that
the vulnerabilities have become much more and events completely out of your
control can now disrupt your business more easily than before. The cost of
success can be pretty high!
Sam Santhosh is CEO and Managing Director of California Software
Limited (Calsoft). He founded Calsoft in 1992. Under Sam’s leadership, Calsoft
grew from a niche technology company in the Silicon Valley to a global player
providing a range of service offerings in Product Engineering & IT Solutions. He
lives in Pleasanton, CA. For article feedback, contact Sam at
sams@calsoftgroup.com
 
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