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Benefits and Risks of the SaaS Model Ė A Case Study

By Sam Santhosh, Chief Executive Officer, Calsoft

Software as a Service (SaaS) is a concept whose time has come Ė 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 yearís 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 customersí 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 yearís subscription fee on placing the order.

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:
  • 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:
  • 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 customerís 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.

  • 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 partnerís 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.

  • 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 Samís 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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