The Impact of the SaaS, Cloud Evolution on ISVs

By Colleen Smith

A Cloud Evolution

The rise of Software as a Service (SaaS), and more recently, the cloud, has brought both technology and business changes for service providers, developers and users but also for Independent Software Vendors (ISVs).

The SaaS business model enables ISVs to reduce costs, enter new market, and launch and run a future-oriented SaaS business in the cloud. But transforming an existing on-premises application into reliable, scalable software capable of supporting many customers simultaneously is not a small thing and the business changes are harder and still ongoing. In essence, the delivery method has changed, and therefore the business model of selling SaaS and cloud services needs to change as well.

A New Way of Doing Business

While traditional software vendors are primarily concerned with application functionality and their customers are responsible for operating and managing the respective environments in which they run the software. A cloud vendor, on the other hand, needs to be equally concerned with operating and managing the environment that supports all its customers.

SaaS has been around long enough that most ISVs understand this and the basics of what SaaS brings – the benefits of a scalable and flexible, multitenant computing platform, alongside the risks and challenges such as legislation, security and performance. The right SaaS/cloud enablement partner will help maximize these benefits and navigate the challenges.

ISVs tapping into these benefits are able to offer applications out to multiple customers, gaining economies of scale while allowing customers to only pay for what they use. They also have the ability to gain access to computing power when they need it and only pay for what they use and need and with the right deployment platform, it can be done in a public or private cloud environment.

Furthermore, doing this through the cloud also improves time to market and productivity, allowing ISVs to quickly build and deploy new cloud applications and services.

A New Business Model

This shift is happening throughout the software industry, delivering rapid technological changes, with new innovations and capabilities coming all the time. The introduction of a new computing paradigm (cloud) combined with reduced budgets, means that long-term licenses arent attractive to most customers anymore.

As a result, a new approach to selling means there needs to be a change to the way an ISV prices and markets its solutions. Similarly, moving from a traditional on-premises software business to a SaaS business can cause a significant amount of disruption to an established ISV.

One of the key changes to the business model is the shift away from this traditional licensing model, which has peaks and troughs of income, to a more stable and constant revenue stream.

This change can also help cut churn rates, as there isn’t the periodic ‘big spend’ crunch time that comes with traditional relicensing contracts. However, this also can make additions and up-selling harder as these one-offs break the cycle of regular and predictable monthly payments.

New Requirements

From a delivery perspective, the move to SaaS and the cloud brings changes to the business requirements too. As such, priorities need to shift when looking at developing a SaaS application.

Where the traditional model was about maintenance and upgrades, ISVs have to get used to delivering a service, with SLAs in place that need to be maintained on an ongoing basis or face the possibility that customers could go elsewhere. ISVs also need to consider scalability, which is key to growth and fundamental to maintaining service quality as the volumes of users grow.

A New Remuneration Model

One of the biggest impacts this shift in business and payments makes is to that of sales staff remuneration. The sales compensation model of paying commissions for selling big deals crumbles when there isn’t a big contract for the customer to sign or big renewals to negotiate.

Different ISVs are experimenting with alternate remuneration models and thus far it seems to vary depending on the company or industry, as well as the type of service being delivered.

Typical SaaS pricing also implies another important change in how organizations should think about their business. Traditionally, both sellers and customers view an ISV’s fourth fiscal quarter as the most important, as that’s when they’re trying to land accounts and boost numbers for the year. However, with the SaaS business model, it is more about the length of the term of the contract, continuously driving new business and increasing the volume of the business.

The SaaS model, particularly when linked with a cloud delivery platform also enables an ISV to look at what’s going on in the market and quickly address changing market conditions, as well as look to new geographies but once again this requires a change in how sales and marketing are perceived and executed.

A New Partnership

This level of change can be a daunting prospect for any ISV, and highlights the need for a partner that can not only deliver the technological underpinning to assist with this transition, but also provide consultancy and support on changing the underlying business too.

When eyeing the cloud, ISVs should look to partner with someone that will provide all of the benefits of multitenancy, scalability, security, data encryption and so on, to allow them to deliver the best and most secure and reliable cloud-based applications possible. The best partner possible will provide all of this as well as help shape the new strategy. This includes enabling the sales team to understand what the selling strategy is, how to change lead generation and marketing and use of the web and social media. 

Conclusion

Getting the business model right is imperative to the successful migration to a SaaS model, but there are many factors to consider. As such, the right partner is key to successfully navigating the transition, not just of the software delivery, but of the business model.

From a technology perspective, it’s about supporting web-based clients, multitenancy, data and access security, scalability and pay-as-you-go payment models, helping migrate over time without having to replace loads of hardware and intellectual property.

Colleen Smith is vice president, software as a service, for Progress Software.