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ISVs Transitioning to SaaS: Common Threads and Best Practices

What is Happening?

Over the past several years, Saugatuck has conducted dozens of business strategy consulting engagements with independent software vendors (ISVs) and SaaS start-ups – focusing on SaaS business strategy development and validation, new market assessments and opportunity targeting, positioning / messaging, and the development of a variety of go-to-market strategies and programs.

Browse Related Research: • Emerging Trends / Technologies • Business Strategy / Mgmt • Software-as-a-Service (SaaS) The author invites your comments and inquiries on this Research Alert. Please contact Bill McNee at

Why is this Happening?

Figure 1 SaaS Readiness Briefings Saugatuck is conducting a series of briefings and workshops with IBM and other leading software vendors who have large ISV partner networks – focusing on SaaS business and technology transition strategies and readiness. Upcoming IBM PartnerWorld briefings scheduled for later this fall include Chicago (Dec. 3) and Toronto (Dec. 11). For more information, contact Chris Macgregor at chris.macgregor@saugatech.c om, or at 1-203-454-3900.

Out of this work, combined with recent case-study research that we have conducted, Saugatuck formally launched its SaaS Readiness Assessment (SRA) consulting practice in October, 2007 – providing a short-duration workshop-based engagement to help ISVs understand their business strategy and offering readiness (and gaps), and to plan and manage the transitions required from traditional software business models and operations to the more demanding business of SaaS. This Research Alert provides six best practices as it concerns ISV SaaS transition strategies, as shared earlier this week during an IBM PartnerWorld briefing in Waltham, MA, at the IBM Innovation Center (see Figure 1). 1) ISVs that intend to retain or repurpose their current ISV software business will be most successful if they target adjacencies, rather than trying to replicate existing on-premise applications in the cloud. • At the end of the day, SaaS is less about a new technology or delivery paradigm; instead it is all about a new platform for creating and delivering new or complimentary business services, and leveraging business processes and workflow in new and exciting ways. • In the case of Concur (see Strategic Perspective Five Challenges in Navigating from Traditional ISV to SaaS Provider: Strategic Learning from Concur Technologies, STR-388, 21Sept07), the ISV basically rewrote everything, as they intended to phase out their previous business. In the case of Kadient (formerly Pragmatech), the ISV targeted a broader set of services while locking down their traditional on premise business – ultimately moving it to a revenue-sharing, 3rd party relationship (see QuickTake Pragmatech Software: Foundation for Sales Effectiveness, QT-368, 20July07). In the case of Lawson Software, they recently announced a new Talent (and performance) Management solution that does not duplicate their core ISV offerings, except for a small amount of replacement functionality. Therefore there isn’t any cannibalization threat, as of yet. • In a case where it makes sense to directly attack a firm’s core value proposition, the key is to rethink and broaden the customer and technology value proposition beyond the original target market. • Our recommendation: change the rules; redefine your market space; add new value; find adjacencies to your core competency. 2) Size matters – significantly impacting the economic, organizational, operational, product/business service development and go-to-market

Entire contents © 2007 Saugatuck Technology. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden.


Figure 2 SaaS Readiness Challenges As part of its Saugatuck Readiness Assessment (SRA) engagement process, Saugatuck provides its ISV clients a questionnaire that helps them self-assess (and for Saugatuck to help identify key gaps) across five key dimensions: • • • • •

Economic Technological Operational Organizational Cultural

For more information, contact Chris Macgregor at chris.macgregor@saugatech.c om, or at 1-203-454-3900.

strategies (see Figure 2). • Smaller private ISVs have the advantage that they have fewer moving parts, are often more nimble, and can control and manage the transition without the challenges of being in the public eye. Even in the best cases, however, a complete rewrite and retooling can take 18-24 months – so firm executive commitment, access to working capital, and a comprehensive rethinking of the firm’s go-to market strategy is required. • Larger organizations (especially those that are “public”) are often more successful creating a separate group within their companies not bound by the same P&L restrictions and measurements during an incubation period. At the end of this period, companies often face the decision of whether to operate a hybrid model, or spin out into a separate entity. However, in Saugatuck’s experience, it is difficult to serve two masters. 3) Every aspect of the company will be impacted by the shift to SaaS. • While the technology aspect is by no means simple, the organizational, operational and business model shifts are profound, interconnected, and complex – especially around organizational issues, Marketing, Sales & Distribution strategies, as well as the shift to a subscription revenue model. Sales compensation issues are particularly challenges. 4) Focus on keeping your customers happy and continuously measure your success. • Renewals are the lifeline to long-term growth and profitability. • Quality of service and service improvement, as well as investing in continuous innovation, is critically important to retain and grow customer contract value. • Put in place scalable infrastructure to regularly monitor your progress. 5) Pick your battles – in terms of what you need to own or control, and what you can rely on 3rd parties to help support the business. • Most SaaS application and business service providers today would prefer NOT to be in the hosting business – with only a few exceptions. • A variety of tough choices need to be made, however, as it concerns going down a co-location approach, or taking on additional managed services – that will be driven by the unique application and customer requirements of the SaaS offering, and the amount of control required to appropriately fine-tine application workloads and manage availability. • Think about other key business service partners that can add value to your offering and value proposition, beyond distribution. 6) Don’t forget about the IT infrastructure – as it is a key means through which you can continuously lower your per-units costs and increase customer value (and profitability). • Be cautious about “quick fixes” (technological and organizational) that

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RA-402 October 31, 2007 COPYRIGHT 2007


• •

don’t provide you long-term leverage and scalability as your client base grows. Fully understand the challenges associated with regularly rolling out schema changes, bug fixes and upgrades without the benefits of a full multi-tenant architecture. Although “SaaS-ifying” existing on-premise applications through virtualized or multi-instance (multi-tenant) approaches might be appealing on first blush – we caution ISVs to fully understand the journey that they will be on, and what it will take to be profitable and successful longer-term. Instead, we recommend that ISVs view these approaches as interim steps to get started quickly and to gain traction, rather than as a replacement for the deployment of a fully multi-tenant architecture that will provide scale and ongoing cost efficiencies, as well as the ability to: 1) continuously add innovation, upgrade and manage the application, and improve service levels, 2) monitor (and potentially monetize) the success of your clients, and 3) capture critical usage and performance data across the customer base. We see virtualization and multi-instance approaches being more viable in situations where an ISV is serving a small number of very large customers that do not require significant customization.

Market Impact

With traditional on premise enterprise software sales slowing, and virtually all new venture investment going toward a next-generation software-as-a-service business and technical architecture, traditional ISVs need to carefully think through their transition strategies to compete and win in the new enterprise business services market that is emerging.

Related Research

• • • •

Five Challenges in Navigating from Traditional ISV to SaaS Provider: Strategic Learning from Concur Technologies, STR-388, 21Sept07 Key Lessons Learned, Part 2: Financial Considerations in Navigating from Traditional ISV to SaaS Provider, MKT-381, 29Aug07 Pragmatech Software: Foundation for Sales Effectiveness QT-368, 20July07 Extending SaaS by the Playbook: Xactly Managed Services for SMBs,

QT-361, 27Jun07 •

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Key Lessons Learned: Navigating from Traditional ISV to SaaS Provider, STR-357, 15Jun07

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RA-402 October 31, 2007 COPYRIGHT 2007

ISVs Transitioning to SaaS: Best Practices  

This Research Alert provides six best practices as it concerns ISV SaaS transition strategies, as shared earlier this week during an IBM Pa...

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