IP Applications Company Blog

In the past month, I attended 3 SaaS industry events (Softletter's SaaS University, Salesforce.com's Dreamforce, and SIIA's On-Demand conference) to keep up with what is happening in SaaS and Cloud Computing, and to investigate new partner channels for IP Applications on-demand subscription billing and payments platform.

A key message at all three events was how channel partners and VAR's played a key role in almost every SaaS and Cloud infrastructure vendors' strategy. This was especially gratifying to hear because a couple of months ago I wrote a blog article  challenging the wisdom of a significant analyst group that had suggested SaaS companies would not go to market with partners.

When researching to support my argument I came across Intacct, a SaaS company with what appeared to be a mature partner strategy. So at the SIIA On-Demand conference I was not surprised to see Daniel Druker, Intacct's SVP of Marketing and Business Development lead a panel of SaaS executives in a discussion on the importance of channels and VAR's to all of their businesses.

The point is that the SaaS industry from a partnering perspective is no different than the traditional on-premise software business. Software companies, whether on premise or SaaS, still need to develop new markets, deliver vertical expertise and service their customers and channels.VAR's will play a big part.

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While attending the excellent SIIA On Demand conference in San Jose, there was a lot of talk about surviving the economic downturn as a SaaS company.  Many of the points in Part 1 of this blog were discussed (somewhat gratifying) but a more fundamental question was posed. 

Are you selling oxygen?

Can companies breathe without your product?  Is your SaaS product a true "need" for businesses to succeed or is it a "nice to have"?  When companies look to trim costs, which column will your product fall into? 

In stronger economic times, companies that sell "nice to have" products can grow and prosper.  In down markets, purchasing companies will cut the nice to have products to preserve margins and cash, while keeping those mission critical solutions. 

As SaaS companies looking for success in a down market, we need to ensure that we are selling products that are critical to our customer's business success.  Here are several things to focus on:

1) Marketing must emphasise those elements of your products that keep companies running.  Do not promote ‘cool' features; stress the core features that will help drive costs down or revenue up.

2) Product value must be quantified and provided to our product champions.  Ensure that product champions within enterprises have the tools to defend it against the forces of rationalization.  Often the decision to cut will have nothing to do with the department that uses and loves your product. The decision likely comes from the finance department but a strong dollar oriented argument can stay the execution.

3) Think sticky.  Focus energy on integration and engagement with key clients such that the switching costs grow greater than the option to cut or downsize.

4) And ultimately, if your product is not oxygen to your customers, change it or find customers who breathe your particular type of air.

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The SaaS industry has the potential to grow in an economic downturn. 

Large capital projects are the first casualties in an enterprise trimming costs.  SaaS offerings limit capital expenditure and IT infrastructure, offer fast implementation cycles, allow companies to limit and adjust licensing volumes.  SaaS is exactly the type of solution that can pass internal executive reviews when money is tight.  When SaaS companies compete against traditional software implementations, SaaS products should win these deals.

How should a SaaS company change its operations to reflect the new economic downturn?

There are many common operational changes that any company will need to make in an economic downturn; the points below are particularly key to a SaaS company:

1) Achieve cash positive business operations.  Rationalizing spending and eliminate that cash burn until the capital markets improve. If VC funding is planned in the next 12 to 24 months, manage cash to do without it.

2) Utilize partners and channels to expand sales.  The downturn will provide additional competitive advantage to SaaS companies over traditional on premise apps.  However, the downturn and the need to preserve cash make it difficult to expand a sales and marketing team to take advantage of the opportunity.  Partner and channel sales can provide increased reach with a success-based reward structure.  Ensure robust systems in place to track the revenue splits and provide transparency to upstream and downstream partners.

3) Purchase SaaS products.  Focus on core competencies and outsource or rent the rest.  Do not become a billing and e-commerce expert or build out a major data center; find other SaaS companies to purchase these products and focus limited resources on the most value - the core product.

4) Capture all revenue possible per customer.  Do not leave money on the table through inefficient or manually intensive billing and subscription management processes.  Ensure customers can add and upgrade products online, simplify the contracting process and ensure to entice additional revenue from existing clients.

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Most of us have heard of the PCI standard. Some of us have gone through the implementation and maintenance of a PCI compliant system. If you're not familiar with the standard, and what it entails, let me shed a little light on the subject.

PCI, or rather, PCI-DSS, stands for Payment Card Industry Data Security Standard. It is a set of requirements introduced by the PCI Security Standards Council (composed of members that represent American Express, Discover Financial Services, JCB International, MasterCard Worldwide and Visa Inc.) in an effort to ensure the protection of credit card data by organizations that handle the data, such as online stores and billing companies.

What kinds of things are covered by the standard? Well, as a short list: a secure network, protection (encryption) of cardholder data, maintenance of a vulnerability management program, strong access control measures and regular testing of the systems and their security. There are other great sites that provide detail on the standard. http://pcianswers.com for example has a good overview of the standard.

Clearly, the list crosses the boundaries between operations and development and requires a focused effort to achieve compliance.

So, what should you do if you want to handle credit card data? Well, if you have the operational and development skills in house and more importantly the time, compliance is achievable. Our company was fortunate to not only have a development department, but a capable operational department and control of our own datacenter. Often, software focused organizations do not have access to the operational knowledge to ensure all the security measures are in place, or to get them in place. At the very least, depending on your transaction volume, you will need to bring in a third party to actually carry out the required audits.

Be prepared for the ongoing maintenance and updates that come along with PCI compliance. In addition to the scans of the system that must be carried out on a regular basis by an external party, the standard is evolving. For example, by the end of June 08, the standard required that application level firewalls be in place in addition to the network level firewalls.

PCI is a good standard, and the maintenance of our compliance makes use of all of our available technical and procedural skill sets. For those of you just getting involved with the standard, take a close look at all that it entails, and be sure you have the skill sets available to become compliant.

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I wrote another post the other day about the key questions facing SaaS marketers.  I talked about Consumer versus Enterprise billing and about Direct versus Channel marketing models.  Overlaid on all of these choices, we have the concept of Session Control.

We implement Session Control through a component of our application called the "Session Manager".  It's an optional service but virtually all of our existing clients use it.

If you're a do-it-yourselfer and your application keeps track of users and sends data to the billing application (wherever it is), session management is done by the application itself.  If a customer doesn't pay their bill, someone in a place of authority has to take action to disable access to the application until they pay. 

If you have a small number of customers, the "someone" is probably in your accounting department and they call or email someone at the hosting company to pull the plug for a while.  It's a workable model for a small business, or if you don't care about timely payment.  It may sound odd, but if the customer has a perpetual license, for instance, or it's your corporate parent there's no payment to wait for and session management is unnecessary.  Manual control doesn't scale beyond a few customers, though - it becomes pretty labor-intensive as you grow.

What our Session Manager does is automate the control process and close the loop on payments.  After an account is set up for a new customer, the application and the Session Manager constantly swap messages about who's using the system (is this user that just logged in an authorized user?) and tracking the necessary billing data.  The Session Manager also monitors the payment queue to track whether the account is up to date.

The real value of the Session Manager becomes evident on that fateful day that a customer doesn't pay their bill.  Then the Session Manager uses the client's business rules to decide how to respond.  If the rules say that the customer is supposed to get daily "payment due" reminders and be allowed 30 days to catch up, then the Session Manager sends advisory messages to your administrative managers and implements that strategy without human intervention. 

At 31 days, if the account is still delinquent, an eerie silence descends on the freeloading users as the service is suspended pending settlement of the outstanding account.  While payment-due notices always get attention, a service suspension usually gets a response that a whole blizzard of notices just can't summon.

For any business model where customers pay on a monthly pay-as-you-go basis, session control makes a lot of sense.  It's one less administrative task for the accounting group, and one more control that keeps you from giving your stuff away through inattention to administrative detail.

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I recently read an article by a keen observer of the software industry advising SaaS vendors to sell direct and avoid traditional VAR channels and partners.  His premise was that building channels is difficult and that SaaS limits the value proposition for the SI and ISV community.

Given our own experience with SaaS channels, I did a little research on SaaS providers and found lots of evidence that channels and partners are alive and well in the SaaS world. There are many examples, but Intacct, (www.Intacct.com) in particular struck me as having a strong partner program as explained in a series of announcements on their website. I also attended an OpSource/Softletter webinar that provided a sneak preview of their 2008 SaaS Survey (download at www.saasuniversity.com under their resources tab). The survey indicates that 53% of the SaaS companies responding either use VAR's today (35%) or plan to use them (18%).

I've talked to a couple of software vendors that have the view that SaaS provides a limited value proposition to VAR's.  One company has consciously avoided the SaaS model altogether for fear of alienating their current plentiful VAR relationships.  Only time will tell if they're right, but the downside to being wrong is nasty.

Looking from a VAR point of view, VAR's understand that customers want choices, and in fact part of their role is providing just that. As more enterprises choose on-demand over on-premise solutions, incumbent VAR's will have to respond or lose their position.  While large implementation-training-maintenance contracts are attractive, VAR's will grow to appreciate the value of a recurring revenue stream of their own.

The 2008 SaaS Survey also indicates that VAR's can expect to earn around 20% of the ongoing services revenue, a handsome reward for their efforts. So, it's better to arm a VAR with your on-demand product then have them go out and find competitive products to fill that need.  After all, while the SaaS paradigm emphasizes ease of use, risk-averse enterprise customers still demand on-site training, integration with other systems and other services provided by VAR's. A VAR's professional services and domain knowledge extend a SaaS providers reach and credibility with enterprise buyers; it's a win-win relationship.

So I believe that most successful SaaS businesses will need and want partners. It's only a matter of time, so plan for them from the start.

Even if you don't agree now, you can increase your options and lower your risk if the systems you use to manage your SaaS business give you the flexibility to include channels and partners in your sales eco-system if you make that decision down the road.

There are a myriad of things to plan for to ensure that the systems you select to manage your SaaS business elevate your ability to sell instead of weighing you down with restrictions.

If you want help thinking this through I invite you to download our complimentary capabilities matrix. There you will find a thought inspiring list of important features regarding channels and partners and everything else you are likely to need as you grow your SaaS business.

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Should I start with the personal stuff?  Sure why not!  We're all humans here!  My name is Kevin Lennox, I am 48 years old as of this post. I am happily married for 28 years, 3 kids, (all grown up), 1 grandson. In my spare time (and I do enjoy my spare time) I like to see friends, I Iike cars (fast cars mainly), I love to play soccer which I do all year round (when I am not down and out with an injury as in right now).  Oh yes, I like to head up to my log cabin on a lake in the interior of our beautiful province (British Columbia) where I fish, boat, relax, chop wood or do whatever projects my wife or I conjure up which are plenty.

I've been the Director of Sales for IP Applications for about a year and I love my job. That's because we're taking a very proven piece of technology that's been in use for ten years into a new market, specifically the SaaS and Cloud computing markets. It's exciting because it's about selling something that works extremely well, does pretty much everything an on-demand billing and payment system should do, and comes complete with an impressive customer list (what more could a guy in sales ask for... oh yes more customers of course). So with all the development heavy lifting behinds us,  it's more about all the things we need to do to introduce ourselves to a new market (yes like blogging about it) which is where I get to play.

Before IP Applications, I spent 26 years or so growing up in the technology business. I started out with a solid grounding on the technology side doing onsite repair work in the early 80's for Dictaphone and Texas Instruments. Then I moved on to a large independent national tech support firm where I traded in my hands-on technical skills for new skills in service management, then business management and eventually sales management. That track lead me to senior roles in national sales management and product development with MCI, then WorldCom and then EDS. A call from a recruiter led me to a startup during the dot-com bubble first as VP of Services and ultimately VP Sales.  We grew the business to 22 Million in annual revenue very quickly but we ran into trouble when the bubble burst. From there short stints in high end surveillance systems and technology project management culminated in my move to IP Applications.

The technology industry has been my turf for a long time now.  Like the rest of the IP Applications team, I've got lots of experience bringing a wide range of technologies to market.  This one's going to be fun!

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One of the challenges we faced as we set about bringing our SaaS billing product to market was how to explain our application's wide range of capability to potential customers.  It sounds simple but it's not.  We've already found that companies who've built their own billing solution are far more interested in our solution than those who haven't tried it yet.  The latter think billing's easy, the former have enough experience to know better.

After talking to a range of software companies and reflecting on the billing and subscriber management business we already do, we concluded that every client has different needs.  Our application is an integrated billing system.  At the start of the exercise, our application was like a restaurant with one prix-fixe menu.  Even if all you want is the salad course, the fish course and desert, we'll still bring you the beef tartare, the duck breast and the cheese.  Of course, our application is flexible enough that you don't have to take or pay for all of its functions, but they'll be there every time you look at it, whether you're using them or not.

We figured that to make it more attractive we'd have to make the presentation simpler so we set about clustering the application components into logical groups.  The prix-fixe analogy still works but now we have three separate menus - the short one, the medium one and the complete one that includes flights of wine.

There are three questions to aim you at the right menu:

1) Do you need Enterprise billing or Consumer billing?  "Enterprise" means we produce one complex invoice covering a collection of end user.  "Consumer" means one simple invoice per end user.

2) Are you going to operate with or without Session Control?  "With Session Control" means that unpaid bills automatically suspend service.  "Without Session Control" means that unpaid bills have to be handled manually outside the application.  Each is appropriate for some categories of client.

3) Are you marketing through a channel or direct?  Channels are structured ecosystems that are complex to bill and administer.  However, many software companies find they can make more money that way.

We're pretty confident that as the SaaS business matures, most vendors will follow Time-Warner's lead and host their customer and user records with a billing service and use its application and its business logic to manage their SaaS business.  I'm using Time-Warner for this example because over the last five years they've worked with us to implement a top-notch subscription and billing management application that we own and that they run a sizeable chunk of their internet business on.  There isn't a lot they don't know about subscription marketing and delivery. 

So, if SaaS delivery is part of your product plans, spend the time pondering the three questions and figuring out your whole go-to-market problem.  Read everything you can find and talk to lots of people who've already done it before you set your developers to work. 

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Back in January, we concluded that we raise our game with some sophisticated management software for our business.  The application we wanted is a common one these days but to protect the innocent, I'm not going to talk about it specifically.  The application isn't the point of the story - the story is about how two well regarded SaaS companies found themselves in a mess when they tried to work as partners. 

To digress for a moment, it was fascinating to watch ourselves go through the buying process.  For our staff, who've delivered hosted applications for years, setting up and running any web application is pretty much a brain-stem exercise.  Perhaps because we know what's involved we chose a SaaS product hosted by someone else for our internal operations. 

Anyway, back to the story.  After we chose a month-to-month plan for a SaaS product we learned that the chosen vendor had struck a partnership with another SaaS supplier we already did business with.  It was an easy choice to just add the new subscription for the new product to our existing account.  So far, so good.

Then things went a bit pear-shaped.  Our decision gave us a ringside seat to the headaches just waiting for SaaS companies working together as channel partners.  While regular on-premise software marketing partnerships are pretty well understood, SaaS isn't so simple. 

From a purely mechanical standpoint, any billing and provisioning problems that the SaaS product owner (effectively at the top of the food chain) doesn't solve will be inflicted on every partner and reseller all the way to the end of the line.  At each step along the channel, the billing and subscriber management process is challenged by an avalanche of details about users, prices, plans, commissions, rebates, revenue sharing agreements, refunds and incentive plans. 

The overall concept of "a single solution from a single vendor" is pretty attractive to technology customers.  So, SaaS vendors have to find ways of working together with each other, with on-premise suppliers and with integration partners.  However, because they're selling a subscription and not software in a box, the whole process of accounting for and administering the sales relationship has to change.  Figuring out the billing and the partner shares in a single up-front license fee deal can be complex.  Most finance and accounting groups don't really mind because big dollar amounts justify the effort.  Doing it over and over every month with small-dollar subscription revenues is another matter.

So how did our "two SaaS products from one vendor" plan work out?  I'd love to say it ended well, but really, it didn't.  The billing and provisioning problems were so severe that after months of trying we finally gave up.  We now have two separate subscriptions with the two suppliers. All is well again, at least until next time.

So what's the lesson from all this?  Even though both partners are successful direct-to-consumer SaaS vendors, when one became the channel partner selling the other's product, the arithmetic was "one plus one equals zero".  The problem for us as a customer was purely with their billing and provisioning process - both products are great. 

Simply put, channel marketing for SaaS companies is really difficult.  The administrative burden increases exponentially with success.

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Well, putting together a pricing model for SaaS billing seems to be a lot like allocating office space.  We're having a tough time coming up with something that's both simple and explainable.  The prices are fine, it's the logic behind them that keeps unraveling in the face of critical questioning.

Why is it so challenging?

Everybody wants a pricing plan that's simple to explain and implement and that makes sense.  The notion that "Our price for doing your billing will be a percentage of your revenue" has developed some momentum in the SaaS billing market.  It's a great little model - simple and easy to implement but pretty much impossible to defend under critical questioning.

We found this out early on a conference call with a prospective client we'll call "Targetco".  When we said we wanted a percentage, the Targetco finance guy on the call said "Really?  If we lower our price we can pay you less?  Why does that make sense?" Of course, what he really meant was "Hold on there buckaroo - do you really plan to charge me more than you'd charge to do the same work for a cheap product?"  There aren't very many ways to say "Yeah, pretty much" without feeling a trifle foolish.

So what did we come up with next?  Well, we started over with an earthshaking new concept: customers want to buy something tangible for a fair and competitive price.  Actually, I have to admit I'd heard that somewhere before.  Anyway, we got started by taking an interesting trip down memory lane. 

IPA's been doing subscriber management and billing for years, so we dug into our customer records and built up a market price model for online billing services.  It helped us to understand why the specific prices that we charge specific customers were fair and made sense to both parties.  We were on the road to a defendable pricing model.  Interestingly, the percentages it yields look kind of familiar, but the cool part is that it makes business sense.

So how did we use this newfound wisdom?  We distilled all the information down to a few really critical parameters and then we put prices to them.  Our next step will be a simple pricing tool on the www.SaaSAutomation.com website that lets a potential client estimate their costs for our service as a percentage of their selling price.  It'll be interesting to see how it works for site visitors.  While it delivers a percentage answer, the underlying model is built on specific prices for specific services - no filler, no padding, no awkward silences at our end of the phone call.

We're thinking it'll make prospect conference calls fun again.  We'll have really good answers for the finance guy's questions!

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