SaaS businesses are all the rage! Even companies that have success with traditional products are re-thinking their business as a SaaS offering, to reap the many benefits:
These benefits are so attractive that every and any product and business model is being re-imagined as SaaS, leading to some great ideas (e.g. Spotify, Coursera, bacon-of-the-month dropped off at your doorstep!). But not every business lends itself intuitively to a SaaS model. Especially if you have years of legacy technology and processes established with an existing customer base, the transition won't happen overnight. There are key questions to answer in each facet of the business.
Start with the Value to the Customer
It could be first instinct for technology companies to think of simply porting their legacy technology to a web and cloud platform, and assume it can be sold as-is. But porting years of legacy code will take a long time. And what worked business-wise before may not make sense in SaaS at all. As Adobe has said about its own SaaS transformation "For any company moving to a subscription model, you need to deliver ongoing value to the customer and also create new sources of value that didn’t exist with the old model. You can’t just sell the same offering in a different way.”
The first step is to go back-to-basics and talk to customers, prospects and non-customers in your target markets using product/market fit interviews, and understand what problems they have that your SaaS offering could solve. Why would web/cloud technology truly benefit them, what problem would it solve? Why would a subscription model lend itself better to solving their problem than a traditional sale? SaaS is very attractive for you, but it only works if there's overwhelming value to the customer.
Existing Customers vs. New Customers
For your existing customers, the question is whether you will aim to replace their legacy product with a new SaaS version (migration path), or continue to support the legacy while at the same time up-selling something new in SaaS. Or, perhaps the SaaS product is a complement to the existing legacy product, such as a mobile or voice companion to the core product, offered as an upgrade to existing customers. Or, maybe it's not intended for your existing customer base at all, but rather an offering to new markets?
A matrix can summarize the strategy per target audience:
Over time, this strategy in the matrix may change. In year 1, perhaps only new prospects in new markets get the SaaS offering, and once the kinks have been ironed out, it can be progressively introduced to existing customers and current markets in year 2, while the legacy product starts to go into a maintenance mode. This adds a third dimension to the planning matrix - time - giving you the blueprint of a transformation roadmap.
Monetizing the Data Requires Market Validation Too
SaaS businesses can collect and monetize anonymized customer data, including patterns of customer behaviour. They can serve ads to different customer segments, or upsell partnering products. For example, if the SaaS offering is an online store, it could be natural to serve targeted ads to particular user groups. If it's a second-language e-learning tool, it could be natural to track anonymized patterns of learning and sell it to AI companies looking to better understand natural language processing. If it's a mobile tool in a hospital, it could track and sell patterns of hospital staff movement or inventory usage, etc.
The key is that the monetization part of the plan needs to be vetted too. If you're selling ads or monetizing anonymized data, who is the target buyer? What problem of theirs does this part of the offering solve? What's the roadmap?
User Experience Design
Re-creating your offering in SaaS often comes with the opportunity to re-think the user experience design. For years customers (and employees) may have had pet peeves about the user experience of the legacy product and finally this is a chance to make things right! But there are risks with re-inventing the user experience however such as analysis paralysis, "political" design ("the VP of Sales wants to see the button over here..."), and undertaking too big of a redesign such that it actually undermines what customers liked about the legacy product in the first place.
Do you know what speciﬁc aspects of your user interface would yield the highest return on investment (ROI) if you updated them? An aesthetic face lift may be nice, but the real wow factor usually has more to do with the little things within the core workflow, such as how quickly the user can accomplish their primary tasks, or how the product handles offline mode and spotty connectivity. The CS and helpdesk teams usually have a trove of these issues and will tell you all about them!
For more on this topic, check out this article I wrote with a colleague How to Overhaul a UX Design Without Alienating Current Users.
Engineering, IT, Customer Success
Beyond a strong architectural and technology strategy, the investment in new skills, hiring and new partners to deliver, SaaS has become synonymous with continuous, automated delivery of new features and on-the-fly improvements. To enable this, companies are turning to the DevOps model, in which the traditionally-distinct functions of software development, testing and IT operations are brought together. However, the transition to DevOps really is a transformational initiative in and of itself, as it requires not only a change in skills and tools but also in mindset and culture.
Along with the customer's expectation of continuous delivery of new features is a similar expectation that SaaS solutions are an easy, "frictionless" experience to deploy and learn, and that any issues found can be resolved quickly on the fly. In fact, sales will likely promote customer service as one of the key reasons to adopt a subscription product. This can mean a significant investment in the customer success "playbook", particularly if customer success was previously tuned to the traditional model of onsite deployment and defect resolution as part of monthly or quarterly service packs rather than next-day updates. It also means a much higher degree of integration between customer success, engineering and product management.
A move to SaaS likely means a massive shift in focus on Data Privacy, as customer data may now be flowing through or be stored in the cloud, and anonymized patterns of data may be part of the value proposition. Data leaks are at an all-time high, anonymized data may not actually be anonymous after all, and a single high-profile data breach in your new SaaS offering can instantly rupture trust.
Finally, IT may need to work with all departments to ensure new tools are put in place to enable their needs at the right time. For example, if the SaaS offering is to be self-service, where a customer can purchase a license online via credit card, this can require a new tool to be evaluated by IT, sales, accounting and CS, and then implemented.
Progress on all of these fronts is really the foundation to executing on any SaaS strategy, the complexities of which go way beyond the scope of this article. The main takeaway is that a detailed plan is needed, and the resourcing required to successfully execute is not to be underestimated.
SKUs and Licensing
Once the value proposition to existing and new markets has been established and a high-level roadmap outlined, there are a host of practical questions to be resolved with Finance and Sales. In Crossing the Chasm: Lessons Learned in transitioning to the SaaS business model, EY documents some of the key starter questions:
Sales Plans and Quotas
At its core, the change to a SaaS business model is a change to the way a product is sold. This will require an organization to rethink how it incents, measures and enables its salesforce. This is particularly challenging if both traditional and SaaS licenses are made available to customers at the same time. In that situation, any commission-based salesperson would be naturally incentivized to promote the traditional license (to maximize commissions and quota retirement) over a SaaS alternative.
Companies need to carefully consider the implications of how quotas are attained and how commissions and bonuses are calculated to ensure that the salesforce appropriately balances the needs of the customer with the strategy of the vendor, maximizing revenue potential. This is typically rolled out over time following a similar new product / legacy product matrix, inline with how the product portfolio is set to evolve over time.
EY provides an 4-stage model of how sales incentives can be transitioned over time:
Financial Impact: Cost Neutral?
An obvious question in transitioning to a new SaaS business model is how revenue will be impacted during the transition, as the legacy product is likely sold on perpetual license (upfront revenue recognition) whereas the new product is subscription (ratable revenue recognition). There can also be implications on cash management as customers go from paying a smaller number of large upfront payments through traditional payment methods, to many more small payments, some over credit card.
While an obvious goal is to remain cost-neutral during a transition to SaaS, EY's top lesson learned from supporting hundreds of SaaS transformations is "Do not expect to be revenue-neutral during the transformation." In essence, CFOs have a variety of options to mitigate revenue and cash impacts during transition, but the goal of cost neutrality starts to force unnatural roadmap phases, it is likely to disrupt value to the customer and undermine the company's overall SaaS goals.
Single-Threaded Owner and the Cross-Functional Plan
All departments within the business have a leadership role in making a SaaS transformation happen. However, each department also has a "day job", focused on meeting the immediate goals of the business, this quarter's target, this month's customer needs, etc. For any can't fail initiative, Amazon recommends the idea of a Single-Threaded Owner, someone who is assigned 100% to coordinating and ensuring the initiative succeeds overall. "This works best when the single-threaded leader does not have to get up in the morning and worry about anything other than the thing they are charged to succeed at.” This can be a product manager, a project manager, a general manager, a specially-appointed executive, or a consultant, the key being a 100% focus on the initiative's success without distraction from the day-to-day operations.
A single-threaded owner for SaaS transformation can ensure all of the various cross-functional questions are addressed and aligned to form a coherent go-to-market plan.
They also work with the organization to ensure the maximum business value is delivered at each milestone in the cross-functional plan. At the start of this article I listed many possible benefits of a SaaS business. It is worth asking which of these are the primary outcomes you are seeking. Of course the answer is "all of them", but surely there is a way to prioritize the list. Which outcomes do you want most long-term? Which outcomes are more urgent? For example, an increased valuation and new market penetration may be the long-term priorities, but short-term the goal is to simply have something to market that helps retain existing customers and makes a splash at the annual conference. That insight can inform milestone 1, a prototype for the annual conference in 3 months, and milestone 2, increase revenue and retention by X% by way of product launch.
By attaching milestones to real business outcomes, you give meaning and motivation to the each department's contribution beyond just a series of activities. It also ensures you maximize business value each step of the way, rather than as a "big bang" when you finally deliver at the end.
In the End, It's Commitment
No matter how carefully planned the SaaS transformation strategy, no matter how well aligned each department, and no matter how ingenious the value to the customer, there is still one more thing that can make or break the transformation - is the organization truly committed to transform? This means frequent communication with staff, customers, shareholders. And beyond just communication, it means action, taking into account the new reality in each decision that is made day-to-day, from internal KPIs to how a customer request is prioritized, to product trade-off's to hiring decisions.
Change is hard, and if employees do not believe their company is committed, the organization will not change. With a strong commitment demonstrated at all levels, the SaaS transformation - and all of its benefits - are just a plan and a commitment away.