It is amazing how much enterprises have changed when it comes to cloud computing. The first response to cloud from most companies was a resounding “no way.” This gave way to the “only a private cloud” mentality. Today, hybrid cloud is where many enterprises are hanging their hats. The types of workloads that enterprises are considering for deploying in clouds are changing as well. First, it was only non-mission critical and low risk applications. Then, it was test and development environments and cloud storage services. Now, another trend is starting and it’s creating a new wave of cloud computing that is radically changing industries. The cloud is now being considered a viable target for deploying mission critical applications. Enterprises are finally realizing that customers no longer want to buy packaged software and instead are expecting everything to be delivered as a service. In other words, customers are expecting their vendors to be SaaS providers.
SaaS will become the new operating model for B2B applications
When we think of SaaS solutions, we think of consuming SaaS for things that are not core to our business like CRM, payroll, and HR applications. After all, vendors in these areas have been early adopters of cloud computing and the SaaS delivery model for years. What is changing is that enterprises are realizing that in order to stay competitive in today’s fast paced business environment, they too have to start delivering their mission critical applications to their customers as an easy to use, frequently updated service.
Enterprises that supply B2B services have traditionally delivered these services in a product-centric operating model. In this model, the vendor creates a software bundle that is installed at the customer location. The customer often takes on the responsibility of managing both the infrastructure and the software within their data center or co-location. Upgrades to software delivered as a product are made infrequently because the customer must be able and willing to schedule and participate in the upgrade process. Upgrades are disruptive to customers and are often deferred even though they contain fixes and new features. Due to these challenges, software releases are often bundled up into to very large builds that can be made up of several months’ worth of development. The larger the build, the more risky the deployment is. The riskier the deployment, the less likely the vendor is to schedule the upgrade. In addition to the risk, there is often a high cost associated with the upgrade and it usually requires a scheduled outage.
Newer B2B companies that were born in the cloud era are free of these legacy issues. Their software was built from scratch to be a SaaS solution. These new B2B companies are stealing large amounts of market share from legacy product-centric B2B solutions even though they usually have a fraction of the features. Why is this happening? There are many reasons. First, the customer is no longer responsible for managing and maintaining the software and infrastructure which frees up precious IT resources to work on value added tasks. Second, new features and bug fixes can be made frequently, even daily in some cases, and without any downtime. More importantly, the cost to implement these solutions is much lower while the time to market is much faster. Agility is a huge driver for SaaS. Even more compelling for many enterprises is that SaaS solutions hit the books as an operating expense as opposed to a capital expenditure.
Competing against SaaS solutions
The first generation of B2B service providers that moved to SaaS were trail blazers. They saw an opportunity to deliver a superior customer experience more quickly and cost effectively. Once a competitor enters an industry with a SaaS solution, it radically disrupts the space. Even traditional on-premises applications like CAD software are now being delivered as SaaS. This has sent many CAD competitors scrambling for a SaaS strategy.
Legacy B2B vendors are getting destroyed in the RFP process by new SaaS solutions. The time and effort it takes to implement product-centric software solutions is becoming unacceptable in this modern era of computing. Also, customers can get up and running with SaaS with a minimal upfront investment whereas in the product-centric model, they must spend a large sum of money long before they are able to implement the software.
Moving to SaaS is becoming a survival strategy. In fact, many RFPs today require that the vendors deliver their B2B services as SaaS. Legacy B2B vendors will be seeing a big decline in RFPs in the future as more customers start demanding SaaS from their vendors.
SaaS is a new operating model
Moving to a SaaS model is not an easy undertaking. As I have written in the past, delivering a product is very different than delivering a service. Becoming a service-centric organization is a transformational change that impacts every department within a company. From a technology standpoint, the technical requirements in the areas of security, stability, scalability, availability, recovery, and so forth require much larger investments than in a product-centric model where more responsibilities are shifted to the customer.
Operations in a service-centric model also require higher investments since the expectation is that the service is always on for all customers and updates are performed frequently. Operations teams need to become more metrics focused, more proactive, and more responsive than in the old model where support was based on managing a queue of incoming trouble tickets. In the service-centric model, the mindset shifts to closely monitoring systems to avoid customer tickets from being opened in the first place.
The sales process is radically different as well. Some sales people may resist the movement to SaaS because the days of huge up front purchases are numbered. The 18-20% annual maintenance fees go away as well. With SaaS, pricing is based on a subscription model where there is a lower up front cost to the customer that is accompanied by a reoccurring monthly subscription fee. This changes the entire sales dynamic. The sales process is no longer a one and done proposition. The customer must be kept happy all of the time because the customer is not locked in by a huge upfront expense and ownership of infrastructure and software. Instead, they are renting and breaking up with their vendor is much easier to do than in the past.
The finance team is impacted as well. Forecasting becomes more of an art form than a science. It was much easier to forecast when there was a large upfront purchase for software that took months to implement followed by an annual maintenance fee. With SaaS, it now becomes more speculative of how many subscribers will be paying each month. Also, most SaaS solutions are made up of a number of modules that the customer can pick from. The customers can turn on and off modules as they see fit which increases and decreases their monthly costs.
Every department will experience changes due to the SaaS operating model. My recommendation is that companies should analyze each department to evaluate the impacts of SaaS to the processes, the technology, and the people.