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With the increasingly popularity of software as a service (SaaS), enterprise software vendors today cannot afford to be without a cloud strategy. As a result, traditional vendors have introduced various forms of hosted, hybrid, and SaaS deployment options. These co-exist alongside the vendor’s traditional on-premises license model, as shown in Figure 1.
But software as a service is more than just another deployment option, another way to consume software. SaaS is a business model. SaaS not only affects the product: it should drive the nature of how the provider does business, from how the product is developed and maintained to how it is sold, implemented, and supported. It should permeate the very culture of the provider’s organization.
For the moment, ignore the various definitions of “true SaaS.” Let’s assume a traditional vendor can deploy its system in a way that meets the various criteria of SaaS. Even so, if SaaS is just another deployment option, the vendor will not have a SaaS business model and customers will not receive the full benefits of SaaS.
Essential Differences in Business Models
How should the business model of a SaaS provider be different from that of a traditional software vendor? There are several aspects:
Stuck in the Middle
Traditional vendors are in a difficult position, unless they are willing to abandon their on-premises customers or spin off their cloud development programs as a separate business. Very few do so. Most choose to add SaaS or hosted deployment options alongside their on-premises option.
It is sometimes said, “If you can’t fix it, feature it.” The easiest way for vendors to spin the multiple deployment options as a plus is to frame it as a matter of customer choice. In effect, they say, “We let customers decide how they want to deploy our software. You can deploy on premises and then move to the cloud, or you can deploy in the cloud and then move the system back on premises. We are all about choice!”
This is a marketing message, not a strategy. Traditional vendors that merely add SaaS as a deployment option face a number of strategic challenges. The most obvious—but most easily fixed—is in sales compensation. Software sales people are accustomed to big paydays when they sell initial licenses. Sales people therefore, can be demotivated in selling the SaaS deployment option, which does not have big upfront fees. Vendors have various ways to fix this problem, usually by paying equivalent incentives up front and assuming the risk of customers not renewing beyond the initial subscription period. In some cases, vendors desperate to establish their cloud credibility even over-compensate salespeople for selling cloud services.
But even if the sales compensation problem is overcome, it is hard for traditional vendors to transition fully to a SaaS business model. Because so much of their business remains with on-premises customers, they do not develop a services mindset, and their interests are not fully aligned. Because they have to continue support for on-premises customers, they cannot release new features continuously to their SaaS deployment versions. If they do they will break their promise that customers can easily switch back and forth between on-premises and cloud deployment. They do not develop customer intimacy nor foster customer communities to the same extent that the SaaS-only providers can.
Should Buyers Exclude Traditional Vendors?
Does this mean that organizations looking for cloud systems should limit their choices to SaaS-only providers? Certainly not. When providing ERP software selection consulting, our sister company, Strativa, does not limit the short list to SaaS-only providers. There are a number of reasons that an organization might want to consider the SaaS deployment options of traditional vendors.
Despite these practical considerations, business leaders are beginning to understand the benefits of dealing with a provider that has SaaS as a business model, not just as a deployment option. In our work with customers and at user conferences, we see many organizations that have made the switch to cloud-only providers. We rarely, if ever, see customers making the switch back from SaaS to on-premises systems. Vendors may push “customer choice” as a marketing message, but we see few customers choosing to switch back to on-premises systems.
One final thought: not all SaaS-only providers fully deliver on the SaaS business model. The product may be “true SaaS,” but it does not guarantee that the provider will nurture a customer service mindset, develop customer intimacy, or foster community. In fact, some SaaS-only providers need improvement in these areas. For organizations looking for new systems, it pays to check references, even with pure SaaS providers.
The software industry is changing. Just as packaged software vendors won out over custom-written applications in the 1980s, so also SaaS is now winning against that traditional software vendor model. The rapid growth of the cloud-only providers over traditional vendors is evidence of this shift.