To be or not to be… in the Cloud. Examining the Motivation

“The undiscovered country from whose bourn no traveller returns” (William Shakespeare)

Yes, it is 2014 and there still are thousands of ISVs who are selling their software in the old, on-premise model.  Surely, many of them are doing quite well, with a large, happy customer base, which is paying for upgrades, new versions and the yearly 20% maintenance fees.
Nevertheless,  I doubt  there is even a single board of directors that is not considering going to the Cloud.
Everyone wants to be in the Cloud. Many ISVs have started offering their services as a Hosted solution (claiming that they provide SaaS) just to have a presence there, and have added a little cloud to their logos or landing page to enhance that impression.

The Motivation
I have been advising ISVs for over a decade on their move to the Cloud (or SaaS as we old-timers still call it).  It is surprising though, how many of the companies I consulted to couldn't articulate why they were doing it.
I always begin with a Motivation session where the C-level staff is gathered to discuss what their thoughts on the matter are, and I find out, time after time, that there is no consensus on this matter.
Since the transition from a Product company to a Service company is so profound, the paradigm change so deep and the costs are not trivial (sometimes they could bring a company to its knees), it is crucial to understand why  the ISV is willing to set on this adventure.
The discussion below outlines the various reasons why an ISV should invest in this process.

Everyone is in the Cloud
Yes, it is fashionable, and I don’t belittle this motivation.  Sometimes a company must have a presence in the Cloud for marketing purposes, just because it is expected and the company brands itself as a forward looking endeavor.  But is this a good enough reason ? I would look into the next items to try to justify the move which is by no means a simple one.

The employees are demanding it
As flimsy as it may sound, this is not dissimilar to the previous motivation. The workforce is getting younger (in age and in mentality). Employees who think that the company is not ‘with it’ might start looking elsewhere, to companies that are more on the bleeding edge of the technology and market. Although this should not be a major consideration, it still is a consideration and might tip the balance toward a decision.

The competition is offering it
As we all know, SaaS solutions are very attractive from many perspectives. If there are a number of new, pure-play SaaS companies that are starting to bite into your customer base, this is a serious consideration. But, it should not be the only consideration; one must examine and compare exactly what the competition is offering. Many times, SaaS companies will offer a small subset, or an over-simplified solution of what your product does. If the competition is up-to-par in most aspects of your solution, you may already be fighting a retreating battle. If not, it is possible that you may lose the smaller customers but could still have an advantage in the larger companies. If this is the case, you should consider the transition to SaaS, while maintaining your advantage, rather than compete with the smaller players.

Your customers are demanding it
That is a very compelling argument. No one knows better that your own customers. If customers are requesting an Cloud solution, the company should listen carefully. Still, it is important to engage with the customers and understand exactly what it is they are looking for in a SaaS solution. Perhaps it is the recurring payment option – that could be done with an on-premise solution as well. Perhaps they are looking for certain features. Maybe it would make sense to offer new options in an integrated version, rather than rewrite the whole application from start.

You want to expand into a new customer base
Often times, the SaaS option will allow a company to reach out into a large customer base that was below the radar because of price or complexity.  While you were selling to the high end customers, there might be a vast group of smaller businesses that could benefit from your solution, but were always out of reach. If this is the great motivator, one should carefully examine what should be offered. Is it the same set of features? Is it a light weight version, or a subset? Are your potential, future SaaS customers different from your existing customer base, not only in size but in their needs ?

You want to expand into new territories
One of the advantages of SaaS is “Anytime-Anywhere”. While the old model necessitated local presence for sales and professional services, the SaaS model will allow the company to sell around the globe without the need to have ‘boots on the ground’.  If your local market is saturated, SaaS is a great venue to reach out to the other side of the globe without the expensive and complex logistics it used to take to make that happen. Here again, it is important to articulate what will you be to selling the customers in the geographies; not necessarily the same as the local offering.

To be – Of course
The discussion above does not suggest that after examining the motivation, one would conclude NOT to offer a Cloud solution. Of course every ISV will have to be there sooner or later, otherwise it will become obsolete. But going through this thinking exercise will allow you to define your approach. Understanding the motivation will help identify the target market, the go-to-market approach, the timing and the offering itself.

As an example:  A large British ISV I worked with, wanted to switch to SaaS by taking its flagship product to the Cloud. After going through the process we came to the conclusion that their product was a cash cow for the foreseeable future, and there was no reason to dive into such a large undertaking at this stage. Instead, the decision was to develop a LITE solution to offer to different customer types in new geographies. This allowed the ISV to experiment with a less demanding task, while learning the ropes of the new architecture and new market approach. I am happy to say that they are launching their SaaS solution these days in two new territories.

7 Considerations for Transitioning to SaaS

“Beware of missing chances; otherwise it may be altogether too late some day” - Franz Liszt

Not there yet?
We are nearing the end of 2012 and there still are thousands of ISVs that have not yet transitioned to the Cloud. For some, the effort might be too big and they fear it will mean an optional death. For others, they might have a steady, captive audience, and their customer base is still strong – perhaps not growing, but enough to sustain them for the short term. What I am certain of, is that no ISV is oblivious to the Cloud revolution, and not thinking of the implications and next steps.

I have been advising ISVs on this process since 2004 and have developed a program that I implement at my customers who went through the process. Some decided to postpone, others have launched successfully. Following are considerations that are the cornerstone of my methodology.

1.    Motivation
There are many compelling reasons to transition from the on-premise model to the Cloud, but many companies do it for the wrong reasons.
I believe that the vast majority of ISVs will transition to SaaS, or cease to exist, so don’t get me wrong – the transition is necessary, but it is also very important for the company to understand why they are doing it. The transition is a Strategic Business Model change, and don’t fool yourself otherwise.

The fact that Everyone Else is Doing It should pop the questions ‘So What’? Fashion alone is not a reason to change your business model. If you are going to be a ‘me too’ company, or put a little cloud on your logo hoping that it will appease your customers, it will not bring you success. Are you losing your customer base, are your customers demanding a web solution? Are you doing it to capture new markets, new geographies, or expand services within your space?
These questions are critical to define your strategy.

2.    Define Goals. Market and Offering
This seems almost too obvious, but one would be surprised at how little this is practiced. At many companies, the drive to offer a SaaS service is driven by a customer request, an initiative of a product manager, or a ‘me too’ attitude. Hence, they decide to play it safe and to first "test the water" by starting the SaaS initiative by offering “something” in order to watch the market’s response. They think that once the motivation is clear, the target market will be better understood, and the offering could be defined. This is a pretty sure fire way not to succeed.
The strategic goals must be defined prior to the transition:  Are you reaching out to the same customer base with improved services? Are you reaching out to smaller customers that were previously below the radar? Will you be offering the same product or a simplified version to smaller customers? Could you expand to new geographies that were out of reach because of the previous need to establish costly local operations?

3.    Go-To-Market
The go-to-market strategy is very much a derivative of goals, product and target market, but it is important to understand the relationship between them all. Think of the possibilities. Will you be going after your own customer base with the old school, of elephant hunters and wining and dining and 18 months sales cycles? Will you go after a wider audience with inbound marketing and a low-touch approach? Will you place your service on a market place (e.g. AppExchange, ApplicationMarketPlace) with a zero-touch approach? What would be the role of the Channel in the new service?

These decisions will weigh heavily on the design of the product and most probably on the technology, not to mention the support, sales and marketing functions within the company.

4.    Think outside of the Box
SaaS is not just another way to reach a larger market with your existing product – the Cloud offers so many new opportunities that were not possible before. The idea is not just to recreate your client-server application on the web, but use the web as fertile ground for stuff you could not do before. Just think of all the usage data you have now - the ability to understand what your customers are using and how, share that knowledge with the community, or sell the benchmarking data as a service or add features and modules to your service that you were not able to provide before. Since everything is available in the Cloud, you can integrate value added services without the need for a scary, time consuming PS project.
Drive a brainstorming session and ask the employees what they think can can be done in the Cloud. You would be surprised at how many fresh, original ideas will surface.

5.    Understand the Pain
As I have written in numerous occasions – the move to SaaS is not expanding through another channel – it is a total paradigm shift and it will affect every silo within the organization. If you do not grasp the enormity of the shift, there is a good chance that you will either fail in the process, or come out on the other side weakened and exhausted. You must understand the effects it will have on every group and the implications, and by "every group" I mean Product, R&D, QA, Support, Marketing, Sales, Finance, Legal, Professional Services and Operations.
If your strategic sessions lead you to conclude that the shift to SaaS is inevitable, you must enhance your chances of success by first understanding the impact, identifying the problem areas and tackling them through buy-in, education and sometimes, yes, the need to let people go.

6.    Spawn Out the Cloud Service
Because of the paradigm shift that comes with switching from a product-centric model to a service-centric one, and because it will affect the way things are done in every department, one must consider a near complete separation between the on-premise and SaaS teams. Whether by spawning out a satellite company, or creating a new division, it is necessary for the success of the SaaS offering without trashing the old customer base. Having the same team working on both models, (whether product, engineering, QA, Marketing, Support or Sales), will, at best, make things difficult, create conflict of interest and will risk the success of the new endeavor.

You should definitely create this new team from your best existing employees and perhaps strengthen it with a few outside recruits. You could begin with a product manager and a small team of young (in spirit) developers, those that thrive on new technology. Challenge them to deliver a new Cloud offering in record time – you would be surprised to find out how much can be achieved in a very short time. (When I started out, over a decade ago, there were so few tools and environments available – one had to build everything from scratch. Now the Cloud provides hosting and eco-systems that allows one to build full-fledged services with billing, integration, monitoring and BI almost out-of-the-box.) Make sure that they report to a C-level in the company that will take this initiative as a personal goal.

7.    Vision & Leadership
There are numerous examples of companies that succeeded in the transition, despite the hardships and challenges. (Concur being the ultimate example) The common thread was the executive leadership's belief that they are doing the right thing and their ability to carry their enthusiasm to their employees.
There are also quite a few examples of companies that failed in the process. Some of them paid dearly for that move (Mercado as an example of a very promising company that depleted itself through the process, and basically evaporated). I believe that the common trait of these failures was a lack of leadership and/or understanding of the managerial and strategic resources needed for the transition. Either the process was carried out by an enthusiastic director who got a mandate to "test out the water" as a sideline project, or that the Sales team stepped in and bungled the attempt as they perceived it contrary to their agenda, or the company tried to run both models in parallel with the same teams.
It is not enough that the CEO believes in the model. She must make sure that the board of directors is behind her and that every C-level is on the team, understands the issues, the opportunities and the difficulties, and propagates the enthusiasm all the way down to the entry-level employee. Bring the sales team on-board at an early stage and get them excited. They have the most to lose in the short term and they can be a royal pain in the backside if they chose to.

And yes, listen to your customers – one of the downsides of on-premise software is that you don’t really know if and how your software is being used.

There is a lot of misunderstanding about Cloud; too much hype has been thrown around. It is important to educate the staff and create a common vocabulary, to facilitate effective discussions in the board room and next to the coffee machine. Make sure that the most junior level worker has a clear understanding of the goals and the path to achieve them and get them excited about the prospects.

Of Dinosaurs and Men – Why Traditional ISVs Will Fail On SaaS

Dinosaurs were an extremely successful model. They roamed the earth and multiplied and were the indisputable rulers of this planet for hundreds of millions of years.

They were not very fast, necessarily, nor even nice to their customers (some of them are reputed to have actually eaten their customers), but they were successful because they had spent millennia adapting to the existing environment, perfecting their model to make the most out of it.

Then an unexpected event occurred (some scientists believe a meteor hit the earth creating a nuclear winter while others claim it was fast, cheap internet and tightening IT budgets) and soon all dinosaurs went extinct. Well, not all. Two groups were not annihilated. There were those alligators that stayed in their swamp (niche) and are doing pretty well, thank you, still today. The other group consisted of small reptiles that were driven to grow wings since the larger crawlers ate up all the easily available resources. These birds were lucky to be able to adapt quickly to the changing environment and survive the downfall of their relatives.

The fast moving, warm blooded mammals were better equipped to deal with the new brave world and many have grown to become true behemoth.

In a previous post I revealed the fact that I have mostly stopped advising the traditional on-premise, enterprise, perpetual, software vendor on the transition to on-demand, subscription model, i.e. SaaS.

This is not because I do not believe that it is a smart move, or that the ISVs would not benefit from the transition. Far from it! I envision a world, not too far in the future, where on-premise software would be the exception, not the rule, and even that exception would point to a dwindling model that would survive in niche markets only (swamps) .

My experience, which is supported by many famous (SAP and Avaia for starters) and less famous companies, has been that most traditional, on-premise, enterprise ISVs will fail miserably in the transition to SaaS. I have advised to companies that started out with great enthusiasm that dwindled to a silent death. They simply do not have the DNA for it.

I am talking about the right STUFF that is inherently lacking in established enterprise ISVs that will allow them to make the successful transition. This is not a comment about these companies’ value or success. It is usually inversely proportionate. The more successful the company is, the more entrenched it is likely to be in doing things the ‘right way’ – right, as far as the traditional model dictates.

These ISVs have a product view, not a service view. Their emphasis is on features not serviceability. There is a lot of push back from every silo in the organization, for change, in general, and the SaaS change in particular. It requires a paradigm shift in the organization, and the bigger, more established that organization is, the more difficult it is to bring about that change. (See Impact on the ISV Organization July 02, for a detailed account)

Until a couple of years ago, one could say that most ISVs just don’t get it. But that is no longer the case.

Many traditional ISVs saw their market share being cannibalized by these fast moving SaaS companies. Many heard their customers ask about an on-demand offering and many understand that it is vital that they have a “me too” offering. One cannot ignore the changes in the market and shrug it off as a fad. SaaS used to be a way to work around IT; now CIOs are building on-demand strategies for their business and even starting to use on-demand tools in IT.

So, there is a much deeper understanding of the need to offer an on demand service, but very few ISVs understand that it means a total commitment from the executive level and down.

Not that it is impossible. I have worked with a company whose board made the decision to go Services. They replaced the CEO, who in turn replaced all the senior staff, save the VP engineering. The new VP Sales brought in a fresh new sales force. Then they went through the process of rewriting most of the application from scratch. This process took about a year. They are now a successful SaaS vendor, but they got as close to re-encoding their DNA as possible.

And, of course, there known successful enterprises such as Oracle on demand, HP SaaS (former Mercury Managed Services) and others that had successfully launched their on-demand services, but they are the exception to the rule.

Dinosaurs were magnificent creatures and it sad that we don't have them around any longer (except on isolated islands in the Pacific), but their only fault was that they were too successful for the 'old world' model. I wonder how many software alligators will still be around a decade form now.

Quick response to a silly blog

Normally, I have my own plans for what I want to post on my blog and I leave the fencing for the US women's Olympic team.
BUT, this morning I received an email from a friend who is also a CEO of a SaaS company, pointing out a new post with an outrageous title Why You Should Steer Your Customer Away from SaaS, for Now asking me to comment on it in my blog.

Frank's argument was that since Goggle's Gmail had an outage " just mention Google and Amazon's problems and a shadow of doubt can be place over the whole hosted applications market" He goes on to say that cloud computing (SaaS) "is just a pipe dream" and that we should resort to good old reliable client server technology.

I told my friendly CEO that it is such a non-issue that I don't think I should waste a good posting on it, but I did add a comment to the blog.
As the day went by and my comment was neither posted nor acknowledged, I decided to use this forum to respond.

So, my comment went something like this:

1. I can't believe we are even having this discussion. This is not 2003 when people were discussing the merits of this novel delivery system. As Dave Rosenberg pointed yesterday in his Negative Approach blog "Software-as-a-Service is so common it's actually boring at this point"
2. Frank's argument is as valid as steering customers away from motor cars back to horse drawn carts, because accidents happen.
3. SaaS companies make a living out of providing these services. Although I do not have the statistics, I know from numerous interactions with many companies that your average SaaS uptime figures are far better than your average IT department's.
4. Part of the success of SaaS has to do with the fact that IT was simply not delivering the goods, not in performance nor availability, so the business units went out looking for someone who could deliver a better service, NOW.

There. I don't think I need to splash in the mud much more. I must say though that I feel like I'm playing out a scene from Back to the Future IV.