How SaaS changes the Vendor/Client dynamic for the better

There’s a blog post on about reducing the cost of SaaS implementations.

The first few paragraphs really hit home:

In the on-premise enterprise software world, I have seen many software implementations go awry despite ballooning implementation expenditures. Customers never see their ROI until many years into the implementation, by which time they are so deep into upgrades, manpower turnover, shrinking IT budgets, IT organizational fiefdom – you get the picture – that ROI is the last thing on their mind.

As the customer struggles, the software vendor bears very little risk. The company has pocketed the license dollars and issued the press release on the customer acquisition.

With SaaS, the tables are turned. The SaaS software vendors (to their own detriment) have perpetuated this notion that, with SaaS, implementation will be effortless. But as we all know, enterprise software implementation is much more than just installing the software. Vendors must work harder to reduce deployment cost and improve ROI for their customers. Here’s how.

There’s two components of SaaS – where the software runs, and how the client pays the vendor. In this post I’m going to focus on how the vendor gets paid because it forces some interesting changes in vendor behaviour.

A traditional software sale goes something like this:

  • The hero salesperson goes in, does a magnificent sales job convincing the client that the package is wonderful and the vendor is deeply committed to success.
  • Customer issues Purchase Order and our hero salesperson exits stage left, pocketing his commission as he goes.
  • The vendor’s implementation team are then left to fulfill the commitments the salesperson made, within the sometimes very considerable constraints of budget, time, and technical feasibility (constraints that seldom bother the salesperson!).
  • In most cases the implementation effort is a matter of containing the damage rather than achieving something positive, and is the principle reason why there’s so little trust between customers and vendors.

Meanwhile, the customer’s business has stumped up a large capital sum in the hope of achieving some return at some point in the future based on the salesperson’s promise. All the risk is on the customer’s side at this point, because they’ve got an awful lot more invested than the vendor.

If you think about it, this is nuts. The vendor is selling an intangible – there’s no justification for a large up-front capital sum except to fit into the vendor’s existing financial model and sales compensation plan. Why can’t the customer pay for value received as it’s received?

I suspect the current state of affairs is just a matter of tradition, software companies have until now been able to get away with it – they haven’t needed to wean themselves off the up-front capital sum. Now capital is much more constrained so things are changing and customers are expecting to pay as they receive value.

Aside from making the finances easier, what’s really interesting is that rental now means a shared risk between the customer and the vendor – if the customer doesn’t get a return they won’t renew. That makes for much more open and honest conversations, and importantly from the vendor’s side, there’s a lot more learning going on – you really do have their attention. Chances are the vendor will need to change internally to respond to the new demands of this “Shared risk” approach – although one might wonder why it took this long to start caring about the customer’s outcomes.

Amphora started offering rental-type pricing for PatentSafe from the start, and I’m sure it’s one of the reasons why our products are some of the easiest ELNs to get going with, and deliver ROI with reasonable certainty. In addition, we’re wired up internally to ensure we learn as much as possible – we have a board-level position of “Director of Customer Relations” and the salesforce report into her which means one person has control over the entire customer experience from first touch to ROI realisation.

I should say that not everyone takes the rental-style option – I guess probably 50% of our customers rent in some way or another, Vs outright purchase. Getting so much of our revenue this way really forces us to pay attention and ensure the customer gets the business benefits we sold them – because if they don’t they will cancel! Our contracts also have short notice periods which means we never take anyone for granted, a deliberate decision on our part – it means we catch problems early.

Some customers don’t like this partnership approach – they’d rather buy the software and take responsibility for ROI themselves, taking the view that they know their organisation better than we do. Which is perfectly fine – some customers are amazingly professional and we just watch in awe. Other customers sometimes need a little help 🙂

I guess the point is traditional software pricing means that a successful project is mainly the customer’s problem. Rental/SaaS-style pricing means both parties interests are aligned.

From the vendor’s perspective this is hard work but it makes you a better company in the end – better products, better services, better (and more ethical) sales. Yes you lose the big upfront windfall of outright purchase, but if you aren’t needing to artificially inflate your short term earnings and can manage your business for the longer term, that’s not a problem.

Yet another way in which being privately held is an advantage, I guess!