13 habits of highly effective SaaS companies

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Feb 21, 2014 (3 years and 3 months ago)

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13 habits of highly effective SaaS companies

by
Gordon Graham
, Editor,
SoftwareCEO


Any way you look at it, SaaS
-
enabling firm
OpSource

is hav
ing a heck of a run.

Founded in 2002, the Santa Clara, Calif.
-
based company has helped dozens of other
software firms bring SaaS offerings to market.

With 170 staff hosting 220 SaaS companies, OpSource now serves millions of end users
and handles billion
s of transactions every day.

Last fall, the firm was named third fastest
-
growing in Silicon Valley in its category by
Deloitte
, with 5,733 percent growth over five years


its third straight appearance o
n
that list.

Last summer, OpSource
won a Software Innovation Award from
SoftwareCEO/
CompTIA

for most innovative service/business model. And before that
it
won a 2006 CODiE award

for best application management solution.

The marketplace has noticed.

In June, OpSource took its pick from a number of suitors and raised $15 million in series
"D" financing led by
Crosslink Capital
. The year before, OpSource raised $20 million in
a series "C" round led by
Intel Capital
.

We figured it was time for a
chat with the leader of such a prominent firm. So we caught
up with OpSource co
-
founder and CEO Treb Ryan for a far
-
ranging conversation about
what makes his company tick, and what it takes for an ISV to succeed in SaaS.


Highly effective SaaS habit #1: U
nderstand the true value of software.

If you're already a convert to SaaS, skip this part and jump ahead. But if you're still
wondering why people go on about SaaS, read on.

"No one ever sat around a board table and said, 'You know what would make us a be
tter
company? A new server!'" says Ryan.

"What they said was, 'You know what would make us a better company? A better way to
interact with our customers' or 'Better use of our marketing data' or 'A better way to track
our financials.'

"The true value to t
he customer is the thing that makes them a better salesperson, or gives
them better business intelligence, or helps them run their medical practice. They want
software that makes them more effective in their world.

"The servers, the security, the high ava
ilability, the storage: You only get that to run the
application. If you didn't have the application, you wouldn't have any reason to buy those
other things."

It seems obvious, when you think about it. Yet
IDC
's "Worldwide Black Book"

finds that
only 20 percent of IT budgets go for software. The other 80 percent is split evenly
between people/services, and hardware.

"Considering that software is the only thing the user wants, th
e IT spend doesn't match
where people are getting their value," says Ryan.

Naturally enough, SaaS addresses that mismatch head
-
on. Through SaaS, customers can
get at the immense value that software provides, without sinking that other 80 percent
into IT a
nd hardware.


Highly effective SaaS habit #2: Don't underestimate the future of SaaS. Younger
people get it, too.

The SaaS value prop doesn't appeal only to grey
-
haired CIOs. Kids get it, too.

eBay
,
FaceBook
,

Google
, and
Yahoo!

show kids every day that they don't need desktop
software; they just need the w
eb.

"My oldest daughter is nine and she had software, we bought her games and stuff," says
Ryan. "But my five
-
year
-
old son doesn't even know what a disc drive is. All he knows is
that you go on the web and do things, like go to
ClubPenguin

or whatever.

"When you look at that generation just entering the workforce


18 to 22
-
year
-
olds who
grew up on the web


their whole world is around what they can do online. They live
online, they interact online, s
o they're going to want to use the power of the web in
everything they do."

In other words, the push for SaaS is only going to accelerate, because time is on its side.


Highly effective SaaS habit #3: Change direction, if you must, to catch a new wave
in
the market.

When OpSource started in 2002, it was a different company.

For Ryan, it was his third startup in a row, after selling
SiteSmith

at the height of the
boom in 2002 for $1.4 billion. Yes, that's billion with a "B."

In those days, telecoms were t
rying to find higher
-
value offerings like managed services.
So OpSource hitched its wagon to the telecoms, and Ryan says it was "scraping by"
doing systems and network management for telecoms and their customers.

"So we decided to build a platform and too
ls for telecoms to deliver services to their
customers, and that's how OpSource got started in 2002. Of course, we were wrong,
unfortunately or fortunately."

By mid
-
2004, Ryan's team agreed that companies were not buying services from
telecoms, but from th
e new SaaS companies that were starting to pop up.

"When someone buys a SaaS app like
Salesforce.com
, they're getting all the associated
pieces: the network, the servers, security, support. All the th
ings that telecoms were
trying to sell were actually coming from the SaaS companies."

But many SaaS startups were getting tripped up by the other parts of the puzzle, by
having to recreate all the infrastructure they were replacing at their customers’ sit
es.

"So a lot of SaaS companies were failing, not because they didn't write good software,
but because they had to do all these other things now."

So OpSource faced this change in the market, and did something about it. Ryan and his
team retooled the plat
form they'd built for telecoms. They even had an early customer


Agile Software

(now

Oracle
)


looking to roll out a SaaS version of its

app, so
OpSource helped them do it.

And that was the real beginning of OpSource's run, only three and a half years ago.


Highly effective SaaS habit #4: Find the problems prospects need you to solve. And
solve them. Even if it's impossible.

To confirm t
his hunch that SaaS was coming, OpSource did some market research.

Ryan and his team talked to existing SaaS companies and people trying to get into SaaS,
asking them about their toughest challenges.

"I don't think anyone looked at what the issues for all

these companies actually were,
from top to bottom, from base
-
level infrastructure, security, to an interesting conversation
we had on Day 1: Did we want to offer support for our customers’ customers?

"To be blunt, we didn't. But we ended up doing that, b
ecause if we didn't, we'd be leaving
a big hole in solving their issues."

They found a general consensus on the issues. And their concept of a SaaS
-
enabling
platform would fill a major gap in the market.

"But many companies, including
NetSuite
, thought we couldn't do it. They believed the
applications were too unique, and every SaaS company was going to have to do
everything itself."

Despite the nay
-
sayers, OpSource created an industry breakthrough: a
standard SaaS
delivery platform that any ISV could use to deliver and support web
-
enabled software.

And the company coupled that with a business model that


even now


is still
considered radical in some stodgy corners of our industry. More on that next.


Highly effective SaaS habit #5: Share the risk with your customers.

We've said it before
, and we'll say it again: You can dramatically reduce software sales
friction if you share in your customer's risk


and their success.

"The biggest thing we did for our success was we realized that if SaaS companies were
going to sell per user per month, or per transaction, or per customer, they were going to
need product
s they bought that way," says Ryan.

"And we were the first [SaaS
-
enabling] company that said you pay us per user per month,
or per transaction, or per customer; it's really based on your business. Your success is our
success.

"That made it very simple to
figure out; if I have to pay OpSource $5 a user, and I'm
charging $40 a user, then I'm going to make money."

The same principle applies to any SaaS company. Share the risk with your customers; let
them pay for results for happy users, not for shelfware.

Ryan said many people in traditional software companies objected to taking on so much
risk.

"With traditional software, you went out and sold a $1 million license, and it didn't matter
whether the software worked for the company, you still got your $1 mil
lion," he says.

"With SaaS the software is taking on the risk that the customer actually uses it and likes
it, because if they don't, you're not going to get paid.

"That's the way the world works now. You can't just tell your customer, all the risk is on
you.


Highly effective SaaS habit #6: Think like a web company, not a software company.

"Our

biggest advice for SaaS companies, or people who want to do SaaS, is that the
successful companies in this space tend to think a lot more like Google and eBay tha
n
SAP and Oracle.

"The companies who do well in this space really think and act more like a web company
going after business customers than a software company that just happens to be on
-
demand," says Ryan.

And he says there are three areas where software
and web companies have a very
different mindset in how they go about their business:



Development, especially how to develop,



Sales and marketing, and



Corporate mashups (also known as "composite applications").

Any traditional software firm hoping for suc
cess in SaaS must change some key practices
in each of these areas. More on these below.


Highly effective SaaS habit #7: Use agile programming to improve the customer
experience, overnight.

Successful SaaS firms know that it's not only
what

you develop,
says Ryan, it's
how
.

"In the old days, a web company would think of updating the site. Now we have new
terms for that, but the idea is that you're doing constant improvements, as opposed to a
long development cycle and then a release.

"It's not necessaril
y more work. If anything, I think it fits much better with the way
programmers and developers like to work, but it does take a completely different
development paradigm."

He suggests SaaS R&D managers seriously consider
the principles of agile programming
,
which include regular iterations and frequent feedback from customers.

"One of the great things about SaaS is you can actually see people use your application.
So if you add a new fea
ture, and you notice that 80 percent of your users go and use that
functionality, but it takes them four clicks to get there, you may want to switch that, so
it's immediately available as soon as they've logged into the app.

"You've just dramatically impr
oved the customer experience, and you can do that this
week! You don't need to wait until a year from now!"


Highly effective SaaS habit #8: Team web developers for your UI with traditional
programmers for scalability and performance.

So where do you find

the right developers for a SaaS project?

"Look for people doing web development, as opposed to traditional software
programming," says Ryan. "But it's not really an either/or.

"Especially on the UI side, you can look for people who come out of the consu
mer web
business, and team them up with your traditional development staff who can focus more
on scalability and performance.

"In the web environment, you have testing, staging, change management control, and
rollback capabilities, and all the other thing
s it takes to run a website. Things like
rollback aren't in the lexicon of a software company because they don't normally install
the software at the customer's site.

"So a lot of this is getting people to change their thinking.

"And many younger people a
re going into this type of development because it allows
them to express their creativity, and get immediate feedback on something they think is
cool."


Highly effective SaaS habit #9: Grow your user base from a free trial, to initial
signups, to wider ado
ption. And use sales resources accordingly.

"One of the things that almost all successful SaaS companies do is make their value
proposition simple. Get it out onto the web and allow people to come and buy over the
web.

"It's amazing how few do it, but th
ose who do, who focus on attracting users and
allowing them to buy on the web, and then once they have someone on, going out and
growing those users from 10 to 100 to 1,000 users, they are the ones having success in
this space.

Ryan admits this took OpSour
ce some time to learn, and if he was doing it over again,
he'd invest more in compelling web marketing sooner.

"The fact of the matter is that most successful SaaS companies don't start with the big
elephant
-
hunter mindset.

"They really focus more on attr
acting users with free trials, and then monetizing them. It's
an online sale, it's an inside sale, and then making the move into the enterprise, and
growing those customers."

There are three key steps to this SaaS sales process.


SaaS sales step #1: Build

traffic and offer easy free trials.

The first step should be web
-
based marketing and SEO to attract traffic. And use good
design that makes it super
-
easy for people to sign up online.

It's a big mistake, says Ryan, to waste time selling prospects a free

trial. Don't use any
precious sales resources until later in the process.

"Sending a sales rep to sign up a five
-
user account is prohibitively expensive; allowing
those five users to sign up over the web is obviously a far better plan."

OpSource now provi
des OpSource Billing, which supports online ordering so you can
offer your visitors buttons to click for a free trial, to buy the service, and to add users.


SaaS sales step #2: Grow each customer with inside sales and account management.

In the SaaS wor
ld, a free trial gives you a "super
-
qualified lead set" to follow up.

"When someone signs up for the free trial, track how many people are coming in, how
many are using it on a regular basis.

"Call them two or three weeks into the trial and say, 'Hey, I n
oticed you signed up for a
free trial. I noticed you've been using it quite a bit. What can I do to help you understand
more about the software? How can I get you moving to a full implementation?'

"Say they have a company with five to 10 users, now you ha
ve an embedded customer
where you can start doing inside sales or account management. Say, 'Listen, you've got
10 users now. Can I help you expand? Do you know we have these other features?'"

Either grow the feature set each customer uses, or grow the user

base at the customer, or
both.


SaaS sales step #3: Go on a sales call to pitch an enterprise
-
wide deal.

And when the time is right, pull out your big sales guns.

"When a customer is up to 50 or 100 users, it's a great opportunity to walk into an
enter
prise and say, 'Listen, you already have 50 or 100 users. Why not put everybody on
the platform?'

"You can show that it's already worked well for their organization for a period of time,
and now you're just looking to make it more efficient. And the great

thing is that you
have internal champions built in."

Ryan says this process of moving from web to telephone to sales calls in an escalating
campaign to grow your SaaS user base is the wisest way to use your sales and marketing
dollars.


Highly effective
SaaS habit #10: Use third
-
party web services to help you focus on
your core value.

OpSource now offers three web services that other SaaS firms can integrate into their
offerings: billing, analytics, and support.

"These really allow your development team

to focus on your core value proposition, all
the pieces that are most valuable and most critical on the production side. All the pieces
that are just infrastructure, you don't even have to build anymore," says Ryan.

"In our mind, that's where this world
is going. The next generation of apps is really going
to involve these types of web services.

"In the future, you are going to focus just on the core value of the app, and not have to
worry about the piece parts like billing, metering, document management,

and all those
things.

"I think apps will be subscribed as services, and most of them will be published as
services too."


Highly effective SaaS habit #11: Resurrect your lost channel with composite
applications (corporate mashups).

And this leads into t
he SaaS trend that excites Ryan most: "corporate mashups" (also
known as "composite applications").

Like
software components
, a composite application could be plugged together f
rom
pieces of SaaS functionality, saving tons of time and effort. Each piece would provide
web services to perform one set of functions, integrate together two other apps, or
whatever.

The big precedent for this is SalesForce.com's
AppExchange
, where developers can post
bits of functionality in a marketplace and others can buy them.

"One of the things that's been tough is that a SaaS sale up to now has been a silo
application, and it's bee
n a direct sale, and the channel hasn't really existed," says Ryan.

"But if you can turn your app into a web service, you have the chance to become a mini
-
platform that can get integrated into other people's apps. By making yourself a platform,
you can ge
t involved in the ecosystem, and see the channel come back for you. And this
can have a huge impact."

He points to a company OpSource is working with, whose software can calculate any
type of taxes, such as sales taxes or VAT.

"Think about that functional
ity put into any other application


a quote application, or
an accounting application


there are so many other apps that could integrate that back
in."

And whenever that code becomes a piece of a composite application, its developer can
presumably extrac
t fees or royalties.

Just remember habit #6: Share the risk with your customers. Don't expect to extract a
huge one
-
time fee. Go for recurring revenues, the way your buyers do.


Highly effective SaaS habit #12: Use SIs to help overcome this year's bigges
t
objection: integration with legacy apps.

"Integration with legacy applications has replaced security as the prime sales stumbling
block for larger enterprises," says Ryan.

"Most companies are now past the security issue. Today, they are saying, 'OK, if
I am
going to adopt SaaS, how am I going to integrate them with these other things I already
have?'

Enter a new generation of SI like
Astadia

and

Bluew
olf
.

"These firms are helping companies integrate SaaS apps, do mashups of SaaS apps, and
even integrate SaaS apps with behind
-
the
-
firewall applications, so these SIs doing SaaS
integrations become your new channel," says Ryan.

For example, a mashup of
this sort might link Salesforce so that every time you close a
customer, that customer shows up in QuickBooks or Sage or SAP. This opens the door to
integrating legacy applications with newer SaaS products.

"The ability to offer your app as a service brea
ks down sales objections, it opens up the
channel, and it allows you to add a lot of functionality to your application that would cost
you a lot to develop on your own."


Highly effective SaaS habit #13: Ride the SaaS wave to VC funding.

Ryan says that Op
Source's series "C" funding, led by Intel Capital in September, "had
given us the cash we needed to operate the business in perpetuity."

So the next round


when they raised another $15 million


was gravy.

"The valuations were so good, it is really allow
ing us to get more aggressive, for
instance, opening OpSource Europe, developing more services, building out new types of
web
-
based sales models.

"The financial markets, the bankers, investors are all seeing these companies as a
significant premium to tra
ditional app delivery models.

"It was much different than a year ago. Now it's people approaching us. I think that's just
an indicator of how strong this market is. I'll take that any day. This is my third startup in
a row, so I've done this a number of t
imes, and it's always nice to have people come to
you!"