So What if my Vendor isn’t a True SaaS Provider?

In conversations about what is meant by a “true” SaaS solution, or even a SaaS-Plus or on-Premise-Plus solution as defined in my last post, the topic always turns to where is the business value.  The reality is that there is a different business value for the vendor than that for the purchaser. No real surprise there.

For the vendor, the benefit from SaaS comes primarily from their ability to support their customers cost effectively.  They are deferring the up-front licenses fees, and for some the initial implementation fees as well, and converting them into an on-going revenue stream.  The concept of true SaaS allows the vendor to update once the instance running on a server and have all the customers that use that instance/server also be updated.  This dramatically reduces the support and operational cost for the vendor.  It allows one round of development for the basic platform, one round of testing for the platform, and one round of testing for each deployed instance (server instance) versus one round of testing for each customer, and potentially customer site, on each server deployed.  These benefits are what allow the vendor to grow and thrive, much less just survive, off of the lower, yet recurring, revenue streams.

One critic of SaaS vs. On-Premise sees this model as just another scam.  His thoughts are based on the reality that many customers are tuned into the on-premise software annual maintenance model and see it as an on-going revenue stream for the vendor that delivers minimal value to them.  Hence, more customers are seeking lower cost support alternatives or are cancelling annual maintenance support contracts all together.  His critique sees the SaaS recurring revenue model as a replacement for the “maintenance contract scam”.  In some ways he has a point, but I don’t see him conceding the value for many customers with simpler, straight forward, industry common needs that a well architected and configurable SaaS platform can provide.

This brings us to the value to the purchaser of a SaaS solution.  The primary immediate value that drives most initial inquiries about SaaS is the concept of minimal up-front investment for a solution that meets most of the customer’s needs.  Specifically, up-front license fees, hardware investments, and annual maintenance payments are removed from the equation.  With some SaaS providers, even the initial implementation fees are eliminated.  Instead, all of these fees are rolled into a recurring subscription fee.  The whole transaction is converted from a capital investment to an operating expense that often can be terminated with limited notice and no capital write-off.  Customers state that if they can get this cost benefit for acceptable function/feature delivered, why do they care whether their vendor is true SaaS or not?  Who cares if they are really a SaaS-querade?

I see this as a shortsighted view that misses the point about the viability of the vendor.  The investment they are making in implementation, operational processes, system documentation, and user training is not trivial.  This investment exists regardless of the type of software solution you purchase.  It is a “sunk cost” even with a SaaS solution in that even if you can dump the solution on a moment’s notice, you still need something to run your operation and that requires setup, procedural definition, and user training.  I don’t want my vendor to force my hand because they chose the wrong financial model to insure their long term financial health.  Also, if I lose my on-premise vendor because they go out of business, I can still operate by business on their software.  I own it; I have a copy running in my data center on one of my machines.  I have time to find a replacement.  If my SaaS vendor dies on me, I may very well be dead in the water.  At best I will have to get a copy of what I was running on and move it to my own data center and then go through a recovery operation.  This situation is a key point when negotiating your SaaS solution contract.

When I assist customers in finding a SaaS based WMS or other supply chain solution, I remind them of these facts.  If we have a true SaaS solution under consideration with a good track record (although probably limited to a few recent years), sufficient internal capital, and external investors or financial backing, we are probably looking at a reasonably viable candidate.  We can compare this to a well-established tier 1 vendor with multiple decades for thousands of implementations that is adding SaaS to their business model; it is a new niche for them to sell into.  Even if they are really an ASP (application service provider, single instance for a customer, not multi-tenant) instead of a true SaaS, they have other factors that also define them as a reasonably viable candidate.  However, if we are looking at a third candidate that has limited cash, a short track record, limited or no external investors, and a SaaS-querade business model, we are looking at candidate with questionable financial viability.

The bottom-line is that a SaaS-querade versus a true SaaS or SaaS-Plus does matter.  When choosing a solution provider, financial viability is a key factor to consider along with functionality, cost, technology, vision, and service and support.  We will be writing more about the solution selection criteria we feel are important in future posts.