Software as a Service: The Challenges for Vendors

Many IT vendors are transitioning to a Software as a Service (SaaS) model, but how can they ready themselves for the challenge?

Over the past five years, there has been a dramatic rise in independent software vendors (ISVs) changing their license model to SaaS. Despite the not insignificant financial considerations, which include large upfront costs, increased investment in security, additional billing overheads and a decline in service revenues, SaaS and cloud is anticipated to become the dominant delivery model for software consumers by 2018.

According to global market intelligence provider International Data Corporation (IDC), the market for cloud-based products and services will exceed £68 billion in the next two years, with 80% of the world’s organisations adopting a cloud-based model.

With this in mind, it’s important for software vendors to plan their transition to a SaaS model and resource accordingly to ensure that the move gives both themselves and their customers the maximum benefit.

The Benefits

For ISVs and resellers , finding a compelling way for their customers and prospects to switch to SaaS can be hugely beneficial. By successfully transitioning them to a cloud model the vendor or reseller is able to:

  • Reduce the development, maintenance and support overheads by ensuring customers are on the latest software version or at least the current version plus one
  • Retain customers for longer by taking greater control of their infrastructure
  • Differentiate themselves more by offering better reporting, service and management
  • Reduce staff costs in the form of costly consultancy resources
  • Capitalise on new opportunities as more people come to market for a new system as a result of cloud services being available
  • Convert a larger percentage of its revenues to recurring revenues making the business more predictable and in turn improving its overall valuation

Given the mass market acceleration of cloud-based products and services,ISVs should be looking to capitalise on the growing opportunity to  target new audiences and expand on their current customer base.

Businesses are finding that there is now a strong case against purchasing perpetual software licences up front and instead are looking to buy into more flexible payment terms. For the buyer, opting for a SaaS model can enable them to make much-needed IT investments without eating into their capital reserves and they get to pay for the software as they realise the return on their investment, not before.

The Challenges

As with all business change, transitioning to providing SaaS presents its own unique challenges. Below are some of the typical hurdles vendors face and how they can overcome common customer buying objections:

  • Giving the customer a chance to say no
    When you propose a potential upgrade solution to the customer the two most challenging outcomes are often that the customer decides to do nothing or that they decide to go to market and re-evaluate their solution from scratch. Some companies have chosen to reduce the fear of moving by offering an initial lift a shift option whereby the customer simply hosts the current solution in the cloud and pays for it over the course of the year.
  • Providing a different kind of service
    Traditional software projects were big, cumbersome and came with lots of service days in order to bespoke the system to the end customer’s every business need. This resource was highly specialised and as such could come at a premium. Service days were generally paid as delivered. As we move to more bespoke, hosted solutions the service element is often included so the provider needs to accurately cost the anticipated services when also factoring in the subscription fee.
  • Maintaining data security
    With increased responsibility comes increased risk, and this is a particular concern for buyers in relation to data. Vendors must ensure they gain the trust of their customers therefore demonstrating investment in security and the safe handling of data is key. Providing additional reassurances in the form of cyber insurance can be a key way to overcome security fears.
  • Mitigating the administrative burden
    By moving from an upfront or annual billing cycle to a monthly or quarterly regime, many IT providers put additional stress on their finance team. Models such as partnering with a third party finance provider who can provide customer billing and collection can be a cost effective alternative to outsourcing these roles or hiring additional staff.
  • Bridging the gap between outgoings and income                             The investment in software, hosting and service delivery all happens upfront before any service is delivered to the customer and they are due to pay. Companies that are used to receiving all of their payment upfront will find their cashflow strained by the shift to a cloud or SaaS model. Finance companies are able to help ease this burden by managing the extended payment terms on your behalf. This means you get paid up front while your customer pays the finance company, monthly, quarterly or annually, depending on the terms. In some cases the finance provider will also manage billings and collections services, leaving you free to focus on developing your next product, market or customer deal.

If you are an ISV considering making the move to a SaaS model, talk to us about how we can help.