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In this article we’re picking up where we left off in Part 1 on our expansion of the podcast we did with Steve Plunkett, CTO of Servitizer and our panel of industry experts – Luis Aburto, CEO of Scio Consulting, Mikael Blaisdell of MBlaisdell & Associates and Lincoln Murphy of Sixteen Ventures. If you haven’t read the first part of our series already – please start there – because the background for the conversation is there.

Going back then to where we left the conversation – Mikael Blaisdell weighed in saying that although he believes the industry is strongly moving towards servitization, vendors still see themselves as selling a technical product. From a business perspective, because of the license-forward sales model of traditional licensed software, vendors realized all their profit “up front” in a sale (although it has to be said, post development and marketing). All following costs, which might be services, were avoided as much as possible. ISVs build a lot of expertise in building software and internal operations to fit that model – expertise in managing the development, marketing and sales processes to match the cyclical nature of licensed software sales. Moving to an incremental revenue model is one aspect of SaaS and many ISVs have made the transition – however difficult that might be. But when it came to marketing the product – they are still selling it as a technology – even if they see it as embodying special expertise for their market and not as a service.

As Mikael pointed out – a true SaaS product needs to embody the relationship between the vendor and the end-user community they are serving. But – unfortunately – very few vendors have figured out how to market that service-based relationship successfully. Not just because it is hard for established vendors to do – primarily because it is just not a part of their strategic view of their product. They still see themselves as technology vendors, not as service providers.

Further, the standard model conveniently supported a split set of payments to the vendor. The vendor set license fees for the product and a separate set of support and maintenance fees to provide ongoing services. In other words, the support services were almost an “optional add-on.” Those same vendors, moving to a “as a Service” model, have to rethink their cash flow and put services in all its various aspects up front while still maintaining enough bandwidth to support ongoing development.

Even more important, transitioning to an “as a Service” model requires a deep reconfiguring of the basic understanding of the product within the vendor organization. This is why it is often (rightfully) said it is easier to start from scratch than “turn a corner” and move from a traditional licensed model to a incremental sales model like SaaS. In the “as a Service” model, focus of the customer relationship shifts to the end-user experience, the expertise embodied in the application, the productivity it enables and the value it delivers. If any one of these areas slips in relationship to either market competition or the experience of users without the product – subscription renewals will decrease and the vendor will feel it immediately. For the vendor organization, their window of reaction time to address customer needs has decreased dramatically and the need to communicate with end-users has increased many times over. A traditional ISV’s expertise and business organization is simply not set up for this transition. As Mikael pointed out – SaaS vendors have to understand this from the core of the organization outward if they are going to succeed. This is a process that is in many ways just beginning in the industry.

In the same way – the industry still uses a “feature-led” technical product approach when selling as a Service offerings. Using a feature list is still considered to be the key way to compare SaaS applications. Do people use all of those features? Are they implemented in a way that users find productive? The industry is not at the stage where this kind of detail can easily be communicated.

Luis Aburto summarized the approach of many vendors when he said that often the first thought is “We just need to get a web version of our application set up and let people subscribe – that’s it.” But after a while they start start to realize the business implications of putting an application on the web:

• Users expect 100% uptime – no “maintenance windows,” no upgrade weekend, no outages
• Users expect consistent performance in the browser and in the back end processing of their data. Having a “end of the day” slowdown is just not acceptable.
• Users expect the vendor to take responsibility for their data security and be able to articulate how they provide security.
• Users expect all aspects of the application stack to “just work” – integration, payment processing, database updates – all working seamlessly and without interruption of the business cycle.
• Users expect the vendor to have plans and tested procedures for disaster recovery and operational contingencies. If there is something the end-user organization needs to do, they expect the tools and processes to be available upfront.

When you consider all the issues this includes, it can become a little scary for existing ISVs coming into the as a Service field. None of these services are part of the expertise they carry in house. There are aspects of these services that can only be handled effectively if the application and its delivery is properly architected from the beginning. Yes, you can get up and “operating” without addressing all of these issues, but in the end, customers will demand full transparency or they will leave.

Of course, as the old ASP model showed, these services cannot be addressed in one off implementations for each customer organization. The delivery model must address customers in a way that allows economies of scale to be passed through. Using multi-tenant architecture and cloud technologies, it is possible for vendors to be more efficient at addressing these issues than the internal IT resources of their customers would be. With scale, the vendor can afford to have more professional expertise at their command than their customers can carry individually.

Addressing these issues effectively also translates into the struggles of sales and marketing in SaaS. Feature-led, version dependent marketing and sales cycles will only work for a short window of time for a service-based product. When the cost of acquisition and operation exceeds the lifetime value of an average subscription – the burn rate will quickly overcome the vendor’s ability to cover losses. And why? Because after a short period of time, the “new car smell” wears off and the end-users start questioning what the value the service is providing. If it isn’t enough – they leave.

Steve Plunkett said it well when he added that vendors today need to be able to articulate the value of the responsibility they are taking on – in addition to actually being able to perform in this environment. Of course, if a vendor hasn’t really considered all the costs of all their new responsibilities they are taking on – it is hard to express the value to their customers and harder still to manage them as effectively as they need to. Going to another aspect, sales teams now need to go from being “hunters” to working hand in hand with product management and becoming farmers – growing their garden of customers and maintaining the relationship with them over the life of their subscription. While many focus on the straight-forward change in their compensation model, this change in the sales relationship may in fact be much harder for sales teams to negotiate.

Even if vendors realize the responsibilities they are taking on – they should be careful as they decide to take them on directly. SaaS vendors, new SaaS vendors particularly, should consider taking some of their own medicine by deciding what parts of their service are core and must be handled internally and what parts can be outsourced to other service providers with appropriate service agreements. This means a big change in the industry. The SaaS vendor is now orchestrating the outsourcing relationships on behalf of his customers. The whole industry ecosystem is turned on its head. Instead of pursing enterprise IT departments – in a “as a Service” model, ecosystem venors are responsible to the service provider that is linked directly to the end user. This should result in better service to the end user and frankly SMBs have the most to gain. The service provider has much more leverage and efficiency than a customer with 100 seats or a line of business group with ten seats.

With all that said, the investment and expertise needed to develop and field a successful service in this market is significant. As Mikael Blaisdell added, it becomes even more important in areas where competition exists. While a vendor might get by with a mediocre user experience or shaky infrastructure by serving the “under served” SMB market – once a competitor appears, all bets are off. Integration and customer assurance demands that user data be addressable and extensible in modern services. Customers can and will “jump ship” and can do so with increasing facility. Leveraging the ability to tap into user experience at this point is critical. If the cost of operations and acquisition is equivalent to the subscription for an average size implementation at ten months and the customer leaves at the end of 12 months – there are only two months profit “in the bank.” That is a recipe for failure. When vendors assess their subscription losses, if the answer that appears is the users’ business needs changed or their assessment of those needs altered – a red flag should fly up in front of them. Why didn’t we know? What can we do to be more “intimate” with our customer’s operations? What do we need to do to be able to adapt our application smoothly to meet the expectations of our users?

So – we come full circle. XaaS is not a technology. It is a business model delivered and enabled by carefully planned technology. The successful vendor needs to manage technology and technical services to deliver their service to their end-users. The extent to which they can do that and continue express the lifetime value they provide in a user experience will equal their success in the market.

Planning the technology to allow the kind of change and growth needed is key. The application has to be properly architected to allow the mining of necessary metadata. The customer support and feedback mechanisms need to be integrated fully both in the application and in the product management function itself.

It is the orchestration of all these aspects of business and technology on behalf of the end user relationship that finally changes every part of the service vendor’s organization. Traditional product management approaches are woefully out of step in this environment. Sales and marketing are poorly equipped at best. Technical services don’t exist. Finance has to rethink every aspect of cash flow and when profit is “realized.”

And as more services come online and reach acceptance – integration of data and the services themselves will be even more critical. Some vendors will become the “system of record” and handle several services on behalf of their customers, while others will remain part of a larger ecosystem used by those “master services.” No customer is going to want to try to manage a mash-up of many services for long if a vendor appears that will manage the relationships for them.

It was here our guest and panel reached an interesting conclusion. The term “Independent Software Vendor” in this market is no longer useful. No vendor is likely to exist in a vacuum and the customer doesn’t care. Users just want the service to work. As a group we toyed with various permutations of the ISV term but I think we finally arrived at “Interdependent Services Vendor” as the more logical evolution. It describes a new relationship between the vendor, the end-user and the larger ecosystem which ultimately must be in place if the industry is to be successful in the long run.

Just remember folks – you heard it first on Haut Tech Conversations

That sums up our first podcast. Once again I want to deeply thank our panel – Luis Aburto of Scio Consulting, Mikael Blaisdell of The HotLine and MBlaisdell & Associates, and Lincoln Murphy of Sixteen Ventures – and of course our guest, Steve Plunkett of Servitizer. I think this podcast did a lot to better describe what becoming a service provider means and where the industry is going – in fact has to go – in the coming years.

If you would like to download the podcast – it is available here and if you would like to subscribe to the podcast feed – it is available here. We’re already planning a very interesting show for next month – so please watch this blog for more information next week when we announce our guests. The conversation continues here, on the blogs of Lincoln Murphy, Steve Plunkett, Mikael Blaisdell and I’m sure others. You can also join our LinkedIn group and continue the conversation there as well.

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