Boasso on Business

SHOW ME THE MONEY: SAAS INCENTIVE COMP Sales Processes & Cycles, Too

2009-05-11T12:38:00.001-07:00

The San Diego Software Industry Council is a stellar local group that offers wonderful sessions and services to its members, and I was extraordinarily pleased to be invited to talk with its members last week about SaaS Sales Compensation and all the things that impact it.

We met on Friday, May 8th, at Sheppard Mullin’s gorgeous Del Mar offices; despite the 7:30 AM start time, the room was full with very awake – to say nothing of interested & active – software industry executives. I was able to leverage the webinar I did a couple of weeks ago for OpSource (which was recorded and can be viewed with Adobe Chat here, and I've posted the Q&A on the blog here), but I had an entire hour last week, so we were able to spend more time on sales process & cycle management.

It was a great morning, a truly engaged group, and I’m pleased to be able to post my presentation below. More than happy to go back to the SDSIC any time they’d like!

[By the way: This is the first time I've used SlideShare, which is a nifty site, but the presentation is so much cooler with the transitions & animations...]

Show Me the Money: Incentive Comp for SaaS

View more presentations from Keychain Logic.

PRACTICAL APPLICATIONS Q&A: SaaS Sales Compensation

2009-05-10T11:59:00.000-07:00

On April 22nd, I was pleased to talk with the industry on how to Motivate SaaS Sales Teams & Accelerate Revenue with SaaS-appropriate incentive compensation plans. The event was part of OpSource's excellent webinar series, and I enjoyed the opportunity to work with OpSource’s Dave McKenzie and Xactly’s COO, Evan Ellis. It was a great session, and the attendees were full of great questions, both during & after the presentations.

(I had a similar – but somewhat different – discussion with members of the San Diego Software Industry Council last Friday, May 8th, at the wonderful Del Mar offices of the Sheppard Mullin law firm. I’ve blogged that presentation, and you can view it here.)

Below are Keychain Logic’s answers to the OpSource webinar questions. The session was recorded and can be viewed here (you may have to install Adobe Chat), and here are links to the slides from my and Evan’s presentations.

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QUESTION: What is a range of typical quota loads for a SaaS sales rep? What is a comparable quota for a perpetual license?

ANSWER: This is really a moving target; there is no absolute dollar-figure answer. Instead, we calculate quota based on several factors that include:

the company’s revenue plan,
average deal size,
typical sales cycle,
opportunities in the pipeline,
territory size,
size of sales organization.

All of these things can impact the salesperson’s ability to meet (and exceed) quota, which should be aggressive but attainable.

It is very difficult to synchronize legacy software license quota with SaaS because of how different all of these inputs are in their respective models, much as it is difficult to compare the “total cost of ownership” of legacy software & SaaS. Instead, we recommend looking at Customer Acquisition Cost, which should be evaluated in terms of the SaaS vendor’s revenue (or billing) cycle.

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Q: Do you recommend different commission rates for sales that come from referrals vs. leads that the rep generates directly?

A: The short answer here is, “Yes,” but it’s not always that simple. Make sure “lead” has been appropriately defined, whether it’s generated internally or by a partner. Marketing and Referral Partners frequently argue that any email address at a target company is a “lead.” Pretty soon, management is spinning cycles to review every pipeline opportunity with Mickey@Mouse.com. The extent to which commissions should be shared with lead generation sources should be driven by the work involved in closing the deal. If the referral partner is merely introducing the lead, then consider covering the cost (which should be a flat rate) through Marketing’s budget. If the partner is integral to the sale, then a more complete revenue split would be appropriate.

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Q: Can you elaborate on some referral structures you have used?

A: Re referrals from outside parties (e.g., channel, technology, or ecosystem partners), make sure structures are aligned with the partners’ responsibility: (a) If the partner refers and helps work the deal, a flat rate or small percentage of the initial deal’s anticipated revenue is appropriate; the plan may look similar to the one discussed in the webinar (with smaller rate). (b) If the partner will own on-going service or customer satisfaction, the compensation structure will be more deeply embedded and can even include an annuity (although we strongly recommend a sunset clause to ensure the partner’s on-going engagement).

The SaaS vendor should know the value the its application brings to the referring partner’s business. When the partner is highly involved in on-going customer satisfaction, it’s likely the SaaS application is more important to the partner’s core business.

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Q: Xactly talked about the customer success organization and new business sales as separate organizations. Which group does the renewals?

A: In an environment where Sales hunts new customers & revenue, Customer Service / Support should be a different organization. Salespeople ultimately tend to do exactly what they’re paid to do. If they earn commissions on simple renewals in their base, then that’s where they’ll spend their time. If they’re paid only for closing new business, then existing customers may find it difficult to get them on the phone.

We worked with a company that had two distinct challenges with its compensation plan, one of which stemmed from commissions on renewals:

Salespeople were compensated on Total Contract Value (TCV). A $6,000 per month contract for a 1-year term equaled a $72,000 sale.
Salespeople were paid on all renewals. An existing $6,000 per month contract that renewed for a 3-year term equaled a $216,000 sale.
Commissions were paid the month following contract effective date.
Customer retention was a staggering 98%.
Revenue had been flat for nearly two years.

What happened? Salespeople worked four hours a day calling friends in their client base; Customer Service sat around chatting with Product Development. Everything was spinning like a top, but the company wasn’t growing. We eliminated commissions on simple renewals; incentive comp was paid on only new business & up-sells into the base. We offered bonuses for new customers; salespeople were motivated to hunt logos. Customer service staff earned bonuses tied to renewals. All of a sudden, revenue growth accelerated.

“Transition” is the key term. Individual salespeople are integral, and compensation is an important part. Nonetheless, other factors (like pipeline & cycle management, sales process, etc.) also will determine success, and the entire organization must be effective at making these changes, too.

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Q: For renewals, do you bonus the customer success? Do you look at surveys? Is there a commission to this?

A: We recommend a compensation metric (whether commission or bonus or MBO measure) for the group responsible for managing customers, day-to-day. Customer surveys are useful but difficult to manage. “Churn” is a simpler metric that can be calculated on aggregate revenue or customer count. Either way, ensure “incentive” and “responsibility” are aligned. The person who is paid to make sure the customer is satisfied is the person who will put time & effort into that.

(If the question has to do with actual “customer success” stemming from customers’ use of the application, the answer is different. Incentive comp must be paid in line with the vendor’s business, pricing & sales models. I.e., A success-based pricing metric means revenue is tied to “customer success,” and sales comp needs to be similarly tied.)

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Q: How would you manage compensation for sales teams that sell both legacy software (i.e., premise-based) (and are paid on license fees) and a SaaS offering?

A: We don’t recommend this. Selling legacy software and SaaS are sufficiently different that the skill sets and pay are necessarily different.

There are many aspects to the sale – beyond incentive compensation – that are impacted by these differences. These include sales process, cycle & pipeline management, handling customer objections, managing relationships, etc. In an environment where salespeople are asked to do double-duty, they tend to find the path of least resistance and sell whatever will make them the most money. Even if there are only two salespeople at a company, it is far better to have one sell the legacy software solution and have the other sell the on-demand service.

With that strong warning in mind – that we recommend dedicated teams – if we were to have a hybrid team, we would assign quotas for both products. E.g., Perhaps 70% of on-target earnings (OTE) would be driven by a legacy software quota; the other 30% would be tied to SaaS sales. The difficulty here is designing a plan where the salespeople didn’t ignore one side or the other.

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Q: A lot of our business is project-based so sales teams have no control over contract duration; therefore, renewals are not always possible at the same level. We’re currently paying comp on TCV but trying to move away for obvious reasons. Some of the projects may be 10 years and have huge comp payments; switching to paying on first month’s revenue would serious impact the sales team’s opportunity to earn the monster paycheck they currently get. Can you suggest a way to manage this transition?

A: Start with the company’s annual revenue plan and align it to sales plans, territories & quotas. Assuming the “monster paycheck” is tied to an extraordinarily long sales cycle, the new SaaS comp plan must account for a realistically shorter cycle. Even so, the company’s model may not align well with a monthly quota (based on the number of deals in the pipeline, expected close ratios, per-deal in-year receipts, etc.). Keep in mind that transitioning may add complexities that cannot be addressed via compensation – they include sales process & cycle management challenges that are unique to SaaS.

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Q: How would you handle negative revenue from prior years? In addition to deducting commissions, would you deduct the negative revenue for prior years’ sales against current year sales performance / quota retirement?

A: We recommend including charge-back provisions in the comp plan that allow the company to recover “unearned” commissions. (Of course, the plan should be structured to minimize the possibility of paying “unearned” commissions.) E.g.: If the plan includes accelerators for multi-year contracts, then recover the part of the commission associated with the part of the contract that is terminated early. Also, if you want salespeople focused on selling new customers, then have a sunset to your charge-back provision; i.e., charge back only when the cancellation is within a reasonably foreseeable time after contract implementation.

We would not recommend “netting” charge-backs of previous commissions against current year’s quotas; this is a double hit. Where companies are experiencing large “negative” revenue from previous years, we would look to causes beyond sales compensation. Perhaps Sales is not properly setting customers’ expectations; perhaps customers are having technical or support problems. Sales process and pipeline management can impact these matters significantly, so these issues should be addressed, as well.

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Q: In a hunter-farmer model, any feedback on how “farmers” are compensated for retention AND protection for hunters over-promising while closing deal (which results in client satisfaction issues after-the-fact)?

A: There are several mechanisms that are effective at managing these kinds of conflicts, particularly in the context of the renewal, referral and charge-back ideas discussed above. Primarily, tie compensation needs to be tied to individual contributor responsibility – salespeople should be paid for performance, and the definition of “performance” should take into account down-stream management requirements.

Salespeople sometimes burden other organizations by over-promising; we describe this as “selling what the company doesn’t offer.” Although this is tied to sales compensation, it is not necessarily a sales comp problem. For instance, there can be a strong focus on closing deals and meeting quota without an appropriate review of whether the salesperson and the company are selling the same things. These are sales management issues that need to be addressed outside the compensation plan structure.

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Q: Regarding the 62.5% commission rate shown in the webinar presentation, why is this the correct number? Why not 25%, for instance?

A: Apologies for our unclear / incomplete comments during that slide. The 62.5% “simple rate” was a calculation developed as an example; it was driven by the OTE, revenue, sales process, pipeline & other numbers in the presentation. 25% would be fine, if the math worked out that way.

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Q: Any thoughts on compensation models for SaaS businesses that have very low cost price points. Our is $50-$100 per month...

A: This really turns into a volume sale; compensation will necessarily be driven as much by the number of customers / contracts as by the individual dollars. With that in mind, we might consider turning the plan on its head; i.e., rather than state quota in terms of dollars, develop it based on the numbers of closed customers / deals. Then, have payment accelerators driven by dollars. These kinds of structures are not so uncommon as it may seem; they are just a bit unique and challenging.

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Q: I hear accountants describe recognition as spread over the “length of the relationship” not the “length of deal.” Please comment on your experience.

A: First the disclaimer (for the lawyers’ benefit): We’re not accountants, so you really need to check with them. That said, revenue recognition tends to be a metric largely driven by accounting for up-front revenue – whether for subscription payments made in advance or for traditional integration / implementation / training “services.” In those environments where enough revenue is booked at the beginning of the relationship, we would expect to see that revenue recognized over the expected initial term.

That said, whether or how revenue is recognized should have little impact on sales compensation. Certain revenue streams – such as those associated with traditional “services” – may be more or less profitable than others, so they may be compensated differently, but that should have nothing to do with how those revenues are booked or recognized.

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Q: On the Rule of 78s, where is the time factor for sales made in January versus a sale closed in December where net realized revenue is quite different?

A: Ideally, the difference in “net realized revenue” for sales from one month to the next should be fairly similar – for business as well as sales compensation purposes – even if that requires a mathematical bridge. If “next year’s” sales comp plan is sufficiently different from “this year’s,” salespeople will either hurry or sandbag their current pipeline – neither of which is a good idea. More importantly, vast differences in monthly revenue should cause investor concern; it can suggest business model instability.

Still, changes in model (including comp plans, sales schemes, pricing & rate design, etc.) can impact realized revenue. In these cases, we recommend transitioning the sales organization with some kind of draw payment with a sunset plan.

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Q: Rule of 78s? I thought it was the Rule of 72.

A: Good catch, but different “rules.” The “Rule of 78s” is also known as the “sum-of-the-digits method.” It describes the aggregate math resulting from a growing a series of recurring numbers over the course of a year. The calculation is useful in determining monthly quotas from an annual revenue plan built in a recurring revenue environment (as illustrated in the presentation).

The “Rule of 72” (and the “Rule of 70” and the “Rule of 69”) are finance methods for estimating the amount of time it takes to double an investment in a compounding environment. With these, the rule number (72 or 70 or 69) is divided by the period’s interest percentage; the result is the number of periods needed to double the base investment. Wikipedia has excellent entries on both of these concepts.

WHAT WE NEED IS A NEW WORD

2008-07-10T19:45:00.000-07:00

I must’ve said it a half-dozen times: “We need to stop thinking like software companies.”

That kind of crack doesn’t resonate as well as you might think when you’re talking to a roomful of software executives. At least the room was polite at the SIIA’s OnDemand Europe summit early last month. It’s a difficult point when you’re thinking about how your business model is changing; you’re generally not thinking there’s anything wrong with your thinking.

I did my best in Amsterdam to explain, but reality is always clearer than theory. So, I’m grateful to read NetSuite’s Zach Nelson is talking publicly about how much software “services” cost. Blaise Zerega heard Zach’s comments at Structure 08 and wondered whether “cloud computing [will] upend the consulting business.”

Well, we can always hope, can’t we?

On the one hand, Blaise has nailed the issue. On the other hand, both he and Zach are missing the point completely.

“Service” is when you turn the tap, and water comes out of the faucet. Or when you flip the switch, and the room lights up. Or when you pick up the handset, and you hear a dial tone. “Service” is when the waiter replaces your over-cooked steak. Or when the clerk (in-store or on-line) helps you select the right size shirt for your nephew. Or when the repair shop shuttles you to and from work while your car is being fixed.

“Service” is when you can’t separate the resource – like water or electricity or telecom – from its delivery. “Service” is when the vendor adds value – like food or advice or a ride – for no extra charge.

I don’t know what to call it, but... Whatever these consultants and systems integrators are doing, it’s certainly not “service.”

And that’s what I mean when I say, “We need to stop thinking like software companies.”

...SO LITTLE TIME

2007-05-30T15:58:00.000-07:00

Oh, a suffering world cries for mercy, as far as the eye can see
Lawyers around every bend in the road; lawyers in every tree
Lawyers in restaurants; lawyers in clubs
Lawyers behind every door; behind windows and potted plants, shade trees and shrubs
Lawyers on pogo sticks
Lawyers in politics
In ten years we’re gonna have one million lawyers
How much can a poor nation stand?

– “One Million Lawyers”
Tom Paxton, 1985

The first thing we do, let’s kill all the lawyers.

– King Henry VI, Part 2 (IV, ii)
William Shakespeare, 1592

Speaking at Key Trends In Software Licensing, I reminded the Fenwick & West crowd, “I’m not a lawyer, and I don’t play one on TV.” Attorneys and non-attorneys alike seemed pleased; one thing we all agree on is we have enough lawyers.

Don’t get me wrong: I’ve nothing against lawyers, per se – except that they run around saying things like “per se” and “res ipsa loquitur” and “de jure” (as if Latin justifies their hourly rate). Some of my best friends are lawyers, to say nothing of the great attorneys who have helped bail me out of one jam or another (figuratively, of course). I enjoyed the morning at Fenwick & West. They had great coffee.

Good business attorneys can be hard to come by. Whenever I find one, I grab on with both hands and hold tight. (Different from other attorneys in that my hands aren’t wrapped around the good one’s throat.) Lawyers who don’t stick to the law amaze and annoy me. I stay out of the courtroom; maybe we can make it illegal for attorneys to practice business without a license.

What’s Got My Knickers In a Twist?
Referencing Sandra Rosenzweig’s column, “Rosie’s Ramblings” (aka “Technicalities”) because it’s ostensibly about Software-as-a-Service (SaaS), the May issue of California Lawyer was shared with me by one of the aforementioned lawyer friends of mine, who described the author as “very smart” and “generally on-the-spot.” Henceforth, I will more closely scrutinize my buddy’s recommendations...

[Note 1: I’d hypertext, but the magazine is password-protected, which I’m sure has nothing to do with the editor’s reasonable desire to limit distribution of Rosie’s limited reason.]

[Note 2: See how Legalese works? It’s easy: Use words like “aforementioned,” “aka,” and “henceforth” inside an involuted structure with a passive voice; avoid clarity. You’ve got it.]

I’ll probably get sued for this, but: What a bunch of wild horse hockey puck!

Listen: I don’t mind if you don’t get SaaS, and I don’t really care if you don’t like the idea of SaaS once you do get it. With the former, we can have a conversation. With the latter, well... It’s still a free market.

What really chaps my hide is when an “expert” like Rosie spends 750+ words demonstrating she doesn’t know what she’s talking about and then slaughters hundreds of trees distributing to an unsuspecting world. According to my lawyer buddy (whose judgment is now in question), California Lawyer goes out to every State Bar member who doesn’t refuse the free subscription.

What’s So Wrong With That?
This means upwards of 200,000 attorneys have just been seriously misinformed. (OK, ok; I’m done with the gratuitous lawyer jokes. Except, what do you call a busload...)

“Misinformed” is pretty polite because I’ve not read anything that gets SaaS technology and the business model as wrong as Rosie gets it since I wrote my “Getting SaaS Wrong” post. Here are just a few of the de facto problems with Rosie’s column:

* SaaS vs. ASP: Serious industry observers know the application service provider (ASP) model is dead and all but buried; it just doesn’t scale. Rosie uses the terms nearly interchangeably, creating the impression they are the same thing.

* Data Security: “Think of [SaaS / ASP] as yet another scam to squeeze more profit from software while invading your privacy.” In the context of Rosie’s column, this is called petitio principii; the equivalent legal principle is “assuming facts not in evidence.” Nowhere does she offer any suggestion – to say nothing of proof – that SaaS companies are compromising their users’ privacy. And what’s wrong with being profitable, anyway? (Remember that question the next time you get your lawyer’s bill...)

* Service Assurance: It’s roundabout, but Rosie questions SaaS reliability: “software as a service (SaaS) and application service providers (ASPs) ... guarantee (although not in the license) that ... your programs will always work.” [emphasis mine, but you can actually hear Rosie’s sneer coming off the page] The term “SLA” appears nowhere in her column.

Who Cares What a Lawyer Thinks?
Generally, that’s a good question. (OK; I’m sorry. I couldn’t resist.)

Seriously: This can be dangerous stuff. First, the only examples Rosie uses to explain SaaS to her unsuspecting and decidedly non-technical audience are Microsoft Office and Corel WordPerfect. Funny, but I don’t think either of those is available as a service... Besides that, look at it this way:

You’re considering a state-of-the-art SaaS application, like LucidEra’s sales operations analysis or Aria Systems’ customer lifecycle management or SuccessFactors’ 360 degree reviews, and you float the service agreement past your attorney. Normally, he’s just going to take a look at the Ts&Cs, make sure they’re reasonable, and sign off. But now, he’s read Rosie’s Ramblings, and he’s armed. He knows all about SaaS and how bad it is for the end user.

“Warning! Danger, Will Robinson!”

Now imagine you’re the SaaS vendor...

Who Needs Another Objection to Overcome?
Besides “P”-ing and moaning about Rosie, here’s what I’m gonna do: Next few posts will be about your SaaS contract. A best practices kind of series. What should it look like? What’s included? What’s not? As an extra special bonus, I’m going to start off with a bit on how to negotiate it with a customer.

You may not think so at first, but the two things are inextricably linked. Here’s a hint: Attorneys tend to get paid by the word; so, unless you’re selling a productivity application that helps them (like, I suspect, OpenAir’s solution), I’m thinking you want to minimize any need to get them involved at all.

Particularly if they’re in California and have access to our friend Rosie...

THAT PESKY "TRUST" CONCEPT

2007-04-24T11:17:00.000-07:00

The realization is dawning: Software-as-a-Service providers need an ecosystem.

SaaS companies’ problem is that they need to do everything really well (or at least avoid doing anything really poorly); otherwise, their customers won’t come back month after month. When you’re building on recurring revenue, you can’t afford to screw up. Why is that a problem? Ask your spouse: When was the last time you did everything really well?

There’s more to building a service company than ripping code to CDs and hiring rainmakers. Can’t rely on the integrators sales channel; can’t rely on customers’ IT departments as the first line of support. Gone are the days when QuickBooks or Money or even Office were enough to create invoices and manage multi-million dollar businesses. (“After all – at $500k a pop and $90k per year thereafter – how wrong could billing be?”)

Where the Rubber Meets the Road
Hostway’s Mathew Baldwin almost nailed the billing issue in his latest WHIR post, “SaaS Trust Relationships.” He’s weighing on-premise versus SaaS billing platforms, but his analysis is as valuable to SaaS vendors as it is to (on-line or on-prem) billing vendors. Interesting that a guy from a hosting company (i.e., a typical technology services business) would point out the challenges inherent with subscription billing. More interesting that he stresses trust.

Pretty much everything Mathew says is right on – businesses need to trust their billing vendors; one clear way to kill trust is to “layer on extra costs” or regularly screw up a customer’s billing and collection cycle. Billing is one the most important back-office functions – especially in how it’s combined with on-going relationship management – because it directly impacts how vendors and their customers interact most frequently (and over the most important thing – money). I’m not going to “Me, too,” Mathew’s entire post. If you’re reading this, you can read his.

Instead, I’m going to expand on one thing he says, take minor exception to another and call out a third.

Off-Ramps
Lots of SaaS companies are running into one of Mathew’s points about billing systems: Customers want to be sure they can get their data.

If SaaS companies are truly providing a quality service / product, then why not simply remove that concern? Give customers an easy-to-use, flexible, reliable way to get their data out of your system, a clear path to migrate to any complimentary provider or competitor, and you’ve shown that you’re not worried they’re going to use it.

It’s their data, after all. (Isn’t it? SaaS customers are looking for assurances that they own their data. SaaS vendors may not want to claim ownership of it for a host of reasons. More on that in a future post...) The solution – which applies to all SaaS applications, not just on-demand billing – is counterintuitive, but it works.

Driving Trust
When customers trust that they’re not chained to their service provider, they tend to give that vendor more room to operate. When they know they can pull their business any time, they relax, stop micromanaging you, and let you leverage your expertise to their benefit.

Trust goes up one brick at a time. If you’re doing things right, your marketing program and sales process demonstrated your expertise. You know more than your customers do about billing and relationship management (or accounting or employee performance management or business process optimization or whatever your tool does) by virtue of that fact that you built the app. The only thing you need to do now is deliver on your promises.

So... Mathew’s right when he talks about how companies blow it when they try add on charges that weren’t discussed during the sales process, but it’s not just about prices or rates. That’s such a rookie mistake, I’ve got to believe it’s an exception to the rule. On-demand / service companies need to make sure their charges, business processes, and policies are all transparent during the sales process. The “Oh, yeah,” comments tear down that carefully constructed wall of trust.

Wrong Turn
Where Mathew goes really wrong is when he says that billing companies need to have both an on-demand and an on-premise solution. That’s what we call “The Bad Thing.”

I understand that Mathew’s company is a Microsoft partner, and he needs to advocate his partner’s wares. I get that; it makes sense. That said, experience and common sense tell us that the on-demand and on-prem models are sufficiently different that the one is not necessarily an on-ramp to the other.

A company that builds an on-demand billing model designed to migrate growing customers onto a “dedicated ... or on-premise solution” simply won’t be good at either. A user that starts out with an on-demand solution while it builds its own won’t do well, either, because it can’t focus on its core competency.

(As an aside: Mathew’s comment about data being “lumped in with a shared set of customers,” is just silly, so I can’t believe he meant it the way it sounded. We know that multi-tenancy works and works well. We know that SaaS vendors can do more vis-à-vis data and network security by virtue of the economies of scale than any of their customers can. We are even learning that various on-demand applications are integrating extremely well with others and with their on-prem counterparts, a situation that is improving daily.)

Success Paths
There aren’t a lot of on-demand billing / customer relationship tools out there. Certain vendors that can do certain mechanics well, but there’s more to it than the matter of applying a rate and mailing an invoice. I’m not all that familiar with Vancouver-based Sapienter or Softrax (out of Massachusetts); one looks very mechanical and the other can’t decide whether it’s on-demand, on-prem or both.

On the other hand, I’m quite fond of the folks and solutions at LeCayla Technologies (Dublin, Ireland, and Palo Alto) and Philly-HQed Aria Systems. LeCayla helps you figure out what to measure and how to calculate billable data; Aria helps you fit those into your business model, generate a revenue stream, and scale customer relationship management. Customers can use one or the other or both; the solutions are stand-alone or integrate-able (is that a word?).

Best thing about them is they’re run by people who are committed to the SaaS revolution, who are experts in their respective fields, and who fully understand Mathew’s concerns about trust.

SUMMER'S OVER WITH A VENGENCE

2006-09-10T16:10:00.000-07:00

I hope everyone had a great summer – I know I did – because vacation season is really, truly over, and it is back-to-work time!

Although many of us tried to stay busy despite the hot weather, the SaaS sector took a serious break. As we enter the post-Labor Day weeks, activities are heating up furiously, promising a productive end-of-year and exciting 2007.

Take a look:

· It's An Inbound World! (September 14, Palo Alto): Opsource’s Nick Blozan (SVP Sales & Marketing) and I will discuss how SaaS success will be achieved by those companies that deliver the services customers need, when they need them. (“What a brilliant concept!” the SD Forum’s SaaS SIG page declares.) Nick will cover the technologies specifically designed for SaaS enablement, how good SaaS companies attain the operational excellence required to accelerate growth, application development best practices, and how technical, business, and customer support are inter-related. Of course, I will focus on the revenue generation cycle, from lead generation, to pricing, to sales compensation.

· SaaS Workshop Series (September 18-20, Austin, Dallas, & Chicago): Keychain Logic and Opsource add Microsoft to the agenda and take the show on the road. The day-long workshops (to be held at Austin’s Omni Hotel, Microsoft’s Texas Campus, and the Illinois Technology Association’s Chicago office) are designed to accelerate growth in ISVs’ on-demand businesses and are tailored for individual job functions. Somehow, I get stuck with the morning gig in each city, but I’m happy to be working with the Microsoft folks and Opsource’s Dave Englebrecht (Director, Business Consulting).

· Key Trends In Software Licensing (September 21, Mountain View): This half-day session, aimed at Enterprise Software, Open Source and SaaS customers, will feature a keynote by Forrester Research’s Ray Wang and two panels: Licensing Agreements for Buyers and for Sellers, and SaaS Examples featuring Steve Lucas from Business Objects’ CrystalReports.com, David Schellhase of salesforce.com, NetSuite’s Katherine Jones, and Chris Kenney from Avolent. On the first panel will be Novell’s Christopher Howden, event host Fenwick & West’s Stephen Gillespie, and, of course, me.

· Pure-Play SaaS vs. Hybrid (September 26, San Diego): Back on the road with Microsoft (Services Architect Kathryn Rostrom) and Opsource (Blozan again), adding Kintera’s Dennis Chyba (SVP Product Solutions) just to make it fair. We will be discussing the costs and benefits to both business models. Regular readers already know what I think (“hybrid” = “doom”) but should attend anyway because it should prove to be fun.

· Software University (on-line): I may be scooping Software CEO / CompTIA because this one’s not on their site, yet, but what the heck. We’re putting together a two-hour (at least!) webinar on the SaaS business model that will include discussion of revenue generation, pricing, licensing, sales compensation, operations, the whole ball of wax. I can’t reveal who else will be there, but this is going to be one content-rich couple of hours. Check the Software CEO site frequently for details.

· OnDemand 2006 Summit (November 8 & 9, San Jose): This is going to be a whopping event. With some 400 C- and V-level software industry executives, analysts, press, and investors in attendance, this SIIA conference will be the seminal event of the fall. The agenda is still being finalized, but it will feature keynote addresses from some of the industry’s most influential leaders, a tri-track panel segment that will address best practices for all parts of a SaaS provider’s business (including application development, SAS-70 compliance, accounting, marketing, pricing, sales compensation, operations, customer service, etc.). This one is going to be huge, even if you happen to miss the two panels I’m involved in.

Hopefully, all of this won’t be too much fun or too distracting. My son’s birthday falls right in the middle of it all, and I somehow need to get ready for Hallowe’en!

Hope to see you on the circuit...

ACCELERATED REVENUE GROWTH IN AN EVOLVING MARKET (Part V)

2006-08-18T10:25:00.000-07:00

Back in May, I started this series of posts based on a case study that was unveiled at the Software & Information Industry Association’s (SIIA’s) Software-as-a-Service (SaaS) Executive Council meeting in San Francisco. At the Council’s request, the study was prepared to demonstrate how companies can accelerate SaaS revenue growth by employing certain service-oriented marketing and sales techniques that are dramatically different from most of those used by traditional enterprise software companies.

For confidentiality and competitive reasons, the company’s identity was masked, and I gave it the pseudonym “Jumpstart.” In previous posts, I set up the story and described Jumpstart’s market and sales position at the beginning of the study period (Part I), discussed how the company re-branded and re-positioned itself (Part II), told how Jumpstart’s leadership implemented active sales management techniques to dramatically accelerate the sales cycle (Part III), and summarized how the company’s new incentive compensation program tied it all together (Part IV).

Frankly, the brilliance in Jumpstart’s transformation was more in the planning, coordination, and execution than in the individual tactics the company used. Each of the steps implemented were fairly straightforward, and the execution was accomplished by consistent application of core principles. Jumpstart needed to change its focus – from being a product-oriented, high-technology provider of a niche solution to being a service-focused service company in a mainstream market – and management understood that the biggest hurdle the company faced was its habits.

The reply to “We don’t do things that way” became a patterned response: “Why not?” Pretty soon, as individual functions became more customer-centric (as opposed to process-centric) and customer feedback grew increasingly more positive, individuals’ creativity kicked in, and staff and management began inventing new ways to ensure customer satisfaction. There was a brief period of change-resistance, but once the tide started turning, there was no stopping it.

So, now we get to the bottom line.

Jumpstart’s Astounding Results
Clearly, many things contribute to the success or failure of any given company, and Jumpstart had a significant number of attributes.

· Known for their superior technical solutions, Jumpstart’s engineering team continually developed products that expanded offerings in support of the company’s new brand as a robust business solutions provider for its customers and their partners / customers.
· Jumpstart’s customer service and support organizations were second to none, providing hands-on technical assistance 24 x 365 and implementing new customers quickly and with minimal effort.
· The most problematic of all Jumpstart’s on-going operations was its manually-intensive billing system, but the difficulties posed by it were mostly transparent to customers.
Nevertheless, the improvements in Jumpstart’s sales and marketing efforts clearly were the primary factor in the company’s explosive and profitable revenue growth (see graph).

By the end of the second full year of its transformation, Jumpstart’s billed revenue was $34 million per year, nearly three times what it had been only two years before; at $2.8 million per month, the company’s run rate had increased by more 290% in the same period, and it was growing at a rate of nearly 30% per year. In and of itself, this growth is impressive; it is truly staggering in the context of the company’s transformation in the face of downward market pressures at the time.

Jumpstart also had increased its installed customer base by more than 90% and had more than 130 individual businesses using its services. These successes were cost-effectively achieved with small increases of only 20% in sales and marketing staff, and the average quote-to-close period had decreased to just over 45 days (and was in decline).

By the end of the period covered by this study, Jumpstart’s parent company had been engaged in reorganization proceedings for nearly a year. After a lengthy due diligence period, the parent funded its emergence from Chapter 11 in part by selling Jumpstart to a competing company that offered related services.

The truly great news was that the new company recognized the value of Jumpstart’s transformation and offered jobs to more than 80% of the company’s employees.

PUTTING THE "CREATIVE" IN MARKETING...Plus a Shameless Bit of Self-Promotion

2006-08-11T14:37:00.000-07:00

My good friend Axel Schultze introduced me the other day to a fascinating blogger / podcaster named Eric Mattson.

A temporary ex-patriot living an adventure in Stockholm for the past year or so, Eric is a marketer by training, profession, and instinct, and he’s on leading side of a truly wonderful self-imposed challenge: To conduct 1,000 podcast interviews with (as Axel put it) “marketers, innovators, entrepreneurs and other interesting people.”

I planted my tongue firmly in my cheek, allowed to Eric that I wasn’t sure into which of those categories Axel intended to put me, but said I would be more than happy to talk with him.

In prep for our chat, I checked out Eric’s site, MarketingMonger, and lost myself for several hours on a sunny Sunday afternoon. “It’s a dangerous place,” I told Eric, when we hooked up on the phone. There is so much valuable, interesting, and insightful content there...

The interviews start to cascade; one subject refers to another, Eric mentions a comment made by a third. Next thing you know, it’s getting on near dinnertime, and the only thing happening in the yard is that the lawn is still growing longer.

Eric’s got some great ideas of his own, and this is a brilliant idea to get us all talking about what works, what doesn’t work, and where our modest profession is going in a future that will inevitably involve the “Business Web.”

While I don’t think you’ll agree with everyone, all of the interviews are worth checking out. I’m #74…

A PARABLESometimes, Doing What You Can Is Not Enough

2006-07-26T19:11:00.000-07:00

“We have to find ways to say ‘Yes’ to our customers.”

My boss said that a million times. We were a services company that had gained traction with early-adopting customers. As we accelerated into the mainstream market, we were learning – the very hard way – that new customers had little time and less patience for our arcane technical rules and operating idiosyncrasies.

We did find ways to say “Yes.” Heaven opened and rained down explosive growth, but internal battles were hard fought because we had to stay true to our core business model. We had to decide once and for all whether we were a niche technology company or a service provider. We chose the latter.

What Business Is Delta Air Lines In?
I heard my boss’s voice several times last week as I struggled with my family’s trip to the East Coast. We made reservations on Delta months ago, ensuring Mother and Small Son could depart and arrive at reasonable times of day, sit together, and have minimal layovers.

Delta wanted none of that.

The airline screwed up 100% of their planned flights, and none of the problems were weather- or airport-related.

Two of four flights were cancelled, probably due to lack of interest. “Mechanical” problems caused delays of more than five hours. Layovers increased from three hours to seven. Total travel time nearly doubled.

It would have been worse, if we left Delta to its own devises. After cancelling the outbound connecting flight, Delta’s first choice was to skip over two others and put Mother and Small Son on the last plane out of Dodge several hours later. When the first of their return flights was “delayed” by over three hours, Delta’s phone agent said, “We’ll put them on a flight tomorrow morning” out of another airport, 25 miles away.

Ignore the fact that they have appointments at home “tomorrow.” Where will they sleep tonight, and how will they get to the other airport?

Ignore the fact that, while they were somewhere over Kansas, Delta emailed the notice that the connecting flight was simply not going to happen. What good did that do?

Ignore the fact that Delta only once flew them into a scheduled city, thereby (predictably) losing their luggage. Why should they have to return to the airport to recover their bags?

So What?
“Big deal,” you think. “Let me tell you about the time” some airline really screwed up a schedule, lost bags, ruined a trip. Happens all the time. Right?

Besides, what does this have to do with saying “Yes” to your customers? Ultimately, Mother and Small Son got home. When push came to shove, Delta said “Yes,” didn’t they?

Well, yes, but there was a lot of pushing and shoving. A trio of calls to Delta’s executive suite were interspersed with a dozen others to customer no-service lines. Hours were consumed trying to find useful information on an unnavigable website while waiting on hold and talking with people who had neither the ability nor inclination to help.

In most cases, no one at Delta would do anything until I called the main number (404-715-2600) and asked to talk with Lee Macenczak (EVP, Sales & Customer Service; email address: lee.macenczak@delta.com). Just finding that information is a mini research project.

All of this tells me that, fundamentally, Delta Air Lines has no idea what business it is in.

Point A to Point B
Most people would say Delta is in the “transportation” business; their job is to make sure people and cargo get from one point to another. How does that differentiate them from an interstate trucking company or Greyhound Bus Line?

Over the past several decades, FAA regulations and industry unions have conspired to re-cast the airline industry in the traveling public’s collective mind. Today, flight attendants tell you their primary responsibility is to make sure passengers are safe.

That’s a bunch of hooey. Delta must provide safe travel; that’s already a given.

Delta has blown it by actually believing that garbage. In believing it, the airline has forgotten that it exists to provide quality services to travelers.

Business to Business
Thinking about what happened to my family, I am crystal clear that I will never book a business trip on Delta. When I travel on business, I not only need to get to my destination on time, I need to be able to trust the information I get from the airline in the event something goes wrong.

I need user-friendly automated systems to deliver that information, so I know my options. When I have questions, I need reliable answers that allow me to make decisions I can easily implement.

Mostly, when I talk with any employee, I need that person to focus on solving my travel problem and look for ways to say “Yes,” as opposed to listing all the reasons the airline cannot fulfill its primary obligation.

What Does This Have to Do with Software?
I’m tempted to say, “If you don’t see the parallel between Delta and enterprise software, then you’re not a SaaS player,” and leave it at that. But that’s not helpful.

The bottom line is that Software-as-a-Service vendors must deliver services that extend the utility of their applications. Kintera helps teach its users how to leverage relationships and the internet to increase volunteer participation and grow charitable giving. Aria Systems provides billing tools, information, and support that help its users benefit from improved relationships with their customers. Authoria’s talent management applications are built to help companies increase employee satisfaction and improve productivity.

Each of these SaaS vendors is focused – at least in part – on how its application can help its customers improve relationships with their customers, which is one sign of a true service-oriented organization.

That is not something you could say about most traditional software vendors or airlines.

The message Delta sends is it doesn’t care what happens to my customer relationship when I miss a meeting because an improperly inflated tire causes a little orange light to come on in the cockpit. Delta doesn’t care that its overbooked or cancelled flight delays my delivery of a mission-critical solution, halting my customer’s production line. Delta doesn’t care about these things because it’s only purpose is to get me from Point A to Point B.

Sometimes, that’s just not enough.

ACCELERATED REVENUE GROWTH IN AN EVOLVING MARKET (Part IV)

2006-07-14T06:32:00.000-07:00

Remember “Jumpstart:” Leading provider of a specialized application to a specialized vertical market that wanted to propel its national deployment while also attracting new customers from more diverse industries. The steps we took there resulted in profitable revenue growth of 290% in two-and-a-half years of general industry stagnation.

In “Accelerated Revenue Growth In an Evolving Market (Part I),” I outlined Jumpstart’s challenge and the three-step plan the company had for repositioning itself in the market and changing its revenue generation model. “Part II” describes the efforts to re-branding and re-position Jumpstart and stress its expertise in solving its customers’ business problem (as opposed to providing a highly technical tool). The previous post, “Part III,” talked about how the sales organization shortened its cycles by up to 75% by employing a customer-centric solutions approach, including fixing Jumpstart’s service agreement, and actively managing the sales funnel.

That dramatic sales cycle improvement was necessary if Jumpstart was to survive. Its core business model was based on recurring revenue streams, and it had expended significant capital in support of its expansion. A cash flow business, Jumpstart needed to quickly grow incremental revenue to stay ahead of incremental costs while supporting the new, higher depreciation costs.

Changing its compensation plan was a key component to Jumpstart’s efforts to shorten its sales cycle, and this post summarizes how we did it.

Stage Three: Sales Compensation
Prior to the changes, Jumpstart’s salespeople were dedicated to re-signing existing customers to multi-year extensions in order to “lock in” rates. Given that Jumpstart had never lost a customer due to non-renewal (other than those few that had closed their doors or changed their business models), these efforts clearly contributed little to the company’s growth. Thus, the company first stopped paying commissions based on the total value of customer contracts. Six months later, incentive compensation for simple contract renewals was eliminated.

The principles of Jumpstart’s resulting sales compensation plan were simple: Salespeople would earn a base salary representing 50% of their targeted annual earnings, and commissions would not be capped. Although this plan identified several ways for earning commissions, they all stemmed from a structure that paid a percentage of the monthly recurring charges (MRCs) identified in new contracts. This kept the plan easy to understand while providing management with the tools to best focus individual contributors’ efforts on strategic objectives. At plan, individual contributors’ annual earnings were consistent with what they could earn elsewhere at that time.

Jumpstart’s new incentive plan carried monthly “new revenue” quotas and included commission rate accelerators for extended term contracts; the longer the contract, the higher the commission paid on each billable dollar. These accelerators increased base commissions by approximately 35% for each additional year in the contract term, thereby providing an incentive to protect near-term revenues (by not negotiating downward the initial service rate) and secure long-term stability (by aggressively selling term contracts). Thus, if the base commission rate for a 1-year contract was 20% of new MRCs, the salesperson would earn 27% for a 2-year term or 34% for a 3-year term; this accelerator was capped at 5-year terms.

The company’s pricing structure also included non-recurring charges (NRCs) for all contracted services, and individual contributors had pricing authority to waive part or all of these in exchange for appropriate term commitments. Commissions on NRCs were designed to provide additional incentives for the sale of term contracts in two ways. First, NRCs did not retire quota; second, the commission rate on these charges was lower than that paid for MRCs. Combined, this structure made it attractive to salespeople to negotiate term contracts in exchange for reduced (or eliminated) non-recurring charges.

Moreover, the new plan encouraged “hunting” by offering “new logo” bonuses and discouraged “farming” by neither retiring quota nor paying commissions on “pull-through” revenues (i.e., those generated by additional services provided at the customer’s request, whether handled by the salesperson or customer service organization).

Finally, the new plan carried a tiered over-achievement structure that further accelerated commissions in 20% increments for all sales closed in those months when year-to-date quota attainment exceeded 100%. Thus, if YTD performance was between 100% and 110% of quota, commissions were 120% of normal; for YTD performance of 110% to 125%, commissions were paid at 140% of normal; and for YTD performance in excess of 125%, commissions were earned at 160% of the standard rate.

Despite some initial resistance from its legacy salespeople, this new plan – combined with the significantly shorter sales cycles – became a very effective motivator and was quite popular with Jumpstart’s producing contributors. Ultimately, many parts of the plan even were adopted by Jumpstart’s acquirer and incorporated into its compensation program.

Next installment, I’ll wrap up the case study and summarize the impressive results Jumpstart achieved.

THE CHURCH OF KAWASAKI'The Art of Evangelism' In the SaaS World

2006-06-27T19:18:00.000-07:00

“Think different. Don’t do better sameness. Don’t be content with doing things ten or 15 percent better. Do things ten times better.” - Guy Kawasaki, “The Art of the Start,” TieCon, 13 May 2006, at 12:31 of his speech

I had the great ego stroke of appearing on a panel at the Software Business Transformation Summit a couple of weeks ago, and, since then, I keep coming back to Guy’s words: Don’t do better sameness.

I’ve been preaching essentially the same thing about Software-as-a-Service (SaaS): Think different. And: Listen to your customers. Seems to me, these are the two most important aspects to pioneering a new business model.

Thing is, I’m not Guy Kawasaki. He’s preaching from a taller pulpit and to a vastly larger congregation. He gauges his blog from the top of the Technorati list; mine is measured from the opposite end. He’s a bit better known than me for a few pretty obvious reasons.

Still, the same day Guy delivered his “The Art of Evangelism” sermon to several thousand attendees at eBay Live!, I had the opportunity to try my hand in front of a couple of hundred software executives down the street at the Mirage. It was rewarding because the feedback I got proves the industry is baptizing more than a few converts and atoning for the right sins.

Nevertheless, there is still a lot of work to do, and Guy’s comments serve as a great reminder of some critical points.

“Bringing the Good News”
At 7 minutes, 40 seconds of his eBay Live! speech, Guy says, “Evangelism is about bringing the good news. … That’s what you do.”

There is a lot of good news in the transforming software industry. There is a lot to evangelize, but this is where we need to start thinking differently. SaaS gives us a different way of improving business processes, so we need to talk differently to our customers about what we do. We’ve got to stop talking about source code and architectures and middleware and interoperability and data integration and the inevitable features and benefits. Frankly, customers don’t give a crap about all that.

For SaaS users, it’s all about the WIIfM, the What’s In It for Me? They want to hear about how your service is going to improve their business, their day-to-day activities, the quality of their lives. Step One to The Art of Evangelism is “Make Meaning,” and to do that you need to “increase the quality of life.” (9:07 of eBay Live!)

When you’re marketing and selling your SaaS app, you should be Bringing the Good News, talking about how your service makes your customers’ lives better. Not “what does your software do” but “what does your service contribute.”

“Fix Something Bad. Right a Wrong.”
Increasing the quality of life is but one way Guy suggests you Make Meaning. Another way is to “fix something bad” or “right a wrong,” and the software business presents great opportunities for that.

SaaS will succeed for the same reason any other revolution succeeds: The movement is demand-driven. Customers have been abused by traditional perpetual license vendors for too long.

They’re tired of paying hundreds of thousands of dollars every year for applications that are impossible to install and support just so they can pay an additional 25% per year to “maintain” and “upgrade” what should have worked properly in the first place.
They don’t trust ROI projections because it’s impossible to generate a return on shelfware.
They’re looking less for “features and benefits” than they are for solutions to their problems.

Given that environment, why would you try to sell them software?

Instead, fix the myriad of wrongs delivered unto users by the likes of Oracle and SAP and Seibel and Microsoft and the hundreds of independent software vendors (ISVs) whose main goal was to generate a lot of sales so they could be acquired by the likes of Oracle or SAP or Seibel or Microsoft.

Monetize Your Expertise
One of the things I said during our panel discussion – which was called “Moving to a Subscription Business Model” – is that SaaS companies need to realize that their application is merely a way of monetizing their expertise.

Think about that for a second…

Let’s say you’ve built a really cool application that helps users optimize operations at their really cool widget manufacturing facilities. Your software coordinates raw material inventory and pending sales orders, notifying the supply chain when resources dip too low; it reports out-of-spec milled parts and monitors widget assembly; it coordinates maintenance intervals with equipment life spans; it even tracks the build-up of toe jam in the processing line and navel lint in executive offices and alerts the cleaning crew when these problems approach critical tolerance levels. It does all these things over a fully-integrated, data transparent, secure, and cross-functional platform that produces SAS 70- and SOX-compliant financial statements, sales reports, customer testimonials, and sudoku for the now under-worked widget company CIO.

Given all of that, who knows more about manufacturing widgets than you?

If you give me any of that crap about, “Well, all of my customers are different,” then it’s time for you to hang it up and find something else to do. You’ve got a perfect perpetual license ISV mentality that will lead you to over-customize and over-charge for an application with 85 features out of a hundred that no one uses.

In the mean time, your customers will never benefit from what you know about their business. You will never have the opportunity to convert them.

The DNA Transplant
At the Software Business Transformation Summit, our panel (moderated by Tier 1 Research’s resident SaaS expert, Mike Mankowski) focused on the “DNA change” needed to transform a traditional ISV into a SaaS company. (I first heard that phrase from Intacct’s Bob Jurkowski, and I may be partly responsible for infecting Mike with the analogy.) Conversations like these almost always center on predictable software industry issues:

What about SOA, SLA, API, BPO, and ABCDEFG?
Why is multi-tenancy?
Is integrated data still really data?
Can you recognize revenue if it bites you?
How do I continue to over-pay my salespeople?

Listen: These are important ducks, and we need to make sure they’re all in a row. But they don’t represent DNA-level thinking. This approach to building a SaaS company is just doing better sameness, and there’s no guarantee it’s going to be “better.”

SaaS executives and their employees need to think different. They have to think in terms of the whole package, the entire solution, the complete product.

“A product that is complete,” Guy said (Ibid., 20:21), “is not just what’s in the shrink wrap, not just what you download, not just what’s in the box that you open up. It’s the pre-sale and post-sale support, also.”

SaaS is not about the application; it’s not about whether or not the servers are powered on; it’s not about internet connectivity or performance. SaaS is not even about the always-on technical support or the expanded, knowledgeable, friendly customer service that are foreign to customers of traditional software. SaaS is about none of these things, and it’s about all of these things, and everyone who builds and sells a SaaS application needs to understand that SaaS is about unique value. (Ibid., 26:44)

Purpose & Solutions
I was talking with someone over at Alibris, and I asked: “What business are you in?”

“Providing pleasure.” The answer came without hesitation.

Man, I loved that. There’s a person who truly understands the customer’s perspective. The software Alibris uses, it’s on-line presence, it’s partner relationships with brick-and-mortar stores and libraries around the world… Those are important pieces, but they are not the whole. That kind of answer, “Providing pleasure,” comes from imbedded DNA.

Similarly, Authoria seems to have it right. This is a company that “gets it.”

Authoria’s CEO, Tod Loofbuorrow, was on the summit panel with me; his company has transformed into a SaaS provider. Tod and his team have so successfully transplanted the new DNA, that there appears to be no vestige of the traditional ISV left in the company.

Go to Authoria’s website. It’s nothing short of brilliant. The solutions and benefits Authoria offers are clear; Authoria’s expertise is prominently displayed. Authoria knows what companies need to do to properly attract, motivate, and retain a high-quality workforce. Theirs is a service most companies can use. They know what they’re talking about and what they’re doing.

Look closer. I have. I don’t think the word “software” appears anywhere on the site (except in some executives’ bios).

DNA and Evangelism
Virtually anybody can deliver a software application that performs a particular task. So what?

Even if your software application has value to the end user, you’ll be competing on price with everyone else who has an application that does the same thing. (Listen to Guy’s section, “Niche Thyself,” at 21:52.)

Your unique value will come from the completeness of your SaaS product. It comes not only from how well you have monetized your expertise, but from how well you have thought different. Your company’s success will be determined by how well you demonstrate that thinking.

Revenue generation in the SaaS market will begin with how thoroughly your marketing organization builds credibility with your target customers. No one is going to buy a service – no matter how it might improve their lives or how many wrongs it might right – from a provider they don’t trust, so your marketing has to focus on evangelizing your solution.

That’s where the DNA transplant starts, but it must go much further. Your entire organization must understand the meaning you want to make and repeat your mantra daily. They need to be customer-sensitive and solutions-focused. Every day they must earn your customers’ business, and, when you are successful, the new DNA will infect your customers, and they will pass it on to their colleagues and friends.

So, think different. Then, go forth and evangelize.

ACCELERATED REVENUE GROWTH IN AN EVOLVING MARKET (Part III)

2006-06-19T12:58:00.000-07:00

Let’s return to the “Jumpstart” case study I started a couple of posts ago.

Here’s the teaser: Jumpstart increased annual revenue by 290% in a two-and-a-half year period. In and of itself, this is an impressive performance; it is truly remarkable given that most other companies in Jumpstart’s market were experience either flat or negative growth.

Catch-Up In Summary
Jumpstart provided a market leading technology to a specialized customer base. To accelerate its organic growth, promote its value prop, and expand into new markets, Jumpstart needed to bring focus to its position as a provider of a full-service application.

A summary of how Jumpstart was operating at the beginning of the study period – including an outline of the three-stage process used to change the company’s revenue generation model – is covered in “Accelerated Revenue Growth In an Evolving Market (Part I).”

Even though the three stages overlapped, I am presenting them separately. The first, Branding & Market Positioning (included in “Accelerated Revenue Growth In an Evolving Market (Part II)”), called for a careful and targeted cultural make-over as Jumpstart adopted the role of a business process solutions expert, which built on its position as a boutique provider of specialty high-tech solutions to a specific market segment.

This post looks at how the company changed the way its direct sales force approached and dealt with its customers, re-focusing their efforts on understanding business problems and how Jumpstart’s applications helped solve them. Not only did Jumpstart expand its market reach, sales management was able to decrease the sales cycle by as much as 75%.

Stage Two: Sales Cycle Management
While new marketing programs were developing higher-quality leads, and a new incentive compensation plan (to be discussed in Part IV) was designed to improve Jumpstart’s sales cycle measurement, the company faced a business plan that called for annual growth of more than 30%. Management needed to dramatically accelerate Jumpstart’s contact-to-close and quote-to-close metrics, so they crafted a three-step plan to do so.

The first step was to fine tune the company’s services agreement. Not only was the length untenable, Jumpstart’s original agreement did not address its new market position. The new contract no longer provided users with a non-exclusive, limited license for Jumpstart’s technology. Instead, it became a services agreement, outlining the terms under which Jumpstart would provide customers with access to the company’s solutions. Key to this approach was the development of a new “User Guide,” into which Jumpstart moved all of the technical and operational terms that had been included in the old contract. With the implementation of this new agreement, contract negotiations became far simpler. No longer did Jumpstart need to engage in multiple and iterative re-writes; many customers simply accepted contract terms after legal review.

In parallel, Jumpstart’s sales leadership instituted a consultative sales process designed to compliment the company’s new market position. Jumpstart’s salespeople were trained to spend time evaluating prospective customers’ business requirements and the problems they were experiencing that could be addressed by Jumpstart’s applications. This enhanced qualifying step identified customers that were more likely to buy, and it uncovered possible objections before they became impediments to the sale. To further accelerate the sales cycle, account managers were trained to raise these objections (rather than to wait for the prospective customer to raise them) so they could be addressed and overcome early in the process.

Finally, account managers were required to complete and submit Weekly Activity Reports (WARs) every Friday morning. These reports summarized the previous week’s customer calls and other sales work and outlined future follow-up and prospecting activities. Reviewed with line management during weekly one-on-one meetings, the WAR summaries provided regular opportunities to improve individual contributors’ performance and gave Jumpstart executives the information necessary to predict each week’s results with greater accuracy. Combined with weekly Monday morning all-hands kick-off calls, the WAR mechanism became a highly effective tool in establishing and building a winning sales culture.

Naturally, Jumpstart’s legacy sales organization was suspicious of these changes. They were convinced the WARs and solutions-focused sales process would only make everything more complicated and lengthen the contact- and quote-to-close timelines; a minority of the individual contributors were not able to make the turn and incorporate these new tools into their approach. Still, the measurable results were incredible: A 75% decrease in the average sales cycle, while Jumpstart expanded its marketplace and attracted new customers.

In the next installment, I will outline the changes Jumpstart made to its incentive compensation plan that contributed to the shortening of the cycle and ensured that its salespeople continued to hunt new and profitable business.

GETTING SAAS WRONG

2006-06-10T15:20:00.000-07:00

“The significant problems we face today cannot be solved at the same level of thinking we were at when we created them.” – Albert Einstein

“Ooh, my head!” – Ritchie Valens

I read Amy Wohl’s latest post, “It’s Hard to Build a New Business Model,” with growing dismay. Reporting that “every week, [her firm is] talking to companies who are offering software as a service,” most of what Amy wrote made my brain hurt.

I don’t disagree with the premise. Building a new business model is hard – very hard. But that's why entrepreneurs exist: They have better ideas and love building better businesses. They live to develop something new that is more attractive, more effective, more profitable than the detritus that existed before.

Amy’s post suggests there are a whole lot of people who aren’t thinking about the software business in new ways. They’re approaching marketing, selling, and partnering the way ISVs always have, rehashing “tried and true” methods – no matter how badly those methods have fared – to make them fit into the new model.

Oy! That’s a recipe for failure because the operative word is N E W.

The “SaaS” companies that contort traditional ISV methods aren’t acting entrepreneurially and are doing a disservice to their customers, partners, and employees. Investors should either pull out today or go ahead and start wallpapering the bathroom with their shares.

Who’s Not Getting It?
Although I dropped Amy a couple of notes, we’ve not been able to connect, and I can’t tell from her post if she’s missing this point or if she’s just reporting what software companies are telling her. Either way, the companies Amy describes are blowing it, big time.

Yes, “traditional software vendors are used to getting the bulk of their revenue … right up front.” So what? Traditional software customers are tired of parting with their money before they receive the benefit of the application.

SaaS is demand-driven because it offers a solution to this problem. Utility or subscription pricing – “pay for what you consume” or “pay as you go” – allows users to be customers for only as long as the application provides value. When SaaS vendors act like traditional ISVs by requiring up-front annual payment, even offering deep “time-value” discounts, customers want to know how SaaS is different from the same-old, same-old and if there’s something wrong with it.

Annualized billing creates other problems SaaS companies don’t need. By adding iterations to contract negotiations, it lengthens (or, rather, robs vendors of the means to shorten) the sales cycle and better manage the sales process. Paying commissions on annualized revenues removes the incentive for SaaS salespeople to close more deals quickly, and doing otherwise is a payroll administration nightmare. None of this speaks to the difficulties in-advance billing creates for accounting, revenue recognition, tracking, and charge-backs. “Oy!” again.

Of course, SaaS companies will find it “hard to get … revenue from subscriptions up fast enough to cover costs and create a profit,” if they’re not doing anything to speed up the process!

Wow!
When you think about it, the addiction to up-front revenue (as Amy puts it) must be sucking the good sense from otherwise smart software entrepreneurs. The companies that are serious about SaaS know it’s about more than a pricing scheme (“subscription” vs. “one-time”) or a delivery mechanism (“on-line” vs. “on-prem”), so it’s a mystery when they twist traditional operations and try to make them fit SaaS.

Why, for instance, would a SaaS vendor rely on the typical stable of channel partners when so many other, more likely, possibilities exist? The average systems integrator isn’t going to be an effective reseller because SaaS actually cuts into its core business. Retail stores? Only if the SaaS application is being offered at Amazon.com. And when was the last time a VAR actually added value to a software deal?

Worse is the thinking around how to compensate the channel. No one in their right mind would advocate a perpetual annuity unless the partner “owns” the customer relationship and provides on-going technical and operational support. Annuities may work in the insurance industry, but do SaaS companies really want to invite that comparison?

Bad Habits
Unfortunately, it’s as easy to fall back into comfortable old habits as it is to slip into those beat-up sneakers just outside the back door or that frayed sweater that always finds its way to the top of the drawer. The challenge is recognizing which habits are the bad ones.

Here are a couple of good rules of thumb: If your solution is complicated, you’re approaching the problem the wrong way. If the answer to any “Why do it that way?” question is, “Because we’ve always done it that way,” or “I don’t want to lose my people,” or some other version of “Doing it differently is hard,” then you’re not thinking it through.

The bottom line is if SaaS companies are going to act like traditional ISVs, their customers, employees, and investors are going to treat them that way. They won’t realize the improvements – shorter sales cycles, more predictable, profitable and consistent revenue streams, loyal customers – promised by the new business model, and they’ll probably fail.

It’s time to look past the old ways of doing things and embrace the service model. There are tons of service industries out there that offer successful examples of the kinds of solutions SaaS vendors can employ. Let’s stop looking backward at the broken pieces of the traditional software business and celebrate the opportunity to build something truly new.

OFF TOPIC: BLOGGING'S DOUBLE-EDGED SWORD

2006-05-30T19:21:00.000-07:00

So… I noticed a significant traffic spike the other day. “Wow,” I thought.

That’s the kind of thing that can send bloggers off on a kind of stream-of-consciousness quest. You backtrack the paths readers followed to get to your site, inevitably leading to other links that catch your interest. You read this, comment on that, scribble some notes. Next thing you know, you’ve burned an hour and, although you feel smarter, there’s no real way to measure its productivity.

Most bloggers don’t talk aloud about paying attention to their site’s traffic, but virtually all of us know with high accuracy not only our average daily hit rate but how many readers subscribe via which feeds, how often they return, how long they stay, whence they come, and when they’ll return. Sharp changes in any metric will distract us from whatever we’re doing ’til we find out what’s going right (or wrong).

My latest “going right” thing was a very cool reference by a favorite blogger, Rod Boothby, who has insightful things to say about the business of technology on Innovation Creators. Rod’s been on my blogroll for some time, so his “Great SaaS Blog” came as a bit of a surprise because it was a nifty compliment but also because I saw that traffic spike before I saw his post.

After dropping Rod a quick thank-you, I followed the falling dominos and pinged Guy Kawasaki’s Signum Sine Tinnitu from Rod’s blogroll – I’m a big fan of Guy’s hilariously true “Top 10 Lies” series – and found this reference to Uri Baruchin’s most recent post, “The Top 12 Sins of Marketing Gurus (and Their Books)” (which folds back onto Guy’s site in a kind of blogospherean infinite loop), on his excellent blog, Marketing Babylon which has apparently also experienced a sharp increase in visitors due to what Uri calls the “Kawasaki Effect.”

My head wasn’t spinning too much to stop me from paying close attention to Uri’s list (and, like Guy, note that I’ve committed several of those sins myself). The irony was lost on most of the self-important gurus who viewed the post as a looking glass and saw only the reflection of their own warts; they missed the joke that Uri committed each of the sins.

An Aside
(Fact is, we are all sinners, and that’s really part of Uri’s point. Marketing is as much art as science, and marketers need to dabble in virtually every other discipline (finance, customer service, sales, operations, etc.) in practicing their craft. Thus, communicating effective Marketing techniques is often a lot like teaching budding authors about character development through dialog; you can give a sense of the best ways to do it, but pretty soon you fall into any number of the sins you tell your students to avoid. The problem is that most Marketing Gurus spend too much time on marketing themselves and not enough on marketing Marketing, and I’m not convinced that this doesn’t devolve from the fact that most Marketing Gurus don’t know what good Marketing is in today’s technology environment.

(Uri would probably call that a “sweeping generalization,” so I’ll follow up with “100% Evangelism:” Business customers looking for technology solutions more likely will obtain them from a partner they trust. Thus, most gurus who advocate one form of “fundamentalism” or another (which means “most gurus”) are just plain wrong because the most effective Marketing – particularly in the technology sector and especially in the B2B environment – demonstrates expertise in everything the company does.

(This expertise must become the company’s brand, meaning that it has to inhabit the company’s very DNA. I’m not talking about just technical expertise; the solution provider must show its proficiency in all of its own business operations. A Marketing department can spend hundreds of man-hours publishing articles and leading seminars on optimizing business processes, raising its company’s credibility as the authority in that field, and the Sales or Service organization can erase customers’ faith in the company’s ability to deliver by using amateurish methods or failing to deliver promised results.

(This is the fundamental challenge for Software-as-a-Service (SaaS) companies as they transition their business models to focus more on the service than the software. Sure, they have to know their app inside and out, but that’s not hard for quality software people. To be successful, they need to transform their entire business to go beyond that.

(So much for me staying off topic. Gimme a soapbox, and I’ll step onto it. I think that’s what Uri calls “pontificating…”)

Back Off-Topic
My point about blogging is that it is at once an incredible tool and a massive distraction. I started off wondering what was driving all those new readers to my site (thanks again, Rod), and I found myself jumping from one site to another getting caught up on new ideas and different ways of applying tested ones. On a daily basis, I can catch up with intelligent and thoughtful people who I have come to know through their posts. I’ve never met Guy Kawasaki, but he seems like an old friend. He even claims to have nothing to say to those who have nothing to do. What better friend that that?

The challenge for us is to figure out how to best use these great tools to our mutual advantage and growth. I think we’re well on the way to doing that with challenging posts like Uri’s and focused blogs like Rod’s and really insightful and entertaining tracts like Guy’s. It’s a great time to be messing around in the technological pool, and where we end up may not be anywhere near as important as the fun we have while we’re going there.

ACCELERATED REVENUE GROWTH IN AN EVOLVING MARKET (Part II)

2006-05-25T10:32:00.000-07:00

Last week, I introduced “Jumpstart,” a company that needed to re-position itself as a provider of a full-service application and implement a campaign designed to aggressively promote this new value proposition while rapidly expanding into new markets. In “Accelerated Revenue Growth In an Evolving Market (Part I),” I summarized Jumpstart’s market position and sales efforts at the beginning of the study period and outlined the transformational challenges faced by its executive team.

I also mentioned the results – a staggering 290% increase in annual revenue, which was achieved in the same two-and-a-half year period during which other companies in the field were experiencing either flat or declining revenue.

Because the strategy Jumpstart was pursuing was a complex one, the executive team broke it up into three stages, each involving several tasks. While the implementation timeline of these stages overlapped, it’s instructive to look at each individually. This post focuses on the steps the company took to re-brand and -position itself and launch into new markets.

Here’s Stage One: Branding & Market Positioning
Founded by some of the industry’s leading engineers, Jumpstart had long enjoyed a reputation for having set the de facto technical standard for providers of its kind. Jumpstart was a price maker in its core market, but that position was about to be eroded by the entry of a higher caliber of competitors than the company had faced before combined with a general collapse of application revenues. Moreover, Jumpstart’s price structure had been designed to provide services to a particular market vertical in which very expensive resources were used exclusively by larger companies. To control customers’ consumption, Jumpstart had actually attached an unreasonably high price those services to act as a disincentive to customer growth.

Jumpstart’s launch into new markets required the company to shed its image as a boutique provider of specialty high-tech solutions while leveraging its strong relationships with larger customers to attract their business partners and customers. To encourage these anchor customers to expand their business with Jumpstart and to promote growth across all verticals, Jumpstart implemented a two-tiered rate restructuring plan that at once broadened its discount program and rationalized its base rates for its higher quality services. Each of these steps was relatively simple, and their effects were immediately positive, resulting in an increase of 15% in billed revenues.

First, Jumpstart aligned its pricing structure with its customers’ operations by expanding its volume discounting program to give customers credit for their entire relationship with Jumpstart; previously, discounts had not been granted on a total usage basis. This recognition of an expanded market in its existing base helped develop stronger relationships with those national customers and drove the company’s expansion.

Second, Jumpstart provided pricing incentives to its growth-oriented customers by lowering the rates for its higher-end services and raising those for its more standard offerings. The incremental costs for provisioning the better application were lower at high volumes, so Jumpstart was able to profitably meet the immediate increased demand for them. By increasing rates for its lower-end products, Jumpstart brought them in line with those charged by competitors while encouraging customers to move up the value stack. These rationalizing changes in Jumpstart’s rate sheet decreased the differences between levels of services and encouraging customers to upgrade to higher-quality, more technically reliable products.

As market pressures increased, Jumpstart’s traditional engineering-focused customers became more cost-conscious, and the company’s sales and marketing leadership developed a new Jumpstart “brand” and strategy for attracting and retaining new business. Without abandoning the focus on technical expertise, Jumpstart positioned its offerings as solutions to its customers’ new business problems and embarked on a campaign to demonstrate how its customers could leverage the company’s applications to more profitably increase revenues with little additional investment.

New promotional materials and product packages targeted the sales and marketing departments of Jumpstart’s prospects and customers. The company’s standard seminar presentation was changed to focus less on the technical specifications required by the engineering community (which Jumpstart was already exceeding) and more on the ease with which customers aggressively and economically scaled revenue growth with Jumpstart solutions. For the first time, the company opened the channel, developing partner programs that encouraged its customers to either resell Jumpstart applications or make referrals to Jumpstart’s direct sales force.

Finally, Jumpstart developed success-based pricing and contract terms that offered temporary rate relief in exchange for broader-based and longer-term contracts. Adopting the philosophy of partnering with its customers to ensure their success, the company was able to help several customers stabilize and grow their revenue streams while reinforcing its reputation of being customer- and service-focused.

Successful implementation of the new Jumpstart brand required an overhaul of the company’s sales efforts; the sales teams needed to adopt a more service-oriented process and convey a stronger sense of urgency about resolving their customers’ business problems. (Note that this “urgency” is customer-focused, as opposed to merely urgency in attaining each month’s quota.)

Next time, I’ll briefly discuss the tactical steps Jumpstart took to re-purpose its direct sales force while decreasing the sales cycle days by as much as 75%.

ACCELERATED REVENUE GROWTH IN AN EVOLVING MARKET (Part I)

2006-05-17T14:33:00.000-07:00

Unveiled at today’s Software & Information Industry Association (SIIA) Software-as-a-Service (SaaS) Executive Council meeting, this case study was developed to demonstrate how certain sales and marketing techniques can effectively accelerate SaaS revenue growth during the industry’s transformation. In this part, I’ve adapted the study’s executive summary and background sections to introduce a company referred to as “Jumpstart.”

I’ve masked the identity of the company for confidentiality and competitive reasons, but I’m not soft-peddling or overstating the issues its management faced. The solutions described are complete, and a future posting will include the actual results achieved.

In this post, I’ve described Jumpstart’s market and sales position at the beginning of the study period and summarized what its executive sales and marketing team did to transform the company’s value proposition in response to customer demand for more service-focused offerings. Jumpstart needed to re-brand and -position the company’s application as a full-service offering and launch a go-to-market strategy to rapidly expand into new markets. To do this, they employed the strategies I’ve always championed, even some of the things I discuss in this space.

The long and short of it is: By (a) positioning Jumpstart as a national (as opposed to “regional”) service provider, and (b) re-purposing the company’s marketing efforts to stress Jumpstart’s services as business process solutions (as opposed to technically-oriented tools), and (c) stressing urgency and customer service in its sales cycle, and (d) motivating its sales force to aggressively “hunt” new business, Jumpstart achieved phenomenal revenue growth of more than 290% during the two-and-half year period discussed.

HERE’S THE BACKGROUND:
At the beginning of the study period, Jumpstart operated a monthly recurring revenue business with a $12 million per year run rate. A wholly-owned subsidiary of a larger firm that held several related businesses, Jumpstart’s specialized applications supported its customers’ technical engineering functions in a specific market. With its flagship offering, Jumpstart had saturated its target customer base, and opportunities for growth existed primarily in other verticals. As the company entered a new fiscal year, its challenge was to accelerate growth in new markets and expand its customer list beyond the ~70 logos it had already acquired.

Historically, Jumpstart’s solution was a highly technical one, and its marketing and sales efforts had been directed at its customers’ engineers. The company’s sales cycle was long and unpredictable, with a contact-to-close period running anywhere from 90 to 240 days. Because new customer acquisition was spotty, Jumpstart’s sales organization had developed the habit of “farming” its existing customer base for pull-through revenues and renewal commitments, nearly 100% of which the company would have received in any event.

Two dynamics were developing that would disrupt Jumpstart’s sales and marketing approach and threaten its market leadership position. First, strong competitors were appearing in the marketplace; a well-funded start-up founded by former Jumpstart managers was unveiling competing products. Second, soft technology/software markets were imposing downward rate pressures for companies of all kinds, and wholesale failures were common.

To survive and prosper, Jumpstart needed to dramatically overhaul its value proposition, messaging, and sales process. In the next post, I’ll describe the steps Jumpstart took to re-brand and re-position itself in the market, and future posts will discuss the changes made to how the company improved its sales cycle and developed a compensation plan that contributed to Jumpstart’s explosive growth.

Stay tuned or check back often…

SAAS VENDORS' BIGGEST BUSINESS CHALLENGE

2006-03-30T00:33:00.000-08:00

Of all the really pertinent points made at SaaS Summit 2006 – and there were a lot of really pertinent points made – the most pertinent came during the VC Panel Discussion on Thursday afternoon when Hummer Winblad Venture Partners’ Ann Winblad was asked which challenge facing new Software-as-a-Service vendors is greatest. “Sales compensation,” she said.

During her authoritative pause, heads around the room nodded in violent agreement; there were a few muttered “Yeps” and “I’ll says.” Sprinkled throughout the audience, light bulbs went on over some attendees’ heads, and others quickly bent over their Silverado Resort pads and scribbled Notes to Self: “Talk to sales veep re comp.”

Out With the Old
Winblad briefly explained that traditional software incentive compensation plans just won’t work in the SaaS environment and hit all the right points. In the midst of the talk of multi-tenancy, security technology, and the need (or not) for a common platform, here was a Big Issue faced by many new SaaS companies for which few have a really good solution.

There’s no dearth of ideas about SaaS incentive compensation, but the big problem is that none of them are really new. Every SaaS executive I talk with admits to concerns about getting it right; ultimately, few actually break from the programs that worked so well at helping break the traditional software business model. As a result, most SaaS companies fall into the traps Winblad was counseling them to avoid.

What to Watch For – And Why
Generally, the problems fall into four categories, but they usually stem from the fact that, on the business side of their business (as opposed to its technical / operational side), providers often view SaaS as merely a different pricing scheme. They try to shoehorn an old-style comp plan into it, and they miss the opportunity to re-focus their sales teams in ways that will help them generate long term recurring revenue streams.

SaaS executives can be sure their comp plans are off-target when…

they don’t see their sales cycles shorten significantly, or when…

they’re meeting revenue goals without acquiring new customers, or when…

more new revenue flows out the door via sales paychecks than stays in house to support marketing and product development and Uncle Sam, or when…

their multi-level, product-specific commission structure generates one or two kinds of revenue, or (worst of all)…

they’re generating negative cash flow because they’re paying more in commissions than they’re billing in revenue.

Tricky vs. Complicated
The tricky thing about many incentive comp plans is that they often suffer from the same problem as most acts of Congress: the Law of Unintended Consequences.

Salespeople tend to be pretty uncomplicated. They usually do exactly what they’re paid to do. On the flip side, if they’re paid for doing a particular thing, that is usually what they will do. They look at a new comp plan and immediately identify the easiest path to commissions. The more complicated the plan, the more likely salespeople will choose paths that are least likely to have the intended effects.

SaaS vendors usually introduce unnecessary complexities by adapting traditional software plans, which tend to create other significant problems.

TCV = SNAFU
Software salespeople are used to making big commissions on a few high-revenue sales per year. The SaaS fix is to develop a deal’s Total Contract Value by taking its expected monthly revenue multiplying by the number of months in the contract term; big commissions are then paid on this TCV figure. Such comp plans present several issues, the most significant of which is that they generate negative cash flows by paying commissions before revenue is even billed.

Some SaaS companies fix this “fix” by calculating commissions on TCV but paying as revenue is received. Alternately, they adjust their model and try to bill customers in advance (more likely than not offering deep discounts to get them to agree). The first merely transforms the plan into an annuity program, which is fine for the insurance industry but presents problems of its own (discussed below). The second pushes the problem onto the customer and defeats one of the main purposes of adopting the SaaS model.

Worse, both add layers of complexity in administering both revenue and commissions, which further increase costs and raise the likelihood of focusing salespeople on the wrong objectives.

Worst of all, the TCV approach does nothing to help vendors adopt the service-oriented focus and culture that are cornerstones of the SaaS model. This “solution” merely re-casts the traditional sales comp model that has resulted in software companies paying up to 80 cents of every application dollar to their salespeople.

Annuities: The Long Road to Failure
At the other end of the spectrum, SaaS companies will pay smaller percentages of each month’s revenue for as long as it is billed. With each new customer, the commissionable base increases, and the salesperson’s pay inches upward. Inches, which is the primary problem: Annuities take time to grow into sufficient rewards to properly motivate high-performance salespeople.

Once they do, they have an oddly counter-productive impact. The annuitized salesperson soon begins to focus only on existing customers, farming the base instead of hunting new business.

The administrative complexities of annuity plans also present problems. Which salesperson earns the commissions when territories are re-aligned? Does the SaaS company charge back credits against commissions (which is also a problem in a TCV plan)? Is it a commissionable event when a customer contacts the company for additional services?

Mismatched Revenue
Improperly aligning commissionable events with the company’s business objectives is the fourth critical error many companies make, and this can be a particular problem for SaaS companies that are torn with the seemingly competing objectives of booking in-year revenue (i.e., monthly subscriptions, transactions, services, etc.) and growing their book value (i.e., signing long-term contracts).

While it’s important to strike a balance between near- and long-term revenue, companies are making a huge mistake when they pay three times the commissions for a 3-year deal at one monthly billing rate as they do for a 1-year deal at the same billing rate. This is another issue with the TCV approach, and it’s a bigger problem from a revenue matching perspective because it invariably motivates the wrong kind of sales activity.

Similarly, when a software application is more profitable than the business or consulting services that are often pulled through as part of the sale, it makes little sense to pay the same commission percentage for both; however, many companies do so almost reflexively.

Easier Than It Sounds
The first step to building a successful compensation plan is making sure that its objectives are aligned with those of the business. From there, the best rule is to keep the plan as simple as possible. Always keep in mind that salespeople are fairly simple beings. They will generally do exactly what they are paid to do, and the good news is that they’ll keep doing it over and over again.

SAY GOODNIGHT, LARRY

2006-03-06T13:35:00.000-08:00

The most remarkable thing about SaaS Summit 2006, the excellent Software-as-a-Service program hosted last week by OpSource, wasn’t the lovely setting of the Napa Valley’s Silverado Resort, or salesforce.com’s Bobby Napiltonia’s rocking introduction to his Day 1 keynote address (“SaaS from a Vendor’s Perspective”), or the typical Northern California microclimate demonstration that included alternating bouts of sunshine, rain, hail, and a double rainbow visible from the North Course’s 16th tee, or even the more-than-200 attendees from as far away as Massachusetts.

The most remarkable thing about the summit was that even CIO Magazine’s editor and publisher Maryfran Johnson couldn’t dredge up an anti-SaaS antagonist for the lunchtime “On-Demand vs. Perpetual Licensing” debate. The best she could find was James Woolwine (who was very good, indeed), CIO of Majestic Insurance, who opened by admitting that he is not against SaaS solutions but was there to offer insight into the buyer’s perspective.

Rich Content
Some market advocacy should be expected at functions like these, and readers already know I’m one of SaaS’s biggest proponents; however, SaaS Summit 2006 was successful beyond evangelism thanks to a content-rich program that packed useful information into a rapidly moving agenda. OpSource prominently featured the summit’s sponsors, allowing speakers to avoid the temptation of turning their presentations into commercials for their SaaS-oriented services.

Napiltonia came closest to advertising when he talked extensively about salesforce.com’s AppExchange. His discussion, however, of the “Business Web” stressed that speed-to-market with quality intellectual property will be key to the industry’s immediate growth and future transformation. SaaS, Napiltonia argued, will accelerate the development and democratization of the Business Web and change the way technology services are delivered to SMBs and enterprises.

Inciting Rebellion
Treb Ryan, OpSource’s CEO and one of the leading thinkers on the service-focused marketplace, picked up this theme when he discussed how SaaS will ultimately change the way virtually all technology is consumed. Because SaaS companies will offer services on a subscription or (better yet) success basis, Ryan argued, they must hold their supply chain to the same standards. SaaS success will ultimately pressure hardware, network, and support vendors to adapt their business models and offer integrated solutions on an on-demand basis.

Such revolutionary talk will not endear OpSource in the high-tech community, but Ryan’s point differs from other predictions of on-demand computing growth because he follows the money, not the technology: SaaS fundamentally alters the way businesses allocate their IT budgets, shifting the total spend towards software. SMBs and enterprises no longer need to spend 60 to 80 cents on equipment and personnel for very 20 cents they spend on software; these costs are born by SaaS vendors, who will impose their performance-based pricing models on their suppliers. Market demand and competition will drive this shift, according to Ryan, altering the technology landscape forever.

Serial entrepreneur Axel Shultze expands on this theme in his excellent post-summit blog, “The Enterprise Software Chasm,” in which he describes how SaaS growth will limit the availability of new technology solutions to large enterprises and ultimately empower “smaller, more agile companies” that can use “on-demand and omnipresent” information management tools not readily available to the “complex enterprise.”

Riding the Tiger
Such large thinking was not lost on summit attendees who attended to learn the best ways to grab the SaaS tiger by the tail. Many found the VC panel discussion enlightening, if a bit unsettling because they were not prepared for such strong advocacy for a radical business model shift. Jason Green of Emergence Capital Partners stressed the importance of fully committing product architecture to the SaaS platform, tag-teaming with Credit Suisse First Boston’s Jason Maynard, who advised independent software vendors (ISVs) to keep SaaS deployments pure and not co-mingle them with traditional installed applications. Many of my conversations with ISV executives had to do with the “revenue divot” they expect as they wean their companies from high-dollar licenses and transition to SaaS’s recurring revenue model.

Hummer Winblad’s Ann Winblad pointed out that a great SaaS application represents a new market opportunity but went stressed that one of the ISV’s largest hurdles is learning how to effectively pay its SaaS salespeople. Dovetailing with and building on salesforce.com’s Tien Tzou’s theme (“It’s an inbound world. It’s a Google world.”), Winblad pointed to unworkable traditional software compensation models that will ultimately break SaaS providers.

Talking about the efficiency and cost-effectiveness of web marketing, Tzou strongly suggested that old-style enterprise software salespeople and methods simply will not work in the SaaS environment. Effective telesales professionals who possess the different skills and personalities that allow them to work with customers on the phone will replace high-priced features-and-benefits hawks who are more comfortable with PowerPoint and the interminable enterprise software sales cycle.

The Technology Works
Business model changes clearly present the largest challenges to ISV executives, who appear comfortable with the technology and operational support offered by companies like OpSource, IBM (via, in part, its SaaS Partner Council), and others. The break-out sessions on SaaS Acceleration (pricing, selling, and integration solutions) were far more popular than those on the SaaS Ecosystem (which featured otherwise excellent talks by leading SaaS providers).

Even technically-oriented speakers like John Rowell, OpSource’s SVP of Operations & Engineering, focused on how SaaS changes the business of software. In his excellent talk on how to accelerate SaaS deployment, OpSource’s Dave Engelbrecht stressed the opportunities for differentiation by creating and offering new functions that can only be done with SaaS applications.

Trust Your ISV
Clearly, the software world is changing for the better. IDC industry analyst Erin Traudt treated the summit to a preview of a software user survey that shows dramatic SaaS growth, and Marketshare’s Jim Geisman summarized the overarching theme, observing that SaaS is not about technology but a better way to deliver value. Microsoft’s Sam Ramji weighed in, humorously noting that there will never be a standard that will stop companies from writing bad code. “We thought HTML was such a standard,” he said, “but I remind you: Blinking Colored Text.”

Majestic’s Woolwine undoubtedly would agree, and he would have to agree that the development of a robust and reliable SaaS ecosystem will be good for businesses in the way Schultze and Ryan describe. One of Woolwine’s concerns was with security, but he was talking about more than just his company’s data.

“Data security,” he stressed is part of “trust,” and CIO Mag’s Johnson agreed that “trust is key.” To date, the software industry has not inspired a lot of trust in its customers, so that is probably the most valid cautionary note raised at the summit.

It is also the reason that the SaaS revolution is about more than just the technology. We are in the midst of a whole-scale transformation, a complete re-branding of an entire industry. ISVs are anxious to step to the plate and demonstrate their utility and trustworthiness, and their customers are anxious to give them the chance. After all, as Ryan patiently explained, SaaS offerings can actually result in garnering more trust for software vendors. “They get paid on it,” he said.

SAAS REACHES INFERNO STAGE

2006-01-18T01:13:00.000-08:00

Seems like everywhere you turn in enterprise software this year, attention is on Software-as-a-Service (SaaS). From Ephraim Schwartz’s Reality Check in InfoWorld to SoftwareCEO’s newly released “SaaS Superbook” to even Ray Lane’s outline of “The Innovate-Dominate Imperative” in SandHill.com, SaaS growth and success are the hot topics.

Where there’s smoke, there’s fire, and 2006 will see further evolution. As Schwartz says, “anyone [who] thought Oracle and SAP were going to dominate the kingdom of business software ... had better guess again.” The sweeping growth of SaaS revenue will prove him right.

Nick Blozan, SVP of Sales & Marketing for OpSource, predicts a shift in the industry’s priorities from SaaS transformation to how SaaS providers will accelerate growth. This will keep the industry on track for completing its overhaul by 2010.

Fanning the Flames
Blozan’s team at OpSource is behind the first industry event specifically dedicated to this goal. SaaS Summit 2006, to be held at the Napa Valley’s beautiful Silverado Resort on March 1-3, promises to fan the flames of SaaS adoption and acceleration like nothing the young sector has seen before.

Much more than the typical technology industry boondoggle, SaaS Summit 2006 is bringing together software companies, technology partners, industry press and analysts, and venture capitalists. In Napa, they will discuss the future of SaaS, share successes, and maximize networking and partnership opportunities within the SaaS ecosystem. Attendees are promised real content in the form of discussion panels, debates, working sessions, and networking opportunities with leaders in the field like salesforce.com, IDC, Jamcracker, Marketshare Inc., Microsoft, Hummer Winblad, Credit Suisse First Boston, Triple Tree, ThinkStrategies, CIO Magazine, and more.

A quick scan of the event’s agenda reveals how comprehensive it will be. Two different discussions – one from the customer’s point of view, and the other from the vendor’s perspective – offer balance. So does the fascinating debate on buyers’ view of the competing industry delivery mechanisms: perpetual installed licenses and on-demand applications.

Industry experts promise insights into steepening the SaaS growth curve. Compelling session titles include, “You’re In the Game. Now, How Do You Win?” and “Avoiding the Scout Syndrome: Taking SaaS to the Next Level” and “SaaS: Getting Funded, Getting Going, Getting Out.” A series of sessions dedicated specifically to SaaS acceleration will cover pricing, selling, and integrating SaaS applications.

And, of course, there’s golf and wine tasting.

Proving the Analysts
Blozan is appropriately enthusiastic because the program is chock full of expertise, content, and a touch of fun. Moreover, his company is uniquely able to pull such an event together.

“OpSource is perfectly positioned to help organize a gathering of all the companies involved in the SaaS revolution,” he told me. “We are bringing together a group that includes highly successful SaaS providers, industry analysts, VCs and bankers, and SaaS enablers. The SaaS summit will be the place to learn about what works and what doesn’t with regard to business model, code, and operational delivery imperatives.”

SaaS Summit 2006 will give the industry its first hands-on view of the SaaS ecosystem in cooperative action, and the lessons learned likely will contribute to validating Schwartz’s predictions. His view that “the coming SaaS channel will redraw the [software industry] map” undoubtedly will be reinforced by keynote speaker Bobby Napiltonia, salesforce.com’s SVP of Worldwide Channels & Alliances.

Hopefully, the summit will prompt Lane to reconsider the complexities of SaaS transformation. As he noted in SandHill.com, the enterprise software industry’s “winners will be the few that can … execute on fundamental, paradigm-changing innovation;” more than a few SaaS providers will lead this revolution. Moreover, no solution is better positioned to immediately provide two things Lane says customers want: “Pricing that is tied to performance [and] recognition of their business problems.”

The entire SaaS movement is predicated on these principles; those who are already executing on them will be at the summit to share what they have learned and develop strategies for addressing the other two requirements Lane cites: “Better interoperability” (on a SaaS platform) and “improved product quality.”

Taking the Sector by Firestorm
The SaaS revolution is heating up, and 2006 will see its acceleration into prominence. IBM’s SaaS Partner Council, salesforce.com’s AppExchange, Jamcracker’s Service Delivery Network, and OpSource’s SaaS Incubator all will broaden the availability, acceptance, and success of SaaS solutions, and the SaaS Summit 2006 is the right booster at the right time.

This will prove to be the must-attend SaaS event of the year. Early-bird registration is available through February 15, and details are available on this page of OpSource’s website, or click here to register directly. (Call the Silverado Resort and mention the SaaS Summit 2006 for a special group rate. Space is limited.)

See you in Napa in March.

A BAD CASE OF PARETO

2005-11-15T02:11:00.000-08:00

The Pareto Principle – AKA, the 80:20 rule – tells us that 80% of results often are generated by 20% of the causes. 80% of a company’s revenue comes from 20% of its customer base; 80% of its operating problems come from 20% of its deployed technology. Not a bad principle (true about 80% of the time) and helpful in analyzing problems.

Pareto’s lousy, though, when the subject is customer acquisition costs for an enterprise software company. That’s why the smart money is on independent software vendors (ISVs) that are fixing their business models and offering applications, services, and solutions on demand.

80:20 Gone Far Awry
In “Time for a New Software Model,” a SandHill.com opinion piece for today, Larry Augustin (CEO of VA Software) cites a Goldman Sachs analysis estimating that more than 80% of an ISV’s new license and maintenance revenue is spent on sales and marketing. As Larry points out, the industry is charging customers a lot of money “just to sell to them,” and the secret is just about as open as the code being developed at VA Software’s SourceForge.net.

“The traditional enterprise software business model is broken,” Larry correctly states. Beyond cost of revenue, he talks about absurdly long sales cycles and summarizes the frustrating complexity of customers’ buying process. Larry argues that “open source … turns the marketing problem on its head” because enterprises can try before they buy. They can search out the app, download it, install it, and start using it without ever talking to one of those pesky salespeople. True; all true.

But open source doesn’t cure all the industry’s ills. Larry describes a “sales” process that sounds a lot like an enterprise version of the free- and shareware models, and I’m not familiar with many successful software companies that grew from such humble roots. Even an open source ISV will need to market its brand and product, and amid all the clutter and static of the evolving industry, this is no insignificant or inexpensive proposition.

Is That Any Way to Run a Business?
ISVs and their customers clearly need to use open source as frequently as they can; the savings of up to 50% of R&D costs that Larry notes can be significant. However, achieving a 75% savings in revenue acquisition is not only highly unlikely, attempting it (according to Larry’s plan) means the open source ISV will adopt a “build it and they will come” approach. That won’t work any better for software makers than it did for all of the dots that bombed five years ago.

Another way to fix the broken software model is to transform to (or at least include an offering of) the software-as-a-service (SaaS) or on-demand platform. The benefits Larry attributes to a revolutionized open source sales process will be achieved in a SaaS / on-demand environment – shorter sales cycles, lower sales cost-to-revenue ratios, decreased prices, growing customer bases, expanding markets. The primary difference between the existing model and the one evolving now (as discussed before in this space) will be in an improved sales and marketing effort that focuses less on an application’s features and more on the business solutions the ISV provides.

However, the critical difference between the open source world Larry describes and the SaaS / on-demand model is in customer loyalty and predictable recurring revenue. Larry’s ad hoc revenue generation model relies almost exclusively on customer-initiated contact, and it provides no opportunity for the ISV to expand the relationship and introduce greater value. The benefits the customer achieves from use of the SaaS / on-demand application will be enhanced by the on-going business services, product improvements, and service level guarantees provided by the ISV. This, in turn, leads to stickier recurring revenue, increased market penetration, and higher company valuations.

Business, Not Technology
I don’t mean to dismiss Larry’s arguments out-of-hand. His points about the problems facing the software industry today are more than valid; his is the kind of wake-up call ISV executives need to hear. His advocacy of the benefits of open source and his support of the community (both individually and through VA Software) are extremely valuable resources in implementing the fixes the industry needs. The difficulty I have with open source as a “business model” is that it remains ill-defined and largely unproven; using the technology as a supposed means of virtually eliminating proactive sales and marketing activities (and their related costs) will not improve the business of software but will, instead, make it less predictable and sustainable than it is today.

Let us agree that major transformations are in order, and ISVs should deploy all the available technologies – including open source as well as distributed secure networking platforms – with the goals of improving customers’ experience, increasing profitability, and being more responsive to market demand.

RELEASE MANAGEMENT OR SALES PROBLEM

2005-09-11T20:03:00.000-07:00

Dawntreader Ventures’ Ed Sim put up an interesting post Friday (09 Sep 05) on how “missing an engineering release date can be a symptom of a larger” issue in what should be a market-driven technology company. While Ed’s point – that a company’s departments are interdependent and problems can cascade throughout an organization – is important to remember, it was his example that resonated in the context of selling software.

Ed’s Problem
In short, inappropriate customer commitments were contributing to product management problems at one of Ed’s portfolio companies. After careful review of the causes underlying a missed engineering release date, the company identified a need to improve its sales function.

The point is one we all can afford to remember: When a company says it has “a revenue problem” (i.e., not enough of it), revenue probably is not the problem, but a symptom. The actual problem may be in its product or target market or customer service or sales approach or – most likely – some combination of these.

Still, Ed’s example – how product development can be derailed by salespeople too often committing to new “features” in order to close deals – reinforced a point I was making in my “What’s Wrong With Buggy Whips” rant. Ed conscientiously avoids revealing the name and industry of the company he talked about, but the similarities between his story and many software companies are too clear to ignore.

Hamsters
With tongue planted firmly in cheek, I suggested that independent software vendors (ISVs) continually develop features to humor themselves, but we know this isn’t true. Nor do features breed like hamsters left alone in the dark.

Most “features” originate as one-offs built for a particular customer and are baked into general releases because ISVs hope they add value to the application. They actually have the opposite affect. The negative impacts on the small- to medium-sized ISV are many: delays in scheduled releases; overly-complicated apps; disconnection from the market’s requirements; increased product development costs; unattainable revenue requirements; and, probably worst of all, an unskilled sales force with really, really bad habits.

The real reason customers use only 16% of their applications’ “features” is that they don’t need them; the proliferation of “features” in enterprise applications has little or no market benefit. The odds against a “feature” having utility beyond the idiosyncratic customer requirement for which it was developed are probably greater than today’s odds against the San Francisco 49ers winning Super Bowl XL (180:1).

Quid Pro Quo
Software is one of the few industries that regularly does customer-specific product development without charging a premium. Imagine saying, “I like this car, but I won’t buy it without an automatic tushie warmer that keeps my bum at 87.4° F,” or offering, “I’ll buy this 900 square-inch grill if you build in a left-handed smoke sifter.” The BMW salesman gladly will show you option packages and quote a price; the Weber rep likely will laugh you out of the store.

BMW knows some people will pay more for cars with tushie warmers; Weber knows that nowhere near enough customers will pay enough of a premium to support the development of smoke sifters (left- or right-handed). Not only do these companies understand their markets and business cases, they value the capital, time and other resources dedicated to new product development. Accordingly, they make sure they get paid for what they produce.

There are at least three issues with software makers’ habit of adding customer-specific features in exchange for nothing more than a deeply-discounted deal. In the first place, customers place as much value on a thing as the vendor does; if something costs nothing, that’s exactly what it must be worth. That’s the quid pro quo part. Salespeople react the same way and take the easy way out by selling things the company doesn’t make. That’s the bad habit part. Finally, the flood of special requests spills throughout the company, disrupting normal operations and interfering with its achievement of its goals. That’s the Ed Sim problem part.

The Solution
Ed doesn’t detail what kinds of problems his company’s sales reps were having other than to say they “were not properly trained or equipped to sell the product,” but it seems clear they were resorting to “promising the world to close deals.” Traditional ISVs, suffering from the addiction to “big, fat revenue hits” I talked about in “Innovating Software Sales,” cannot imagine a world without a “features & benefits” pitch. Toss in an on-the-fly ROI analysis, and you have a recipe for the kind of problem Ed’s talking about.

Solving this kind of sales problem doesn’t require the ISV to offer software-as-a-service (SaaS), but it certainly will help. SaaS allows the ISV to direct the efforts of its technical staff to what it does well – developing marketable code – in part because it requires the sales organization to shift its focus away from the app’s features and concentrate on the service the company provides. Service oriented salespeople pay attention to how their product helps their customers solve problems, and that’s always a recipe for success.

WHAT'S WRONG WITH BUGGY WHIPS

2005-09-06T15:55:00.000-07:00

Toward the end of Other People’s Money, Danny DeVito’s character, Lawrence “Larry the Liquidator” Garfield, speaks to the stockholders of the New England Wire & Cable Company.

“You know the surest way to go broke?” he asks rhetorically and then fills the silence with his own answer: “Keep getting an increasing share of a shrinking market.”

In case his point isn’t clear, Larry the Liquidator provides a trite but clear illustration: “You know, at one time there must’ve been dozens of companies making buggy whips. And I’ll bet the last company around was the one that made the best … buggy whip you ever saw. Now, how would you have liked to have been a stockholder in that company?”

So, given what’s happening in the software sector today, does this mean that I’m liquidating my Oracle position?

Nooooo. After all, at $13.56, Oracle was up 1.27% today (06 Sep 05), which tracked the overall NASDAQ. Still, $13.56 is more than 70% off Oracle’s five-year high of $46.31 (01 Sep 00), and I don’t think even Larry Ellison expects his company’s stock price to ever reach that level again.

However, technology stocks are largely governed by quarterly trends, so (for now) I’ll go with the majority of analysts and say Oracle’s a decent bet. But I’ll be surprised if I’m still holding five years from now.

Here’s the Opportunity (i.e., It’s Not a Problem)
Let’s say we’re playing Jeopardy: “I’ll take ‘Larry Ellison and Zoloft’ for $400, Alex.”

“And the answer is, ‘The enterprise application solution that will turn Oracle into the technology equivalent of the buggy whip.’”

Bing!

“What is ‘Software-as-a-Service’ or ‘SaaS,’ Alex?”

You’re skeptical: “Make Oracle obsolete?” Well, not today, but soon. If Larry (Ellison, not “the Liquidator”) isn’t concerned about SaaS, then why did Oracle revive, repackage, and rename Oracle On-Demand? And why is Oracle On-Demand the head-fake of all head-fakes? After all, it’s not really a departure from Oracle’s perpetual license. Oracle On-Demand merely allows Oracle license holders to host their Oracle products on Oracle-owned and -maintained servers. For a price.

Oracle and other perpetual license vendors (PLVs) don’t really want their customers to move to SaaS; that’s why they spend so much time telling tall tales about what’s wrong with the business model. OpSource’s Nick Blozan kindly calls it “FUD” (fear, uncertainty & dread); end users and independent software vendors (ISVs) will do well to recognize it for the horse hockey puck that it is.

The opportunity isn’t in knocking PLVs off their pedestals. The opportunity is in propelling the enterprise software market forward and making it more efficient, responsible, innovative, customer-friendly, and – most importantly – profitable.

These are all good things. Right?

The Difference Between Flak & Chaff
Well… “Wrong,” if you’re one of the legacy PLVs. Sometimes I wonder if these folks are in business to provide better products and services to their customers or if they just impress themselves with all the things they can make software do.

Features aren’t benefits if they’re not being used, and IDC suggests that less than two of every ten features are actually used by enterprise customers. Does that mean PLVs are spending too much on development? Does that mean they’re charging too much for their software? The answers to both questions are “Probably,” but what is crystal clear is that SaaS vendors will have shorter time to deployment for each release. (See Arena Solutions’ Eric Larkin’s discussion of bug fixes in “Replicating Software Revenue;” his points there also apply to new releases and upgrades.)

That, of course, leads to more PLV FUD: “With SaaS, changes are forced on all customers.” True, but it’s hard to imagine a scenario where the SaaS ISV – which has up-to-the-minute visibility into what customers are doing with the app – will change it in a way that doesn’t improve end users’ experience. Given IDC’s findings, PLV customers are waiting longer for less utility; with SaaS, they know they can have a greater impact on product / service development.

“But SaaS isn’t secure,” PLVs FUD. “You’re accessing it via the internet.” But that’s not a problem for Oracle On-Demand or eBay, which – looking an awful lot like SaaS – processes millions of secure transactions every day. How much of a problem is security for the customer’s intranet and the users who access it from outside the office? SaaS customers will be surprised to find that a true multi-tenant app often is more secure than existing extranets. (For example, OpSource’s SAS 70 compliance is baked into the enablement platform offered to all of its SaaS ISV customers.)

The real problem with SaaS, from the PLVs’ perspective, is that it seems to be undermining their business models and eroding their customer base. Truth is, the PLV model is already broken, and enterprise software customers are demanding less costly and more responsive solutions.

Gezhunteit
SaaS provides those benefits; the improved model is truly disruptive in that it has the potential of upsetting the industry’s legacy perpetual license structure. This is good news; it embodies the spirit and nature of capitalism, which Austrian economist Joseph Schumpeter described as “creative destruction.”

Schumpeter, a champion of entrepreneurship, said that the “process of creative destruction is the essential fact about capitalism,” and he would recognize that the SaaS revolution qualifies. Unlike myriad claims in the late ’90s that the dot-coms would change the entire American economy, SaaS is a specific technology that solves a particular set of demand-driven problems and that has matured to the point where it cannot be ignored.

Larry Ellison’s private investment in salesforce.com seems sufficient evidence, despite the FUD being spread by PLVs. Larry knows well a line from another movie:

“My father’s way of doing things is over,” Michael Corleone tells his girlfriend in The Godfather. “It’s finished. Even he knows that.”

BUILD A BETTER SALES FORCE

2005-08-22T23:56:00.000-07:00

So, I was talking with the president of a medium-sized biotech firm about his company’s IT requirements, and the conversation turned to technical salespeople.

He said, “One thing I have in common with the salesguy” from a particular software company: “We agree that he believes he knows what my company needs.”

You might have to read that one twice.

Family Tradition
It’s a common refrain among software users talking about application salespeople. When it comes to their relationships with independent software vendors (ISVs), enterprise customers are more animated only about the customer and technical service organizations – and then there’s no trace of the wry humor with which they view salespeople.

“What he really knows,” the medical devices exec continued, seriously, “is all the nifty things his app can do. He demo-ed them so fast, I handed out Dramamine after he left.”

Like most users, my new friend has sat through so many presentations he knows the “features & benefits” pitch almost as well as the salesperson making it. But this year – like the last five – he’s not buying. “I don’t see the value,” he stresses, “no matter what the salesguy says.” Pause. “Besides: I don’t believe his ROI. His numbers are all over the place.”

The numbers that are clear show service agreement charges growing as a percentage of ISVs’ revenue streams, which means new application sales are lagging. Embodying the definition of “insanity,” software sales organizations continue doing the same things that haven’t worked for years. Why? It must be because (with apologies to Hank Williams, Jr.) it’s a family tradition.

Proactive Mentoring Wins
In addition to innovating the software sales process to stress business solutions, the break in tradition must start with sales management’s shift to a long-term focus. As we approach 4Q05, and begin gearing up for ’06, now is the time to start implementing. Myriad selling books promise improved results through innovative processes, cold calling (or not), power presentations, negotiating, etc., but sales managers need guidance, too. Fortunately, the best advice available comes from an unlikely combination of two sources.

William “Skip” Miller’s ProActive Sales Management is the most comprehensive single resource available. Concentrating on achieving and maintaining long-term success, Miller quickly addresses the differences between successful salespeople and successful sales managers. These differences are highlighted from the other side of the same coin by Steve W. Martin’s article, “Why Does My Sales Manager Dislike Me?” Developer and advocate of a sales philosophy centered on interpersonal dynamics, Martin demonstrates how the most effective sales managers are those who mentor their staffs.

Combined, Miller and Martin describe at a high level the qualities of sales managers who build super-performing teams. In short, these managers are collaborative, people-oriented leaders who hold a long-term view of the company’s sustained success and posses strong selling and coaching skills.

Clearly, there’s much more involved, and Miller’s book-length treatment is worth the investment. Immediate tactical steps are simple to implement and pave the way for a more substantive organizational evolution.

Management Opportunities – Now
The mentoring leader has metrics that track performance, provide on-going feedback, flag areas needing improvement, and help avoid the dreaded micro-manager trap. All keep in mind that the primary objective is winning.

Success Speaks – Rule of thumb: Salespeople who consistently exceed quota usually can be left alone. That should go without saying, but some companies are actually more concerned with the number of calls salespeople make, how frequently they travel, where they live, or when they report to the office. “Why keep that guy?” they ask about an account manager doesn’t meet certain arbitrary criteria and are puzzled by the simple reply, “He’s crushing his number.” These star performers need little management, provided they do the required paperwork and do not disrupt their teammates or other departments. Every sales organization has at least one of these stars, and I don’t mess with success.

The 85%ers – These are B+ performers – not necessarily closing only 85% of their quota, but falling within the 85th percentile of the company’s bell curve – and the bulk of the mentoring leader’s time and attention are best spent here. By definition, not everybody can be Sales Manager of the Year, but with help the 85%ers can give the stars a run for their money. Account & territory planning, goal-setting, customer meetings, negotiations, and closes are all areas where the mentoring leader’s experience and guidance can accelerate growth. For this group, I advocate hands-on collaboration.

Minimum Performance; Maximum Requirement – Improvement criteria for under-performing individual contributors must follow the problem>action>result (PAR) metric, and targeted results must be specific, measurable and attainable. The mentoring leader helps identify underlying performance problems and works collaboratively with the salesperson on the development of an action plan that, when implemented, will achieve the desired result. It is up to the salesperson to produce.

Tools
No matter the type, experience or size of the sales force, mentoring sales leaders always can use the following tools to great effect in establishing a proactive organization that is not reacting to daily events but leading market expansion and attaining company objectives.

Habitual Planning – Develop and standardize this practice early, and update often. Plan everything, from tomorrow’s prospecting calls to next week’s customer & team meetings to the following month’s targeted closes to subsequent quarterly kick-offs and marketing initiatives. The company’s business plan establishes goals, and the proactive leader sets objectives and builds strategies for long- growth. The purpose of any plan (as Andrew Grove notes in High Output Management) is not to be put on the shelf in a really cool binder and crossed off the To Do list; instead, it is a living document needing regular review and update, the premises of which need testing and revision, so it can be a roadmap to success.

The Power of WAR – Weekly Activity Reporting (WAR) needs to be more than merely a summary of the last week’s daily goings-on. Included in each week’s report should be the following weeks’ schedules, which can be compared in the future to actual results. Thus, WAR evolves into a view of how well individual contributors are executing against their own plans and can be used for future one-on-one mentoring and team training. For under-performing salespeople, WAR, in combination with sales results, is a self-generated tool that the employee uses to track daily activity against PAR metrics. Augmenting normal pipeline management, WAR is a fundamental tool for individual contributor development and long-term team growth.

Pareto’s Funnel – Well-versed in the ubiquitous “80:20 Rule” (i.e., the Pareto Principle) the proactive mentor focuses on the “vital few” deals (i.e., the 20%) that will make the most meaningful contribution to the company’s goals and also trains individual contributors how to identify which are this kind of opportunity. The art of funnel management is twofold: (1) separating the wheat from the chaff so that limited sales resources are most efficiently brought to the market, and (2) doing so early enough in the sales cycle to ensure long-term growth. Through accurate and thorough qualifying a solutions-oriented sales team can improve on Pareto’s Principle and increase the share of the “vital few” opportunities in the 30-day funnel.

Immediate & Long-Term Improvement
Miller’s proactive approach, Martin’s mentoring philosophy and these simple tactical tools can readily be put into practice with an immediate positive impact. More importantly, the habits developed by their use will shift sales leaders’ focus to long-term company objectives and maintaining a solidly performing sales organization. For WAR, planning and other templates, drop me an email, and I’ll reply with simple versions that can be readily adapted to any situation.

REPLICATING SOFTWARE REVENUE

2005-07-10T12:00:00.000-07:00

Here’s a headline: The biggest challenge today for privately-held small-to-medium sized sellers of traditional licensed software is building replicable revenue streams.

The operative word there is replicable.

In its CEO Outlook 2005 (part of the “Software Business Strategy Research Series”), the Sand Hill Group reported that 70% of independent software vendor (ISV) executives responding to its annual survey indicated their primary growth mechanism this year will be new customer acquisition. (This excellent study can be purchased from Sand Hill’s website here.) The question, then, is from where will these new customers come?

Stickiness
In the coming years, the independent software vendor’s market value will be based more and more on revenue under contract than even market share or number of users. For this reason alone, it is puzzling that more ISVs are not pursuing a Software-as-a-Service (SaaS) strategy and its attendant “Holy Grail” monthly recurring revenue (MRR) stream.

Today, licensed-based sellers’ recurring revenue opportunities are limited to maintenance fees and service agreements, which are not readily replicable because they are tied to the sale of licenses for customer-installed software. Moreover, they distract the ISVs from what they do best – creating and selling applications. As recurring revenue, they are not “sticky” beyond the utility of the current version of the application.

Under the SaaS model, with appropriate customer monitoring and support (both of which can be largely automated into the delivery infrastructure), the ISV can generate MRR that is truly sticky. Here’s how:

First, the model itself is responsive to market demand. As noted in “The Holy Grail of Software” (published on this site) and by Kleiner Perkins’ Ray Lane in “The Coming Service Revolution,” demand is steadily increasing for service-oriented delivery of virtually any application. Perkins advises that, “customers are in control, [and] they’re demanding … more accountability for results.” Giving customers what they want is only the ISV’s first step in establishing strong relationships with them.

Second, a fully integrated SaaS infrastructure allows the ISV to distribute updates and bug fixes to its entire installed user base at one time. Arena Solutions’ CTO and Founder, Eric Larkin, reported to the SDForum’s SaaS SIG (chaired by Riseforth’s John Koenig) that on-demand providers “can fix bugs instantly.” While this increases the burden of good release management, Larkin said, “every problem that you fix, you fix for 100% of your customers.” Obviously, such improved utility is invaluable to customers that use an application every day.

Third, a SaaS application hosted on the ISV’s platform provides up-to-the-minute usage data. Attentive ISVs notice when a regular customer’s usage drops off and are able to proactively address the cause – whether it be a problem with the application, a lost password, or even an infiltration by a competitor – before the customer is lost.

Not only do these delivery and service improvements breed customer loyalty, resulting in sticky MRR, they readily demarcate business issues. Appropriate customer service, maintenance and application teams can concentrate on specific business issues and ensure a satisfied user base. Salespeople can focus their energies on acquiring new customers.

Acquisition
Over the past several years, ISVs have found that “acquiring new customers” is an idea more easily said than done, and this is where the discussion of SaaS revenue shifts from stickiness to replicable. On the one hand, a secure customer base enables the ISV to invest in new marketing and expanded sales; the SaaS platform actually facilitates scalable revenue growth.

First, the platform is a perfect closing tool because SaaS ISVs can demonstrate the application’s production instance by merely authorizing a prospect’s complete access for a specific period of time (e.g., 30 days). For a fully-hosted application, the marginal cost for such trials is extremely low; more importantly, the cost (in time and dedicated resources) to the customer is virtually nil.

Second, the sales cycle for an enterprise SaaS solution can be less than half that of a customer-installed licensed application. According to CEO Outlook 2005, 41% of the responding ISVs reported “an average sales cycle of six to eight months” (with a staggering one-third weighing in at "nine months or more"). Virtually any improvement in this critical metric will appear as an increase in sales productivity.

(Not clear from this statistic is the ratio of deals “lost” due to the customer making “no decision,” which has been reported as high as 60% among enterprise ISVs. This vital measure screams for the attention of sales management because whatever the underlying reasons, a number this high represents normalized pain in the industry, and very expensive normalized pain at that. If ISVs only shorten sales cycles by 50% – and do nothing about their “no decision” problem – cost of revenue could drop by as much as a third. More on improved sales process and management elsewhere on this site.)

Third, for vendors of traditional licensed applications, SaaS provides an opportunity to expand potential customer bases. At a panel discussion on SaaS at the Software 2005 Conference (Santa Clara, California, April 26-27), representatives of Agile Software (product lifecycle management applications) and Blue Martini Software (customer relationship management tools for retailers) said their companies’ development of SaaS offerings resulted from strategies to penetrate new markets. Both are successful, and Blue Martini is attracting and closing smaller enterprises – and doing it more efficiently – at a rate faster than anticipated by their most optimistic plans.

Scale
By expanding into new markets, shortening sales cycles, and closing a higher percentage of proposed customers, ISVs can generate SaaS revenue that is more readily replicable than the licensed flavor and its pull-through adjuncts. These, combined with a sales process that is focused on solving the customers’ business problems (instead of the price of the application) and a more straightforward demonstration mechanism, allow the SaaS ISV to more aggressively open the channel.

And that is where replication really starts to scale.

An ISV that offers standard $250,000 licenses and takes six months to close needs only to sign three one-year contracts at $10,000 per month to significantly exceed its traditional sale’s book value. Moreover – as Agile, Blue Martini, Kana (service resolution management tools), Mercury Interactive (business technology optimization software), and others have proven – the two delivery mechanisms are not mutually exclusive. By identifying and pursuing truly replicable revenue through a SaaS strategy, today’s innovative ISVs will be tomorrow’s success stories.

INNOVATING SOFTWARE SALES

2005-06-30T00:03:00.000-07:00

Andy Singleton, president of open source solutions provider Assembla, asks in the IT Manager’s Journal, “Is the Enterprise Software Licensing Business Dying?,” arguing “buyers have had enough” of “software that is very complicated and expensive to acquire and implement.” He points to British Petroleum: With a FY05 IT budget of $2 billion, “only $30 million is allocated for new software licenses.” Singleton allows that enterprises “still buy a lot of software … but [they] don’t buy it as licenses.”

OK, so maybe enterprise software isn’t actually dying, but the sector certainly is going through a painful transformation.

Minimize Pain / Maximize Return
To minimize pain, independent software vendors (ISVs) serious about their future are entering the software-as-a-service (SaaS) arena (see “The Holy Grail of Software”). These companies do not need to abandon licensed sales (there always will be a market for customer-installed applications – just as there always will be a market for buggy whips); truly innovative ISVs will incorporate SaaS into what they are already doing.

To maximize this enhancement’s return, ISVs will also innovate their sales efforts. Successful SaaS companies understand the fundamental differences between the standard features-and-benefits / ROI process used to sell licenses and the consultative / solution process required for a service-focused offering.

Solution Selling Made Easy
Talk to technology sales managers, and most tell you they advocate solution selling. Probe further, and find few who describe their value proposition beyond discussing the ROI achieved via product features and benefits. Attend a few seminars on solution or strategic or consultative selling, and quickly understand why (a) most salespeople disregard these processes because (b) most sales trainers make them too complicated.

Solution selling is actually quite simple, and – particularly in the B2B technology arena – it is the most effective for profitable growth.

Key is the qualifying step (sometimes called "discovery"), and it is the one most commonly circumvented. During qualification, the seller learns about the customer’s business, processes, customers, competitors, and problems. Thorough qualification eliminates false starts and minimizes the number of opportunities that result in “no decision” by the customer. Good qualifiers avoid discussing their solution during this step, and the best continue qualifying and re-qualifying throughout the process. Rules to great qualifying: [1] Ask open-ended questions. [2] Listen to the answers (i.e., the salesperson’s two ears and one mouth are used proportionally).

Complete qualifying reveals the enterprise’s contracting process and identifies the actual decision-maker. Licensed-based ISVs often find themselves selling applications to three buyers at every customer: [1] the end user (features and benefits), [2] the CIO (installation and support) and [3] the CFO (ROI). SaaS providers concentrate their energies on the one executive whose department will benefit most from the application and rely on this person to coach them through any other approvals that are required. This shortens the sales cycle significantly.

Proposals are designed to solve the identified problems in the context of the customer’s culture and ecosystem. For traditional ISVs, this looks like the “features and benefits” step, but they need to be careful. Discussing rates and charges too soon refocuses the process on ROI, which is a losing proposition. Successful solution sellers understand this and fully demonstrate their inherent value before negotiating price.

In “The Coming Service Revolution,” Ray Lane (of Kleiner Perkins and former COO and President at Oracle) notes that a “service delivery model … gets software vendors out of the ‘hockey stick’ sales dynamic” and “gets customers out of having to buy something before they can use it.” By its nature, the solution sales process demonstrates the application’s current utility and avoids the ROI pitch, which only commoditizes intellectual property.

Effective Sales Management
Under a clearly defined solution sales process, management of the organization’s efforts is uncomplicated and efficient. The typical manager-to-salesperson hallway exchange – “So, how’s the deal going with ToeJam Industries?” followed by “Great! I’m taking their IT Manager to lunch on Friday.” – is replaced by one where real information is exchanged: “Where are we in the process with ToeJam?” and “I am giving them a revised proposal on Friday based on their feedback from last week.”

With the inherently shorter sales cycle, management can more readily track deals through the pipeline and follow up on these conversations in a topic-appropriate manner. The process’ collaborative nature reveals customer objections earlier and more clearly, which often can be overcome without crashing the price. Sales management focuses on key metrics – such as quote-to-close ratios; the number of “losses” due to customer “no decision;” days proposals outstanding – to improve sales force performance.

Consistent growth is driven by compensation plans that draw bright lines between hunters and farmers. By maximizing commissions paid on new contracts and “logos” and by minimizing (or eliminating) commissions on pull-through revenue from existing customers, the SaaS ISV will ensure both revenue and market share growth. Prospecting and on-going customer service can be handled by non-commissioned personnel, freeing the salespeople to do nothing but close new business.

A New Addiction
Talking with the CEO of a software company, I asked why more ISVs are not pivoting toward SaaS. He said something like, “It’s those big, fat revenue hits. Software companies are addicted to them.”

(After I laughed, I asked “Can I quote you on that?” He grinned and said, “Yes,” but neither he nor I understood my question to mean “Can I quote you on my blog?” so I’m not naming him here.)

Being “addicted to big, fat revenue hits” is an interesting concept. In today’s demand-driven market, it is akin to being addicted to heroin, which is not overly hyperbolic. Withdrawal from heroin probably won’t kill you, but it sure is painful.

Assembla’s Singleton believes that “traditional software companies still can deliver a lot of value, [but they] need to figure out new packaging and revenue models.” SaaS’s monthly recurring revenue (MRR) is one of the options available, and if “big, fat revenue hits” are like being addicted to heroin, then MRR is like being addicted to breathing.

THE HOLY GRAIL OF SOFTWARE

2005-06-17T00:07:00.000-07:00

Anyone who is paying attention knows the software industry that emerges from the post-2000 recession will be unrecognizable from the one that went in. Mergers, acquisitions and failures have, of course, changed the roster. Beyond that, the future winners will have overhauled their business models and left behind the problems that have plagued the industry. They will have responded to customer demand and adapted their products, support and delivery mechanisms to a new service-focused paradigm. As a result, they will have broad and deep product lines, profitable recurring revenue streams, and loyal customers that regard them as valuable partners.

The most successful will propel change, mindful of their customers’ requirements and Albert Einstein’s admonition that “the significant problems we face cannot be solved at the same level of thinking we were at when we created them.” Those companies whose business models remain stuck in the bygone good-old-days will be overpowered by their reinvigorated competitors.

Serious Business
Software company executives that are serious about their businesses and their customers already are actively refining their plans for incorporating true Software-as-a-Service (SaaS) offerings. Their less focused competitors are getting bogged down in day-to-day tactical particulars and the semantics of SaaS versus “ASP model” or “On-Demand” or “Utility” software.

Fundamental business model changes are exactly the point, no matter what the underlying dynamic is called. And “dynamic” it is. In his April 22nd column, Sand Hill Group’s M.R. Rangaswami discussed customer demand for SaaS in the context of the four “seismic shifts” coming to the industry. For the record, seismic = earthshaking, momentous, devastating.

The coming shifts do not have to be devastating, as the serious execs know well. Their companies will not be merely responding. The most significant difference between them and their less successful competitors will be that they listened to their customers, something for which software vendors are not generally well known. Almost as important, the winners will have incorporated what they were told into their plan. Momentous changes require planning, and planning is not a tactical exercise.

Pricing & Other Delusions
The development of SaaS (or “pivot” toward it, as suggested by the name of Jamcracker’s cornerstone enabling product) requires more than just a pricing model change. As one industry CEO put it, subscription pricing – absent true service-oriented delivery – is “a head fake” many software execs give to their customers. These vendors know IT budgets are more closely monitored than ever before, and they recognize their customers’ need for more flexibility. They figure if they can offer their standard licensed product for a monthly or quarterly fee over a fixed term, they will have solved the problem. And they may – for a while.

But pricing changes are almost always tactical, and a closer examination reveals other issues not so easily resolved: What dedicated resources are required of customers’ IT departments to install, operate and maintain the product? What responsibility does the vendor have for ensuring proper configuration and performance? What services (both technical and non-) does the customer expect during the term of the contract, and at what cost? What does the SLA mean? Not “What does it say?”, but “What does it mean?”

The answers to these questions certainly will differ from company-to-company or product-to-product, but they also will be more revolutionary than anything vendors have been delivering to date. The questions represent critical issues because they – not just pricing – are driving increasing customer demand for SaaS, where “service” is the operative word.

On the other hand, there are those software execs who are convinced their applications are not compatible with or their customers are not interested in SaaS; some claim IT managers’ are unwilling to commit to SaaS and use that as an excuse for their sluggishness. These positions fail to recognize market data that clearly show escalating demand across virtually all sectors for almost any kind of software, to say nothing of the plethora of SaaS start-ups over the past year or two.

Demand & The “Holy Grail” Model
If rising demand for new services was not enough (especially at the tail-end of such a deep and long recession), one would expect the SaaS revenue model to gain broad-based industry attention. Serious software execs understand that the industry’s end-of-quarter price slashing game will not work over the long term, and they are not interested in customers’ growing tendency to treat negotiations as if they were buying a new car at the close of the model year.

Instead, they recognize monthly recurring revenue (MRR) as the Holy Grail it is. Businesses with committed MRR sufficient to cover fixed costs can realize an escalating relationship between sales expense and highly profitable revenue. There is no quarterly panic to “make the number,” because the number is accumulating month over month with dramatically shortened sales cycles. This is true particularly with enterprise products that no longer need to be installed on the customers’ IT stack. Downward pricing pressures are imposed primarily by competitors and product substitutes, as opposed to customers’ negotiating tactics.

Most of the industry’s start-ups and many of its future winners are already well-positioned to capture this multi-faceted prize. At question is how many (and which) of the rest of the traditional, license-based vendors will embrace the coming change.

Bifurcated Problem
For legacy software companies, the pivot into a SaaS model is difficult from two different perspectives: The technical and the commercial.

Technologically, the solutions exist. Many SaaS vendors have already developed products for scalable on-demand delivery. Servers are cost-effective, and their supporting multi-tenancy solutions work. One positive outcome of the telecommunications crash is that bandwidth rates are more than competitive; they are downright cheap. Data center floor space is ubiquitously available at rates that are one-third (or less) than those demanded four years ago. Hardware, infrastructure and service providers are hungry for new business, and demand has yet to match their appetites growth.

Software vendors that do not prefer the do-it-yourself approach have many enabling options from which to choose. Jamcracker’s Pivot Path, OpSource’s Optimal On-Demand, and NaviSite’s SaaS Enablement Platform all offer robust – and sometimes complimentary – solutions for the customer-facing technological problem. By using one (or more) of these, the software vendor can focus on what software vendors do best: writing code.

On the business side, software execs will find that Sales, Marketing and Finance are as different as Operations under a SaaS model. What does the quarterly revenue growth curve look like? In what ways are revenue recognized and treated differently? How do they define, plan for and manage churn? What additional customer-facing services need to be and can be provided? Will lead generation work differently? How will the sales pipeline change, and thus, how will sales quotas and compensation need to change? What will success look like?

The Dirty Word Repeated
In future posts, many of these questions will be examined in more detail. For now, suffice it to say that most of the answers will present themselves through rigorous planning.

Most executives shrink from that idea because they can develop tactical solutions that are effective in the short term. The word “planning” represents a process that can be agonizing, cumbersome, boring and time-consuming, but it does not need to be any of those things. A good plan can be developed quickly and with minimal pain as long as it concentrates on the company’s core competencies in the context of prevailing market forces.

Currently, those forces are demanding higher quality services from software vendors. Based on that demand, the SaaS model was developed. From that model should come the plan, then the strategy, and then the tactics. These are things that any good executive already knows; the only things left to do are define success and draw the map.

The most successful will have not only remembered Einstein’s words but also Lewis Carroll’s Cheshire Cat: “If you do not know where you are going, any road will take you there.”