Challenges in SaaS, via Rackspace

A few weeks ago I was invited to be on a panel in front of several dozen SaaS companies attending the Rackspace seminar on "SaaS and the Cloud 2010".  The VCs who were there (Mike Chalfen, Jeppe Zink, Saul Klein, Ivan Farneti) discussed the typical challenges faced by SaaS companies as they grow, and some of the difficult decisions they have to make along the way. 

Many of the questions that came up are ones we hear a lot when talking to SaaS companies, so I thought it worthwhile to summarise them below.  The video of our session is here: 

Self-hosted vs cloud-hosted SaaS?  

The consensus on the panel seemed to be (with a tip of the hat to our host Rackspace) that it makes sense to host your applications in the cloud to begin with.  It's the easiest and cheapest way to get up and running.  But as the business scales up significantly, pay-per-use can become expensive.  So either cloud services will have to evolve to be more cost-competitive at the high-volume end, or self-hosting your apps will continue to make sense beyond a certain scale. 

Valuations of SaaS companies vs traditional software vendors?

SaaS companies are still valued by public markets at roughly 2x traditional licence software vendors.  All agreed that some premium is warranted for more predictable revenues and -- in theory -- greater eventual  profits.  But at the moment the public markets do not seem to be thinking about software vendors in the right categories.  It's not about licence vs SaaS, but rather about market segments that are more or less attractive, eg CRM, systems management, financial/accounting apps, supply chain apps, consumer software, etc.  That is the way we used to analyse the software industry.  

Are enterprises still resistant to deploying SaaS solutions and how to overcome this?

The short answer is: yes, there is always resistance to trying something new.  And undoubtedly resistance is greater in Europe today than it is in the US.  But ultimately it depends on the value of the solution.  If you're offering a straight replacement for a traditional behind-the-firewall application, of equivalent functionality, then you'll struggle to convince a company to make a change.  You have to offer something that inherently exploits the SaaS delivery model, ie additional value that can't be delivered by the legacy software package (see "future of SaaS" below).

How do we deal with the recession and pricing pressure?

Focus on sales productivity.  It's the only metric that matters besides churn control.   See here for some thoughts on how SaaS sales productivity needs to adapt in the current market. The key is to find the right sales model for each price point of your sale: web only, inside sales, direct sales.

What is the future of SaaS; what is the next shift?

It's early days for SaaS companies, and most vendors are still delivering software functions that are similar to the traditional software packages, albeit via the web.  In the coming years, they will have to develop much more valuable features that take advantage of the web as platform, for example: 

• rich user experience on any device
• valuable analytics and benchmarking data aggregated from multiple customers or sectors
• proprietary content that is relevant to the process or the domain of the application, and is seamlessly integrated into the service

More on these topics to come. 

Thanks to John Tridgell of Rackspace for organising the event -- who knew there were so many SaaS companies in Europe!?

Comments

[Donal Daly]

Max,
The best thing about SaaS is that it's really easy to get started; plug into the cloud, use the in-place infrastructure, build the app.

But there's rain in those clouds for the inexperienced.

When bugs appear and patches have to be applied - every user is impacted. When data is stored in one region - others are concerned about Data Protection in Europe, or The Patriot Act in the US. Release management is critical, scalability testing essential, and applications require a high degree of data driven configurability, because customization doesn't work well in the cloud.

Sales productivity is, in my opinion, no less or more relevant for SaaS than On Premise - but is more critical now than ever before. For that to work well companies need to start with a sales process.

Here's link to a free resource that I think will help a lot. If you think it's useful please talk/tweet/blog about it.

http://bit.ly/9f3VSB

Donal Daly
CEO, The TAS Group
@sales20network