1. Tradition - Sales teams are accustomed to large commissions associated with the large license fees tacked on to on-premise software. This creates significant incentive to sell, sell, sell! SaaS, however, takes an “amortized approach” to the traditional lump sum revenue. This puts the company in a position where giving a life time value or term value commission is at odds with the companies sales position since the funds from the sale have not been realized and/or collected at the time of commission payout. This can cause negative cash flow, force underfunding of growth initiatives, and a slew of other issues.
2. Disincentivization via Annuities - If an ISV decides to avoid the cash-flow problems associated with the paying out of commission on contract or lifetime value, they generally try to do so via an annuity approach to commission. Although this aligns with the corporate revenue cycle and cash position, it tends to do a poor job at providing incentive. Furthermore, a successful sales person may focus strictly on account management of existing clients since commission is paid out in annuities and keeping existing customers happy (and collecting the ongoing annuity payment) is easier than landing new customers.
3. New Job Role - Unless your organization separates the function of account manager from sales, odds are your sales people will also serve as account managers, which might be a new concept to your sales folks but also justifies continuing to payout commissions even after discrete sale events. Sales teams are responsible for keeping your existing customers happy since, as an ISV, you must now provide them recurring value for their recurring money, and part of that value comes from their relationship with you.

We can definitely find many more issues to deal with, but tackling just this set is challenge enough. An idea I’ve been tossing around is assigning “age” to generated SaaS revenue, where a salesperson receives the highest % commission at the beginning of a contract and that as the revenue stream becomes older, the % commission drops.

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The early commission could be pegged large enough to give significant new customer acquisition incentive, but low enough to not create a negative cash flow situation. At the tail end, commission can drop significantly but remain part of the salesperson’s overall compensation, incentivizing long term account management commitment with “base farming” offset by the bloated commission associated with new customer acquisition.

I think something like this might help out, although I’ve never put it into practice. I’m curious as to how people feel about it, and if anyone has used any other compensation mechanisms that either worked or didn’t, so please chime in!

The decision really boils down to understanding value acquisition from the customers perspective. In order to charge on a recurring basis, you need to be able to justify your pricing with a measure of the magnitude of value acquired by your customer along with value acquisition frequency. For example, if you’ve designed a very valuable piece of software that might be used once or twice a month by your customer in their business processes, odds are they would prefer to “pay per drink” rather than a recurring fee since theoretically you should be able to charge less in an absolute sense for that one time used instead of unlimited for a given month (they would generally be willing to pay a premium as long as total cost is lower than recurring fee models). However, if your offering has frequently recurring value acquisition from your customer’s perspective, odds are they’d prefer to pay a fixed fee at some frequency knowing that the firepower is available to them when needed and that cost is fixed but value acquisition has no ceiling.

Clearly, what I’ve described is a trivial rule of thumb. If you’ve  ever encountered this decision or have thought about the differences in these models, what other components should be considered? Have you ever offered a SaaS service in one model and then switched, or ended up offering both?

Traditional SaaS examples generally follow a theme where end users access their application online, produce data online, and then consume artifacts of that produced data online. Take using Salesforce.com, for example. Individuals save leads, contacts, etc. only to come back and use data they or others in their organization have added. What if a business domain relies heavily on or could experience huge value from exploiting geographically bound data? Software for the food industry could exploit this. Being able to near real time monitor things like refrigerator temperatures at a warehouse or refrigerated truck temperatures can reduce spoilage and lost revenue, reduce liability burdens, and even save energy. SaaS, at least in most people’s current conceptual model, doesn’t account for local data because of SaaS’ relatively centralized nature. Microsoft’s “Software + Services” approach is a touch closer to what I’d like to see. Local software agents essentially make up the on-premise software side of the equation, where the agents might be connected to things like temperature monitoring hardware. That data is coordinated and reported back to the food warehouse management SaaS offering, which can correlate the data to a tenant’s standard data model. This gives a tenant a local and deep view of their operations as related to the business function managed by the SaaS offering.

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This concept is not revolutionary and I’ve seen it done, but I think it should be part of standard SaaS conversation. I rarely hear discussions pop up regarding how to exploit customer premise data. It allows for situations like a food distributor recognizing drastic temperature changes in a refrigerated truck while enroute to a customer, or other situations like temperature fluctuations due to an overstocked freezer at a warehouse, and merge that with the inventory control functions of the SaaS offering. Decisions like “move the following stock from freezer A to B” are possible while maintaining most of the SaaS benefits. We live in a connected world, so what can SaaS do to exploit this connectivity? The creative boost that comes from local data acquisition is immense and shouldn’t be discounted.

What role do you think (if any) blurring the line between SaaS function and locally acquired data will play in the short term? The long term? Are security implications too grand to achieve success in this sort of play?

From a deployment standpoint, an offering that aggregates data and extracts value from that aggregation needs to offer each individual customer the ability to correlate that data to their own unique landscape and set of processes and metrics. Without taking this additional step, and making this correlation easy to associate and measure, the extracted data could prove to be just that - data.

Second, is the data valuable outside of the application’s customer domain? A SaaS 2.0 vendor should definitely look to other constituents. For example, if a help desk application can show help ticket close rates across the industry and offer to you, a customer, for benchmakring against your own performance metrics, it can use the same data and resell services and analysis to the hardware vendors for which the help tickets were generated against. Hardware vendors can use the SaaS vendors data and analysis to identify everything from manufacturing trouble spots to measuring the repair difficulty of a given product. In turn, this could lead to a community driven quality improvement without the community having to do anything beyond their normal use of their SaaS application.

My interest in this is seeing how a PaaS offering like SaaSGrid can help with this, making the abstraction of benchmarking even more interesting!

Do you see the next wave in SaaS as the exploitation of aggregated data or as something else?

The report did a good job at breaking down PaaS archetypes, value propositions, etc. but one thing notable missing was what impact PaaS based offerings have on SaaS consumers (end user). Building on a PaaS offering is by far the best approach for an ISV, but it also has significant impact on end user experience.

End users benefit from centralized application management, shared data and collaborative aspects offered by the platform, and even things like single-sign on across vendors. There are many, many more value propositions coming from PaaS for end users; it would be interesting to break these down and compare end users using PaaS based offerings on the same platform instance and what value they can derive vs usage of non PaaS-based offerings.

Are there any immediately apparant value propositions owned by the end user when they consume PaaS-based SaaS offerings?

Hosting companies frequently get written off as dinosaurs lacking innovation and understanding, and instead are simply here to provide “raw resources” via their 3P offerings. I couldn’t disagree more. First, from the business standpoint, hosting companies have invested millions of dollars in leveraging infrastructure and highly tuned infrastructure staff. This, if exploited, can lead to awesome economies. Furthermore, they have a history of understanding what it means to be a provider of outsourced needs and acting as an extension of their customers business, as well as dealing with “recurring revenue” models. To me, all of this identifies a clear alignment of what SaaS enablement (particularly in a PaaS world) is to those that consume it.

The big question is whether hosting companies will evolve into something beyond 3P and tackle core issues in SaaS enablement. I believe they will. We’re starting to see evidence of this in some of the initiatives that hosts are pushing. Take Rackspace, for example, who recently announced CloudFS, an infinitely scalable cloud storage solution. That’s a degree of innovation that we should all appreciate. Although it’d be interesting to see if it succeeds, what excites me most is that some hosts like Rackspace are starting to “rock the boat” and seem to yearn for an evolution (or even a revolution) toward complex value propositions that matter to SaaS vendors. I’m confident that over the next 1-2 years, we’ll see some pretty cool initiatives come directly from hosts; I can’t imagine that they plan on handing over the biz to whomever wants it and that they’re content with the idea of going gently into the night.

The problem with resisting is how staying in the on-premise world interacts with what the SaaS paradigm does to market sizes. SaaS is an amortization of sorts when compared to on-premise licenses (from the expense perspective), and as a result absolute market size shrinks or growth rate is dampened because of the marked differences in license costs (think of it as market level cannibilization). As SaaS continues to spread across the space and end users continue to accept the model, resistant ISVs have to battle shrinking market size where their on-premise license charges are significantly disproportionate. I’m not sure how those ISVs intend to deal with this and compete. My guess is that resistant ISVs will have their “lunch eaten” by a new player in the space who clobbers them with a SaaS offering.

One thing I’m curious about is the “why” aspect of those resistant ISVs for which SaaS does make business sense. Is it because of the difficulty of transitioning (cannibilization, rehashing their company to be service focused, etc.)? Is it because they think SaaS is a “fad”? Are the hurdles technical in nature? If you had to guess, why do you think ISVs generally resist the transition?

As the founder of a PaaS company, these curiosities are multi-level: why would some people stay away from SaaS and is there something that a PaaS offering can do to alleviate their concerns?

Now that more companies are throwing their hats into the PaaS arena, I’m keeping an eye on what could become a disturbing scenario. Greg Matter from Sun Microsystems wrote a blog post about a year and a half ago where he stated that “…there will be, more or less, five hyperscale, pan-global broadband computing services giants.” For the most part, this is an ok scenario at a specific layer - the delivery platform layer. Disturbingly, what we’re seeing is that some of the major players like Google and Amazon are approaching the market in a monolithic stack fashion. That is, even though their PaaS offerings are in their infancy, they seem to be adamant at controlling all aspects of the PaaS stack. AppEngine creates a set of libraries, which sits on a service delivery layer sitting atop of Google’s compute resources. Force.com creates a library and language layer, which sits atop a delivery platform, which sits atop compute resources. What I’m seeing is a disturbing trend that as an industry we should avoid. Let’s take a page from the history (and future) of the electric industry.

Transmission of electricity and power in the United States has faced two major outages; one in the 1970’s in New York City and another in 2003 that affected a majority of the Northeast. In the U.S., electricity generation and distribution are separated from transmission, thus creating functional decentralization. However, generation and distribution is highly centralized. The problem with this is that it creates large single points of failure with significant, non localized downside in the event of malfunction, is conducive to congestion, and unmanageable complexity. Now, some of these problems predominantly affect efficiencies (such as being too complex) while others affect customers (single point of failure) in near catastrophic ways. Both the blackout of the 70’s and of 2003 were costly and devastating, bringing parts of the U.S. to a veritable halt.

In 2003, I was working in Manhattan during the blackout and ended up having to walk across the Brooklyn Bridge in what almost seemed to be a pre-apocalyptic scene from a movie. This was a direct result of a poorly designed system that outgrew itself and couldn’t scale well because the centralized nature of the grid. As a result of these issues, many have suggested introducing decentralization to America’s power systems: individuals such as Al Gore have made it a key point to create a decentralized “electranet” while action groups such as the Union of Concerned Scientists have pointed to decentralization as necessary and critical to insure reliable power. We created a system that did not anticipate our massive energy needs and that unecessarily coupled at strategic layers. Now we have to do significant work to try and correct errors and prevent the cost of failure that is growing superlinearly with our growth in consumption. A majority of proposed corrections have to do with breaking a part a monolithic electric grid stack into manageable layers. Notably, this partitioning may even help create a scenario that is much more free trade friendly and more efficient: the notion that somehow this monolithic approach created some sort of benefit through tight coupling and specialization is absurd.

PaaS and SaaS (which in the future will all most likely be hosted via one platform or another) create a producer -> distributor -> consumer scenario familiar to those in electric power distribution. From my perspective, the idea that PaaS providers want to establish monolithic stacks is akin to the centralization of power generation and distribution, which comes with all the associated downside and ris. From the top down, most complete PaaS offerings will come with an API/service integration layer, a service delivery platform (SDP) layer, and a compute layer. But are these layers unnecessarily coupled?

When looked at it from the strictest sense, APIs and the underlying platform establish a well known functional contract between the application and the SDP. If a software company looking at a PaaS offering agrees to that functional contract and can extract all functionality they need from the PaaS, they commit to the PaaS at that level. Once built, applications are deployed, managed and operated through the PaaS. Service contracts exist between the SDP layer and the compute resources that the SDP lives on. This is an ongoing relationship that carries  good level of risk not measurable by commitment to the PaaS at the functional contract level. Once up and running, the opaque nature of the compute resources from the applications perspective creates a scenario where the application and its creator have little control and recourse.

A PaaS provider may start off giving you exceptional service, but over the course of a few years, performance degrades drastically. This degradation tends to occur at the compute resource layer or at the linkage between the SDP and compute resources layer. You’ve committed to the API and SDP, making it difficult to decouple. Worse yet, being on a monolithic PaaS stack, you can’t alleviate the degradation in service contract since the provider is one and the same in an exclusive relationship where by virtue of agreeing to the functional contract, you’ve agreed to the service contract both current and future. This is the same ridiculous architecture we’ve inherited in power generation and distribution. If Greg Matter is correct and things shakeout to 5 (more or less) PaaS providers, I sure hope it’s not 5 monolithic stacks. I’d hate to see the results of the first blackout. My goal is to push toward a much more resilient mechanism for PaaS, avoiding the pitfalls that come with gross centralization that is present in purely monolithic stacks. Yes, some might say “But company X would NEVER fail us” - I’m sure people also said “Our electric grid will never go down” and “Enron is too big to go out of business.” History is the world’s teacher, and if we’re wise, we’ll be attentive students.

Do you feel that it will be ok to function atop a few monolithic stacks, or should the PaaS focus be on decentralized PaaS mechanisms? What are your predictions for the future of SaaS and PaaS?

When deciding on how to technologically tackle a SaaS implementation, a software company should understand their marketplace and business strategy needs. B2B SaaS offerings that focus on businesses small and large generally bump into questions like:

1. Does your SaaS offering have an API?
2. Is cross-application interoperability important?
3. Do you need interoperability across broad technologies or are you targeting a single technology for interoperability?

In today’s on-demand world, companies like Salesforce have established an expectations baseline. B2B applications are expected to have APIs, as well as the ability to bridge technology divides from an integrations standpoint, and provide policy control over functional parts of an application. This provides a technological foundation for strategic partnerships that not only serve to tackle markets that may require legacy support, but actually deliver value at the same time (imagine that). Implementing a SaaS offering from a technical viewpoint can be divided, at the highest level, into two very broad categories: non-SOA and SOA.

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Looking purely (from a 30,000 foot vantage point) at the positive attributes that SOA and non-SOA implementations bring to the table, in my opinion pursuing a SOA implementation does wonders for setting up a technological foundation that can be used to promote effective business strategies. Taking the non-SOA approach is great for getting to market quickly, but in the B2B space it can become increasingly cumbersome to support new initiatives and plans. To some degree, the market is starting to agree with this concept: SaaS offerings and consumer Web 2.0 apps expose a variety of interfaces as business expansion points. New SaaS implementations should seriously consider SOA as a foundational architecture if the company expects to encounter some of the business needs mentioned.

Do you agree that technology and architecture choices can significantly impact business strategy, or are they inherently uncoupled?

When determining how to best map your current operations to a “saas-ified” one, the key analytic point is to evaluate whether a particular operational facet will negatively impact churn if left as-is. If, in fact, it will negatively impact churn you must determine how that operational facet can be morphed into something that either a.) provides recurring value to the customer or b.) reduces the probability that a negative experience results in a customer dropping your service. A good example is customer support (help desk). Traditionally, ISVs deployed software on-premise. This allowed for significant “wiggle room” on the part of support since uptime was two components: the quality and stability of the software (provided by the ISV) and the quality and stability of the infrastructure (responsibility of the customer). If an ISV making the move to SaaS doesn’t realize that both components (and therefore all burdens and accountability) are now their responsibility, they’re in a for a world of hurt. Help desk and customer support needs to be re-tuned from strictly a reactive entity to a proactive entity with reactive functions that strive to reduce customer loss. Don’t forget, customers pay recurring fees for recurring value. In the on-premise world, the customer has already paid for licenses and most likely for a year or more of support. This creates an upkeep scenario that is much less demanding than that required by SaaS since the downside is already dampened by a prepay amount.

Some ISVs try to create artificial downside by requiring very large SaaS “setup fees” in hopes of reducing the likelihood that a customer will leave as a result of poor service (if the customer has sunk enough money in the offering already, a psychological deterrent is established). Clearly, this is a sweeping generalization that doesn’t always apply but generally it is my opinion that these fees probably negatively affect that ISV’s adoption curve. Instead, that same ISV can take Lederman’s advice of recognizing that their operations need to be overhauled to support SaaS and rather than relying on artificial barriers to reduce attrition, they can rely on the mechanics of their “saas-ified” business.

Do you believe that ISVs can function in a business as usual fashion, or that they need to shift internal operations in addition to sales methodology?