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Ten Lessons from a SaaS Transformation

By July 12, 2011Article

When I reflect on the experience of transforming Pragmatech from a traditional enterprise software vendor to a Software-as-a-Service (SaaS) company, the expressions “extreme makeover” and “creative destruction” spring to mind. But the reality is that even those phrases don’t quite capture the full impact of the undertaking.
After three years of transition, we are beginning to absorb some of the lessons learned as we approach the culmination of the transformation process. Based on our experience, here are some guidelines that might help other software vendors considering adopting the SaaS model to improve their chances of success.
1. Prepare to be a Trailblazer
Lesson One for any company seeking to adopt the On-Demand model is “don’t look for road maps to guide you.” They don’t exist. This is virgin terrain. Be prepared to experiment and follow the process of trial and error. We learned this from a number of companies who have made the journey, including Red Hat. While they provided valuable bits and pieces of specific information – such as how to structure sales organizations, design comp plans and create new channel strategies – transferable master plans and blueprints simply don’t exist. You are on your own.
2. Embrace total change
There isn’t any part of a company that isn’t profoundly impacted by the transition to the SaaS model. We tried to deal with the changes gradually – working through each department one at a time. Looking back, we could have accelerated the changes and sped up the entire process. We now realize that we had to change the thinking of the entire company, and doing that piecemeal isn’t the most effective approach.
We also came to realize that the longer a company has worked in the enterprise model, the more difficult the change process is. I cringe when reading about Microsoft’s ongoing efforts to incorporate (some would say co-opt) the SaaS model. Thirty-two years of enterprise software thinking stands in the way of achieving that objective. We wish Ray Ozzie well. He has a monumental task in front of him.
3. Clear the decks and focus relentlessly
The shift from enterprise-based offerings to SaaS is so all-encompassing that it demands total focus and attention. It took us a while to figure that out and to segment our old business into a separate business unit, freeing our SaaS team to completely focus on its mission. In retrospect, we should have done that at the outset. There are lots of ways to accomplish this depending on your circumstance, but do it fast and do it completely. We waited and now wish we hadn’t.
4. Collapse the cycles
At Pragmatech, we took a very laborious iterative approach to adopting SaaS. We quickly identified our operational needs and began to model our approach. Through the process, we developed three or four distinct financial models as we explored options and refined our objectives. Although I can’t be certain, I suspect that more time at the outset defining needs and objectives might have reduced the number of iterations and accelerated the process. Banishing the notion of sequential development is also useful. Do everything you can in parallel. For example, we waited too long to begin working on our web interface and the design of the user experience. As we began to recognize how important those elements were, we undertook a crash development cycle to catch up. As we proceed, that is a mistake we won’t repeat.
5. Trust your instincts
SaaS is a great example of where the lessons conveyed in Malcolm Gladwell’s bestselling book Blink apply. Trust your initial instinct and act fast. One of the nice things about the model is its constant evolution. If you don’t get it right the first time, keep moving fast and fix it until you do. It is the concept of “creative destruction” at warp speed.
6. Forget everything you know…
…about the software business because SaaS is a completely different animal. With enterprise offerings, everything is geared toward the initial implementation. SaaS is all about end user use and adoption.
That changes how you think about all aspects of managing your products. R&D must view product development, not as a one or two release per year process, but as a continuous iterative process with updates and enhancements made on the fly. A monthly update cycle isn’t unrealistic.
That turns your service and support organization upside down. With our enterprise offering, 35 percent of our people were in service-support, training and consulting. In our new model, that number is 10 percent. SaaS means little or no hand-holding or training.
7. Make them users before they become customers
You must figure out how to get the customer up and running fast with an easy-to-use, intuitive user experience. The secret to securing annual or multi-year subscriptions is immediate and strong user satisfaction right out of the gate.
It also flips your sales and marketing departments. Forget about the typical sales cycle. With effective SaaS marketing, your prospects are using your product long before your sales rep comes in to sell. In a classic bottoms-up approach, you put the product in the hands of the ultimate end-users, turning them into your most effective sales people. That means driving huge volumes of traffic to your Web site where fast and simple trials are easily available.
Finance is where the most powerful and problematic shift will occur. With the SaaS model, expect your revenues to be approximately one-third of what they were from the enterprise model in the first phase of the transition. This is why most public companies operate both models in parallel until the On-Demand offering takes hold and develops a robust revenue stream. Private companies like ours, with supportive investors, put revenues under pressure and try and compress the period of transition, but expect a three-year horizon.
8. Unlock the optics treasure trove
One of the larger frustrations of enterprise software lies in understanding in detail how your customers are using your product. For too many companies, tracking renewal of maintenance contracts is the only regular pulse-taking of customers that happens. Not so with SaaS. Because you maintain the software, you can monitor usage and determine how your customers are using your products. By analyzing that usage, you can design tactics to increase adoption and more effective use of features. The sooner you tap into this treasure trove of real-time information, the faster you’ll effectively drive adoption rates and renewals.
The visibility that the subscription model provides your finance department is also invaluable. The initial ramp-up can be brutal as customers evaluate your offering before making a long-term subscription decision, but once that hurdle is overcome, the predictable revenue stream is a benefit that your board, investors and analysts will love.
9. Trust your customers
As we transitioned from the enterprise to the On-Demand model, we were apprehensive as to how receptive our customers would be to the new model. Looking back, those worries were unfounded. Our transition was timely, and we enjoyed the tidal wave of popularity that SaaS experienced as the concept took hold and early adopters like realized explosive growth and proved its viability.
Our largest customers were our most enthusiastic supporters. Initially the technical people who deploy IT in those companies helped us define the specs and test beta models. Gradually that expanded to include actual end-users.
Moving forward, our users will continue to define and shape our offerings.
10. Recognize life in a new world and enjoy the trip
As I mentioned earlier, moving to SaaS demands a total transformation of your company if it is going to succeed. The final step in that change process is to create a permanent culture of change and evolution. Banish the notion of product cycles from everyone’s mind. Embrace continuous change/improvement as your driving principle. Finally, savor the experience. SaaS is transforming our entire industry. Companies, from the largest to the smallest, must come to terms with this development. You are not only entering a new world, you are helping to create it, and that is an experience unlike any other.
Brian Zanghi is president and CEO of Pragmatech Software.

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