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From Product to Service: Key Operational Changes for Software and Cloud Companies

By January 23, 2012Article

As a founder of both license software and cloud technology companies, I’ve experienced first-hand two radically different approaches to selling and delivering business software. The prevailing software delivery model today is still to sell business software as a product, but it is flawed in some fundamental ways that can no longer be ignored. But switching to a software-as-a-service model involves major changes in the way a software company operates. I’d like to share a few thoughts about how building and running a cloud company is radically different from running a traditional business software company.
Two game-changing technology shifts
In the late 1980s and early 1990s we saw the emergence of client-server software for business. This was a big shift away from the mini computers and mainframes of the preceding two or three decades, and the whole tech industry realigned itself around this shift. Some very big business software companies grew up during this time, and whole new categories of business software were created too. I was personally involved in creating the Customer Relationship Management (CRM) space as a founder of Scopus Technology, one of the first CRM companies to succeed. Scopus, along with Clarify, Vantive and Siebel, grew quickly, went public and defined the market. Today the CRM market is over $20B. Most executives would agree you can’t run a business without a CRM system – it’s “must have” technology for business.
In 1999, at the height of the Internet “bubble,” I started GT Nexus with a few others from my Scopus days. Having spent years in a traditional business software systems company, and being intimately familiar with the mechanisms and constraints of the “Software-as-a-Product” model, our vision this time around was to build a very different kind of company, with very different economics for both customers and ourselves. We set out to build a Software-as-a-Service (SaaS) company that would transform how companies collaborate with each other across their value chains.
We focused on supply chain logistics – a huge category. Companies spend over $1.3 trillion every year on logistics alone, making it one of the largest service industries on the planet. And supply chain is strategic – the best companies have to operate with visibility and control across their value chains in order to keep costs down, revenue up, and be agile in the face of global disruptions and market changes. Their strategic weapon? Their information system. But for years companies had been buying business software systems built for the single enterprise, not for business networks. And supply chains are networks.
Today, after having feasted on business software for the better part of two decades, most companies still cannot identify the status or location of inventory in their global supply chains with confidence. They still operate with 20-30 percent more inventory than they need. They still spend 20-30 percent more in logistics services than they should. This is because of one over-arching capability gap: their inability to collaborate and share information effectively and economically with their trading partners.
We built a B2B process collaboration platform in the cloud not just because we believed it was the future of how software would be delivered but because what we were trying to accomplish could not be done selling software-as-a-product. ERP architectures could not be extended to enable B2B collaboration beyond the four walls of a company.
Cloud, more than just a better and faster way of delivering software to the market, was an enabler of a break-through information exchange model. Information – such as purchase orders, and inventory positions and detail – could be put in the cloud once, in one place, where hundreds of linked commerce partners could access that information, keep it current, and act on it. This information-sharing model enabled, for the first time ever, massively scalable information sharing across trade networks on a global scale. It got to the heart of the supply chain problem that companies had been facing for many decades, a problem that ERP and “license-and-install” software could not solve: how to collaborate and share information not just within a company – but across a company’s trading network.
So, for us, delivering our system as a service, in the cloud, was not just a matter of harnessing all the benefits and advantages of the cloud delivery model; it was also about harnessing the more strategic capabilities that only this model could offer around business networks and community-based collaboration.
So I’ve lived through two very significant “game-changing” technology shifts in the past two decades, inside of two companies that exemplified the best of what both worlds had to offer.
Operational impacts due to seismic shift from product to service
Yes, the prevailing software delivery model today is still to sell business software as a product, but it is flawed in some fundamental ways that can no longer be ignored. The cost of implementing should not be five times the cost of the software itself. Customers should not bear the lion’s share of risk and burden. Innovation should not take years. Staying current on the latest software release should not be a dedicated costly project every two years. Half the software purchased shouldn’t sit on the shelf.
The difference between the “software -as-a-product,” and “software-as-a-service” models is not slight. It’s huge. It’s a seismic shift in favor of the customer. Cloud can slash the total cost of ownership, lower delivery risk, enable hassle-free upgrades, align payment schedules to value attainment, and to get to value faster. Some argue it can also provide levels of security, performance and scale that few companies could accomplish on their own.
The difference between the two models is a seismic shift in how software companies themselves operate – how they sell, how they’re run, how they support, how they scale. Here are five examples.
1. Intense customer focus and service.

This may strike some as obvious, but it is profound. When a customer pays for a service as value is delivered, the customer has more leverage and control.

The customer doesn’t pay up front for a product that it now must make successful. Cloud providers must provide great service or face cancellations of service. I’ve seen just how powerful this single incentive is. Cloud providers take on the customer’s risk and share the customer’s burden for success. The customer’s success is tied to the cloud provider’s financial success.
As a result, cloud companies tend to focus far more on customer service. There is a high degree of urgency around preventing churn, on staying close to customers, on staying relevant – and on growing with the customer. If you’re a cloud company, you’re in the service business. You must be hyper-focused on this aspect of the business. For the customers of cloud companies, the net result is a far better overall experience and return on investment.
2. More innovation, and faster. One of the great things about delivering software and IT as a service is that we can see directly how our customers are using the system. The use metrics are all right there. We can see how to improve their experience. We don’t have to wait for long feedback loops. As a result, we’re constantly tuning and improving in ways that are economically and practically impossible for traditional software vendors to match. This is no small thing! What could take years for a traditional software company to uncover, cloud companies uncover in minutes.

Also, because we aren’t developing, testing and supporting dozens of different code lines across a range of hardware environments, we can redirect a huge percentage of time and energy toward innovation.

It’s a virtuous cycle, and the net result is more innovation at all levels – and faster. In this environment, the last thing you want to do is break the virtuous cycle by straying from the model.
3. Hybrid approach. I hear a lot of talk about “hybrid” approaches – software companies that try to play on both sides of the line, delivering software as a product to some, delivering software as a service to others. While the pitch to the market is that it gives the customer choice, it actually undermines the power and focus of a truly powerful innovation engine. It’s the worst of both worlds.

If you’re building a cloud company, commit to cloud, commit to the model. Do not dilute its power by holding on to the past.

This is easier said than done, I know; but software executives who adhere to this single principle will gain huge advantages and focus by resisting the urge to go back to their old ways.
4. Healthier, more stable companies. What buyer of business software hasn’t experienced the end-of-quarter pressure to close the deal? Discounting can be extreme. Software vendors jam even more product into the deal as further incentive to sign now.

No wonder more than 50 percent of purchased software sits on the shelf. But in the world of software as a service, the focus is 180 degrees different.

The focus is on the long-term relationship. It’s about the value stream created and then monetized over time. It’s on keeping customers happy. Winning new customers is important, of course, but keeping customers is king.
Because of this, cloud companies need to focus on winning the right business with the right customers and then working very hard to keep those customers over the long haul. That translates to more predictable and stable financial performance over time. In this model, 80-90 percent of revenue is recurring and predictable. Unnatural tactics and desperate behavior doesn’t work. Software executives must focus and incent their teams on the long-term value of winning a customer relationship that pays back over time. You cannot build your company around the value of a one-time software sale. Your sales incentive agreements, your service agreement structures with customers – these all need to be tilted heavily toward long-term, sustainable customer success.
5. Enabling communities that contribute and add value for all. Multi-tenancy is the cornerstone of cloud. If you can’t take an asset and spread its cost across a community of users to give the community better economics overall, you’ve missed the pillar idea behind cloud.  Talk of “private clouds” (private IT solutions hosted “off premise” but not multi-tenant) misses the point. Only when the cost of IT is shared and spread across multiple companies do customers begin to get real benefits of cloud.

B2B platforms are doubly interesting because they represent not just a great example of how cloud can transform the economics of buying and using sophisticated IT systems but because they have the potential to put the community itself to work, adding content and value for all. In the world of supply chain, this community dimension is the most exciting aspect of all.

When a partner modifies its connection to our platform or improves the quality of that connection, it’s done once, in one place, and the change is immediately available across all their customers on the network. Conversely, this means that when any company on the network improves a partner connection, it’s improved for all. In other words, if you are on this platform, the stability and value of your integrated solution improves over time not just because of your hard work but also because of the hard work of others. Like real estate, the value of the asset grows when the value of the neighborhood grows. What ERP software does that?
For software executives building companies for B2B, this aspect of the business needs significant focus and attention. It’s not enough to market to the end customer – you must market to, and support, the partners and service providers of those customers too. Certification programs, platform capabilities for enabling those partners and service providers to showcase their qualifications and certifications, as well as social network paradigms for allowing the community to connect and share – all of these become key elements and require as much investment and focus as the direct customer channel.
We are more than a decade into the IT shift we now call cloud computing. But actually, it’s still early. Last year, according to Gartner, cloud reached the #1 position for topics CIOs considered their highest priority. The software-as-a-service market is expected to reach $12B in 2011 – a 20 percent increase over 2010.
If you are a software executive leaving a traditional business software company or starting your own cloud company, do not assume this is just a different delivery model and it’s otherwise business as usual. It’s not. It’s a completely different game.
Aaron Sasson is CEO of GT Nexus, a provider of a cloud-based platform that the world’s largest companies use to drive efficiency and agility across the global supply chain. He has more than 20 years of experience as a technology leader. Before starting GT Nexus, Mr. Sasson was co-founder of Scopus Technology and served as SVP of field operations. At Scopus, he played a key role in its successful initial public offering, in driving revenues to over $100 million in six years and in leading the company’s successful merger with Siebel Systems. He was also a founder of Plato Software, which later was acquired by Genesys Labs. He has held executive-level and management positions at Opus Systems, Sun Microsystems, GenRad and Motorola.