Newly minted SaaS/software providers often face resistance from conservative prospects who wonder: “What happens if the provider is acquired, or worse, goes out of business?” or “What if the business can’t scale and adequately support our needs?”
Executives today are more skeptical and risk averse than ever, making it more likely that you will, or already have faced this objection. It may have even cost you deals, or at the very least, significantly slowed down the sales cycle.
To be successful, you’ll need to have the answers to these key concerns at the ready, and you may even want to proactively address the objection up front before it can be raised by your buying champion or a key executive on the prospect’s decision committee. The more mission critical the software/service, the more important proactive mitigation becomes.
Walking the prospect through the likely risks, and how you mitigate each scenario, can leave your buyer more secure and confident in their purchase decision.
Likely, the buyer is concerned with one or more of the following scenarios, each of which you can walk them through:
1. Going out of business
A catastrophic failure is the least likely to occur; but unfortunately business failures are on the rise, and smaller companies are more vulnerable when compared to larger entities. I have seen several providers in our own market space suddenly close up shop, leaving customers who did not adequately protect themselves with no other choice but to quickly replace and re-customize the bankrupt solution, often losing a year’s worth of historical data in the process.
Mitigation options. Customers will be looking to maintain the software/service without you, leveraging a few common methods for protection:
- Software in escrow – The most common way to mitigate this issue is to place the software being licensed, or software powering the service, into escrow. Upon a bankruptcy filing or business operations closure, rights to the source code are transferred to the customer in order to continue service delivery.
- Database in escrow – As many applications/services are data/information intensive, it is vital from the customer’s perspective to address customer data and the database as part of the escrow agreement, providing the customer with ownership of their data and the ability to restore/use the database going forward.
- Documentation in escrow – The software and database are less than adequate if they cannot power the service, and to do so usually requires documentation regarding build, installation, setup and operations. The documentation will allow the company to leverage the software and database to restore the service and keep it running.
A opposed to business closure, a more likely scenario for smaller software/SaaS firms is that they are acquired and integrate their operations within a larger firm. When this occurs, the acquirer will more than likely want to leverage the software/service provider’s customer base as much as possible, often providing additional solutions and services, greatly enhancing the customer relationship.
But this is not always the case. For example, the acquirer might radically change the licensing terms or pricing. Worse, and I have experienced this first hand with a company I sold, the acquirer might end certain product lines or certain customer relationships that are outside their marketplace or competitive.
Mitigating acquisition risks can have consequences to potential acquirers, so it is important to consider how these provisions might add risks or costs to the acquiring firm, therefore resulting in lower-than-expected acquisition price or providing enough disincentive to halt the deal.
As contracts will be reviewed and often inherited, it is essential that the customer mitigation terms strike a balance by covering customers enough to assure them of a good deal, while leaving flexibility for acquirers to refine the business model, increase pricing and update licensing terms.
Mitigation options. Customers will want assurances that the licensing/services will continue post acquisition and often seek risk mitigation including:
- Licensing/service continuation – The software/service provider can offer the customer a continuation clause, where if an acquisition were to occur, there is a legal contract to continue the operation for a minimum defined period. This provides enough time for the customer to figure out alternative solutions if they are not happy with the acquiring company’s actions. However, this contractually obliges the acquirer to support the solution for longer than they might like.
- Pricing protection – Often, as part of licensing/service continuation, a customer pricing protection is added, assuring the customer that the pricing will remain below a certain maximum or subject to annual increase limitations.
- First right of refusal – One way to mitigate the risk is to include a” first right of refusal” clause whereby the customer is notified when an offer has been negotiated to purchase the software/service provider. Under the typical terms, the customer has the right to offer a better deal for the company/assets.
- Buyout – Should the acquiring company not want to continue to support the software/service, the customer may be provided with the right to buy out an exclusive license and source code / database / documentation for their own use.
3. Can’t provide adequate support / service levels at sale
Everything works well today, but the customer may be concerned that, as the business grows, the service or support might not be scalable. Lack of answers to support calls, slow bug fix turnaround times, slow enhancement cycles, and service performance issues are but a few of the symptoms of scalability issues.
Mitigation options. Customers seek assurances that the application/service will perform adequately and be supported professionally regardless of how the provider’s user base/business grows. This can include:
- Service level agreements – Service level agreements put in place response time, up-time, and support response timing so that all parties understand the requirements. The agreement sometimes includes financial rebates or other penalties if the agreement terms are not met but often can be formed without economic ramifications.
- Security / disaster protection policies and agreements – Particularly for SaaS providers, helps to assure a customer’s technical teams that the application and data are secure and can be recovered should a disaster occur
- Risk vs. reward – In today’s economy, buyers are not only risk adverse, but they are frugal, with over 90 percent requiring that every purchase quantifiably prove bottom-line benefits prior to purchase (IDC – 2011). With each purchase decision, executive decision makers weigh various investment options on a risk-vs.-reward basis. For example, they might question the purchase of your software/service:
– Is it worth the initial/ongoing investment and potential risk versus the rewards for the business?
– Is it worth the cost / risk / benefits versus alternative providers?
As well as providing the ways that you are going to mitigate the risks of potential business failure, potential acquisition and service level issues, don’t forget to provide the prospect with a business case, quantifying the rewards that will offset the investment/risks. This can include:
- ROI business case – Quantifying the value that can be delivered to the business in implementing the solution, usually quantifying the ROI compared to the status-quo (the do-nothing case)
- Total cost of ownership/ competitive comparison – Providing a comparison of life cycle costs, risks and incremental/value comparison to alternative options/providers.
The bottom line
Buyers are more skeptical, frugal and risk adverse than ever before, presenting a greater challenge to new software/SaaS providers.
For buyers, these risks are real, with many of them having negative experiences with providers going out of business, getting acquired, or delivering less than stellar service as they grow. Prospects want to know you are sympathetic to their fears and provide a good risk-vs.-reward proposition.
Understanding the risk objections, and proactively walking the buyer through the various risk scenarios can help overcome objections, increase win rates and reduce sales cycles.
Tom Pisello is CEO of Alinean.