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Why SaaS Plays Nicer than Enterprise Software

Joe Ruck

Not long ago, enterprise software was the only kid on the block. Companies were spending hundreds of thousands of dollars to implement robust solutions by companies such as IBM and Oracle. But, with the emergence of SaaS and Open Source, the marketplace changed. Now, the traditional infrastructure players are up against some tough competition, as customers look for easy solutions that are cost effective-especially in an economic recession.

Some may argue that making software is easy. You just collect the market data, generate a high level technical specification, build the product and test it. All marketing needs to do is put together some screenshots and sales can just kick back and wait for the orders to start flooding in.

Unfortunately for software vendors, it isn't quiet that easy. It takes months or even years to get software exactly right, and the problem starts from the very beginning- understanding the market.

Understanding the Market
A major issue is that the market does not understand itself. Go into any large company, and ask them to detail a business process such as order entry, and you will get a variety of differing responses. Management describes process as they think it is. Unfortunately, this vision is rarely accurate and tends to ignore the foreseeable trade-offs that need to be made in the real world. Users will tell a different story. A small number of staff members can be counted on to provide a fair description, but many will innocently leave out critical nuances that are essential to effective outcomes, while others will deliberately conceal activities that are considered out of bounds. Unfortunately, workarounds, however necessary, are frowned upon by management and so are often left out. The net of this is that the definition of the business process that emerges is often inaccurate and/or incomplete and then any effort toward automation is bound to fail.

Even when the descriptions by the users are accurate, if the process itself was poorly designed, automating it will only make it worse. To put it mildly, many companies are out of balance when it comes to the quality of their internal processes. They may have excellence in one department, yet only mediocrity in another. Automation of a poor process is bad business and only makes the situation worse by creating more efficient ways to fail.

A second problem with automating processes is that too often, little weight is given to the value of flexibility. Allowing for a little bit of common sense can go a long way in addressing this challenge, but many applications err on the side of mandatory fields and aggressive input validation amongst others, which creates a great deal of user frustration.

I Know What I Want When I See It
Some companies think ahead and solicit feedback of specific ideas of a group of customers; however, this often leads to disappointment as most people only know what they want when they see it.

That leaves the vendor with only one credible option, which is to build a series of prototypes, or pre-production versions, before settling on the ultimate product spec. Of course, this takes time and is expensive. This often becomes the reason why this approach is not taken with predictable consequences. On the other hand, if the vendor may be able to mobilize resources this way, then a superior product can be the outcome. Critical to all of this is customer engagement. It is at that point where the SaaS model wins because the process of rapid prototyping and rapid implementation is infinitely easier in a SaaS model than an on-premise model.

Oh -- That Was Just the Demo
With enterprise software, what the customer thinks they are buying, what was demonstrated and what is actually developed, are frequently vastly different things. With SaaS, it's What You See Is What You Get. There is no need for a polished or customized demo, merely an actual demonstration of the functionality as it exists today. There is no special customer implementation, just a provisioning of individual users.

In the event a customer is dissatisfied, then the subscription is simply cancelled. There is no huge sunk cost to try and recover or cover up. Conversely, the fact that the SaaS vendor needs to sell his or her product every day to customers means that good service becomes a differentiator and the vendor's success is well aligned with the project success.

The Feedback Channel: Money Talks
One problem with on-premise software is that the implementation and integration is often done by the customer's IT department with minimal involvement from the vendor. Even if the vendor's professional services team is involved, important customization lessons are rarely fed back into the product. Perhaps the area where there is the greatest misalignment between the customer and the vendor is that the software vendor frequently has little incentive to see to a successful customer implementation because shelf-ware has no immediate detrimental effect on an enterprise software vendor. That stands in sharp contrast to a SaaS vendor whose revenue depends on the renewal of annual subscriptions.

With SaaS, there is an instant feedback channel. There are a number of users trying the product at once; simultaneously pointing out the copious ways the software can be improved. Of course, you will hear good and bad ideas, but ultimately the good ones win out. So over time, a SaaS solution begins to represent what users actually want, need and find valuable. In a way, SaaS customers are therefore not just subscribing to a service; they are leveraging the collected, concentrated and distilled best practices of a whole market.

It's this same feedback channel that helps improve software quality -- simply because SaaS vendors can't operate for very long with a serious bug. Not one, but hundreds or thousands of customers will be affected; as a SaaS vendor, you have to fix the issue now. Otherwise you will put your renewal business in jeopardy.

This remains the single best measure of customer satisfaction. Customers can opt out of their contract once a year, and it's an unlikely customer who is going to continue a subscription if they don't use the system or if our service is poor (similar to a cell phone or cable contract). As the CEO of a SaaS company, this gives me perfect visibility into customer satisfaction and is worth more than a thousand customer surveys. People vote with their wallet.

With SaaS, where all your customers use the same implementation, you can have confidence in the direction because there are many voices pointing out ways the application can be improved. Of course, you will hear both good and bad ideas, but since we're in a market of ideas, the good ones win out. So over time, a SaaS solution begins to represents a consolidated set of best practices. The SaaS model has a built-in mechanism to favor the best ideas and providers for improving the product.

Why SaaS Outperforms On-Premise Software
Repeat business is the bedrock of the SaaS business model. The startup costs for a SaaS business are high and it takes time to develop organizational discipline that the model mandates. However once those milestones have been reached, the SaaS model is more predictable and more friendly to investors than the on-premise model. The real beauty is that the model perfectly aligns the goals of the customer and the vendor in delivering a quality, functional and tested solution. Because SaaS operates in only a single environment, the need to support a multiplicity of different configurations doesn't exist. That means that engineering is free to focus their time on incorporating new functionality, using the constant stream of customer feedback that a large customer base will bring.

About the Author
Joe Ruck is president and CEO of BoardVantage. He has led many high-technology companies through successful growth to IPO or acquisition. Prior to joining BoardVantage, Joe was senior vice president of marketing at Interwoven and part of the team that drove the company through one of the most successful IPOs of 1999. Previously, he held sales, marketing, and executive positions at Sun Microsystems, Network Appliance, and Genesys Telecommunications, subsequently acquired by Alcatel. Joe holds a BS in engineering from Oregon State University and an MBA from Santa Clara University.

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