First published in The HotLine Magazine in June of 2007, this article is one of the earliest to look at the concept of Product-as-a-Relationship as a necessary aspect of the SaaS/subscription model. It is now part of The HotLine Magazine Archive.
In the traditional perpetual-license model of selling software, the manufacturer takes the majority of their profit up front from the sale of the licenses. In the Software As A Service subscription model, that large up-front influx of revenue and profit goes away, replaced by a more predictable monthly membership arrangement. SaaS profit is realized incrementally instead of all at once. There are variances — some manufacturers require a 12-month commitment and payment in advance while others do not — but the basic difference between the models is clear. The profits realization strategy for traditional vendors is largely front-loaded and transactional; that of the SaaS vendors is based on an incremental income-stream relationship. To succeed in selling an ongoing relationship, you have to have relationship-thinking embedded at the DNA level throughout the company.
Beyond Software As A Product
In the traditional “Software As A Product” perpetual license model, Support simply isn’t perceived as being strategic. It’s effectively a separate product area, almost an add-on or aftermarket item, loosely connected with the main product list. You may hear companies and executives claiming otherwise, but the truth is easy to see. In the SaaS/Cloud model, however, Support has to be an integral part of the relationship product, a vital channel for the productivity and profitability enhancement being sold to the customer. As such, Support must be seen as strategic by every person in the company. Companies that do not get this point will almost certainly find themselves in the trap of selling too much software and not enough service.
In order to develop a strategic plan for profit, there first must be an accurate picture of your actual costs. Over the years, the software industry has learned how to handle the cost accounting for engineering, marketing and sales reasonably well. However, SaaS companies are painfully realizing that the accounting and compensation practices of the traditional perpetual license model in these areas are not sustainable in the new era. They are struggling to implement the necessary changes, but haven’t even begun to address what will be a much harder challenge. Outside of the outsourcer companies, a reliable financial picture of the support group is virtually unknown.
In terms of access channels, knowledge resources and tools, etc., there is no difference between a SaaS support center and one in a traditional perpetual-license software company. Both are knowledge inventory operations. But if a company wants to truly succeed long-term in the SaaS market, the accounting practices of support have to be brought into alignment with the profit realization strategy of the new model. That’s not going to be easy. It will require new ways of thinking about human and automated resources, and new metrics for measuring the group’s strategic contributions to the success of the company. If your company is ready to start the process of change, we’re here to help.
The HotLine Magazine, June 26, 2007