Software as a Service

Communications as a Service

JUST - 24 September 2009

© Joren De Wachter

CaaS – what will we talk about

• What?• Why?• How?• WIIFM?• Who owns what?

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What is CaaS?

• Outsourcing model for enterprise communications (VOIP, instant messaging, collaboriation and video-conference applications)

– The client buys the service, not the technology– Pay-as-you-go principle

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CaaS = SaaS ?

• SaaS:– Salesforce.com (CRM)– Google: Gmail, Google docs, …– LinkedIn (peer2peer), NetSuite (accounting,

ecommerce, CRM), Eloqua (marketing), Perimeter (eSecurity), Broadsoft (VoIP), Ariba (Spend management solutions)

– Accounting, web analytics, web content management, …

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Why C/SaaS?

• Gartner: in 2011 35% of all software purchased is under SaaS model

• World annual turnover reported by public companies in 07: $750m

• McKinsey: in 09, 10% of all enterprise software will be SaaS

• Market valuation: up to 5x revenue• Salesforce.com annual revenue currrently grows 80%

y/y

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How does SaaS work?

• Characteristics:– Access through network (the internet) – Application is managed centrally by provider

(both functionality and data)–No on-site local installment–Web-based technology: scalable, multi-tenant,

configurable– Easily customised (in theory)

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Business model SaaS• Typically subscription– user based – pay-per-use:• Predictable • Budget management

• Compare with classical software business model (licence and support/maintenance) : difference in cost of ownership (TCO)

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Example TCO – 5 years

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Proprietary Software SaaS

Upfront license 100 Upfront fee 0

Annual maintenance & support

20 Annual subscription

30 - 50

Implementation cost

Open & external Implementation Budget & partly internal

Training cost Open & external Training cost Budget & external

5 years 300-350, of which 75% first two

years

5 years 250-300, of which 65% last three

years

The Buyer’s perspective• Pro (business):

– Lower implementation cost– Continuous application of patches and updates– Always the latest version– Automatic back-up data– Lower maintenance cost– Outsourcing of risks on infrastructure and implementation– Less down-time– Predictable costPay as you use– Lower cost of ownership (typically around 30%)– Scalability– “Try before you buy” sometimes offered

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The Buyer’s perspective (cont)• Pro (legal & IP):–Standard terms, quickly, no cost–No IP risk of software on-site

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The Buyer’s perspective• Risks (business): – Dependency (“vendor lock-in”)– Reliability of the application– Vendor’s financial and operational continuity– Limited integration, compatibility or standardisation

with buyer’s IT platform– Limited potential of customisation of basic functionality – SaaS is more business focused, less IT/technology

focused (issue for IT procurement, not business owner)

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The Buyer’s perspective• Risks (legal & IP):– Vendor’s standard terms– Data protection/data back-up– Security– Risk management– Intellectual Property – how to protect IP rights used

through the application– What happens if supplier goes under or is acquired?– No or very limited liability/recovery. – No or very limited remedies in case of bad performance– Evidence

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The Provider’s perspective• Pro (business):– Cost of R&D: only one development, but multiple use– Cost of Support: only one version supported– Projectable revenue streams– No“on-site” support at customer’s site– Internal implementation, very limited issues around

integration, back-office, etc…– Focus on smaller upgrades– “Sticky” application for the customer– Obvious cross-sale marketing potential

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The Provider’s perspective• Pro (legal & IP):–One contract, standard risk-

management–No discussion on IP rights–Lower legal exposure–Duration of contract under control

(yearly upfront payment)

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The Provider’s perspective• Risks (business):

– Cash-flow (investment upfront)– Sales approach: farming, not hunting– Hosting? A lot of implications– Security cost– High Service level expectations– Cost of Back-up service– Clients will request SLA’s, KPI’s and penalties– Audit – transparency– No implementation revenu (services)– Upfront high sales and marketing cost, lower cost for incremental

growth– More customer focused, less product focused

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The Provider’s perspective• Risks (legal & IP):–Potential liability much larger than anticipated– IP rights: risk of breach of third party rights–Data protection/ data security – use of the

service by the customer (cf. ISP – “notice and take down”)–Full protection not compatible with business

model

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The Investor’s perspective• Pro:–Projectable revenue–Higher valuation (up to 5x revenue)–Low marginal cost of new customers–Lower general “cost of sale”–Better cost management R&D

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The Investor’s perspective• Risks

– During transition to SaaS model (walk through the desert):• Preferred timing: on major release/new functionality• Use of new pricing model (appels/oranges) – if you keep upfront license, use

premium• Determine contract duration(service level vs. Flexibility)• Operating margin will suffer during transition • Sales culture : focus on MRR (Monthly recurring revenue) – bookings become

irrelevant• Direct sales most important channel (partners/alliances?)• Sales cultuur: adapt bonus system & structure – important!• Transfer as many customers as quickly as possible• New services/cross-sales: analyse, benchmarking, business intelligence, etc…

– Start-up :• Cash-flow• Business model

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Conclusion: WIIFM• Pro:– Cost benefit, shared between customer and provider– Business focused instead of IT focused– Investor valuation

• Risks:– Business-critical applications– High-end innovative niche products– Cost of transition– Legal risk management– Intellectual Property

• example: Salesforce.com

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Conclusion: IP issues• Data protection, data retention, data liability• Ownership vs. Right to use?• Extent of use/license?• Trade secrets?• Copyright?• Patents?• Security?

SaaS less appropriate for IP sensitive matters

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Questions?

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Thank You

[email protected]+32 476 43 20 47

© Joren De Wachter