The "SaaS" On-Boarding Process - Billing, Provisioning and Fostering Users of On-Demand Solutions

A confluence of factors is driving customers to adopt a new generation of web-based, on-demand business applications via the Internet. The emergence of these Software-as-a-Service (SaaS) solutions is being driven by three primary forces:

1. Growing frustration among corporate end-users and executives with the costs and complexities associated with traditional, on-premise applications.
2. Broad-based acceptance of consumer-oriented, on-demand services which are setting a new standard for ease-of-use and cost-effectiveness.
3. Rapid evolution of enabling technologies which makes it more economical to develop and deliver SaaS solutions.

As a consequence of these trends, corporate adoption of Software as a Service is accelerating. This adoption is not only among small- and mid-sized businesses (SMBs), but also large-scale enterprises. It is not only in "front-office" applications, such as customer relationship management (CRM), but also in "back-office" areas, such as accounting and financial systems. Industry-specific, vertical market oriented SaaS solutions are also emerging.

The rapid growth of the SaaS market has attracted a widening array of competitors, both start-ups and established independent software vendors (ISVs), seeking to capitalize on this new opportunity. This competition is placing greater pressure on aspiring SaaS providers to develop and deliver highly differentiated solutions at the lowest possible cost.

One of the key attractions of SaaS solutions is their ease of deployment and use from a customer, or end-user, perspective. These same attributes are critical for providers of software as a service who must acquire new customers and scale their operations in a cost-effective manner. However, this "on-boarding" process is fraught with complications and pitfalls that can lead to service delivery problems and customer dissatisfaction.

As a result, Software as a Service is fundamentally changing the nature of the software industry and the way software companies do business. In many cases, the shift to a SaaS model is forcing ISVs to think like a web company, rather than a software vendor. This means creating new ways to engage customers via the web, as well as setting new standards for rapid deployment of their applications.

If a software vendor can't quickly and cost-effectively on-board customers, it won't succeed in this online business. And if it can't automate the on-boarding process, it can't build a scalable and profitable business.

Yet, Tier 1 Research has found that only 13% of Software as a Service providers had "click-to-buy" functionality on their websites. And, amazingly 70% of web applications and on-demand companies do not have an integrated billing solution.

The State of the SaaS Market

The Software as a Service market is being driven by a combination of ten macro-trends:

1. Globalization
2. Commoditization/Differentiation
3. Mobility & Worker Dispersion
4. Consumerism
5. Web 2.0
6. Social Networking
7. On-Demand
8. Reliability/Security
9. Operational Efficiency
10. Out-tasking

Globalization has changed the competitive landscape within nearly every major industry sector. Globalization has not only opened up new markets, it has also opened the door to a new set of offshore competitors offering low-cost products and services which is commoditizing many markets and creating price competition. This commoditization is making it more difficult for companies to differentiate their goods and services.

Worker dispersion and mobility is also allowing people to work anywhere, creating new challenges for companies seeking to give these employees access to corporate applications and databases remotely and securely. At the same time, many workers and corporate executives are becoming comfortable using on-demand, web-based solutions in their personal lives, and are seeking the same ease of use and low cost services to address their corporate and professional needs.

Business professionals have also become more comfortable using online services, such as Amazon.com and iTunes, in their personal lives. This positive consumer experience has set a new standard for the ease-of-use they expect from their software applications in their professional lives.

Today's Web 2.0 and social networking tools are also being applied to the corporate environment, creating new ways for dispersed workers to interact internally and corporations to engage customers externally.

Growing dependence among companies to communicate internally and externally via the Web has also made them more aware of the escalating challenges of delivering reliable and secure online services. These pressures are intensifying as they attempt to gain greater operating efficiencies in an increasingly competitive market.

Organizations Turn to On-Demand Solutions to Overcome the Shortcomings of Legacy Applications

The growing interest in SaaS solutions is also being driven by escalating frustration, among corporate executives and business end-users, with the fundamental shortcomings of traditional, on-premise software applications.

This frustration is due to the fact that over half of legacy software deployment projects take twice as long or cost twice as much as originally estimated, and nearly a third of software projects are cancelled before they are completed, according to government studies.

The cost overruns continue after the deployment process is completed because maintenance and management costs to keep traditional applications up and running can often be ten times the original license fee, according to AMR Research. AMR Research has also found that the majority of legacy application deployments which are completed are under-utilized. This is because many organizations over-provision their license agreements to simplify the procurement process.

In an increasingly competitive marketplace, companies cannot afford the inefficiencies of legacy applications. Instead, a growing proportion of organizations are looking for new ways to acquire software functionality without the added hardware and staff costs, and ongoing administrative hassles of the past.

As a result of this rising customer interest, Gartner predicts over 25% of all software sales will be via services by year-end 2011, but it is likely that this number will actually turn out to be far greater.

Maybe the clearest indication of the magnitude of this shift toward software services came from Microsoft's CEO, Steve Ballmer, who predicted at a gathering of public sector CIO's in March 2007 that 80% of their organizations would be utilizing SaaS solutions by the end of the decade.

The Challenges of Meeting the Varying Needs of Business Users in an On-Demand World

The good news is that a growing number of organizations are willing to adopt Software-as-a-Service to achieve their business objectives. However, based on their consumer experiences, they expect that they will be able to easily acquire on-demand solutions via a simple online transaction and immediately begin to utilize the online application to meet their business needs.

However, corporate demands can be far more complicated than consumer expectations. Many companies will want to try an application before they buy it. They may want to acquire a single user license before making a commitment to an enterprise license. They may want to vary the number of users, number of application modules or level of usage. They may want to use the on-demand applications in business situations which require varying levels of security and reliability.

The intensifying competitive landscape is creating greater pressure on aspiring SaaS vendors to deliver highly differentiated solutions at the lowest possible costs without sacrificing quality. Many of these aspiring on-demand solution providers have not fully considered the complexities of delivering reliable and cost-effective solutions. They often depend on viral marketing and social networking tactics to grow their installed base of customers, but are not prepared for the variety of ways that potential customers might want to acquire their on-demand solutions. However, a bad experience can reduce the likelihood of repeat customers and customer referrals.

Therefore, SaaS vendors must design the solutions to maximize their ease-of-use and optimize the user experience. The quality of the user experience depends on the reliability and performance of a SaaS provider's service delivery capabilities, as well as the lifecycle of procurement, provisioning, metering, billing and reporting components which are integral to the service delivery process.

Given the impact of escalating price competition within the Software as a a Service market, it is essential for successful SaaS providers to have cost-effective customer acquisition and application management systems in place so they can generate greater sales, without requiring additional staff or cumbersome processes to properly support new customers.

With the success of consumer-oriented on-demand solutions, an expectation has been set that business-oriented hosted application solutions will be equally easy to acquire and use. Many online vendors have promised highly automated procurement, billing and reporting systems. However, the reality can be very different for many SaaS providers.

Tier 1 Research reported at its SaaS Evolution Summit in March 2007, that only 13% of SaaS providers had "click-to-buy" functionality on their websites. Although many of these companies offer online demos of their applications, when a customer decides to subscribe to the service a salesperson must become engaged to administer the transaction.

While this human interaction may seem attractive, it can result in a clumsy and costly manual process. This is especially true as corporate customers demand varying contracting arrangements. Some may want per user pricing, while others may be seeking usage-based pricing. Companies that don't have integrated order entry and service provisioning capabilities to handle new customers or modify the service levels of existing accounts will face serious operational constraints as they try to scale their business.

The marketing hype surrounding on-demand solutions has also set an expectation that companies will be able to acquire online services on a true, pay-as-you-go basis. But many companies also lack reliable service usage metering and measurement capabilities to properly monitor and bill for services. This deficiency can create billing disputes and cause SaaS companies to miss new service sales opportunities.

These issues can become even more complicated when a company attempts to enlist channel partners to sell its services, or when a company attempts to integrate its solutions with third-party SaaS providers. Tracking these transactions can create a multitude of provisioning, metering and billing issues.

Closely associated with these service management issues is the multi-tenant architecture which makes SaaS scalable and profitable. Many aspiring Software as a Service companies are migrating from an on-premise, single-instance, packaged software architecture, and need help designing, developing and hosting a new multi-tenant architecture to ensure it can withstand escalating customer demand.

In many business application areas, sophisticated certifications are required to comply with governmental and/or industry regulations. An increasingly important certification in the online transaction business is the Payment Card Industry Data Security Standard (PCI DSS 1.1).

This worldwide data security standard applies to any organization which stores, transmits or processes credit cardholder data. Because many hosted application customers will acquire these online services via a credit card, it is essential that the SaaS vendor, or its hosting partner, have proper PCI procedures and certifications.

In addition, many companies are still relying on hosting companies that cannot consistently meet their availability and performance promises. These vendors are under the misconception that hosting is a commodity business and can be taken for granted. They fail to recognize that many general purpose hosting companies lack high-availability service delivery capabilities, comprehensive management systems and proactive reporting mechanisms to support the "five nines" service standards necessary in the SaaS market.

As a consequence, the SaaS providers relying on general purpose hosting companies are often notified by their customers when service outages occur. This is no way to win and retain customer trust and confidence, and build a Software-as-a-Service business.

In fact, falling short in any of these areas can have a detrimental impact on the quality of the customer experience, harm customer satisfaction and lead to customer abandonment. Just as in the wireless service business, customer churn can be very costly in the SaaS market. But, with the plethora of online chat rooms, reports of poor customer service travel faster and further in the market, seriously undercutting a vendor's chances for success.

However, most aspiring SaaS companies face escalating competitive pressures which require them to focus their energies on building the best on-demand applications possible, rather than worrying about the service delivery infrastructure and operational processes which will support them. The subscription fee structure associated with web application delivery also makes it difficult for companies to invest in their own service delivery infrastructure and support staff to address these issues.

How Application Delivery Companies Are Addressing the SaaS On-Boarding Challenges

Many vendors will have to turn to a third party hosting company for infrastructure or support. Application hosting or delivery company must go beyond traditional hosting and managed services in order to maximize ROI for ISVs. The most up-to-date application management companies will provide an On-Demand platform including an end-to-end set of services which enable Web application and on-demand companies to more quickly and effectively develop and deliver their online solutions.

Along with this inclusive set of services, hosting companies should offer a payment and collections processing solution to help web application and on-demand companies overcome the challenges of billing for software delivered via the web. Ideal tools in this niche would include--at a minimum--account activation, pricing and rate implementation, accrual of usage information, invoice generation and delivery, and the processing of payments, collections, and service suspensions. ISV's should also seek a hosting solution that would provide real-time account creation, user authentication and authorization, activity tracking, pricing and rating, billing, and customer service that can scale to millions of users. This scalability and flexibility is something that application management companies must provide in order for the delivery of the application to be successful.

Application delivery and hosting companies also need to provide ISVs and developers with comprehensive analytics packages. This is also crucial to the success of a given application since it enables web application and on-demand solutions companies to obtain a wide range of operational indicators to better manage their business and optimize their performance, such as:

• Bandwidth consumed
• Performance thresholds
• Units consumed: Clicks, seats, downloads
• Sign-on rates
• Customer churn
• Growth rates
• Advertising ROI
• Feature utilization
• Daily revenue run rates

Finally, its behooves ISVs to recognize that the subscription fee model associated with SaaS can represent a significant impediment for many ISVs who are attempting to start-up and later scale their operations. This makes success-based pricing models advantageous for ISVs, since they would pay for application management services as they would generate revenue from their SaaS solutions. This eliminates expensive investments in infrastructure and staff and reduces start-up risk.

Summary and Conclusions

As organizations become increasingly fed up with the costs and complexities of legacy applications, they are becoming more receptive to on-demand software alternatives. The pervasive nature of on-demand services in the consumer world has also made business professionals more aware of the potential benefits of the alternatives emerging in online web applications.

However, the ease of use and reliability of these consumer-oriented, web-based services has set a high standard for the quality of service which corporate users expect from their application solutions. They expect it to be just as easy to get on-board with SaaS solutions as it is to acquire popular online services. ISVs seeking to become leading on-demand vendors must implement procurement and provisioning system which makes this possible.

Ironically, the pay-as-you-go subscription services model associated with SaaS makes it difficult for ISVs to invest in service delivery infrastructure, provisioning, billing and reporting systems to fully meet the needs of their customers. Instead, ISVs must focus their limited financial and staff resources on designing web-based applications which are more compelling than their competitors.

As a result, smart ISVs are teaming with service and application delivery providers who can do more than simply host their applications. They are looking for providers who can help them design their applications to ensure they are scalable and secure. They are looking for providers who can monitor and manage the applications 24x7. They are looking for providers who can help them provision and charge for their applications. And, they are looking for providers who can help them build a successful SaaS business in an increasingly challenging market.