13 habits of highly effective SaaS companies
by Gordon Graham, Editor, SoftwareCEO
Any way you look at it, SaaS-enabling firm OpSource is having a heck of a run.
Founded in 2002, the Santa Clara, Calif.-based company has helped dozens of other software firms bring SaaS offerings to market.
With 170 staff hosting 220 SaaS companies, OpSource now serves millions of end users and handles billions of transactions every day.
Last fall, the firm was named third fastest-growing in Silicon Valley in its category by Deloitte, with 5,733 percent growth over five years — its third straight appearance on that list.
Last summer, OpSource won a Software Innovation Award from SoftwareCEO/CompTIA for most innovative service/business model. And before that it won a 2006 CODiE award for best application management solution.
The marketplace has noticed.
In June, OpSource took its pick from a number of suitors and raised $15 million in series "D" financing led by Crosslink Capital. The year before, OpSource raised $20 million in a series "C" round led by Intel Capital.
We figured it was time for a chat with the leader of such a prominent firm. So we caught up with OpSource co-founder and CEO Treb Ryan for a far-ranging conversation about what makes his company tick, and what it takes for an ISV to succeed in SaaS.
Highly effective SaaS habit #1: Understand the true value of software.
If you're already a convert to SaaS, skip this part and jump ahead. But if you're still wondering why people go on about SaaS, read on.
"No one ever sat around a board table and said, 'You know what would make us a better company? A new server!'" says Ryan.
"What they said was, 'You know what would make us a better company? A better way to interact with our customers' or 'Better use of our marketing data' or 'A better way to track our financials.'
"The true value to the customer is the thing that makes them a better salesperson, or gives them better business intelligence, or helps them run their medical practice. They want software that makes them more effective in their world.
"The servers, the security, the high availability, the storage: You only get that to run the application. If you didn't have the application, you wouldn't have any reason to buy those other things."
It seems obvious, when you think about it. Yet IDC's "Worldwide Black Book" finds that only 20 percent of IT budgets go for software. The other 80 percent is split evenly between people/services, and hardware.
"Considering that software is the only thing the user wants, the IT spend doesn't match where people are getting their value," says Ryan.
Naturally enough, SaaS addresses that mismatch head-on. Through SaaS, customers can get at the immense value that software provides, without sinking that other 80 percent into IT and hardware.
Highly effective SaaS habit #2: Don't underestimate the future of SaaS. Younger people get it, too.
The SaaS value prop doesn't appeal only to grey-haired CIOs. Kids get it, too.
eBay, FaceBook,Google, and Yahoo! show kids every day that they don't need desktop software; they just need the web.
"My oldest daughter is nine and she had software, we bought her games and stuff," says Ryan. "But my five-year-old son doesn't even know what a disc drive is. All he knows is that you go on the web and do things, like go to ClubPenguin or whatever.
"When you look at that generation just entering the workforce — 18 to 22-year-olds who grew up on the web — their whole world is around what they can do online. They live online, they interact online, so they're going to want to use the power of the web in everything they do."
In other words, the push for SaaS is only going to accelerate, because time is on its side.
Highly effective SaaS habit #3: Change direction, if you must, to catch a new wave in the market.
When OpSource started in 2002, it was a different company.
For Ryan, it was his third startup in a row, after selling SiteSmith at the height of the boom in 2002 for $1.4 billion. Yes, that's billion with a "B."
In those days, telecoms were trying to find higher-value offerings like managed services. So OpSource hitched its wagon to the telecoms, and Ryan says it was "scraping by" doing systems and network management for telecoms and their customers.
"So we decided to build a platform and tools for telecoms to deliver services to their customers, and that's how OpSource got started in 2002. Of course, we were wrong, unfortunately or fortunately."
By mid-2004, Ryan's team agreed that companies were not buying services from telecoms, but from the new SaaS companies that were starting to pop up.
"When someone buys a SaaS app like Salesforce.com, they're getting all the associated pieces: the network, the servers, security, support. All the things that telecoms were trying to sell were actually coming from the SaaS companies."
But many SaaS startups were getting tripped up by the other parts of the puzzle, by having to recreate all the infrastructure they were replacing at their customers’ sites.
"So a lot of SaaS companies were failing, not because they didn't write good software, but because they had to do all these other things now."
So OpSource faced this change in the market, and did something about it. Ryan and his team retooled the platform they'd built for telecoms. They even had an early customer — Agile Software(nowOracle) — looking to roll out a SaaS version of its app, so OpSource helped them do it.
And that was the real beginning of OpSource's run, only three and a half years ago.
Highly effective SaaS habit #4: Find the problems prospects need you to solve. And solve them. Even if it's impossible.
To confirm this hunch that SaaS was coming, OpSource did some market research.
Ryan and his team talked to existing SaaS companies and people trying to get into SaaS, asking them about their toughest challenges.
"I don't think anyone looked at what the issues for all these companies actually were, from top to bottom, from base-level infrastructure, security, to an interesting conversation we had on Day 1: Did we want to offer support for our customers’ customers?
"To be blunt, we didn't. But we ended up doing that, because if we didn't, we'd be leaving a big hole in solving their issues."
They found a general consensus on the issues. And their concept of a SaaS-enabling platform would fill a major gap in the market.
"But many companies, including NetSuite, thought we couldn't do it. They believed the applications were too unique, and every SaaS company was going to have to do everything itself."
Despite the nay-sayers, OpSource created an industry breakthrough: a standard SaaS delivery platform that any ISV could use to deliver and support web-enabled software.
And the company coupled that with a business model that — even now — is still considered radical in some stodgy corners of our industry. More on that next.
Highly effective SaaS habit #5: Share the risk with your customers.
We've said it before, and we'll say it again: You can dramatically reduce software sales friction if you share in your customer's risk — and their success.
"The biggest thing we did for our success was we realized that if SaaS companies were going to sell per user per month, or per transaction, or per customer, they were going to need products they bought that way," says Ryan.
"And we were the first [SaaS-enabling] company that said you pay us per user per month, or per transaction, or per customer; it's really based on your business. Your success is our success.
"That made it very simple to figure out; if I have to pay OpSource $5 a user, and I'm charging $40 a user, then I'm going to make money."
The same principle applies to any SaaS company. Share the risk with your customers; let them pay for results for happy users, not for shelfware.
Ryan said many people in traditional software companies objected to taking on so much risk.
"With traditional software, you went out and sold a $1 million license, and it didn't matter whether the software worked for the company, you still got your $1 million," he says.
"With SaaS the software is taking on the risk that the customer actually uses it and likes it, because if they don't, you're not going to get paid.
"That's the way the world works now. You can't just tell your customer, all the risk is on you.
Highly effective SaaS habit #6: Think like a web company, not a software company.
"Ourbiggest advice for SaaS companies, or people who want to do SaaS, is that the successful companies in this space tend to think a lot more like Google and eBay than SAP and Oracle.
"The companies who do well in this space really think and act more like a web company going after business customers than a software company that just happens to be on-demand," says Ryan.
And he says there are three areas where software and web companies have a very different mindset in how they go about their business:
- Development, especially how to develop,
- Sales and marketing, and
- Corporate mashups (also known as "composite applications").
Any traditional software firm hoping for success in SaaS must change some key practices in each of these areas. More on these below.
Highly effective SaaS habit #7: Use agile programming to improve the customer experience, overnight.
Successful SaaS firms know that it's not only what you develop, says Ryan, it's how.
"In the old days, a web company would think of updating the site. Now we have new terms for that, but the idea is that you're doing constant improvements, as opposed to a long development cycle and then a release.
"It's not necessarily more work. If anything, I think it fits much better with the way programmers and developers like to work, but it does take a completely different development paradigm."
He suggests SaaS R&D managers seriously consider the principles of agile programming, which include regular iterations and frequent feedback from customers.
"One of the great things about SaaS is you can actually see people use your application. So if you add a new feature, and you notice that 80 percent of your users go and use that functionality, but it takes them four clicks to get there, you may want to switch that, so it's immediately available as soon as they've logged into the app.
"You've just dramatically improved the customer experience, and you can do that this week! You don't need to wait until a year from now!"
Highly effective SaaS habit #8: Team web developers for your UI with traditional programmers for scalability and performance.
So where do you find the right developers for a SaaS project?
"Look for people doing web development, as opposed to traditional software programming," says Ryan. "But it's not really an either/or.
"Especially on the UI side, you can look for people who come out of the consumer web business, and team them up with your traditional development staff who can focus more on scalability and performance.
"In the web environment, you have testing, staging, change management control, and rollback capabilities, and all the other things it takes to run a website. Things like rollback aren't in the lexicon of a software company because they don't normally install the software at the customer's site.
"So a lot of this is getting people to change their thinking.
"And many younger people are going into this type of development because it allows them to express their creativity, and get immediate feedback on something they think is cool."
Highly effective SaaS habit #9: Grow your user base from a free trial, to initial signups, to wider adoption. And use sales resources accordingly.
"One of the things that almost all successful SaaS companies do is make their value proposition simple. Get it out onto the web and allow people to come and buy over the web.
"It's amazing how few do it, but those who do, who focus on attracting users and allowing them to buy on the web, and then once they have someone on, going out and growing those users from 10 to 100 to 1,000 users, they are the ones having success in this space.
Ryan admits this took OpSource some time to learn, and if he was doing it over again, he'd invest more in compelling web marketing sooner.
"The fact of the matter is that most successful SaaS companies don't start with the big elephant-hunter mindset.
"They really focus more on attracting users with free trials, and then monetizing them. It's an online sale, it's an inside sale, and then making the move into the enterprise, and growing those customers."
There are three key steps to this SaaS sales process.
SaaS sales step #1: Build traffic and offer easy free trials.
The first step should be web-based marketing and SEO to attract traffic. And use good design that makes it super-easy for people to sign up online.
It's a big mistake, says Ryan, to waste time selling prospects a free trial. Don't use any precious sales resources until later in the process.
"Sending a sales rep to sign up a five-user account is prohibitively expensive; allowing those five users to sign up over the web is obviously a far better plan."
OpSource now provides OpSource Billing, which supports online ordering so you can offer your visitors buttons to click for a free trial, to buy the service, and to add users.
SaaS sales step #2: Grow each customer with inside sales and account management.
In the SaaS world, a free trial gives you a "super-qualified lead set" to follow up.
"When someone signs up for the free trial, track how many people are coming in, how many are using it on a regular basis.
"Call them two or three weeks into the trial and say, 'Hey, I noticed you signed up for a free trial. I noticed you've been using it quite a bit. What can I do to help you understand more about the software? How can I get you moving to a full implementation?'
"Say they have a company with five to 10 users, now you have an embedded customer where you can start doing inside sales or account management. Say, 'Listen, you've got 10 users now. Can I help you expand? Do you know we have these other features?'"
Either grow the feature set each customer uses, or grow the user base at the customer, or both.
SaaS sales step #3: Go on a sales call to pitch an enterprise-wide deal.
And when the time is right, pull out your big sales guns.
"When a customer is up to 50 or 100 users, it's a great opportunity to walk into an enterprise and say, 'Listen, you already have 50 or 100 users. Why not put everybody on the platform?'
"You can show that it's already worked well for their organization for a period of time, and now you're just looking to make it more efficient. And the great thing is that you have internal champions built in."
Ryan says this process of moving from web to telephone to sales calls in an escalating campaign to grow your SaaS user base is the wisest way to use your sales and marketing dollars.
Highly effective SaaS habit #10: Use third-party web services to help you focus on your core value.
OpSource now offers three web services that other SaaS firms can integrate into their offerings: billing, analytics, and support.
"These really allow your development team to focus on your core value proposition, all the pieces that are most valuable and most critical on the production side. All the pieces that are just infrastructure, you don't even have to build anymore," says Ryan.
"In our mind, that's where this world is going. The next generation of apps is really going to involve these types of web services.
"In the future, you are going to focus just on the core value of the app, and not have to worry about the piece parts like billing, metering, document management, and all those things.
"I think apps will be subscribed as services, and most of them will be published as services too."
Highly effective SaaS habit #11: Resurrect your lost channel with composite applications (corporate mashups).
And this leads into the SaaS trend that excites Ryan most: "corporate mashups" (also known as "composite applications").
Like software components, a composite application could be plugged together from pieces of SaaS functionality, saving tons of time and effort. Each piece would provide web services to perform one set of functions, integrate together two other apps, or whatever.