Rethink Commerce Blog

Savings on Both Sides: Vendor and Client Perspectives on the Financial Advantages of SaaS – Part II

Posted on January 28th, 2014 by

As the title says it as well, this is the second part of a blog post series that provides an overview of how SaaS can reshape a company’s finances in multiple areas, from the high-level business model implications to support and compliance. We’ve already covered aspects such as the benefits of onboarding in SaaS or renewal and upgrades, while in the current post we’ll dive into maintenance and support, compliance, partner relationships as well as revenue recognition. The purpose of it all is for software companies to understand how SaaS will transform their business, from a finance pov and more.

Maintenance and Support

SaaS savings are often envisioned as stemming largely from shared server space. Installing software on a multi-tenant database “in the cloud,” rather than on onsite servers, certainly represents a significant reduction in monthly hosting bills, not to mention server maintenance. A multi-tenant model also enables SaaS providers to maintain and update only one central version of the software, making maintenance less complicated and expensive both internally for the vendor and for external customers. Multi-tenancy may involve some upfront costs to the vendor to create the redundancies and server capacity that will accommodate traffic spikes and enable effective disaster recovery. However, these costs to the vendor will stabilize over time as they are spread out over more and more customers, and having a SaaS software provider manage server capacity is typically much cheaper and more convenient for customers than having to do it themselves.

Using a SaaS provider allows clients to focus on their unique core competency. SaaS vendors that provide responsive services and meet appropriate uptime guarantees can ease a great deal of strain on client IT budgets as well as on employees. And because many SaaS contracts are inclusive of service, upgrades, and support, clients gain multiple benefits at a greatly reduced cost.

In another financially advantageous tactic, SaaS vendors often take a “self-service” approach to support, empowering customers with the tools and APIs they need to accomplish almost anything with the software components provided, and fostering customer interaction to share best practices. This approach allows scaling and saves vendors money in terms of fielding and managing high volumes of support requests, and also eliminates vendor time and availability as roadblocks to customer achievement. However, self-service definitely doesn’t mean abandoning customers. Many SaaS vendors use proactive “customer success managers” to train customers thoroughly in the software and coach them personally through the best practices and tactics that will help achieve specific business needs. SaaS companies often also foster large customer communities or “ecosystems” where clients share their strategies and tactics, helping each other along with little or no additional cost to the vendor. This model eliminates the need for vendors to provide “siloed” support to clients developing their own individual custom solutions.

  • Vendor benefits: Distributing costs throughout clients, empowering clients with self-service
  • Client benefits: Diminished IT obligations, more business tools for success

Standards Compliance

Along with relieving customers of the need to have an internal IT organization or spend lots of money on servers, SaaS providers can also achieve certifications such as SSAE 16 and ISO27001 and maintain uptimes that meet established service level agreements. The ability to use one provider certified under these standards alleviates the need for individual organizations to scramble for certification, enabling the cost-effective provision of standards-based services. The upfront effort necessary to achieve certification may be a hidden cost of SaaS, but it’s also a hidden savings, relieving customers of the burden and cost of achieving certification on their own.

As SaaS systems collect more and more user data, it becomes more and more important for SaaS providers to adhere to data privacy regulations. Approaches for doing so may range from Safe Harbor self-certification to passing involved HIPAA audits. This can involve a great deal of upfront preparation and costly, time-consuming compliance efforts—but it’s ultimately more effective for one SaaS provider to spread out these costs of compliance over many customers than for each customer to achieve costly compliance independently. SaaS providers that meet data integrity and privacy standards provide their customers a service that goes beyond mere software tools to encompass information security.

  • Vendor benefits: Distribution of costs
  • Client benefits: Assurance of standards compliance and data privacy

Relationships with Resellers and Systems Integrators

Even in the SaaS world, channels are becoming more important, not less as they increasingly provide the specific buying context and information that customers need to make a buying decision. Going further, customers not only want to buy in context, but also be supported over time by the channel that sold them – whether providing guidance to get the most from the service, but also finding other add-on solutions and associated services. ISVs therefore need the channel to play a greater role in not only distributing their SaaS solutions, but to own the relationship with the end-customer beyond the first sale.

ISVs need of course to invest in technology to support the channel: portals, APIs, marketing tools, etc. As with vendors’ own client relationships, resellers and SIs will benefit from support tools that focus on empowerment, not obstacles, in making best use of solutions. Resellers and SIs thus become partners in building a customer ecosystem, not rivals competing for customer dollars. The better trained a reseller or SI is in the core SaaS system, the more business can be brought in—beneficial for both the initial vendor and these channel partners.

  • Vendor benefits: More business from these channels
  • Client benefits: More engaged service and better resources from resellers and Sis, better overall solution/ ecosystem

Revenue Recognition

Subscription models can significantly change how companies manage their revenue. While the typical model for on-premise software installation was to charge a large amount of money upfront and recognize the revenue immediately, the shift to subscription-based SaaS models brought with it a need to recognize deferred revenue. Because SaaS works for customers every day, revenue can be recognized on a deferred basis as well. Upfront cash flow, ongoing subscription contracts, and deferred revenue (cash collected and accounts receivable minus recognized revenue) create an attractive financial model for SaaS while clearly recognizing what has already been paid. Offbook backlog (total contract value less collected cash and outstanding accounts receivable) also figures into the total funds coming into SaaS. These accounting models are attractive to SaaS vendors and investors alike, and significant investor interest is often prompted in new SaaS companies or when existing companies switch to SaaS.

Accounting models for SaaS can vary, but many companies find that a standardized 30-day month makes sense for accounting for revenue on a regular basis, rather than dealing with month-to-month fluctuations in number of days. Revenue recognition was previously complex, but now many SaaS solutions exist built specifically to recognize revenue from the SaaS model. And SaaS has positive financial implications for the customer as well, in terms of a more rapid ability to recover investment in the system. Initial investment is typically lower and time to implementation is shorter, saving money from all perspectives.

  • Vendor benefits: Deferred revenue, investor interest
  • Client benefits: Ongoing service, affordable prices

The financial benefits of SaaS extend far beyond shared servers, encompassing more rapid and less costly implementations, closer customer relationships with more resources, seamless upgrades and affordable maintenance, and—perhaps most importantly—an empowered ecosystem of devoted vendor representatives, clients, resellers, and SIs, all interested in building tools, modules, and features that will boost the bottom line, improving vendors’ ability to provide better tools and services for all customers.

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