SaaS Innovation

Because of their business model, on-premise enterprise application software vendors focus their software innovations in two main areas:

1. Adding features that help sales demonstrations of the software.
2. Building software abstraction layers to enable "porting" to multiple platforms (e.g., databases, operating systems, and application servers).

This is because wIth on-premise software, customers choose a software package based on feature set before the sale, and compatibility with the customer's infrastructure. And once they choose the software with the most features, they are locked-in to that software for many years (usually on the same version), no matter how well the software performs in practice.

So legacy enterprise software vendors can safely ignore adding features for current customers, and invest instead to make the product more attractive to the next customer.

By contrast, SaaS software companies increase revenue through increased usage and adoption of their solution. So SaaS vendors focus their energies on increasing customer adoption, satisfaction and expansion, through innovating in areas that increase value and reduce costs for their business customers:

• Speeding up implementation
• Improving the user experience
• Integrating more easily with customer systems
• Increasing functionality in ways that will increase usage
• Providing more insights to the customer into the value and performance of the automated process.

New features are primarily driven from current-customer feedback, via a high-metabolism process that quickly learns and adapts from iterative customer and user feedback. With functional releases every 3 months or so and fast feedback from customers who are automatically upgraded, SaaS products evolve quickly, especially compared to the 12-18 month product cycle for legacy on-premise solutions with multi-year delays before customers upgrade.

Just as important are the "non-functional" innovations that drive cost of ownership and architecture longevity.  The feedback cycle for SaaS solutions, compared to on-premise solutions, is even faster for non-functional aspects of the software.

For example, a friend of mine joined a new company a couple of years ago as a VP in a 5,000-person salesforce that used Siebel CRM.  He received a new laptop from IT, plugged it in, and four days later it was still synchronizing with the Siebel database!

The interesting part is:  Did Siebel know of this performance problem?  Of course not - the company's IT group knew, maybe the consulting group that implemented the software, maybe even the database vendor.  But Siebel probably had no idea, and even if they did know, they were enhancing their software for the next customer.

By comparison, a SaaS vendor knows of performance problems immediately - not only does it affect the user experience and usage (hence revenue to the SaaS vendor), it also impacts the SaaS vendor's internal costs with additional server and infrastructure usage.  For both of these reasons (immediate impact on revenue and cost), the SaaS vendor is very motivated to proactively track down and fix a performance issue.

Other examples of non-functional SaaS innovation include:

• New user-facing technologies like Ajax and Web 2.0 - these can be adopted and deployed throughout the customer base in months rather than years for an on-premise solution.  (Or decades, apparently there are still SAP customers running mainframe versions.)
• Automated deployment and upgrades - SaaS vendors automatically migrate customers to the next version, and as a result have built tools to upgrade efficiently and assuredly.  (Multi-version SaaS vendors like RightNow Technologies must build many-to-many upgrade capabilities, a questionable investment in my view.)
• Configurability of functionality, user interface, and business processes - True SaaS solutions upgrade all functionality and all customers automatically, so tend to create an efficient configuration backbone
• Continual tuning - More on this in upcoming posts.

In the end, any vendor is motivated by revenue, and since SaaS vendors must keep current customers satisfied to protect their recurring revenue and grow usage to increase revenue, they focus investment and innovation focus on continually adding value to existing customers.

Comments

[Howard Oliver]

This is an older but valuable post that we wanted to draw attention to again with a post. You mentioned SaaS being good because:
- Configurability of functionality, user interface, and business processes - True SaaS solutions upgrade all functionality and all customers automatically, so tend to create an efficient configuration backbone
- Continual tuning - More on this in upcoming posts.
I wanted to provide and example. Storage Guardian offers automated backup, off-site storage, and data recovery SaaS. See http://www.storageguardian.com/detailed_feature_list.php for a detailed overview. To your point their DS-Client functions as a "gateway" between your data and the off-site DS-System data storage vault. The DS-Client integrates with your existing network security structure. This is an example of what you are talking about. It provides the continual tuning you commented upon.

Great post…Keep up the coverage of the sector.