I recently had a chance to sit down with new SIIA member Cloud Strategies. Cloud Strategies is an advisory firm for SaaS companies. I spoke to their managing director, Dave Key. Read my interview below.

Rhianna: Tell me a little about Cloud Strategies and what makes you unique.

Dave: Cloud Strategies provides strategic advisory and SaaS execution assistance services to SaaS companies.  We offer assessments and guidance to ISVs moving to SaaS, to new SaaS companies, and technology suppliers to the SaaS marketplace.  Cloud Strategies’ expertize include SaaS and mobile product definition, SaaS Software Development, SaaS sales, marketing and partnering strategies, SaaS Services strategies, and financial and capital models and strategic planning.

Services include providing assessments of current plans and assistance focused on the SaaS and mobile technology, partnering, sales and marketing, and financial modeling.   Cloud Strategies is unique particularly in the depth of expertise in areas of technology and financial aspects of implementing a successful SaaS business model.

Rhianna: SaaS has been around quite a while now, so why are companies still hesitant to transition to SaaS?

Dave: The market’s demand for SaaS continues to increase rapidly. Virtually all the new growth in software is in SaaS often in conjunction with, Big Data and mobile applications.  The SaaS market had its roots in areas like CRM (think Salesforce) and productivity applications (think Dropbox).  It had its greatest initial adoption in the SMB markets in a subset of verticals.  Concerns about Cloud security and reliability have diminished with the maturation of SaaS offerings and increasing experience with successful SaaS implementations.  SaaS adoption is particularly accelerating in larger enterprises and to a greater number of vertical markets that were initially reluctant to embrace the transition to the cloud (such as medical and financial markets).

Like prior transitions from mainframe software to client/server, and then to Internet software, the market transition came slowly and then accelerated rapidly.  Those that lag the market in the transition will ultimately lose market share and company valuation, while those that embrace the market change thrive.   We can see this play out with the SaaS leaders such as Salesforce, NetSuite, and Workday all with annual growth rates between 20% and 200% and market valuations from 8x to 27x of revenue.

The good news for ISVs is that more and more companies are embracing the transition to the Cloud.  The bad news is that enterprises and world-wide government regulations are becoming more demanding of their set of standards SaaS companies must adhere to.  SaaS companies need expert guidance to successfully address these new challenges in providing a SaaS solution as well as determining the optimal strategy for transitioning all or part of their current on-premise software solutions to SaaS.

Most software company executives understand the benefits of SaaS, but have difficult transitions in their technology, channels, and financial structure.  Cloud Strategies can help in the strategies and implementation of this transition.

Rhianna: I saw a recent blog post you did on software development. How is software development different for SaaS companies?

Dave: The SaaS technology transition complexity varies greatly from one company to another.  Some companies have 20 year old client/server technology which ultimately will require substantial architectural changes to meet the requirements of today’s enterprise.   Other companies may have more modern web based n-tier applications which can be more readily adapted to support SaaS efficiently.  Most any legacy software can be hosted using VDI (Virtual Desktop Interface)– using a MSP (Managed Service Provider) model with modest changes to support monitoring, provisioning, and billing.  This will allow the ISV to begin to provide hosted, subscription based services to their clients allowing them to test the market and develop their SaaS sales, marketing, and partnering strengths.

A true SaaS implementation should be developed to provide the modern user experience (UX), operational efficiency, and reliability of a world-class SaaS model.  This is very often done in conjunction with the need to address other major business drivers including providing a model platform to support the “Bring Your Own Device”, Big Data, Social and Analytics support, and meet the rapidly changing and fragmented regulatory compliance requirements.  SaaS companies will have to ensure that their products meet rapidly changing Security, Privacy, and Data Governance requirements mandated by the enterprises and governments throughout the area where their products are used.

On-premise software vendors should start with an adaption of their current software for SaaS deployment and quickly transition to a Cloud optimized SaaS suite.  Cloud Strategies can help map out and assist in the implementation of these product strategies.

Rhianna: What would you say are the top three areas that companies need to focus on to create a successful SaaS business?

Dave: SaaS companies need to get three things right: their product, their SaaS sales and marketing strategy, and their financial model – all are significantly different with SaaS than for on-premise software businesses.

The product must delight the user, provide significant competitive advantages, and be compliant with the governmental and IT requirements.  It must provide superior user experience, accessible by the device of the user’s choice, and leverage modern big data and analytics capabilities while providing excellent availability, security, and integration with other software and external information sources.

The sales and marketing strategy must embrace the subscription model where the customer needs to be sold “every day”.  That means a focus on push marketing to educate the market on the project capabilities, a “land and expand” philosophy of starting small and expanding, and a heightened focus on customer success both to reduce attrition and to maximize the ability to upsell and cross-sell to a delighted customer base.  Sales compensation and partnering strategies also need to change to adapt to the cloud sales model.

The financial strategy for a SaaS company building a reoccurring revenue stream is completely different from an on-premise product, particularly with respect to cash flows.  It is important to generate well-designed models that account for the heavier upfront sales and marketing costs with delayed cash flows generated by the subscription model.  This impacts how sales contracts are created to maximize the vendor’s cash flow, and structuring sales costs to consider the deferred revenue.  Once the SaaS “flywheel” of reoccurring revenue gets up to speed, SaaS organizations can have very attractive cash flows and outstanding company valuations.  It is essential, particularly for companies transitioning from a “software sale” model to have realistic financials models to ensure that there is adequate working capital to successful execute the SaaS model.