The SaaS memo most ERP vendors missed

Profile picture for user brianssommer By Brian Sommer December 17, 2018
Summary:
Recently, a SaaS vendor executive asked whether his firm should adopt some aggressive revenue policies. Brian Sommer gave him earfuls about not doing it, but this executive wasn’t listening. 

memo

ERP vendors and pure-play SaaS vendors are genetically and fundamentally different. While the former like to tell us they’re now a SaaS business, most aren’t. Just as tigers can’t change their stripes, old-line ERP vendors don’t become real SaaS firms just because they say they are.

Ironically, some SaaS vendors aren’t great role models for the SaaS world either, as they choose to behave the way old ERP vendors do. It’s as if some SaaS vendors have both feet firmly stuck in the business practices, sales methods, adversarial customer behaviors, etc. of their old-school ERP predecessors.

In today’s market we have three kinds of firms:

  • Old school ERP firms that haven’t made much progress towards a true SaaS existence
  • SaaS firms that adopted too many bad business practices from old-school ERP vendors
  • Good SaaS companies, the smallest group of all

SaaS companies often adopt a slew of new business practices when they launch their businesses. The best of these SaaS firms recognize that an app that customers subscribe to (not license) requires a different mindset re: customer satisfaction and other focus areas.

The best SaaS firms are empathetic – they know that customers don’t want to pay for SaaS software until it is fully in production. They know that customers want low-friction contracts. They know customers want reasonable renewal terms. They know customers expect the kinds of continuous price reductions that Amazon brings through its scale. While many vendors of all kinds ‘know’ these things, few actually organize their SaaS offerings to deliver these outcomes. Actually, they often deliver the opposite result.

The old software economy metrics revolved around licenses, maintenance fees, audits, etc. Today, there are a ton of new metrics that SaaS vendors use to measure their effectiveness in managing their business. These new SaaS metrics (e.g., churn, monthly recurring revenue, etc.) indicate one critical element of what should occur with all SaaS apps: customers who don’t like the experience they are having will leave while customers who are getting value will stay.

The new SaaS business model should also be one of scale. With a simpler, consistent install base and technical platform, the vendors should be able to offer great economies of scale. Do they? No.

In the old ERP world, once a customer pays a (hefty) upfront perpetual license fee, an ERP vendor has the money whether customer uses the software or not. ERP vendors are used to a ‘no-give-backs’ world. But in the SaaS world, vendors have to prove their continued value every single month. Or so the theory goes.

So, let’s imagine there’s an 8-point SaaS memo that ERP vendors should read prior to announcing their move to SaaS. What would it say?

SaaS is more than converting license revenue to a subscription basis

One core competency of ERP vendors is their ability to change their pricing almost daily. So, changing a bunch of license numbers to reflect a subscription price isn’t a big deal: it’s just a few more numbers on the price list. What is a big deal, though, is changing everything else that’s needed to become a real SaaS firm. SaaS is more than a billing or revenue recognition change. It requires new partners, new partner policing strategies, new methods of implementing solutions, new culture, new sales performance metrics, and, above all else, a new way of interacting with and delighting customers. Most ERP vendors only changed their billing method – and it shows!

SaaS vendors have to re-earn their business every month (ERP vendors think this doesn’t apply to them)

When you subscribe to a magazine and it no longer meets your fancy, you don’t renew it. Great SaaS software vendors get this point. Old ERP vendors think in terms of lock-in and don’t even try to create a permanently increasing value proposition for their customers. The adversarial nature of many ERP vendors towards their own customers is proof positive of this. You can’t be delighting your customers and re-earn their business if you like to litigate and audit them.

Re-earning the business every month is a major SaaS evolution. If you:

  • always delight your customers, every day and at every interaction
  • let customers scale up and down their software needs without financial penalties
  • don’t charge customers for applications they aren’t using
  • don’t charge customers until the applications have been implemented
  • make sure your firm and your implementation partners have a total customer satisfaction focus
  • put your customers’ interests ahead of your own
  • pay your sales team based on products implemented (not just sold)
  • etc.

then you might be on your way to re-earning your customer’s business.

ERP vendors don’t have a great track record for delighting customers. Strongarm sales tactics are often the norm. These tactics could include:

  • forcing customers to license unwanted/unnecessary cloud products just to make an audit issue go away
  • litigating customers over audits or indirect access issues
  • egregiously raising maintenance pricing or subscription renewal pricing (with no regard for the actual value the customer will get)
  • denying customers access to third party maintenance for licensed products
  • letting partner integrators steer customers away from public cloud, multi-tenant cloud solutions to more expensive single-tenant on-premises or hosted products
  • utilizing contracts that would take a small army of lawyers to comprehend (and then change the underlying URLs within them the very next week)

Tell the truth, have you ever met an old-school ERP vendor that wanted to change the above sales tactics?

Perhaps the ultimate customer un-friendly act by an application vendor is where a vendor uses an AI-tool to assess the degree with which a customer is ‘locked-into’ the vendor’s solution. The greater the lock-in, then the higher the renewal pricing will be. How can vendors earn the right to future subscription revenues when they abuse the relationship with a customer?

All of this is happening because of the short-term mindset of ERP (and many SaaS) vendors. Their salespeople will do whatever it takes to get the most money possible out of a customer now as it helps them make President’s Club, earn big commissions and, most importantly, keep their job. The salesperson’s bosses (e.g., Chief Revenue Officer, CEO, etc.) encourage this behavior as big numbers delight shareholders and Wall Street. But the problem with short-termism is that it doesn’t last forever. It might take a while but markets will shift away from these parasitic vendors when the opportunity is right.

SaaS vendors don’t try to get all of a customer’s cash in the initial sale (ERP vendors make wallet fracking at time of sale a strategic priority

An ERP sales pro will try to make a deal as big as possible. Why? A big deal brings big commissions. ERP sales pros get commissions even if the customer never installs the product.

This practice is contrary to what customers actually want and how the subscription economy is supposed to work. SaaS customers want to add/remove applications whenever they like. These pay-for-everything upfront deals virtually ensure the customers will not be satisfied as it could be years, if ever, before all applications are implemented.

The impact on the customer’s wallet is even more severe. The customer pays a lot of their hard-earned capital for a bunch of apps that they might not use or get to use for years. This money grab is not subscription-oriented but a mere clone of licensing. The customer pays a lot of money upfront for a bunch of applications: that’s how the licensing game works, and it’s not what subscription software is.

The corollary bad SaaS behavior is to make customers pony up 3-5 years of subscription monies in advance (or contractually commit to paying a fixed amount per year for 3-5 years even though the apps might not get installed until 2 years have already passed). If this feels like a licensing arrangement, it sort of is. In fact, try modelling a scenario where your business or subscriber count shrinks after you sign this multi-year term. If the costs don’t decrease, your SaaS vendor is behaving just like an old ERP vendor.

SPOTS (i.e., Software Packages On The Shelf) have always been a bad thing. Customers pay for the product and keep paying maintenance on something they don’t even use. SPOTS in a SaaS world should never exist, and yet I see bad SaaS vendors signing up customers with subscriptions that might never get implemented. If SPOTS were a bad idea in the old ERP world, they still are in the SaaS world.

But the absolute worst of all worlds occurs when an old school ERP vendor does an “I want it all” pricing deal for their SaaS apps. In this deal, they want to sell you some SaaS app but to do so, they want:

  • A SaaS subscription for 5 years, paid in advance
  • To also charge you for every ‘document’ or transaction line item that is entering, stored or leaving the SaaS app
  • Renewal pricing set at ‘then-market’ pricing or at terms that vastly exceed cost of living or GDP growth rates
  • To make you acquire additional or upgrade existing on-premises modules that are needed to ‘enable the full capabilities of and release the value within’ the new SaaS app
  • Of course, the new on-premises apps will be run on the vendor’s data center (for a fee) and require the customer to contract to a maintenance agreement for these apps starting 30 days from contract signing.

I wish I was making this stuff up but I’m seeing this kind of insanity in more than one client.

aaS vendors use scale to achieve ever lower costs and pass these on to customers (ERP vendors do the opposite)

Amazon AWS has an enviable track record of price reductions. NO ERP VENDOR I’m aware of has ever reduced prices. Here’s one comment from Amazon on AWS:

As AWS grows, we continue to find ways to make it an even better value. We work with our suppliers to drive down costs while also finding ways to build hardware and software that is increasingly more efficient and cost-effective.

ERP vendors generally never cared to get their product cost structure down or to increase the productivity of their R&D activities. These kinds of cost management items weren’t historically a concern for ERP vendors as many assumed that they could find a way to keep passing these on to customers. It wasn’t a great business idea but it’s what many chose. Here’s another AWS comment:

AWS has publicly reduced its pricing across various services 62 or 65 times depending on who you ask or what metric you utilize.nWhat I see in that data is that AWS …has never increased prices, but has not always made it cheaper

  • decreases costs in specific set of tiers (e.g. mid volume or high volume) most of the time
  • drove down their internal costs in 2008, 2012, and 2014 to provide the highest discounts.

Just as CIOs notice when an ERP vendor is bending them over the barrel with price increases, they also notice when AWS does the opposite. If ERP vendors don’t think they’re on the wrong end of this practice, they’re mistaken. CIOs expect all tech providers to use their scale to drive down costs – not raise them.

In the application software space, more vendors should be like ZOHO. Here’s a vendor that uses open source software and custom code. It can instantiate a new customer for virtually nothing. It puts its pricing and contracts on its website (e.g., how does $10/user/month for all the applications you want sound?) and removes friction in the sales process with a simple, short, straightforward contract. I’ve seen some non-US HR vendors that have a similar set of business practices, too.

ERP vendors didn’t have this low-cost mindset like some newer SaaS firms do. CIOs have seen what a cost-improvement (or total cost targeting or total cost management) approach can do for some vendors but its Amazon’s attention to this that is really making an impression. If Amazon can be big and use its scale to drive down costs, then why can’t big ERP vendors do this too? That’s the question of the day.

Vendors think scale and pricing only work one way - up

If you want to go mad, ask an ERP or SaaS vendor how they can help your firm through a tough patch (e.g., your company has had to contract and needs to re-negotiate deals with all of its suppliers to remain economically viable).

Ideally, your SaaS vendor should let you drop a number of subscribers and, in return, you’d see a corresponding, pro rata reduction in your bills. Unfortunately, too many SaaS vendors have told Wall Street some whopper stories about ‘bookings’ and don’t want to report any downward data about future subscription revenues. So, these vendors will try to tell you that although your firm is half as big as it once was, your reduced subscription payments will still, somehow, turn out to be the same as they are today. Ugh!

Industry analyst Frank Scavo adds:

One of the NIST characteristics of cloud computing is “Measured Service” and this is exactly what it means. I have mentioned that few “cloud” (SaaS) vendors are true cloud in this respect. They do not offer a measured service.

Now, when the opposite situation occurs, and you need to add more subscribers, the SaaS vendor has the nerve to suggest that new subscribers will cost more per subscriber than prior ones. This is because of some interim price increase or other such nonsense. In fact, renewals will cost more per subscriber, too. Prices only seem to go one way with these firms.

Granted, I make an effort to inform vendors that these new subscribers will not trigger any support calls like you had when the product was being implemented. They don’t give any credit for that. At least my newspaper subscription allows me to suspend my subscription for an extended timeframe and then resume it without a penalty. I’ve re-negotiated countless cell phone and cable TV agreements but enterprise software seems impervious to common sense and customer friendly behavior.

Old school vendors NEVER refund license monies. Once you give them your capital, it’s gone forever. These vendors never reduce your maintenance payment amounts no matter how much your firm has shrunk in size. Pseudo-SaaS firms work the same way so don’t pre-pay that subscription!

Yet when it comes to scale, most vendors seem oblivious to what scale could and should deliver for their customers. Customers should reap the benefits of:

  • Low, and getting ever cheaper, public cloud computing power
  • The vendor having only one version of the application to support and only one technical platform. This is in stark contrast to the on-premises world where every customer has a unique combination of hardware, systems software, etc. all with slightly different configurations of the application software.
  • Greater R&D efficiency and scale from the vendor’s development teams – bigger teams, bigger budgets, etc. should be delivering massive amounts of new functionality at ever lower cost/function point ratios

But customers don’t see these economies of scale and their benefits. No, customers get pillaged while vendors ignore the real opportunity of SaaS.

On this point, let’s not forget that scale and economies of scale also apply to software implementations. Vendors should be able to instantiate a new customer in minutes. Customers should have access to pre-built conversion utilities to move their data from one ERP product to another. Customer data should be rapidly mapped to the new software. Best practices and workflows should be part of the solution (not an expensive consulting assignment). And, of course, the software vendor should ensure consistency and quality in all implementations regardless of who does the implementation. Well, a guy can dream, right?

Old ERP vendors charge long-time, maintenance paying customers an all-new subscription to upgrade to their (substantially unchanged) cloud version of their ERP product.

This massively customer unfriendly behavior is all too true and vicious.

So, a customer that’s been dutifully paying application maintenance for 20+ years on an application that they have a perpetual license for, now has to essentially re-buy the SaaS version of the same product. You have got to hand it to vendors that can demand this and not die laughing while asking for it. Remember this customer has probably re-bought this license 3X via maintenance payments alone and now gets to go to their board and ask for this money once more.

Maintenance should always cover new innovations in the product line. While ‘maintenance’ has always been a misnomer, it gave customers access to new product releases and upgrades. Just because a vendor re-wrote the underlying plumbing of an application to exist on a cloud platform doesn’t invalidate the value the maintenance was to provide.

Again, this is not how one re-earns a customer’s business every month. (I can’t wait for a class-action suit to arise from this behavior.)

Great SaaS vendors make software contracts frictionless (ERP vendors make contracts as large as possible with embedded URLs that can change 50X per year)

Somewhere there must be a conference where software vendor attorneys meet to discuss newer ways to complicate software contracting. It’s probably got an event title like “Obfuscation, Fatigue & Misdirection – How to Needlessly Confuse & Irritate Software Buyers”.

Did software get more complicated? If you believe the simplicity stories of SaaS vendors, their platforms make it easier for anyone to create products on their platforms. If true, then why are contract sizes growing faster than the national debt?

The answer is that many vendors need language for the old code and new code they embed in a solution. If a vendor acquired a lot of best-of-breed or line-of-business cloud apps then don’t be surprised if each acquired app has its own flotilla of lawyers and contracts coming with it, too. Some vendors include a number of third-party tools in their platforms or product sets and these add to contract girth.

But contracts are growing mostly because vendors don’t want buyers to know or understand what’s in this deal. They have punitive language which undermines the concept of a subscription. And that, folks, is just wrong.

Great SaaS apps run in the cloud in multi-tenancy (Old ERP vendors still peddle single-tenant on-premises, hosted and private cloud solutions)

Why does matter? If the vendor still has to support on-premises products (and their countless variants), it can’t take advantage of the scale opportunities that a public cloud based, multi-tenant solution can. That means these non-standard solutions cause the vendor’s cost structure to stay high and deliver less value to customers.

On-premises systems also are closed off to the vendor making it harder for the vendor to aggregate data from customers. This data (when anonymized and gathered from a statistically significant number of users) could provide a wealth of valuable benchmark data, best practices and other data.

The Bright Spots

Some SaaS vendors are doing some things well.

  • Ceridian does not charge for its Dayforce HCM software until after the customer goes live.
  • Some vendors do not charge a subscription and a per document fee
  • Some have very simple contracts
  • Some only pay their sales professionals after the customer goes live
  • Some either do the implementations themselves or monitor the daylights out the partners that do
  • Some put customer interests ahead of their own
  • Some want to be the white-hat wearing vendor in their space
  • Only 1-2 that I’ve met have committed to either holding down prices or reducing them over time
  • Several are abandoning their own (pricey) cloud data centers and moving their products to large-scale third-party cloud platforms (e.g., Amazon AWS, Google, Microsoft, etc.).
  • Etc.

Apparently, some vendors got the SaaS memo.

My take

In the move to SaaS, many vendors did not make the full transformation. They kept the old, familiar business processes of the ERP world and implemented them into their SaaS offerings. In doing so, they missed an opportunity to transform and to lead their firm into the next generation of software. This is a missed opportunity that will continue to pay adverse dividends to customers (and eventually to the vendors) for many years.

When the new SaaS business model emerged, vendors had choices to make. They could have figured out how to use scale and how to re-earn a subscribers’ business every month. Or, they could be lazy and do what they’ve always done: take advantage of customers.

If you’re looking at new applications, look at how well your short-listed vendors really understood the move to a subscription economy. Don’t be surprised if you have to tell your old ERP vendor that you’ll be ‘seeking true love elsewhere’. And then, do it….