Software vendor 2.0: the age of SaaS
Software vendors are increasingly adopting the cloud and software-as-a-service (SaaS) models.
Ronan Vander Elst - Partner - Consulting Digital & Technology - Deloitte
Sebastien Genco - Director - Technology Strategy & Transformation - Deloitte
Simon Van Wonterghem - Manager - Technology Strategy & Transformation - Deloitte
Xuefei Dong - Consultant - Technology Strategy & Transformation - Deloitte
Published on 1 July 2021
"Cloud services are expected to double in the next five years"
The computer services industry is experiencing a transformational wave in the delivery of its products, shifting from selling licenses and charging maintenance fees to a subscription-based model, such as software-as-a-service (SaaS). While this trend is not new, it has accelerated in the past few months.
At the core of this transformation is the adoption of the SaaS instead of hosting computer systems on-premises. The total revenue from the public Cloud is expected to keep growing in the coming years, with almost doubling 2020’s revenue by 2024 (see figure 1). And, latest studies suggest that, despite a small deceleration in Cloud growth during the early stages of the COVID-19 pandemic, this trend has now reversed, with the pandemic actually catalyzing Cloud transition1.
Figure 1 – Sizing Cloud Shift, Worldwide, 2018 Through 2024, for public cloud and non-cloud services2
Source: Gartner - 721225_C
"The subscription-based model (or pay as you go) is overtaking traditional licensing models"
The rise of subscription services can be seen across several industries, including technology, media and telecommunications (TMT). Software development is following a similar path, shifting from upfront license purchasing to a subscription-based model. Statistics about the market reach of SaaS3:
- In 2021, 73% of organizations will all or mostly be using SaaS solutions.
- Nearly 85% of small companies have already invested in SaaS options.
- Despite security concerns, 93% of CIOs indicate they are already adopting or are soon planning to adopt SaaS solutions.
- Organizations with 250+ employees use more than 100 SaaS apps.
- Small firms of up to 50 employees use between 25–50 SaaS solutions, on average.
From the customer’s perspective, the subscription-based model not only reduces the upfront costs of a software purchase; it also makes it easier to implement, maintain and operate, as it is hosted by the provider in the SaaS. This model also improves vertical scalability, as licenses can be easily tailored to the client’s needs, making software acquisition and management quicker and more efficient. And, using the SaaS reduces the costs of setting up and maintaining an on-premises infrastructure. Companies can fully switch to the SaaS, or adopt a hybrid-cloud model where their datacenter is complemented by cloud-run services.
This model also benefits software vendors in several ways. Aside from gaining more predictable and linear revenues, they can consolidate and scale the platform’s development and maintenance. Vendors can also leverage product usage metrics to better understand their customers.
Figure 2 – Challenges and opportunities for SaaS shifting
"The rise of the subscription-based model, however, is not without challenges"
To move towards a recurring revenue model, in addition to the technical considerations, software providers must be prepared to make certain changes in their organization. In many aspects, this represents a shift in their operating and business models.
The subscription-based business model is about selling experiences rather than products. Traditional providers shifting their business to a SaaS model must intently review their architecture, operating model and business model. Redesigning their operational DNA is a prerequisite for businesses to break away from a product mindset and embrace a service one.
- Architecture: providers must implement a standardized application that can be used by many customers.
- Operations: providers must undergo a major change in the way they deliver, manage and operate their system, with strong requirements related to service level agreements (SLAs).
- Service provision: software vendors must implement the necessary changes to their infrastructure, staff and skills to operate under this new business model and quickly react to customers’ needs, such as regular status updates and short maintenance periods.
"The essentials for a successful transition"
For vendors to successfully shift to a SaaS model, they must closely analyze their existing business strategy and operating model to determine their readiness. The most typical steps required are:
- Implement the right tools to operate the platform: a configuration management database (CMDB)-like component is essential to build a clear view of the various versions running in parallel. Advanced monitoring tools are also essential to operate the platform efficiently and proactively detect points of failure.
- Ensure an adequate skill set to manage the platform: developing and integrating a system is one thing, operating it on a cloud platform is another. A good Dev(Sec)Ops practice can ensure a balance between the delivery and operation of the platform. Security is under the microscope more than ever before, so vendors must ensure the right level of protection for a platform that will be fully exposed to the outside world.
- Adapt the technology operating model: transitioning to a SaaS organization is not just about skills and technology. The main shift is the need to adapt other dimensions of an IT operating mode: from processes to governance.
- Adapt the client servicing model: customer relationships transform when the classic license model is replaced by a service-based model where operators are obliged to deliver results.
Figure 3 – Dimensions to cover as part of a SaaS Operating Model
1 ForresterNow “Predictions 2021: Cloud Computing” https://www.forrester.com/fn/51A83KxURjmofUAEV7bCKR# 2 Gartner “Market Trends: Cloud Shift — 2020 Through 2024” https://www.gartner.com/document/3989101?ref=solrAll&refval=292354457 3 BMC “SaaS in 2021: Growth Trends & Statistics” https://www.bmc.com/blogs/saas-growth-trends/
Tackling the challenges of this migration requires a deep rethinking of business and operating models, together with implementing adequate tools and acquiring necessary skills. The first step in this transformation is generally a strengths, weaknesses, opportunities and threats (SWOT) analysis, which vendors can use to create a transformation roadmap.
Another important aspect of the shift to SaaS is the vendor’s approach. This important initial investment is also an opportunity to increase the organization’s maturity of key aspects, which were once a nice-to-have but are a must-have today.
We have a full suite of service offerings and capabilities available to accompany you throughout your Cloud journey, whether it’s for a full end to end business transformation, a single part of the transformation journey, or ad hoc components of a cloud strategy.