YOUR COMPLIMENTARY CHAPTER

CHAPTER 1:SaaS and the Power of Communities

SaaS Entrepreneur: The Definitive Guide to Succeeding in Your Cloud Application Business by Merrill R. Chapman

www.progress.com

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Zach Nelson is an accomplished soft ware in-dustry executive and visionary with more than 20 years of leadership experience. He has held a variety of executive positions spanning mar-keting, sales, product development and business strategy with leading companies such as Oracle, Sun Microsystems, and McAfee/Network As-sociates. In 2002 he took the helm of NetSuite and grew the firm exponentially to its current position as one of the industry’s leading SaaS

companies, with 2011 revenues of $236.3M, a 22% increase over 2010. NetSuite is a publicly held company, with 1.3K employees and a market cap currently hovering in the range of $3B. Th e company’s principle stockholder is Larry Ellison of Oracle. Both NetSuite and Salesforce.com were founded on investments by Ellison, which is why we find it very funny when various industry pundits proclaim that Oracle does not ‘get’ SaaS. Really.

As the primary driver of NetSuite’s vision and market direction, Zach led the company’s successful IPO in December 2007. In early 2008 he provided the keynote presentation at our first SaaS University conference in Atlanta, and once again in 2012 at the session in Austin, TX. Zach holds a patent in the field of application integration, and has several other applications pending approval. He holds B.S. and M.A. degrees from Stanford University.

Th is interview was conducted immediately aft er NetSuite’s annual user conference, SuiteWorld 2012, which we attended on a media pass.

Foreword: An interviewwith Zach Nelson, CEO of NetSuite

SaaS Entrepreneur2

Th e five-day show, which drew over 3K attendees, is dedicated to the NetSuite platform and the development and business ecosystem that has grown up around it. Th e 2012 show featured numerous breakout sessions, keynotes by Zach Nelson and other NetSuite executives and partners, and a substantial exhibit floor featuring diff erent companies that have built applications that integrate with NetSuite or are built around the NetSuite PaaS. Th e tone and energy of the event reminded us of the soft ware industry’s early COMDEX conventions in the 1980s, where attendees walking the vast, cavernous aisles of the Las Vegas con-vention center knew they were participating in a business movement that would change every aspect of society. Th ey were right, but not even those foot-weary pilgrims foresaw how much would change over the next 30 years. We suspect much the same dynamic is taking place right now in SaaS and mobile applications.

NetSuite (originally NetLedger, then later Oracle Small Business Suite, then finally NetSuite) was built around the concept of layer-ing functionality onto a back office, ERP-style architecture. Th is is in contrast to Salesforce.com, whose roots stretch back to the 1980s and the sales and contact management soft ware of that era, including products such as Telemagic, Act! and Goldmine. Salesforce.com has grown by expanding beyond its CRM roots into new markets, while NetSuite has moved out of its position in the back office into CRM and other markets. As exemplified by its name, core to the company’s business model is the ‘suite,’ a tight coupling of applications with an underlying single data model.

Zach, we listened to your keynote at SuiteWorld and have read and listened to your other writings on SaaS suites. You are a strong advocate of the future of the suite concept in SaaS and believe it will ultimately triumph. Th e industry has been here before with the desktop soft ware battles of the ‘90s, where the best of breed philosophy championed by companies such as Borland and WordPerfect took on Microsoft Office.“Yes, and we all know who won. And don’t forget that in the client server markets there was a similar battle. I think one of the best ex-amples was Siebel vs. SAP. Siebel certainly made the claim that their CRM was best of breed, but SAP won that skirmish as well.

I think it’s important to remember that the early desktop wars

3Foreword

were driven by pricing and the desire for vendor reduction. Th e first several iterations of Microsoft Office were not very ‘integrated’ at all, but they were a good deal. I don’t think Microsoft Office Model could be regarded as integrated until the release of the 1997 version, and Microsoft has been working on increasing integration between the applications since then.”

Th at is true. Th e desktop suite wars are described in “In Search of Stupidity: Over 20 Years of High-Tech Marketing Disasters.” Th e Microsoft Office suite was released in 1991, and it was cre-ated as a response to and retaliation for Borland and Philippe Kahn’s ‘barbarian’ price promotions and competitive upgrades.“Well, as we see, history made its judgment. But in terms of SaaS, our philosophy is driven by our belief that the suite always wins where a tightly coupled, transactional business model is a core re-quirement. Let us take an order as an example. An order is com-prised of many diff erent details but which details and what type of reporting needs to be built around them diff ers very widely based on your place in an organization. Someone in manufacturing needs to see orders aggregated and characterized to help manage inven-tory and supply chains. A sales person needs to see orders broken down to the account level to track closes and sales pipelines. Upper management wants very high level reporting so that they can un-derstand how their organization is doing across multiple business lines, subsidiaries and countries. In NetSuite, all these views are de-rived from a single data model; this ties back to the product’s ERP and back office beginnings.

“I do want to qualify this a bit. We believe the suite wins with closely coupled data, but not necessarily for situations where the data is loosely coupled. A good example of what I mean is that when you are using Quicken Online Mobile and it pops up a Google map, perhaps to show you where a potential service or business is lo-cated, the data being manipulated is not integral to any transaction. Th ere are also the various social ‘aggregator’ dashboards and view-ers; these are also examples of loosely coupled systems where the tightly coupled suite does not off er a significant advantage.”

In SaaS Entrepreneur, when we discuss the reason for the SaaS

resurgence that began in the 2004/2005 period, we make the point that the primary reason for the rebirth was the inherent ability of the SaaS business model to open up new markets and new market segments.“Yes, NetSuite believes strongly in verticalization. SaaS allows what seem to be small markets to be aggregated into much bigger ones. For example, one of our partners is building a product that services the 8K to 10K marinas in the U.S. and the over 100K in Europe alone. Attempting to build a desktop or client/server application for such a widely distributed industry is not practical with anything but a SaaS application. Another example of this is a partner who is building a vertical for the wine distribution business; again, the aggregation eff ect transforms this into a new market opportunity.

“At NetSuite, we have built a vertical product designed to run a soft ware business. We are a soft ware company, so we’ve a great deal of domain expertise on the subject. We run our soft ware business on this product and so do 750 other soft ware firms. We understand issues such as revenue recognition, always a tricky issue in soft ware, and hundreds of related issues specific to this industry.”

Since we are talking about verticals and markets, which in-dustries currently dominated by client/server products do you think will come under increasing pressure from SaaS competi-tors over the next three to five years? “I think you need to look at this from a couple of diff erent perspec-tives. In terms of new markets such as the ones I have described above, I think the more relevant question is whether or not we’ll ever see desktop or client/server competition appear in these mar-kets. Th e answer is probably no.

“Of course, as everyone knows, SaaS-based CRM has driven cli-ent/server out of the market. And there were always markets that were a natural fit to SaaS, such as HR, project management, talent management and so on. Th ese markets are increasingly dominated by SaaS, and the clock will never turn back.

“Given our roots, ERP markets are of great interest to us, but ERP is very diff erent. Moving your HR system from client/server to SaaS can be thought of as knee surgery: it can be somewhat com-

SaaS Entrepreneur4

plex, somewhat painful, but you will be out of bed pretty soon aft er the operation.

“Moving off your ERP system can be thought of as heart sur-gery: it is very complex, very painful, and if the operation fails, the patient dies. Where we are seeing the greatest opportunities in ERP are in areas of the world and industries where there is a great deal of change pressure. In Chinese and Asian markets, where manufac-turing must automate quickly, 36-month implementation periods for an ERP client/server product is simply not acceptable when you look at three months for an equivalent NetSuite installation. On a global basis, GroupOn chose NetSuite to manage their global oper-ations based on speed of implementation. Th is ties back to our fun-damental product architecture, which is based on creating views of an integrated data model.

“Even in cases where a company may have an existing client/ server product in place and does not wish to disturb it, we are winning new business. For example, Land of Lakes chose NetSuite for its Mexican and Chinese subsidiaries. Th ey chose a SaaS-based ERP system based on the fact that these are fast-growing markets for the company and they wanted to get their IT up and running quickly. A similar situation was in place when P&G picked NetSuite for its Manila-based distribution management in Th e Philippines.

“I will say we are seeing a greater migration rate from legacy ERP systems. Many of these systems are not ‘Cloud aware’ and retrofitting these abilities into a legacy system is not a trivial exercise. In many cases, the hearts are getting old and starting to miss a few beats. But new markets facing rapid change are our current ‘suite’ spot.”

Speaking of the Cloud, how do you define it?“Th e Cloud is just the Internet. Well, let me modify that. Th e Cloud is the intersection of computing and telephony. Th e original cloud concept came from AT&T in the ‘50s and revolved around a vision of ubiquitous communications. Th is idea has become possible with the convergence of computing and communications as exemplified by the smartphone. Do you know anyone who does not have one? I don’t, and in a few years the only phones being sold will be ‘smart.’”

Foreword 5

Mobile applications are alsoan arena of great interest to SaaS firms. Below are some interesting statistics from our just-released 2012 SaaS Report.

Have you developed a ‘smartphone’ mobile ap-plication interface for your SaaS system?

Figure F-1: Percentages of SaaS companies developing mobile ap-plication interfaces for their systems. Source: Th e 2012 Soft letter SaaS Report

In light of these numbers, do you think mobile/tablet applica-tions represent a revenue opportunity for SaaS firms?“For B2B SaaS? No. In my opinion, mobile is an interface to a sys-tem and no one is charging for interfaces. Th e last time the market was paying for an interface was back when people bought Win-dows 3.X. Our PaaS off ers mobile application development tools as a core capability of the system, and I believe that over time, with a few exceptions, every business app will have native mobile support. Mobile will enable you to deliver new functionality and new con-venience to your customers, but not new revenue. Mobile, analytics and social networking will be table stakes. You will have to have them to compete.”

In this book we spend a great deal of time discussing the value of analytics to SaaS firms. What is your take on the issue?“We think analytics is very important and it is baked into our prod-uct line. SaaS systems create vast data sets, ‘big data’ in today’s par-lance. And a well-engineered SaaS system should be able to report on the full range of data, from aggregating entire customer bases to assigning values to a single detail assigned to a single customer.

“In terms of social networking, there are two aspects to this. Th e first is what I call ‘socializing’ the data. When an account places an order, the sales person who closed that account wants to know what

SaaS Entrepreneur6

No37%

Not applicable4%

Yes27%

We aredeveloping

one32%

their customer is doing. finance wants to know about cash flow. Management is worried about revenue and profitability. Within the SaaS system, this data flow should be directed to the right people at the right time with the relevant information they need.

“Th e other aspect of this is interaction of the company with cus-tomers and with each other. Years ago we found out that the best source of leads was references from current customers to prospects, and interaction with our customer support team. We now allow customers to engage with each other within our applications, and we are going to be building on this concept.”

Let us close with a discussion of the future of PaaS. NetSuite, along with Salesforce.com, is one of the major PaaS providers in the industry. Our research indicates high levels of skepticism towards PaaS adoption because of concerns about lock-in and PaaS provider competition. What is your take?“If you are worried about provider competition, at least from Net-Suite, my advice is to build verticals. NetSuite is never going to enter the marina management or wine distribution businesses. We do not have the domain knowledge and expertise in these areas and never will. As you have pointed out, SaaS opens new markets and opportunities.

“As for lock-in, you can’t avoid it. Once data is entered into a system, lock-in begins. Th e only question is at what level. A SaaS company making a decision on what platform it is going to develop on has to accept that if it wants to move from that platform, it will take time and money. You can spend money on building out your own infrastructure, buying licenses, learning new languages or contracting for outsources. You can decide on various intermediate strategies, such as integrating with applications from NetSuite. We think that if you evaluate all your options carefully, from a business standpoint developing on the NetSuite platform can make a great deal of sense. It will be your call.”

Foreword 7

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Th ank you for purchasing SaaS Entrepreneur: Th e Definitive Guide to Succeeding in Your Cloud Application Business. Th is book is the most comprehensive guide you will find to understanding and suc-ceeding in building Soft ware as a Service — SaaS — a powerful model for providing soft ware applications and services online. Its case studies, operations analyses and timely data will help you build and grow a successful new SaaS business. Its focus is on those areas of community and product management, sales, marketing, compensa-tion, customer service, and operations and infrastructure where SaaS B2B companies sharply diverge from their on-premise counterparts.

What is in SaaS Entrepreneur?

SaaS Entrepreneur is divided into the following chapters:

ForewordIntroductionSaaS and the Power of Communities (and the Death of Tradi-

tional Soft ware Product Management)Marketing, Selling and Pricing Your SaaS SystemSales Organization and Compensation in SaaSSaaS Business MetricsOperations and Infrastructure in SaaSDevelopment and SaaSCustomer Service and SaaSProfessional Services in SaaSLegal Issues, SLAs, Taxes and VAT in SaaS

Introduction

SaaS Entrepreneur10

International Markets and SaaSAppendix A: Th e SaaS Entrepreneur ChecklistsAppendix B: Glossary of TermsAppendix C: Th e SaaS Resources DirectoryAppendix D: Further Important Reading for SaaS Companies

Each chapter contains detailed descriptions of the specific op-erational issues and challenges you may face, as well as appropriate and helpful case studies, all of which are based on actual events and challenges faced by SaaS companies. We would like to take a mo-ment to personally thank the company executives and staff person-nel who participated in our research and provided us their valuable industry insights.

The SaaS Entrepreneur Virtual DVD

In the past, we have included a CD or DVD with many of our books to further assist you in carrying out the activities and suggestions contained in their pages.

For SaaS Entrepreneur: Th e Definitive Guide to Succeeding in Your Cloud Application Business, we have decided to make this DVD available ‘virtually’ as a downloadable zip file or as an image file you can choose to burn to DVD.

Th e SaaS Entrepreneur Virtual DVD contains:• Extensive goal and execution checklists that back up the

topics discussed in the book. Th ese checklists are in Excel formatted and are indented and color coded. Th ey can be ex-tended and/or modified to fit your business environment and challenges. Th ere are approximately 600 separate checklisted items and many of them are commented to assist you further.

• Several hours of video presentations from past SaaS Univer-sity conferences with accompanying presentations in PPT or PDF format.

• Several spreadsheets dealing with sales compensation, calcu-lating key SaaS business metrics, setting up sample budgets for your company and more.

• Various document and templates that provide you assistance

11Introduction

in creating business plans, positioning your product, creating customer ‘success’ surveys and more.

All contents are stored in folders that mirror the structure of SaaS Entrepreneur.

Th e complete contents of the SaaS Entrepreneur Virtual DVD can be downloaded from the Soft letter website at the following link:

http://www.soft letter.com/Resources/SaaSEntrepreneurVirtualDVD.aspx

We strongly suggest you register with the Soft letter website if you have not purchased SaaS Entrepreneur from us directly as the virtual DVD is updated from time to time and you will be notified when it is if you are on our E-mail list.

The Appendices

Th e appendices provide additional information relevant to a SaaS entrepreneur’s business strategy. Appendix A provides a listing of suggested resources to assist you

in building and running your SaaS business.Appendix B is a glossary of terms commonly used in SaaS and re-

lated markets.Appendix C provides a sample of the goals and success checklists

found on the SaaS Entrepreneur Virtual DVD.Appendix D provides further reports and books of interest to SaaS

companies.

Who Should Use SaaS Entrepreneur?

SaaS Entrepreneur can be used by SaaS B2B companies of any size. Larger soft ware publishers with existing desktop products as well as firms selling on-premise, client/server applications can use it as a transition guide to building new SaaS products and lines of busi-ness. Smaller firms should use this book as a field manual to success and apply its case studies, data and checklists to speed their time to market and avoid making mistakes and wasting money as they ramp up operations, marketing and sales activities.

About SaaS Entrepreneur’s Charts and Tables

Th is book also contains extensive, up-to-date data on current SaaS business operations, costs and best practices. Unless otherwise noted, the charts, tables and numbers in the book have been ac-cessed from Soft letter’s extensive series of SaaS surveys and reports. Since 2006, Soft letter has led the industry in digging into all aspects of the SaaS business model and the growth of Cloud-based infra-structure technologies that support on-line applications. Reports and surveys of interest to SaaS companies include Th e Soft letter SaaS Report (now in its fift h year of publication), Th e Soft letter Lead Generation, Management and Conversion to Sales Report, Th e Soft letter SaaS Escrow and Fallover Report, and the Soft let-ter SaaS Marketing Report.

What is SaaS?

Despite the existence of ASPs, SaaS firms and ‘cloud applications’ for well over a decade, some confusion remains in the market about the precise definition of SaaS. Along the way, needless complexity has been added to the topic. Many answers refer to virtualization, multi tenancy (MT), architecture, standards, Open Source and more. Some pundits defer to so-called authoritative organizations such as NIST (the National Institute of Standards and Technology), a gov-ernment entity which is currently wasting taxpayer money in an at-tempt to impose standards on a rapidly evolving business model.

In actual fact, SaaS is easily defined, particularly in the view of those buying subscriptions — in other words, customers. Th ree key factors define an application as SaaS:

• Th e subscriber does not license (’buy’) the soft ware.• Th e subscriber does not install the product on their hard-

ware, either on their desktop(s) or on corporate servers. Th ere are a few exceptions to this. In some cases, a ‘thin cli-ent’ or program ‘stub’ may be downloaded to a device to pro-vide for greater security and/or performance.

• Th e use of the product is paid for on a recurring basis; this as-sumes a paid model. As we will read later on, some SaaS com-panies such as AnyMeeting operate using an ad-based model.

SaaS Entrepreneur12

Many major social marketing systems such as LinkedIn and Facebook, both of which operate in a SaaS environment, rely partially on ads to generate revenue as well as a variety of dif-ferent ‘premium’ services. In the case of LinkedIn, payment for its premium membership is recurring.

Th at is it. If your products meet the above three criteria, the sub-scriber will identify it as SaaS. In most markets and in most sales situations, subscribers will not be interested in the underlying tech-nical foundations of your product. Long and passionate expositions on the glories of multi-tenancy will eat into the limited time you have to convince prospects to open up their checkbook and sub-scribe to your system. If your SaaS system stores data securely and retrieves it quickly, you can be using MDRG (magic data retriev-ing gerbils) technology and they will be content. When developing your marketing collaterals for your SaaS sales teams, be prepared to accept that most technical glories will be reduced to quick ‘tick list’ bullet points of limited interest to most of those involved in the subscription decision.

Why SaaS?

Soft ware as a Service is the second-fastest growing segment in the soft ware industry today (mobile applications are the first, but SaaS companies are making much more money). In 2009, various indus-try analysis firms, such as Gartner and IDC, estimated worldwide revenue to range from $12B to $14B by 2012, with 2014 numbers estimated to reach $35B to $40B, or more. Th at is an annual growth rate in excess of 20% to 25%, numbers the soft ware industry enjoyed during the golden eras of the 1980s and 90s. In terms of the over-all soft ware market, the current consensus is that SaaS subscription revenue will represent approximately 35% of all worldwide business purchases by 2014. (Soft letter believes this number is low and will be closer to 45%.) Most growth is currently in the B2B markets, though important consumer markets such as the various online gaming worlds and social systems represent an important (and overlooked) area of revenue growth and profits. Soft letter provides its subscribers periodic analyses of VC investments into the soft ware industry, and

Introduction 13

by 2010 the amount of venture money allocated to companies not built on a recurring revenue model had dropped to under 20% of the total. By 2012, it was difficult to identify any new money flowing into companies developing new on-premise soft ware.

For companies looking for new growth and opportunities, SaaS (along with the mobile markets) is the path to the future. To drive the point home, let us look at the 2012 Revenue Growth and Profitability numbers from the Soft letter 2012 SaaS Report.

Did your company’s SaaS revenues grow from this period in 2009/2010 to this period in 2010/2011? (Please include revenue ONLY from increases of sales of SaaS products and services.)

By what percentage did your revenues grow? Source: Th e 2012 Soft letter SaaS Report

Figure F-2: Revenue growth of SaaS companies. Source: Th e 2012 Soft letter SaaS Report

It is worth noting the num-ber of SaaS companies reporting 100%+ growth.

Is your SaaS company or busi-ness unit profitable?

Figure F-3: Profitability of SaaS com-panies. Source: The 2012 Softletter SaaS Report

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1% to 5% 4%6% to 10% 11%11% to 20% 25%21% to 30% 15%31% to 40% 6%

41% to 50% 6%50%+ 2%75%+ 2%100%+ 29%

No15%

Yes85%

No38%

Yes62%

A Brief History of SaaS

Before continuing, a brief history of SaaS is in order, along with a concise discussion of its predecessor — the application service providers (ASPs). For a more complete history, we urge you to pur-chase a copy of In Search of Stupidity: Over 20 Years of High-Tech Marketing Disasters. Th ink of this book as the Evil Twin of SaaS Entrepreneur, a ‘how not to succeed’ guide for entrepreneurs and executives. Th is will be a valuable exercise because over the last sev-eral years, ‘newbies’ to the SaaS industry have begun to promulgate various myths and misstatements about why the ASP movement of 1999 to 2001 failed. If you accept these myths as fact, you run the risk of not learning from history and repeating the mistakes of the past (which is what In Search of Stupidity is designed to prevent)

In 1999 a new acronym was introduced to the computing world: ASPs (Application Service Providers ). Th is new class of soft ware provider spearheaded the reintroduction of shared computing re-sources and applications remotely administered and then provided to people and companies via subscriptions. To many computing veterans of the time, ASPs were highly reminiscent of time-shared computing, a model of renting computers and applications that de-veloped in the 1970s when people such as the author’s father rented spreadsheet-type products that were accessed on green screen ter-minal systems while the soft ware resided on main-frame and mini-computers. Time sharing for the masses disappeared in the 80s with the rise of personal computing; PCs were much cheaper and provided far more functionality than their time-shared competi-tors. Time sharing retreated back into such enterprise niches as air-plane reservation systems, best represented by the SABRE system, the brainchild of American Airlines.

Th e ASP movement reached its heights conterminously with the dot.com bubble and when that bubble burst, the ASPs (many of them, at any rate) also vanished, taking approximately $10B with them in investments while returning $600 million in revenue (not profits). Venture firms and resources fled shrieking from the whole mess and the ASPs movement seemed to evaporate almost overnight. But, here and there, survivors of the collapse survived (most famously, Salesforce.com) and scraped by for a few years.

Introduction 15

By 2004/2005 interest in ASPs (now renamed SaaS) was growing steadily, as was the market for online applications. By 2007/2008 SaaS was back with a vengeance as industry growth started to hit 20%+ per annum levels.

As the SaaS industry regained its footing and gathered strength, the SaaS Myth Makers also appeared and began to expound on the sad history of the ASPs. Statements explaining the demise of the ASPs such as those below began to circulate widely and naïfs new to the industry took them seriously. (Both examples are quotes from a LinkedIn group devoted to SaaS business issues and were answers to the question “What is the diff erence between ASP and SaaS companies?”)

“Th e diff erence is that while the ASP model has been around a long time it was highly conceptual and specifically did NOT imply or require agreement concerning STANDARDIZED architecture, whereas SaaS (properly defined, architected, and implemented) does require adherence to open standards. For example, ASP vendors were free to off er completely PROPRIETARY solution architecture and their clients were required to implement that proprietary architecture in order to interoperate.”“Th e main diff erence is that an ASP provider may or may not be providing a SaaS architecture solution. Th ey could pos-sibly be providing a web based solution that is operating via a remote on-premises server that is unique to each customer including individual customizations.”

In the case of the second example (the fi rst is simply not true), by ‘SaaS architecture solution’ the writer was referring to multi-ten-ancy, a popular database technology that enables a SaaS provider to administer all its customers’ information in a central data struc-ture, as opposed to creating and managing multiple individual databases. (Th ink of a condo vs. a row of tract houses.) Over the last two years, a lot of ink has been spilled by those proclaiming that multi-tenancy is the SaaS technology ‘Mark of Grace’ and that without it, no application can possibly be called Soft ware as a Ser-vice. Furthermore, many SaaS myth makers are convinced that

SaaS Entrepreneur16

this lack of technical purity, which they consider the original sin, is what doomed the ASPs.

All of the above is incorrect and allows us to immediately spot what we call a SaaS Newbie, someone you can safely estimate has experience in SaaS that probably goes back no earlier than 2007 and 2008. Why this time frame? Because it coincides with the SaaS indus-try moving from its comeback stage to its current explosive growth. Beginning in 2007, SaaS companies began to get serious about in-corporating technologies such as MT into their product’s architec-tures, as the amount of business they were generating started to make scalability an important issue. By 2008, scalability and MT were becoming critical issues for many (though not all) SaaS firms. Th e SaaS Newbie is simply telling you what he or she has recently learned. Th ey are also confirming that they are believers in using technology to drive their marketing, and are seizing on the latest, hottest, shiniest bit of coding-bling to sell their companies and themselves.

Oh, we apologize. Th e correct answer to the question is that SaaS companies make money and the ASPs did not.

No, we are not being funny (though the reality is grimly humor-ous). As the ASP market collapsed in 2001, the SaaS Newbie will not be aware of the following facts:

• Th ere were ASP firms implementing multi-tenancy that failed.

• Th ere were ASP firms not implementing multi-tenancy that survived.

• While high-speed bandwidth connections were far more problematic over a decade ago, they were available, most com-panies did have access to high speed bandwidth, and the ASP movement did not collapse because of dial-up connections.

Multi-tenancy was not a new idea in the late 90s; variants of the technology had been used in the soft ware industry since the late 80s. Anyone who played with Microrim’s R:Base system in the 80s un-derstood the underlying concept of creating a ‘Big Cube’ of data and ‘virtually’ stacking more cubes on top of one another. Online gam-ing companies particularly understood the value of multi-tenancy, as they used the technology to support the myriad of customers who

Introduction 17

signed up to slay orcs, fight dragons and virtually marry cute mythi-cal creatures such as elves and fairies. (Not that there’s anything wrong with that!)

Backing up these facts is another one. In 2006, in the midst of the ASP (now renamed SaaS) recovery, Soft letter released the first edition of its comprehensive SaaS Report. Th at first edition, as have all subsequent editions, asked SaaS providers if they implemented multi-tenancy in their systems. In 2006, about 60% of providers did not, yet SaaS was roaring back to life and continued to do so despite the fact that by 2007, 50% of SaaS firms had not yet implemented the technology into their system architecture.

Now, the SaaS Newbie is also not going to know when SaaS re-placed ASP as the official designation for on-demand soft ware, and why. If you ask, you will hear more babble about ‘scalability,’ ‘multi-tenancy,’ ‘hosting,’ and so on. Th e answer to this can be found in the pages of In Search of Stupidity: Over 20 Years of High Tech Marketing Disasters. Th e first edition was written in 2000-2001 as the ASP movement was melting down; the second as the technol-ogy was picking itself up off the canvas. Here is an excerpt from the second edition that describes the gruesome demise of the poor old ASP acronym. Th is was written in 2005 as SaaS was winning the acronym war of the time. It is from Chapter 11, Purple Haze All Th rough My Brain: Th e Internet and ASP Busts:

“In a desperate attempt to distance itself from the unrelenting stream of failures, the industry frog marched the ASP label up against a wall and summarily executed the unfortunate acro-nym. Taking its place were a plethora of new alphabetical appel-lations — MRPs, HSPs, HRPs, XSPs, etc. — intended to take everyone’s mind off the current depressing state of aff airs. Most were immediately hunted down and dispatched. Th e ASP des-ignation crawled back from the grave and resumed its official role as the standard designation for hosted applications, but it was now in official disgrace and no one talked to it. It finally expired from all the sheer contempt directed at in 2005, to be replaced by the fairly unpronounceable “SaaS (Soft ware as a Service).” (Th e boldfaced text was added by the author in 2005; the rest of the paragraph is from the 2001 first edition.)

SaaS Entrepreneur18

Of course, the logical next question is if it was not the lack of multi-tenancy, infrastructure, scalability, ‘open standards,’ and all the rest of it that killed the ASP movement, what did?

Th e simple answer is: the lack of customers. As the author was writing the first edition of Stupidity in 2000-2001, he interviewed perhaps three dozen people from diff erent ASP firms and asked why their companies were dead or dying. Invariably, the answer was lack of revenue from far too few people signing up for the ASP off ering. Th e SaaS Newbie will frequently start to stammer on about ‘scalability,’ but for those of us who were there and paying attention, there was a conspicuous lack of business and trade press reporting on ASP firms dying because they were being crushed under the weight of all those customers rushing to subscribe. No one interviewed in that time period reported that their firm had ex-pired because of too many customers or that their operations were groaning under the stress of too much business; it was a problem they would have been glad to have. (By the way, if you are going to claim that your company died for just that reason, your word is not going to be good enough to convince us. We would like to see a copy of the press release issued the day your company died stating you were going down for the count from too many customers, and a press clipping or two reinforcing that assertion. And yes, if you can not provide them, we do not believe you.)

Why was there a lack of customers for ASP products in the 1999-2001 time frame? For the complete answer, you need to pick up a copy of the second edition of Stupidity. Read Chapter 11, then turn to Chapter 14, Stupid Analyses, on page 324. Read the section on the Disruption Model carefully. Th is will help bring the era into focus.

But we do not wish to tease you too much! Th e short answers are:

• Too many SaaS companies launched into horizontal markets occupied by big bruiser companies ready, willing, and able to defend their turf. SaaS succeeded by moving into new mar-kets and opportunities inherent in the on-demand model. Yes, Salesforce.com is an exception, but it’s one that proves the rule. (SaaS veterans will remember how beloved Siebel was by companies in the 1999-2001 time frame.) We will

Introduction 19

soon be discussing in this chapter more about why SaaS is sweeping the soft ware industry.

• Th e ASP model suff ered from collateral damage caused by the dot.com implosion. Even deserving companies, in some cases, were taken down.

• Too many ASP firms received funding they should not have. In the period leading up to the 2001 meltdown, the VC com-munity lost its collective mind and threw money into firms with stupid business models that had no prayer of succeed-ing. Th ere were plenty of SaaS (ASP) companies in that mix.

Th ere were other reasons for the bust but you’ll need to read In Search of Stupidity to learn more.

Why is SaaS Succeeding?

As SaaS began to grow and flourish, the inevitable press stories about whether SaaS was right for the ‘enterprise,’ i.e. large companies, ap-peared in the pages of all the major IT magazines and periodicals. Based on these articles and prognostications, a neutral observer would have concluded that the fate of SaaS lay in the hands of the Fortune 500 (or at least the 1000) CIO community. In all their wis-dom, knowledge, and with their grasp on the keys to corporate com-puting resources and establishments, would they bless SaaS? Or curse it and consign the market (again) to the Stygian Darkness occupied by OS/2, hierarchical databases, token ring networks and related products and technologies? Th e covers of InfoWorld, Com puter-world, CRN and others were covered with staged photos of IT execs pondering deep strategic thoughts and smiling reassuringly into the camera lenses while they pondered their momentous decision.

But the question was off the point. (So were the photos.) Th e truth is that the SaaS industry did not care what corporate America CIOs thought; the industry was growing quite nicely without their official sanction and approval. And it continues to grow today, though CIOs throughout the world are starting to get with the (SaaS) programs.

If you lived through the PC revolution of the 80s, you’ve seen this before. When the combination of the Apple II and VisiCalc first began showing up in corporate CFO and accounting operations in

SaaS Entrepreneur20

the late 70s, it was regarded by the IT establishment (then called MIS) with the same favor as the roach crawling across the cake at the wed-ding. Stories of Apples being purchased via expense accounts and snuck into executive suites while being concealed under rain coats are legendary (and only a little bit apocryphal). And despite the best eff orts of the Geek Squads of the time, nothing IT did was going to chase those little green critters out of the CFO’s or controller’s office once he had sat down and played a bit with VisiCalc. A few years later, in 1981, the rollout of the IBM PC made IT feel a bit better about the whole mess, but all that Big Blue’s legendary micro computer did was accelerate the inevitable. PCs, with their decentralization of comput-ing resources and empowering of the workforce en masse, were an unstoppable force. Very much the same dynamic was in play when Novell pioneered PC networking in the 80s and early 90s.

Th is now leads us to the logical question: why did SaaS crawl back from the grave and vigorously reanimate? Insight can be gleaned from these responses to the following question that has ap-peared in every edition of Th e Soft letter SaaS Report:

What do you believe is the primary reason your customers choose to subscribe to a SaaS system?

Figure F-4: Reasons to purchase SaaS as seen by SaaS providers. Source: Th e 2012 Soft letter SaaS Report

Introduction 21

Customers can quickly gain access to new capabilities and functions that they cannot obtain by purchasing ex-isting soft ware products and servicesCustomers wish to replace existing licensed and/or client/server applications with SaaS applications to reduce overall IT operations and complexity at their company or business unit Customers wish to replace existing licensed and/or client/server applications with SaaS applications to reduce the overall cost of soft ware at their company or business unit SaaS applications are counted as an operating expense (OpEx), not as a capital investment (CapEx)Other (Th ese were usualy combinations of answer one and another choice)

40%

19%

13%

16%

11%

As you can see, Quickly gain access to new capabilities is the re-sponse leader by a strong plurality. In fact, in the previous four re-ports this answer was always the majority response. (Last year Quickly gain came in at just over 50%.) What accounts for this year’s numbers shift ?

Before we answer this question, let us look at these responses in greater depth. In the Soft letter SaaS Report, we drill down into our survey questions by various criteria, including years in business, revenue size of the company and development state. Below are the crosstabs for development state of the company.

What do you believe is the primary reason your customers choose to subscribe to a SaaS system?

A. Customers can quickly gain access to new capabilities and func-tions that they cannot obtain by purchasing existing soft ware products and services

B. Customers wish to replace existing licensed and/or client/server applications with SaaS applications to reduce overall IT opera-tions and complexity at their company or business unit

C. Customers wish to replace existing licensed and/or client/server applications with SaaS applications to reduce the overall cost of soft ware at their company or business unit

SaaS Entrepreneur22

Development Stage Privately Privately Owned/ Owned/ Venture Start-Up Funded Funded PublicQuickly gain access …A (See below) 43% 40% 40% 33%Reduce complexity …B (See below) 14% 19% 20% 22%Reduce overall cost …C (See below) 14% 13% 20% 11%OpEx vs. CaEx …D (See below) 29% 14% 13% 33%Other 14% 7%

D. SaaS applications are counted as an operating expense, not as a capital investment

Note that across the four categories in this breakdown, Quickly gain access maintains its lead in three of them and ties in Public with Reduce IT complexity fairly stable across all cohorts. It is not surprising that CapEx vs OpEx is strong in Public, as most of the companies in this category are dealing with larger companes in es-tablished and successful SaaS application categories (CRM, project management, HR, etc.). In these markets, CapEx vs OpEx is be-coming more compelling.

One answer to the shift in numbers is that the uptake of SaaS in the enterprise is indeed increasing, driven by the poor economic climate that arrived in 2008 and that persists today. Faced with a ongoing slowdown, companies have been continuing to modern-ize their business operations and increase flexibility while also con-serving cash. But note that the CapEx vs. OpEx answer comes in at 16%; in 2011, this response came at 19%. Over the five years of the survey and report, the response to this question has ranged be-tween 15% and 19%, with a mean of 16%.

Another factor driving the change is that for the 2012 Report we added a new question to the survey on which the SaaS Report is primarily based, Reduce overall IT operations and complexity. Th e introduction of client/server technology in the 90s gave businesses the ability to build and maintain internal datacenters of amazing complexity and flexibility. But as more and more applications have been poured onto corporate servers, these environments have be-come increasingly fragile and difficult to maintain, leading to a coun-ter movement in IT to simplify their computing environments.

Today, increasing numbers of companies believe that existing client/server applications that work, are paid for, and address key elements of a company’s business operations should stay in place for many years into the future, much the same way COBOL ap-plications devised for the financial and insurance industries in the 50s are still chugging away in back offices all over the world. A working application in place bothering no one tends not to be bothered, and no one wants to bother it in return, as Microsoft , Oracle and other companies built around on-premise soft ware are

Introduction 23

discovering. Within soft ware categories that have existed for over thirty years, customer resistance to change is steadily increasing as the perception grows that everything these applications can do they are doing, and it is cheaper and best to leave them alone to keep on doing what they do best. And it is also probably best to leave the servers on which these programs reside alone, as well, something that becomes increasingly difficult to do as more programs take up residence next to these placid, domesticated chunks of code.

Th is point is driven home by the next question we asked in our survey:

What do you believe is the main secondary reason your custom-ers choose a SaaS system?

Quickly gain access maintains its number one standing but loses ground to reduce IT complexity. CapEx stays stable; clearly, it is important to a significant segment of customers but it is never a main driving factor.

But the world is not standing still and the need for new applica-tions to address new needs is not going away. And herein lies the primary reason for the growth of SaaS over the last several years as the market began to recover from the ASP meltdown of 1999-

SaaS Entrepreneur24

Customers can quickly gain access to new capabilities and functions that they cannot obtain by purchasing existing soft ware products and services Customers wish to replace existing licensed and/or client/server applications with SaaS applications to reduce IT complexity and overhead at their company or business unitCustomers wish to replace existing licensed and/or client/server applications with SaaS applications to reduce the overall cost of soft ware at their company or business unitSaaS applications are counted as an operating expense, not as a capital investmentTh ere is no secondary reasonOther

31%

24%

11%

18%

11%6%

2001. Th e on demand model inherently opens up new markets and opportunities that can not be adequately serviced by existing on-premise products. We will be exploring this point in greater detail in the Marketing and Pricing chapter of SaaS Entrepreneur.

Other Contributing Factors to the Growth of SaaS

Th e Great Recession (Otherwise Knownas the Very Slow Recovery)Yes, this seems paradoxical. Recessions hurt companies, including soft ware firms, and the longer the economic malaise lasts, the more it will hurt. Since the recession (or VSR) began, and while this book has been under development, we’ve spoken to over three dozen SaaS firms that also off er on-premise versions of their products, and asked them all the same question: “How have sales of your on premise product compared with those of your SaaS equivalents?” Most of the companies reported strong and continued revenue growth in their SaaS product lines, while their on-premise sales have slowed or stagnated. In many cases, the ability of SaaS firms to discuss purchases in the context of operating budgets was a factor in opening customer wallets.

Th e Struggles of Microsoft Love it or hate it, Microsoft , since the advent of Windows 3.X and NT, has established the standards by which both the network and the desktop operate. But as the recent Vista debacle and Redmond’s struggles on mobile and tablet platforms demonstrate, Microsoft is heading down the path of IBM as it struggles to manage a dizzying array of increasingly unconnected agendas and initiatives.

One result of the aging process is an increasing reliance on the tried and true. Windows 7, a cleaned-up and tidied-up Vista, rep-resents the apotheosis of a strategy desktop and server companies developed to drive revenues decades ago — the upgrade cycle. It is difficult to argue that either Windows 7 or Vista were necessary products in terms of increased functionality or productivity (at least Microsoft has been unable to make a convincing case for this), but they do drive revenues into Microsoft ’s coff ers (as the company hopes the case will be with Windows 8). Microsoft , as demonstrated

Introduction 25

by its focus on copy protection via WGA and related technologies, is intent on squeezing ever more money from its installed base via upgrades. Th is clashes with the desire of many companies that have stable, working server platforms and applications to not bother them. Ever, if at all possible. Microsoft has diff erent motives. Absent significant new sources of cash from innovation, the company must drive revenues via upgrades. As this desire breaks more and more systems, forcing expensive outlays for IT operations for little per-ceived benefit, the allure of SaaS becomes greater. (But let us be fair to Redmond. It must be frustrating to be asked to support a decade-old operating system (XP) that can only be updated via a very tedious and problematic remote update process. If only there was an alterna-tive to all of that. Hmmm.)

Th is is not to count Microsoft out as a potential force in SaaS. Th e company is striving mightily to establish itself as a platform provider via its Azure framework and, with the release of Office 365, the company is attempting to counter the threat from Google Docs to its Office monopoly. Th e release of Windows 8 later in 2012 will herald a very ambitious eff ort by the company to both maintain its desktop grip while simultaneously rebooting the company’s ef-forts in the fast-growing tablet market. But the Microsoft is ham-pered by the fact that to fully adopt the SaaS model it must accept the cannibalization of its two ultra profitable monopolies, Win-dows and Office. While it is all very well for academics and unac-countable business book writers to preach the virtues of innovation by destruction, they are not faced with the prospect of chewing off two major revenues arms off the corporate corpus and counting on them regenerating into new and profitable SaaS extremities.

Microsoft , in an eff ort to defend its market position, has pro-pounded an alternative vision of SaaS, ‘Soft ware plus Services.’ In this model, ‘thick’ desktop and on-premise applications still pre-dominate, but are interlinked by a series of services that spread their tendrils out through the Internet. Th ere are successful exam-ples of this model; iTunes is the one everyone is most familiar with. But except in particular niches, the ‘S+S’ model has not taken flight.

SaaS Entrepreneur26

The Coming of the Cloud

In 2009, a new marketing meme came to the soft ware industry, the ‘Cloud.’ When we first heard the phrase come into wide usage in the summer of 2009, we thought that one of the old synonyms for the Internet (Cloud) was reappearing for reasons that were not clear. During the 90s, network design products such as NetCracker typi-cally used a picture of a cloud to represent the Internet.

But some quick digging revealed that the phrase seems to have a dual origin. One parent is Grid Computing, which in 2007–2008 was quite the hot term. Grid computing popularized the idea of computing power becoming commoditized and consumed in much the same way as power and telecommunications. It became popular to describe grids as ‘clouds of virtualized servers,’ an ap-propriate and descriptive phrase that caught the fancy of many; unfortunately for proponents of grids, the Cloud appears to have devoured its parent in much the same fashion as the Greek god Zeus snacked on his progenitor, Cronus.

The Cloud’s ‘mother’” may be Eric Schmidt, then CEO of Google, who used the term ‘cloud computing’ in reference to SaaS at an SEO conference in 2006. A few weeks later, Amazon debuted its S3 service and used the word ‘cloud’ in its marketing literature to help describe the new service. Both parents’ DNA strands inter-twined over the next several years and the Cloud and ‘cloud com-puting’ caught fire.

Soon, everyone was talking about the ‘Cloud’ and no one quite knew what anyone was talking about (a problem that persists to this day). Th is is because the term ‘Cloud’ was not accompanied by the release of any new technology or products to help give the new buzzword any tangible reality to hang onto. Th is is somewhat un-usual in high tech; normally, when a buzzword is introduced into the general computing lexicon it is preceded by some actual ad-vance in technology or products. When relational database systems were introduced into the PC marketplace in the 80s, you could buy one. When the Internet became widely accessible to the public in the 90s, you could surf it. But none of this is true of the Cloud. Vir-tualization, SaaS, middleware and PaaS are all technologies that are part of ‘cloud computing,’ predating the Cloud by years. Th e phrase

Introduction 27

is strictly a marketing gambit (and so far, a very successful one).Insofar as cloud computing has a coherent meaning, it refers to

a group of functional layers oft en called the ‘cloud stack.’ Th e diff er-ent layers of the stack are identified by their ‘as-a-Service’ acronyms. While there are vendors that have tried to leverage the ‘as-a-Service’ phrase specifically for their off erings (storage, identity, etc.), they ul-timately fall under one of these three layers in the stack.

The Cloud Stack

Infrastructure-as-a-Service (IaaS)Sitting at the bottom of the cloud stack, IaaS are self-service (in varying degrees), computing, storage and support infrastructure resources that have been virtualized for scalability and designed to replace dedicated servers and network hardware. For infrastruc-ture firms such as RackSpace, GoDaddy, BlueLock and others, virtualization allows them to wring every last dollar out of their hardware investments, and most major hosting systems are moving to virtualize all their operations where feasible; you can expect that even if you are not particularly concerned about what type of server your system resides on, a virtualized box is in your future unless you specify otherwise.

IaaS’s value to SaaS companies depends very much on the elasticity of your subscriber base and the need to adjust for sharp changes in transactions being processed, since virtualized re-sources are not always priced significantly below those of physical systems. If during a holiday season your company expects activity on your system to spike sharply, a virtualized infrastructure may off er your business tremendous operational flexibility and savings. On the other hand, if the volume of business running across your servers tends to be steady across the year, the benefits of virtualized or ‘cloud infrastructure’ may be far less apparent.

Deep technical knowledge at the system and network adminis-tration levels, as well as an understanding of at least some level of programming, is oft en necessary to adequately leverage IaaS off er-ings. Some IaaS vendors off er web-based administration tools, and where those do not exist or lack functionality, third-party vendors have been quick to bring products to market to help ease the adop-

SaaS Entrepreneur28

tion and use of IaaS resources. Technologies such as multi-tenancy are oft en implemented at a low-level in an IaaS environment; this is a key driver that enables Amazon Web Services, for example, to achieve tremendous economies of scale with their hardware.

Platform-as-a-Service (PaaS)PaaS is the most difficult level in the stack to define clearly; many SaaS applications off er impressive levels of built-in flexibility and could themselves be considered as high-level development plat-forms. Additionally, some IaaS providers are ‘moving up the stack’ to off er more full-featured bundles of functionality that include PaaS functionality, as in the case of Servoy, which is off ered by Mi-crosoft on its Azure platform and by IaaS firm Verio. Until it all shakes out, PaaS is still its own element in the cloud stack, and is itself generally broken into segments ranging from low-level ab-straction layers to high-level data-driven business analysis and re-porting environments.

Th e lowest-level platforms abstract the underlying infrastruc-ture from developers to create a complete application deployment and delivery system that appears to the developer like a standard runtime environment. Th ese platforms oft en leverage open tech-nologies such as programming languages, databases, etc. Examples of these would be Heroku (Ruby on Rails) and Google App Engine (Java and Python).

Higher in the stack are those platforms that provide a rapid ap-plication development environment, complete with web-based development tools and, in some cases, proprietary programming languages, APIs and data stores. Force.com is the most success-ful and visible PaaS at this level, though the platform faces strong competition from such systems as NetSuite’s SuiteFlex, Microsoft ’s Azure, and other companies eager to replace Microsoft as the ‘One Platform to Rule Th em All.’

Topping off the PaaS stack are those environments that provide a drag-n-drop interface for non-programmers to build applications. Th ese off erings, like Zoho Creator or Rollbase, generally abstract the underlying architecture and source code completely by en-capsulating the functionality in user-friendly objects. It should be noted that some vendors off er a ‘PaaS’ that can be installed behind

Introduction 29

a firewall or on public servers in order to build applications rapidly and abstract the underlying infrastructure from the application de-velopers. Th is is more like a next-generation framework or applica-tion environment, and while perhaps technologically advanced, it should not be referred to as a PaaS. Once a SaaS product is installed on a customer’s hardware, by definition you have dropped back to the licensed model.

Soft ware-as-a-Service (SaaS)While SaaS is oft en portrayed at the top of the ‘cloud stack,’ SaaS applications do not necessarily leverage the PaaS or IaaS layers below — though they can. Today, the majority of SaaS systems run on dedicated hardware and are not developed via a PaaS. SaaS can encompass a wide-range of products, from enterprise applications such as CRM and ERP, to departmental or line of business appli-cations, to stand-alone supporting elements such as reporting and user management. (And let us not forget consumer off erings such as World of Warcraft and the various gaming and social networks.) SaaS is the most widely known, and visible, layer of cloud comput-ing and is oft en also referred to as ‘on-demand soft ware,’ ‘webware,’ ‘cloud applications’ and even still as ASPs (though we strongly urge you, for marketing purposes, to purge ASP from your sales and marketing collaterals and vocabulary).

SaaS purists argue that SaaS, as opposed to other ‘on-demand soft ware models, is web-native, single-instance, and multi-tenant. ‘Single-instance, multi-tenant’ means there is only one version of the application that all customers use. Th e most well-known benefit of this type of architecture is the fact that all subscribers essentially share the cost of a more efficient infrastructure. Beyond that benefit, SaaS also allows for unique functionality not avail-able to legacy soft ware by nature of its ubiquity and the network eff ects generated by having everyone share the same application in a shared environment.

Hosted legacy applications served to clients via ‘virtual desk-tops’ or ‘desktop sharing’ technologies are not ‘true’ SaaS in that this type of architectural approach has a limited life span in its ability to scale. However, as we have noted, to most customers these claims will normally be translated as technobabble or irrelevant. If your

SaaS Entrepreneur30

target market values your adoption of a particular technology, you will want to highlight it in an appropriate manner.

Th e stage now set, we’ve provided a quick glossary of the latest cloud buzzwords with a Buzz Rating of one (think Windows Vista) to three, with three being maximal buzz (think iPad).

Cloud applications = SaaS. We suggest giving equal weight to both terms in your marketing literature and be ready to fall back to SaaS if advisable; while hardly a thing of beauty, the acronym has gained credibility and is widely understood. We aff ord cloud applications a Buzz Rating of 2.

Private cloud = corporate datacenter. Th is phrase is gaining strength rapidly and is even gaining traction among corporate CIOs, who use the term to show they are cool and hip to today’s computing, though events such as the Amazon’s EC2 April 2011 meltdown has made it likely that no major corporation is going to shut its internal datacenter down anytime soon. Buzz Rating of 2.5.

Public cloud = a web hosting company (GoDaddy, Rackspace, et al) that uses virtualized servers. Not much excitement sur-rounds the concept; who cares how hosting companies run their servers? Buzz Rating of 1.5.

Cloud development = PaaS. Th e revival of the SaaS movement has reignited the platform wars of the 80s and 90s, which ended with Microsoft dominant and competitors such as OS/2 and CPM/86 moribund. Today, Salesforce.com, Microsoft , NetSuite and others fight anew to be the dominant development platform for SaaS applications. For application subscribers, a Buzz Rat-ing of 1; for developers, 2.5. Note that as of this writing, no par-ticular PaaS has become dominant in the marketplace. We will be discussing the various PaaS systems in greater detail in the Development chapter of this book.

Hybrid clouds = internal datacenters that use third party, external resources for non-critical operations such as archiving. Th e con-cept is not that exciting to readers of this book. Buzz Rating of 1.5.

Introduction 31

Contacting Us

In an industry as dynamic and changeable as soft ware, new trends, ideas and challenges appear constantly. As in the past, we are always delighted to hear from you and rely on communications with our readers to help keep us up to speed. If you have a suggestion to make or a topic you’d like to see covered in greater detail in future editions of SaaS Entrepreneur: Th e Definitive Guide to Succeeding in Your Cloud Application Business, please visit us at www.soft letter.com or www.saasentrepreneur.com and join our community, or contact us directly via E-mail or phone. We wish you the best of luck!Acknowledgements

Portions of this book are derived from articles that appeared in past issues Soft letter. We would like to thank the following columnists and contributors for their help and assistance in creating SaaS En-trepreneur: Th e Definitive Guide to Succeeding in Your Cloud Ap-plication Business.Jan Aleman, CEO, Servoy for his contributions on the evolving

market for PaaS.Ted Finch, principal, Chanimal, for his information on channels

and providing most of the channel spreadsheets and related ma-terial on the SaaS Entrepreneur Virtual DVD.

Hank Galligan, Practice Offi ce Accounting Director BDO for his contributions on revenue recognition and SaaS.

Laura Roach, director, BlackBaud and Jeff Saling, vice president, Spectrum Business Technologies, for their assistance in help-ing shape the Sales Organization and Compensation in SaaS chapter.

Jay Greenwald, principal, International Revenue Acceleration, for his insights into SaaS and international venues and much of the data in the International Markets and SaaS chapter.

Michael Whitener, founder, VistaLaw International, for his legal commentary in the Legal Issues, SLAs, Taxes and VAT in SaaS chapter.

SaaS Entrepreneur32

33

SaaS — The Software is the Social Network

In many respects, this is most important chapter in the book. If you decide to read nothing else, read this chapter thoroughly and imple-ment its suggestions as soon as possible. Failure to do so will fi rst damage, then destroy, your ability to compete successfully in SaaS.

When pundits and analysts argue over what is the single most important point of diff erentiation between SaaS and on-premise, licensed soft ware, they usually point to:

• Th e recurring revenue nature of SaaS. In SaaS, you do not purchase licenses; rather you subscribe for X amount over X period for the right to use the soft ware. But some soft ware companies allow you to subscribe to their on-premise soft -ware.

• Th e fact that SaaS applications are run in an Internet browser. But in some cases, SaaS applications are provided via termi-nal services and in other cases a ‘thin client’ desktop version of the soft ware is installed on a PC and can both access a re-mote server and/or run on your PC locally. (And many mo-bile applications run the same way.)

• Th e fact that SaaS applications are not installed on a com-pany’s servers. But a signifi cant number of companies do li-cense and install SaaS products on their internal servers. Th is is oft en referred to as the hybrid model and while we urge SaaS companies to avoid it, customer and fi nancial demands sometimes require you license your products.

chapter 1

SaaS and the Power of Communities(and the Death of Traditional Software Product Management)

SaaS Entrepreneur34

• Th ere are other issues and technologies that are discussed: multi-tenancy ; virtualization; agile development. Th e ‘cloud.’

While these can indeed be diff erentiators, they miss the crucial point of SaaS. And that is that SaaS systems, by their very nature, create communities of customers who can collectively interact with each other and your company on a 24/7/52. In SaaS, the applica-tion is the social network. But to benefi t from it, you must prepare to manage and leverage the application network to the maximum extent.

What Creates the Application Network?What comprises the application network? Two inherent elements of SaaS:

Th e fi rst is that if your SaaS system is properly architected, you should be able to monitor, capture and analyze every aspect of a subscriber’s interaction with your product. Th is includes keystrokes, functions accessed, functions not ac-cessed, browser usage, etc. Th e second is that because SaaS applications inherently con-centrate subscribers with a common set of interests in one virtual ‘place,’ the foundation for a community is already in place. If you provide the right infrastructure, your commu-nity of customers will grow, thrive and transmit information about your product and their usage of it to your company on a constant basis at an ever increasing bandwidth.

Th e charts and tables below provides more insight into what percentage of SaaS fi rms are adding analytics and community en-ablement into their systems and the type of information they are capturing. (Please note that community integration lags behind analytics, but this number will shift sharply to ‘Yes’ over the next two to three years.)

35SaaS and the Power of Communities

Does your product in-corporate a customer usage tracking analytic system directly within the SaaS application en-vironment?

Figure 1-1. Percentage of SaaS firms integrating analytics into their systems. Source: Th e 2012 Soft letter SaaS Report

What type of analytics does your measurement system provide? (Please pick all that apply)

Figure 1-2. Data points measured by SaaS analytics systems. Source: Th e 2012 Soft letter SaaS Report

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Does your product system incorpo-rate a customer community man-agement system directly within the SaaS application environment? (By “within” we mean the customer can access the community from within the SaaS system via either direct access to an integrated community module or a direct link to a third party module.)

Figure 1-3. Data points measured by SaaS analytics systems. Source: Th e 2012 Soft letter SaaS Report

What customer community activities are supported and/or ac-tive on your community management system? (Please pick all that apply.)

Figure 1-4. Activities supported by SaaS community systems. Source: Th e 2012 Soft letter SaaS Report

Th ese twin characteristics give SaaS applications an unmatched competitive edge over their desktop and on-premise counterparts. By analyzing customer interaction via an analytics engine, generat-ing reports and metrics, and then integrating these metrics with insights and information gathered from your customer commu-nity, SaaS companies can react to market changes and subscriber requirements with a speed and accuracy not possible with on-

SaaS Entrepreneur36

We areplanning

to add thiscapability

16%Yes

20%

No64%

Discussion forums 35%Reputation management and acknowledgement 9%Customer administered expert advice and training sessions 9%Peer to peer customer direct messaging (think IM integrated into your SaaS system) 9%Wiki-type functionality for documentation and best practices documentation management 18%Social media linking 9%File sharing and uploading 6%Other 3%

premise products. On-premise companies simply cannot compete.(An interesting historical note: there have been attempts to graft

on to on-premise products technologies that are organic to SaaS. Th e author of this book consulted early in the new millennium with an Israeli company that had developed a server-based product that allowed users of desktop applications to directly message and communicate with one another. But security issues and the com-plexity of supporting an almost infi nite number of computing envi-ronments short-circuited the attempt.)

A fi nal component that also needs to be added to your SaaS sys-tem is a requirements tracking and management system. Increasing percentages of SaaS companies are adding this ability (though in some cases this functionality is provided in an analytics package):

Does your product in-corporate a ‘new fea-tures or capabilities’ request mechanism by customers directly within the SaaS appli-cation environment?

Figure 1-5: Percentage of SaaS companies incorporat-ing requirements manage-ment into their systems. Source: Th e 2012 Soft letter SaaS Report

Whether you purchase or buy your requirements management system, it should possess the following baseline feature set:

• An ‘any’ screen deployment that enables your customers to submit a feature request from most systemscreens with which the subscriber interacts.

• A requirements prioritization list feature which, as its name implies, allows customers to list their features in order of es-timated importance.

• A ‘desirability’ or weighting option that subscribers can as-sign to their feature requests.

SaaS and the Power of Communities 37

Yes34%

We areplanning

to add thiscapability

19%

No47%

• A requirements history or log function that enables your subscribers to track their requests and their resolutions by your company.

• A cataloging capability that enables your subscribers to submit feature requests by common topics or area of functionality.

Optional features of great importance are:• Th e ability for customers to purchase features based on such

criteria as cost per estimated hour. Th e case study on Plex Systems, which uses this model, describes their approach in greater detail. Whether you will be able to charge for new feature implementations is dependent on your market and customer base. Over time, we expect increasing numbers of SaaS companies to implement this model.

• Th e ability for customers to vote on new features requests, with the elected winners receiving increased development priority.

The Age of the Community Manager DawnsWhile That of the Product Managers Sets

For a SaaS company to enjoy these benefi ts, all of which will be covered in greater detail in our Plex Systems case study later in this chapter, a profound change in how soft ware companies manage their internal interactions must occur, in addition to a change in customer relationships. In SaaS, the concept of traditional product management must be retired and replaced by community manage-ment. If you do not do this, you cannot properly leverage your cus-tomer community and the invaluable analytics it will provide you.

A Brief History of Soft ware Product ManagementBefore going further, a brief history of product management and a discussion of its function in soft ware fi rms is in order. Th e role and concept of product managers (PMs) appeared in soft ware as far back as the late 1970s, as the modern industry was crystallizing around such systems as the TRS-80 and Apple II and later the IBM PC. Th e fundamental idea was lift ed from consumer goods companies such as Procter and Gamble and Johnson & Johnson, where product man-agers functioned (ideally) as ‘mini CEOs’ of product lines. In theory,

SaaS Entrepreneur38

the product manager of a popular toothpaste, as an actual example, had bottom line responsibility for the sales and profi tability of his or her product and could hire, fi re and allocate development resources to their product in order to increase revenue and profi tability. (Th e truth is that in many case, this idea was paid a great deal of lip ser-vice but in practice, upper management kept their PMs on very short leashes. Still, this was the theoretical ideal.)

In the soft ware industry, product managers, with very few ex-ceptions, never came close to acting as mini CEOs. To the contrary, product management has always had an uneasy relationship with the rest of the company (and upper management) because of the lack of an ‘organic’ connection to the bottom line. Product managers are not responsible for the sales of the product they manage in any meaning-ful sense, and developing measurable benchmarks for the position has always been a challenge. An article in a Pragmatic Marketing online publication discussed how to measure product management success. Th e author provided benchmarks that included:

• ‘Number/frequency of face-to-face visits with the market.’• ‘Creation of Buyer and User Personas.’• ‘Draft s of Problem Statements.’• ‘Eventually statistically valid market evidence that describes

those Problem Statements by their pervasiveness and ur-gency.’

None of these are the type of metric that warms the cockles of the typical CEO’s fl inty heart.

And despite exaggerated claims (many made by companies that sell product management training), product managers are neither ‘strate-gic’ nor ‘visionary,’ nor are they innovation drivers. Soft ware product managers do not hire or fi re personnel. Th ey do not normally allocate development, sales, or marketing funds, all requisites for a manage-ment position to be strategic. Th ey almost never control a budget. Th eir primary role is to act as the administrative ‘glue’ during the prod-uct development cycle and help support sales and marketing aft er a product launch. Th is places a premium on execution, not vision.

Th at said, what do product managers do? In most soft ware com-panies, their principal duties consist of:

SaaS and the Power of Communities 39

• Managing the new features list (informally referred to as ‘tick list’ herding) and, in theory, ensuring that at least X% of it is incorporated into the next release of the product. Much of this work is iterated in on-premise companies by MRDs (marketing requirements documents), PRDs (product re-quirements documents) and FSs (feature specifi cations). While still relevant to desktop/retail and on-premise prod-ucts, these documents and the processes that create them are usually a pointless exercise in SaaS fi rms.

• Acting as a communications liaison between customers and the company on product development, direction, roadmaps and philosophy. Th e introduction of Agile development methodologies brought increased interest in the idea of product managers acting as ‘surrogate customers.’ As you’ll soon read, much of the theorizing around this idea was never practical, and SaaS requires new thinking about the issue.

• Executing or assisting in carrying out various marketing pro-grams, determining the pricing of the product, and in making themselves useful in dozens of undefi ned and non-measur-able ways.

One experienced product manager we have known for years once told us the most useful tool a product manager could have was a “pom pom.”

Product management titles are typically broken into two main types — product managers and product marketing managers. Prod-uct managers are normally tasked with pre-release activities such tick list herding, assisting in managing beta programs (also irrelevant in SaaS), and coordinating product release activities. Product market-ing managers typically assist with post-release tasks such as press tours and relations, indirect marketing programs, sales assistance programs and related activities. Over the years, a third title has been added to the fi rst two: ‘technical product manager,’ also sometimes referred to as domain or industry experts. Th eir primary job is to focus on features and requirements in the context of providing spe-cial insight and expertise into an industry segment or niche.

Historically, most soft ware companies add a fi rst level of product management aft er they have hit several million dollars in revenue.

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Th e reason for this is that the CEO, CTO, and other members of upper management normally play the role of product manager while the company is struggling to grow and expand. As the company gains traction, so does the desire to shift the administrative burden of product management from upper management to these special ad-ministrators. Continued growth normally means adding more prod-uct management titles to the company’s organization chart.

Since, as noted, the various types of managers almost never have line or budgetary authority for ‘their’ products, their ability to sway the fate of a soft ware product or product line is limited. Because no quantifi able metrics are attached to the job (at least metrics the prod-uct manager can manage, control and ‘own’), it is always diffi cult for a product manager to prove the worth of his or her contribution to the corporate bottom line. Th is does not stop upper management from systematically decapitating a hapless product manager when ‘their’ product fails to meet sales expectations. ‘All responsibility, no author-ity’ is the mantra most associated with the job.

Th e above model, with diff erent twists and variants, has held sway in the soft ware industry for over 30 years. Th e problems, limitations and frustrations associated with the job are well known and have been discussed in endless detail. Take for example a website popu-lar with soft ware product managers, the Cranky Product Manager (www.crankypm). Th e site is the bailiwick of the Cranky PM, a ‘fi c-tional person’ who also claims to be the real life alter ego of a female product manager (yes, we realize the contradiction here but it is not our site). Th e site is fun and well written, but reading through its vari-ous riff s, comments and observations feels like a time travel journey back to the 80s for anyone who has lived through the industry’s his-tory and worked as a product manager. Th e problem of a lack of any real authority was the same. Th e lack of solutions was the same. A product manager for WordStar, Lotus 123, and dBase II, all 80s icons, would feel very much at home ‘taking over’ the product management reins of Microsoft Offi ce, PhotoShop, and Oracle. (Well, not really ...)

SaaS and the Power of Communities 41

Figure 1-6: In thirty plus years, the narrative about product management in soft -ware has not changed.

SaaS Entrepreneur42

But then a new savior for product management and managers appeared — the ‘Agile Product Manager.’

Silly Agility: Th e Myth of the Agile Product ManagerAbout three years ago, the agile product manager came to soft -ware. If you followed such things, you began to read a great deal in the industry press about this fabulous new creature, followed by a plethora of new training courses, books and tools from the usual suspects. Th ese all promised to transform yesterday’s slow and slug-gish product manager into a new sort of sleek, streamlined super-hero, somewhat akin to Tony Stark skinned out in his Iron Man suit. Cloaked with the power of Agility, product managers would now streak through the sky saving soft ware companies from evil slow release cycles and insidious blackholes, where lurked horrid crea-tures, mutant users who were willing to spit up kryptonite to avoid deinstalling XP from their PC and worship the Dread Dormammu provided he would save them from yet another IT server upgrade.

Unfortunately, the courses, tools and superhero cloaks are a waste of time (and money) for SaaS companies. (In our opinion, they do very little for on-premise soft ware companies, too.) Why are Agile product managers doomed to be mythical beings, like comic book superheroes? Because:

• Agile methodologies were never designed nor have they evolved in any practical way to encompass the job of product managers.

• Agile methodologies do not address the underlying reality of the product management title in on-premise soft ware compa-nies — they cannot create real change because they lack real au-thority.

• Th e resistance of businesses (and many consumers) to buy increasingly complex on- premise and desktop soft ware is caused by the nature of these products and systems, not product management methodologies.

Now, before proceeding any further, we would like to urge you to download the following E-book from Pragmatic Market-ing, the leading fi rm in the industry currently off ering product management training courses. It is not really a book, more like a

SaaS and the Power of Communities 43

PowerPoint on steroids, but it makes the case for ‘Agile’ product management. To be honest, the case it makes is incoherent and il-logical, but we think it is still the best that can be done with the topic, and it is a short read. Th e book is called Living in an Agile World and can be found on the Pragmatic website or on www.soft -letter.com. Put it aside for later reading in this chapter.

A Brief History of AgileAt this point, a brief history of soft ware’s Agile movement is in order. Agile methodologies were conceived as a reaction against the development processes that dominated the soft ware industry from the 1950s through the mid-90s. Traditionally, soft ware fi rms would develop a product, release it and then have a series of big sit-downs and meetings to discuss the capabilities the next version of the product should possess. Th ese sit-downs and meetings were typically accompanied by heated discussions, temper tantrums, political knifi ngs, assassinations, underhanded deals, betrayals, blackmail and other forms of bloodletting normally associated with high-tech corporate life. (Th ere is a theory that Shakespeare was inspired to write plays such as “Hamlet,” “Richard III” and “Co-riolanus” by using occult magic to peer into the future and eaves-drop on a next-version-planning meeting taking place at a major soft ware corporation.)

Th e end result of this cyclical Apocalypse Geek was an agreed-upon list of requirements that would be incorporated into the next version of the product. Work would begin, and over the next 12 to 36 months or so, a new version of the product would appear. Th e cycle would then repeat itself and proceed along. Th is approach to development is oft en referred to as a ‘waterfall development,’ no doubt a reference to the rivers of corporate blood that spilled down the aisles and fl owed down the steps of corporate HQs while the new requirements specifi cation was under development.

Th ings thus moved along in the world of soft ware until 1995, which is when word spread throughout the industry of the C3 proj-ect. a stood for Chrysler Comprehensive Compensation System, a soft ware development project launched at the carmaker that was an attempt to build a new, complex soft ware application in a new way. Specifi cally, it was to be a payroll application that would replace

SaaS Entrepreneur44

several existing systems at the company. Th is new Agile system was called ‘XP,’ for extreme programming. (Th e system is still in use at a substantial number of SaaS fi rms.)

XP was an attempt to replace waterfall development approaches with something new. Instead of a vast requirements framework cre-ated aft er much corporate ‘Sturm und Drang,’ development would focus on short, highly focused periods of development during which an actual user would sit side by side with the programming group and provide instant feedback on the code being created by the developer(s). Th e Holy Grail of this fi rst Agile project was to develop code more quickly, with fewer bugs that adhered closely to the needs of actual users. All Agile methodologies seek this same Grail.

C3, objectively analyzed, was a failure; aft er fi ve years the prod-uct was not completed and the development eff ort was terminated, one reason being that the poor schnook who was picked to be the user sitting next to the programmers literally broke down. But the industry thought a great many lessons had been learned, and new Agile methodologies and theories were introduced, debated and argued over with an oft en religious ferocity. One point that all these methodologies agreed upon, however, was the need for intense user involvement during the development cycle. Real users, when approached about sharing cubicles with programmers during Agile development cycles, tended to fake epileptic fi ts when the topic was brought up. When pressed, they made loud noises about the 14th Amendment to the Constitution and the prohibitions against in-voluntary slavery. Th e idea was dropped. (Th ere were rumors about an abortive attempt to breed a race of human clones to fi ll in, but the concept seems to have gone nowhere.)

Now, this was a problem, because all Agile methodologies crave direct customer involvement in the development cycle. What to do, what to do.

Th en, one day an innocent product manager headed down the wrong aisle in his company’s offi ce complex, ignored several warn-ing signs, and found himself strolling past a row of programmer workstations. Th e desperate coders looked up, spotted the luckless functionary and had an epiphany. Th ere was a quick ambush and

SaaS and the Power of Communities 45

a brief struggle, followed by some fast DNA resequencing. When the unfortunate manager fi nally fought free of his captors, he dis-covered to his horror that the words ‘Agile Customer Stand In’ now appeared on his forehead in day-glow lettering. Th is DNA recon-fi guration soon went viral and product managers everywhere were now expected to represent customers in Agile frameworks. Which they were happy to do when they were not doing all the other things that were required of them — things which took up most of their time.

Now, this was not as big a problem as it sounds because the fl ock of those worshipping at Agile alters remained fairly small despite the loud sounds the movement made. Th at’s because while it was fi ne to discuss how to rapidly and incrementally improve soft ware products, the underlying infrastructure of the desktop and client/server systems are not a great fi t to Agile. Th ese platforms still ad-here to the traditional 12- to 18-month development cycle; in such a milieu, development agility is not that critical. Waterfalls will do, and did for about the next 10 years.

Th e SaaS/Agile connectionTh is changed with SaaS because SaaS and Agile are a development marriage made in heaven. Th e primary driver for this is the ex-treme pace of development that takes place in the SaaS program-ming environment, as illustrated in the chart below:

How oft en do you release a “major update” of your SaaS product to your cus-tomers? (A ‘major update’ is defi ned as including signifi cant new features and functionality, not just incremental improve-ments and bug fi xes.)

Figure 1-7: Major new release frequency of SaaS companies. Source: Th e 2012 Soft letter SaaS Report

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Less thanonce a year

9%

Other2%

Oncea year20%

Twicea year15%Three or more

times a year26%

We do not havea “timed” or set

release schedule;we release new

features asthey are ready

28%

Note that aggregated, 54% of SaaS companies are releasing major new versions of their product three or more times a year; 15% are releasing major upgrades twice a year. Th is frequency of release was never possible in on-premise markets.

It is vital to realize that this relentless drive to improve and ex-pand functionality is driven by customer demand. From time to time, we’ve spoken to ‘voice of the customer’ advocates who argue that what today’s SaaS customers want are stripped down, mini-malist applications. In every case we’ve analyzed, the VOC advo-cates have been proven wrong. SaaS customers, it turns out, want the right set of features and they want a lot of them.

Customer demand and fast develop-ment have thus driven the rapid accep-tance of Agile programming methods in SaaS, as we see below:

Does your company implement “Agile” methodologies in its R&D?

Figure 1-8: Agile methodology usage by SaaS Companies. Source: Th e 2012 Soft letter SaaS Report

When Soft letter began publishing this report fi ve years ago, these numbers were almost completely reversed.

Th e Product Manager/Agile Methodology Non-ConjunctionIt’s time now to crack open that copy of Pragmatic’s Living in an Agile World. We will interrupt this chapter and give you time to work through it; a half hour or so should do it...

Good, you’re back. Let us resume.First, you’ll note that Living talks a great deal about ‘Th e Prod-

uct Owner.’ Th e idea of a product owner is an intrinsic part of Scrum, currently by far the most popular Agile system. In Scrum, what does a product owner do? To quote the book:

“Th e product owner is a new role, created and defi ned by the Scrum Alliance (www.scrumalliance.org). Product owners live full-time with development teams — elaborating users’ stories,

SaaS and the Power of Communities 47

No30%

Yes70%

managing sprint-level backlogs, expanding specifi cations and in-terpreting product vision.”

Some of this sounds like things a product manager might do. So, is a product manager now a product owner? Not according

to Living:“And a product manager is now called a Product Owner … right?Wrong!”Not everyone agrees with the above (though we think

the book gets it right). For an even more detailed analysis of Scrum’s product owner concept, visit Jack Milunsky’s blog at http://agilesoft waredevelopment.com/blog/jackmilunsky/top-10-activities-product-owner and read a bit more about the topic. You’ll note that when Jack raises the question of whether or not a product owner can be a product manager, his answer is “Yes.”

So, why does Living feel that a product manager cannot be a product owner? Because:

“In fact, a product owner’s responsibilities are just a small subset of product management.”

Before going further, we need to more fully discuss what it is that an Agile product owner does. Let us ask Jack; aft er all, he is a certifi ed Scrum master! In his words a product owner:

• “Creates and maintains the product backlog.” (More collo-quially known as ‘the new features that aren’t done yet.’)

• “Assists with the elaboration of Epics, Th emes and Features into user stories that are granular enough to be achieved in a single sprint.” ( Th is is shorthand for the creation of simulated users because the lure of Cheetos and stale Mountain Dew hasn’t enticed any real users into the development cubicles, and the product manager is only available to sit down with us on Th ursdays from 1:15p.m. to 2:45 p.m.)

• “Conveys the Vision and Goals at the beginning of every Re-lease and Sprint. (Hands out the Jolt Cola before beginning more coding.)

• “Participates in the daily Scrums, Sprint Planning Meetings and Sprint Reviews and Retrospectives.” (Makes sure that ev-eryone is in their cubicles and working hard.)

• “Inspects the product progress at the end of every Sprint and

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has complete authority to accept or reject work done.” (Looks for bugs.)

• “Can change the course of the project at the end of every Sprint.” (Tells the product manager that ‘No! Th at feature isn’t making it into this release.’)

• “Terminates a Sprint if it is determined that a drastic change in direction is required.” (Th is usually only happens when the company goes out of business and everyone is laid off .)

Whew! Th at’s a lot of stuff to do. It seems that what a product owner does is manage a development team (in other words, herd cats). In the 1980s and 90s, people with this job were typically called soft ware project managers and it was very much a full-time job. And project managers always reported to development.

But wait! Th at’s not all the product owner does. In addition to all of the above, the product owner also:

• “Represents the customer, interfaces and engages the cus-tomer.” (Since the product manager is never available, screw them. I’ll do this myself).

• “Prioritizes and sequences the Backlog according to business value or ROI.” (See the above comment.)

Now, it should be apparent why Scrum product owners cannot be product mangers. Th e primary function of product owners is to manage developers, and for that you need another developer. A programming team will not accept a product manager as their team leader. Product managers don’t write code, they stink of too much time spent with marketing and sales, and wouldn’t know how to break out of a do...while loop if they were given a map and they’re not qualifi ed to tell us bupkus. Development personnel and product managers can have good business and interpersonal rela-tionships, but coders do not take orders from product managers.

But, Living has its own take on what product owner can and cannot do. According to the folks at Pragmatic:

“Product owners can’t rank backlog based on ROI (in fact, this task is impossible for anyone to do, since real business metrics and fi nancial projections don’t exist at the feature/backlog/item level.” (By the way, this statement by itself

SaaS and the Power of Communities 49

shows just how out of touch current theories about SaaS and product management are, as increasing numbers of SaaS companies are doing just this. But the point that Living wants to make is that the spreadsheet jockey work should be left to the product managers, not some geek in development.)

And Living doesn’t think product owners are much good at rep-resenting users to development, either:

“Creating successful benefi ts and feature descriptions that truly sell products, requires a detailed understanding of the technology and a detailed appreciation of the customers’ prob-lem. Th is takes lots of practice, hands-on fi eld experience, and a clear view from both sides. In our experience, internally pro-moted technical staff members almost never get this right.”

So where does all this Agile theorizing leave us? Right back where we started. Th e rest of the book simply repeats the standard mantra that’s developed around product management in soft ware for the last thirty-plus years. For example, when talking about the interaction of product management with Agile teams, we are as-sured that “Product management is outwardly focused.” Uh, yes. And we learn that “As Pragmatic Marketing-trained product man-agers know, you don’t learn anything about the market while sitting at your desk,” an observation that is wrong for an increasing num-ber of SaaS fi rms and steadily becoming ‘wronger.’

And of course, we hear again that “Th e point of integration for these teams, though, is a single product manager. When the execu-tives demand ‘one throat to choke,’ it’s the product manager who is responsible for overall success of the result.”

Th at is nice, but choking the throat of someone who, as we have pointed out, cannot hire/fi re personnel, control the budgetary expen-ditures of ‘their’ products, and measure their performance against signifi cant quantitative business metrics is akin to punishing a puppy that has failed to protect the family home from armed burglars. It seems obvious that demanding responsibility without authority is a pointless exercise, but people have been tilting at various windmills for centuries, so we do not expect the process to stop any time soon.

Th is brings us (back) to the point of this section. Agile prod-

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uct development methodologies are exactly that — development methodologies. Th ey were designed for and by programmers, are used by programmers, are used to measure programming develop-ment and do not apply to product managers. Th ere can be no such thing as an ‘Agile’ product manager because PMs are not program-mers. And in many cases, the ostensible role of ‘user stand in’ that product managers are sometimes supposed to play are dedicated to specialists in development who carry out certain tasks. Th ese tasks include developing use cases, creating personas and all the other ‘virtual person’ activities that have been developed to cope with the fact that while the product manager would really like to stand in for the customer, it is a busy corporate world out there. What is more, our product manager is leaving with the CEO for a road jun-ket playing the role of demo dolly in front of the press and some important analysts. (Again, we speak from personal experience.) Scratch the Th ursday meeting for the next two weeks.

By the way, to further illustrate the point, we do urge you to read the rest of Living in an Agile Word all the way to the end. You will note that while it talks a great deal about ‘Agile product managers,’ what an ‘Agile product manger’ does in contrast to a regular old slug of a product manager is never actually described. And that is because there is nothing extra for them to do.

Now, it is time to leave the last 30 years behind and look to the radiant future being ushered in by SaaS.

The New Model for ProductManagers — Community Management

As we have noted, from a business standpoint the most distinguish-ing facets of SaaS products include their ability to operate 24/7/52, capture all subscriber interaction with your system, and concen-trate your subscribers into a natural community (and this will ex-tend to your reseller channel, assuming you have built one). And to leverage this ability, you must build community as well as analytics and requirements management into your product.

Now, let us assume you have incorporated the capabilities you need to manage, study and learn from your community of custom-ers. What do you do next?

SaaS and the Power of Communities 51

Th e fi rst thing to do is decide if the people who will interact with and manage your community should be called ‘product managers.’ To reorient your company’s thinking, we suggest using the term ‘community manager’ (CM). However, the PM title has been in use for decades and it is relevant in on-premise soft ware. If you decide to stick with it, the next thing you need to do is reorient your brain to accept that while the title may survive, very little of its previous functions will. It is time to put the pom poms away.

Let us move on to what your community managers should not be doing:

First, the need for feature requests management should be handled directly by the SaaS application, with prioritization driven primarily by the customer community and an ongo-ing and vibrant communication between your company and its customers. Th is means the end of traditional ‘tick list’ herding. Instead, your community managers will spend their time in this regard analyzing customer requests, prioritizing them based on community feedback and measurement, ne-gotiating with the customer community on implementation schedules and best practices, and providing your develop-ment group with constant and quantifi able updates on fea-ture usage and community satisfaction.

Second is that MRDs, PRDs and other related documents and processes should disappear. Th ese tools have always been closely tied to the traditional 12 to 18 month soft ware release cycle prevalent in desktop/retail and on-premise soft ware, but as we have seen, this cycle has pretty much vanished in SaaS. In an environment of continuous build, test and release, no one has time to create or read lengthy MRDs, PRDs (and the pace of SaaS development tends to make these docu-ments obsolete before they can be fi nished). Instead, the on-going dialog between your company and your community of users will substitute for these documents and provide a con-stant narrative of system change, adaptation and evolution. Internal Wikis, collaboration tools and other systems will be used to record and manage this narrative.

SaaS Entrepreneur52

Th e third area of radical change is the abandonment of the stand-in role that product managers have tried to play during the Agile development cycle. With a community of users, no middleman is needed to communicate directly with custom-ers. Tools such as ‘personas,’ which attempt to simulate cus-tomers, will be less compelling. Instead, use actual customers or prospective customers from your subscriber community to directly interact with new versions of the product under development in ‘sandboxed’ areas of your system that capture actual clicks and record actual complaints (or kudos), and allow detailed analyses. Use web-based video conferencing to assemble and manage focus groups. Remember that in a properly architected SaaS system, your community is always observable and manageable from your desktop. Community managers who submit requests to hop on airplanes so that they can ‘fi nd out’ what customers think of your soft ware and how they use it should be told to stop kidding around and get back to work. (Sorry, air travel fans.)

Instead, a SaaS community manager’s primary function will be to build and enlarge a customer community, empower it to manage itself to the extent practical, serve as community advocate and communications channel to upper manage-ment, and perform the role of community guide and re-source provider.

Launch planning is another area of operations that will un-dergo radical change in SaaS companies. In on-premise mar-kets, your fi rst product ‘launch’ tends to be your last major involvement with your customers until the next launch. But SaaS products, driven by the interaction between your company and your community, evolve in an almost organic, real-time fashion. Marketing programs must focus less on short-term glitz and bling and more on providing access to trusted experts, building ‘micro promotions’ closely tuned to your community’s internal business clock and providing services of ongoing value that can be measured and to which ROIs can be attached.

SaaS and the Power of Communities 53

Beta programs, which have traditionally functioned as both testing and marketing programs in the soft ware industry, also undergo fundamental changes in SaaS. As Google has shown, the idea of a product entering and leaving beta on a release schedule built around the assumption of a 12 to 18 month re-lease cycle is meaningless; Google has kept programs in ‘beta’ for years while still monetizing them in a variety of ways. In much the same way, a SaaS product as it evolves is always, in a sense, a beta program because of the near real-time evolution of the system. While individual features or new modules may be released in sandboxes for testing and comment before de-ployment, this is a far cry from the massive beta programs that industry observers have oft en seen serve as PR stunts. For all the CDs dumped into the mail and fi les downloaded from servers, these programs oft en seem to have missed the point of uncovering problems with and objections to your soft ware.

Once again, what replaces beta programs is the concept of leveraging a customer community to provide ongoing feed-back from that community to your company on the relative value of your product’s new features and capabilities. An ef-fective SaaS ‘beta’ program identifi es ‘power users,’ domain experts and industry experts, and listens carefully to their ad-vice, comments, observations and complaints. It incorporates these into the ongoing narrative of the product’s evolution. It publishes this narrative to the entire community. It listens to the community’s feedback and opinions. And the program measures and analyzes outcomes and adjusts accordingly.

Roadmaps will remain a factor in your marketing and devel-opment operations, but their importance will be diminished. Some subscribers, particularly in markets where your SaaS product needs to be integrated with other soft ware and sys-tems, and in cases where your product is mission critical to their core operations, will want to be kept abreast of future product developments for technical reasons. However, the ongoing narrative between your subscribers and your devel-

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opment group will unveil product directions early and oft en. And in most cases, it will be your community creating the roadmap. Th ey will know where you are going.

Before this book was written, we blogged about some aspects of the community management model on the Soft letter website and promptly aroused the wrath of some product management sophis-ticates. Some of the objections were a bit funny. For the past 30 years, pundits and product management experts have prayed for extensive “user input into the development process.” Agile proph-ets have established priesthoods dedicated to worshipping the user. Th e fi rst Agile manifesto proclaims, “Our highest priority is to satisfy the customer through early and continuous delivery of valuable soft ware,” as well as “Business people and developers must work together daily throughout the project.” (All quotes are from the original Agile manifesto.) When SaaS enabled that vision to be-come reality, suddenly the apotheosis of ‘business people’ stopped. Instead of demi-gods, soft ware customers suddenly became dolts, peasant clods who lacked the ability to see the big picture and needed to be led by the hand into a misty future by a wise techno elite. Here is an excerpt from a Forrester blog that summarizes what is perhaps the most cogent objection in this regard:

“And what about market development? Our hypothetical SaaS vendor has already attracted a particular kind of com-pany — say, medium-sized eschaton brokerage fi rms in the continental United States. But is that the ultimate market that you, the SaaS vendor, want to reach? By following the direct feedback of current customers, you may be missing the features that are important for the next market you want to enter, where neither streamlined imanetization or improved reporting may be the cost of entry.”Excerpted from Tom Grant’s blog site, the Heretech, 06/19/2009. Grant is an analyst at Forrester Research.

Th is misses the point. Are you worried that your customers are not as smart as you? Th at they are missing the big picture and that you are missing opportunities because of your focus on the most communicative and knowledgeable users of your system?

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No problem. Nothing about the community manager model prevents you from adding whatever features you want. Moving into new markets. Innovating as you see fi t. It is your product. And if you have integrated analytics into your system, you should be able to measure the activities of the ‘silent majority’ in your subscriber base. But in a properly architected SaaS product, you’ll be measured on the acceptance and usage of new capabilities very precisely. Your community’s complaints about your failure to add functions they request will become palpable. And remember that as it grows, your community should also be thought of as active marketing place that is ‘trading’ in the future of a single commodity — your com-pany. And markets are the most active predictors of the future ever developed. But if you feel the road to success ignores the input and desires of your customers, you can now precisely measure its im-pact on your business. And be accountable for your decisions.

Another point is that product managers are not tasked with opening new markets at soft ware fi rms; that is the job of upper management, who typically hire business development specialists or ‘domain experts’ to analyze new opportunities and industries. Product managers are hired to focus on and optimize the sales and marketing of ‘their’ product, to the extent they are able. A manager who spends too much time looking longingly over at another in-dustry or product is usually assumed to be stuck with a barking dog wad of code and trying to save their skin before it is scorched off at a ritual auto de layoff designed to placate the God of Poor Sales.

Community Manager Measurability, Accountability (and Responsibility)Now that we know what community mangers should not be doing, what are the metrics and tasks that will defi ne their new roles and responsibilities in the era of SaaS customer communities?

Measuring and increasing community satisfaction. Once a SaaS product has been introduced, it will be vital for its cus-tomer base to grow quickly into a interactive, self-managing community; obviously, helping create this dynamic will be the job of the CM. Measurable metrics will include the size of the community, percentage of growth, percentage of community in-

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volvement by customers, and level of satisfaction with the CM by the community. Product managers are supposed to crave constant customer contact; in SaaS, it will be the central facet of their day-to-day work.

Encouraging community learning and self support. As noted in the Customer Services chapter of the book, driving down support costs via community learning will be an important met-ric with a long lasting impact on the bottom line.

Increasing community monetization. A SaaS community is a rich potential source of additional and incremental revenue for a SaaS company. Opportunities include:• Sales of specialized reports to interested members of the

community.• Sales of aggregated information (where appropriate) on best

practices and business trends relevant to the businesses ser-viced by your customers.

• Sales of upgrades as well as cross/upsells from promotions recommended and, in some cases, implemented by the com-munity manager — perhaps a ‘community marketing man-ager.’ (It may prove desirable to separate these two roles lest the community manager come to be regarded as a sales shill rather than a community advocate.)

• Fees from new capabilities requested by community mem-bers who are willing to pay to achieve new levels of function-ality on an accelerated basis.

• Revenue shares with companies that are building new ser-vices on top of the SaaS vendor’s API/platform (assuming your system off ers this type of access).

• Organizing and communicating community insights and in-telligence. A good SaaS community system enables a manager to collect, analyze and report on community usage of a SaaS system at a very deep level. Every login and click (and non click) can be stored, aggregated and measured; SaaS compa-nies can measure user/product interaction in ways not pos-sible before. If, for example, the development group (or the

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community manager) feels that Feature X should be added to the system instead of the Feature Y requested by the commu-nity, it will be possible to measure acceptance (and assign re-sponsibility) for the success or failure of new feature additions and subtractions.

Once again, there is a strategic advantage that comes from the ability to precisely measure community and user acceptance of new capabilities via the measurements created by the combination of community input and business analytics derived directly from the application. It is an advantage that is unique to SaaS fi rms. Since the early 80s, endless angst has been generated over the issue of provid-ing customers with the functionality they truly want in their soft -ware. SaaS companies are in position to quickly and precisely meet their needs in ways and time frames never before possible. A SaaS company can be truly ‘agile’ in all aspects of its operations — de-velopment, marketing, sales and support when they properly lever-age their community. Th ose who learn to do it sooner and better will prosper and grow more quickly than those who do not. And in a well-run SaaS company, it should be the community manager who performs this role while working against a series of quantifi -able metrics, many of which will have a direct bottom line impact. In the future, expect to see the power and infl uence of community managers increase at SaaS fi rms.

Of course, with great power comes great responsibility. Many will struggle with the community manager model as it drives ac-countability through your company in ways not seen in the indus-try before. In the past, soft ware companies have been very good at pointing internal fi ngers when new releases do not do well. Sales blames product management for providing unsellable products (normally, they are too afraid of development to blame them). Product management blames development for refusing to listen to their opinions or read their MRDs and PRDs. Development blames product management for providing poor user input and unrealistic and vague requirements. Upper management blames all of them.

But in SaaS, all the excuses go way. In a properly structured SaaS system, accountability and measurability will be pushed out to every job and function in your company by your community.

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Development, marketing, sales and upper management can all be measured on their prescience and business sense and held account-able for their decisions. (And we will assume upper management will continue to blame middle managers when things go wrong; we are discussing SaaS aft er all, not Utopia.) Th e manufactured (and greatly overused) word ‘customercentric’ takes on a new meaning and signifi cance in the world of on-demand soft ware.

What will the consequences of these changes mean to the world of Agile and its devotees? Well, there still will not be any such thing as an Agile product manager because community mangers will still not be programmers. But tomorrow’s SaaS community manager will be able to help guide and streamline the provision of the one commodity craved by all Agile methodologies — timely, compre-hensive user input and feedback as a product grows and evolves.

For Agile enthusiasts, this all for the best. Th e use of product managers as stand-ins for the customer is and always has been a second-best choice. Th e original Agile manifestos do not reference product managers but rather customers. In an ideal Agile world, customers and developers are supposed to be in direct, constant contact with developers, expressing their needs and desire to them. But SaaS inherently allows customers and developers to constantly (though virtually, to everyone’s great relief) communicate in just the fashion envisioned by the original Agile visionaries.

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Marketing Overview and Challenges In June of 2009, the author of this book gave a presentation at Soft -letter’s SaaS University Conference in Chicago during which he urged all SaaS companies to integrate business analytics into their systems immediately. It was a stirring call to action, but unless you were willing to ‘roll your own’ system for capturing and analyzing analytics, it was not actually possible to follow his advice. At the time of his invocation, no commercial systems existed that would allow a SaaS system to quickly plug analytics into their operations.

By 2011, that had changed. Releases from companies including Apptegic, ToTango and Kontagent (their system is targeted towards smartphone applications) were coming online.

Apptegic began its life as a concept for an on-premise appli-cation to assist companies to manage and monitor their growing portfolios on SaaS applications. Faced with the reality of the expen-sive and slow sales cycles that are the norm for the type of product, the company reversed course and instead developed a comprehen-sive analytics system that can be used by any SaaS fi rm. Th e App-tegic system can monitor:

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SaaS Entrepreneur Case StudyApptegic: Providing Business Precision in SaaS

Company: Apptegic Company HQ: Boston Market/ SaaS analytics,Industry: customer engagement analytics Company Principals: Karl Wirth, CEO, Greg Hinkle, CTO Founded/ Founded 2010, went betaYears in Business: with paying customers in May 2011 Company Privately held, Development Type: privately fundedNumber of Employees: 4 % of Revenue Growth Company is in the startup phaseOver Last Years: with paying customers Notable Customers: Dyn, ConstantContact, Recorded Future, Vela Systems

• Capture usage data (clicks).• Functions.• Pathing or bread crumb trail.• Browser usage.• Location.• Demographics.

Information unique to a particular business, such as number of documents managed, customer age, etc. Th is can all be tied into basic usage statistics.

Th ere is no limit on the number of subscribers who can be tracked. Currently, Apptegic is supporting systems with millions of customers. Th e system is very granular, allowing its subscrib-ers to analyze anything from a complete subscriber base to selected segments and groups down to an individual account. Th e system is implemented via an API and data is accessed via a web interface that presents as a dashboard. Pricing per month ranges from $200 to $2000 per month.

One of the company’s earliest customers was Dyn, Inc., a pro-vider of managed DNS and E-mail services, located in Manchester, NH. While the company’s enterprise off ering, Dynect, was growing strongly, their self-service product, DynDNS.com, was starting to stagnate, declining from mid-double-digit net growth to the single-digit. Cory von Wallenstein, Dyn’s vice president of products, was assigned to fi nd out what the problem was.

Th e fi rst analyses discovered that the company was suff ering from high customer churn rate, with the percentage hovering at 60% (80% retention is a minimum goal for SaaS fi rms and 90% is the goal for companies selling into more niche and vertical mar-kets). Th e company was signing up new customers at a healthy clip, but failing to hold onto them. And because creating a new customer is approximately three to fi ve times more expensive than keeping one, the company was spinning its wheels.

To try to understand why the product line was suff ering from such a high churn rate, a project was launched to analyze customer interaction with their DynDNS system. But to do this, Dyn needed to develop a means to drill down into and query a dataset that had millions of users and many more millions of unique interactions.

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Dyn fi rst began the analysis process by using a series of ‘do it yourself ’ tools and processes to handle the analysis. Th ese included:

• Th e Unix command line for looking at Apache logs with grep, uniq, wc -l and more.

• Google Analytics, with dozens of custom confi gured ‘events’ and ‘segments.’

• Plenty of SQL hammering, with reporting code written in Python and Perl.

• A homegrown tool for graphing a moving average of key metrics.

• Large quantities of Excel and PivotTables.

As you can imagine, this mix of tools and processes was diffi cult to manage. Extracting results from it was equally challenging.

Leveraging Apptegic Fortunately from Dyn’s standpoint, Apptegic was coming online and Dyn decided to become one of the company’s fi rst customers. Compared with what they were doing, Apptegic was simple to get up and running and its extensive reporting capability allowed Dyn to rapidly drill down into the data and uncover correlating events between subscriber interaction churn.

What Dyn discovered was that the problem could be traced to its renewal process. Th e company made it too diffi cult to renew, and their renewal processes and promotions were not properly aligned with their subscriber’s schedules. In terms of schedule alignment, the company found that:

• Subscribers were far more likely to take action on renewing a service if their reminder email notifi cations (sent 60, 30, 14, 7, 3 or even just 1 day in advance of expiration) were delivered on a ‘workweek’ day (Monday, Tuesday, Wednesday or Th urs-day) versus a ‘weekend’ day (Friday, Saturday or Sunday).

• Correlated to email deliveries of notifi cations, the ‘fi nal re-minder’ E-mails delivered the day before expiration of an annual service had very diff erent success rates for the ‘work-week’ days vs. the ‘weekend’ days. Accordingly, Dyn stopped shutting down services on the weekend and pushed all expira-

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tions that would fall on a weekend day to the following Tues-day. Th is allowed the fi nal ‘day before’ reminder email to be sent on a Monday, when the subscriber was likely to see it).

In terms of marking it easier to renew, Dyn did the following: • Made it easier for users to turn on automated renewals on an

initial purchase, so no manual action was require to extend a subscriber’s renewal.

• Created highly visible renewal calls to action within the ap-plication itself.

Changed business processes that were preventing easy renewals. Specifi cally:

• Dyn created highly visible ‘update your soon-to-expire credit card now’ calls to action in the applications, as well as sepa-rate reminder emails for updating credit cards due to soon expire. Th is signifi cantly increased the success of automatic renewals.

Th e results of Dyn’s deep dive into its analytics were excellent. Churn rates were raised to 80%, a reasonable median for a SaaS company in a broad, horizontal market such as Dyn’s. (Again, if the company were competing in a niche or more vertical industry or segment, 90% would be the minimum acceptable percentage.)

Th e company also spent time analyzing the activities of two dif-ferent classes of subscribers — its most vocal minority and its high volume customer base that rarely contacted Dyn. Th e results were enlightening and had a dramatic impact on the company’s revenues.

Responding to requests from highly engaged customers netted approximately $100K in additional revenue over 12 months (as well as generating insights into how the system could be improved). But Dyn added seven fi gures to its bottom line aft er analyzing the ‘silent majority’ of one of its major product lines.

Dyn has been in business for 14 years and one of its most pop-ular products is DynDNS Pro, a service that allows you to assign an easy to remember hostname (such as yourname.dyndns.org) to your location’s IP address. By installing an update client on a device at that location, your hostname is automatically updated whenever

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the IP address changes, ensuring you can access your device re-motely at any time. Th e service has fi ve million subscribers.

When the system was fi rst introduced, it used the ‘ freemium’ model. Subscribers could use the system for free as long as they used it at least once a month. A paid, ‘premium’ subscription started at $20 a year, with higher paid subscription levels. Th e rev-enue model for the service included the assumption that free sub-scribers would in the main be casual users. If their needs grew, X% of subscribers would purchase a paid subscription. However, an analysis of subscriber interaction with the system revealed no such correlation! Freemium subscribers were just as likely to be heavy consumers of DynDNS as paid subscribers.

Based on this fi nding, the company changed its model. New subscribers had to sign up for a 14 day trial that required they pro-vide their credit card information for billing. If aft er this period they decided they did not want to pay for a premium plan, they could drop back to a free account. Th e process of exposing new accounts to the benefi ts of a paid plan increased conversion rates from .24% to 1.01%, a 300% increase that added seven fi gures to the Dyn bottom line.

Lessons LearnedTh e lesson any company can learn from Dyn’s experience is simple. By integrating analytics into your system, you can quickly learn how subscribers are using your product, learn what problems they are having in maximizing their engagement, solve those problems and raise revenue. A SaaS product without integrated analytics is a blind product.

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In the summer of 2007, the author of this book attended a soft ware marketing conference hosted by Soft ware Business Magazine at a hotel on the Boston 128 corridor. During the program we attended a panel session on the SaaS industry that included Patrick Fetterman, Plex System’s marketing chief. During the panel discussion, Patrick described Plex’s successful transition from an on-premise to a SaaS model. While discussing how his company managed its develop-ment cycle, he told the audience that the entire process was now done without product managers and the traditional product management framework so common in on-premise soft ware fi rms. Plex was a pio-neer in this regard and is being joined by an increasing number of

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SaaS Entrepreneur Case StudyPlex Systems: A Pioneer in Community (No Arrows in the Back). An Interview With Patrick Fetterman

Company: Plex Systems Company HQ: Auburn, Michigan Market/Industry: ERP (enterprise resource planning) for manufacturers Company Principals: Mark Symonds, CEO; Craig Huke, CFO; Doug Gregogy, SVP Products and Services; Patrick Fetterman, VP of Marketing Founded/ Founded 1995 as Plexus Systems, LLC;Years in Business: changed name of company to Plex Systems, Inc. in 2009 Company Privately held; majority shareholderDevelopment Type: is Apax Partners LLP Number of Employees: 210 % of Revenue Growth Th ree year compoundOver Last Th ree Years: annual growth rate of 32% Notable Customers: Invensys Controls; Inteva Products, LLC; IMS Gear GmbH; Magna; Vornado Air; Serralles Distilleries; Meijer, Inc.; the company currently has 661 subscribing companies.

SaaS companies who are replacing ‘product’ with community man-agement, for example, Priava in the International chapter. Patrick Fetterman, who oft en presents at our Soft letter SaaS University Conferences, is the subject of this interview.

Patrick, you say Plex has no product managers (PMs). Tell us more. Over the last 30 years, almost without exception, once a soft ware company reaches a certain size, and certainly within the enterprise space, it begins to implement a formal product management process.“First, let’s defi ne what PMs traditionally do and why; both you and I have practical experience in this area. Th ey’re usually keep-ers of the MRD (marketing requirements documents) and the PRD (the product requirements document). Normally, they spend a lot of time running around talking to customers and diff erent groups within the company about what should be on the MRD and par-ticularly the PRD. Th e cycle runs about a year or so, and there’s lots of arguing, negotiating, and winnowing of the feature list. Finally, something emerges from the process that no one likes and everyone tries to subvert; then you move forward with your product release. At Plex, the process wasn’t quite as gruesome as what you describe earlier on in this chapter, but you weren’t completely exaggerating, either.

“During the 90s, this process was driven by the realities of the client/server model. We had to support diff erent OSs, databases, clients and desktops. We were locked into the 12 to 18 month prod-uct upgrade cycle by the environment. But once we’d moved to the SaaS model, aft er several months we began to realize that tradi-tional product management practices and methodologies weren’t relevant to our company. Much of this was driven by the imple-mentation of Agile methodologies at Plex. As the model took hold, the changes it created in development rippled out across the entire operating fabric of the company.”

Do you adhere to any particular school of Agile? “Our approach mixes several RAD/JAD approaches. We’ve spoken to Dr. Cockburn, the ‘father’ of use case development, but we don’t use formal use case analysis.”

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Let’s discuss the fate of traditional product management at SaaS.“As Agile spread through our organization, traditional product management approaches withered away. MRDs and PRDs didn’t make sense; the soft ware was evolving too quickly. Preparing for launches and beta program was pointless; there weren’t any. Th ere was no typical roadmap. But we had to reconfi gure our organiza-tion for the avalanche of user interaction and requests for new fea-tures and capabilities that began heading for us on a daily basis.”

How many feature requests are you managing per year?“Th e current rate has ramped up to about 100K per year. Of these, 50K we discard quickly because they duplicate existing functional-ity. 25K we feel are bad ideas in that they don’t fi t with the thrust and philosophy of Plex. Th at leaves 25% for consideration. Of these, maybe 25% make it into the product. New feature releases are an everyday event. We don’t work around product deadlines; when the new feature is ready, we turn it on.”

What kind of a strain on your bottom line does this development cycle represent?“None at all! Development and QA are profi t centers at Plex. We charge for all feature requests. We bill out our engineering services at industry standard fi gures over cost [author’s note: $150 to $200 on average] on an hourly basis, with the understanding that new fea-tures we develop per customer request will be available to all Plex users; Plex retains the rights to all features we develop. If/when we decide to implement a feature we always tweak it so it’s useful to the entire customer base. We’ve had no push back over this issue; any one customer gets the value from the enhancements requested (and paid for) by all other customers. Our product is surrounded with a robust confi guration framework; again, this is inherent in SaaS products.

“Th e number of development hours will obviously depend on the complexity and scope of the new feature. Customers can make a request of any type, which is then managed by our team of devel-opers and implementation specialists. When a customer requests a specifi c feature the teams go through the product ‘inventory’ to see if a current capability is close to the request. Nine times out of ten we’ll implement a feature a customer requests, except in the case of

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a determination that it’s not a best practice; in that event our com-munity manager will open a dialog with the customer.

“Another facet of the SaaS model we’ve leveraged is that feature management and testing are directly integrated into Plexus and are used daily by our project management and testing systems. Our system has an integrated feature request button on every page of our product. In a sense, this is a voting mechanism that puts Plexus directly in contact with our customers. Once a feature is requested and implemented, it’s tested internally and then turned over to the customer or a customer team.

“Th is all takes place in the context of our customer community. In many companies, product managers are supposed to function as the voice of the customer, but in a SaaS environment you don’t need that. Th e customer can ‘speak’ directly to you via the product 24/7/52. We ask our customers to keep a ‘running’ top 10 feature requests poll in the system; if they don’t keep that feature in the Top 10, its likelihood of being implemented drops. We’ve also integrated a community/forum system within Plex that enables subscribers to create discussion topics of mutual interest and concern. And we’ve also added a peer to peer communications system that can provide context-sensitive notifi cations of changes to the Plex system.

“Th is approach allows us to react quickly to not only our sub-scribers but to changes in the industries served by our customers. We experienced this directly soon aft er the integrated requirements system went live. When steel surcharges went crazy in the manu-facturing industry, we received almost instant feedback from the system for better management of these charges and we were able to respond quickly.

“Another important advantage that our ‘charge for feature’ of-fers Plex is that it naturally winnows out requests that aren’t truly important to the subscriber. If you want to pay for something, then it’s important to you; if you don’t, it’s not.

“Our model in this regard is also evolving; for example, we’re considering:

• A program the enables our subscribers to cost-share localiza-tion and translation costs to help facilitate our entry into new international venues.

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• A cost-share model for subscribers who want to commission us to develop major new modules.

• A kick-start program designed to deal with a problem we’ve seen in our market. When a new industry standard is intro-duced into a particular industry segment we service, a situa-tion sometimes arises where multiple customers will hesitate to ask us to implement new features to meet the standard. Th e kick-start program provides the fi rst company that re-quests the new features the opportunity to obtain them for free or deeply discounted.

“An interesting fallout from our pay-for-new-features approach is that customers have become so addicted to our model of en-hancements that they have fl ooded us with requests. We currently have approximately a three month backlog of enhancement re-quests that customers want to pay for. While a backlog isn’t great from a customer service point of view, it’s excellent from a product strategy point of view as we have a database with tens of thousands of customer requests for enhancements to our product! We are hir-ing specialists to analyze this database, tease out trends, and help us prioritize similar requests that also align with the company’s ex-pansion strategy.

“I’d also like to make the point that our customer community drives other aspects of our product development beyond features sets.”

An example?“Our documentation. As you can imagine, documenting features and usage for our system is a big job. Plex is a complex piece of soft ware that’s also mission critical to most of our customers. At one point, we identifi ed over 10 separate repositories of knowledge management. Th ings were spinning out of control. During an open discussion on our forum system about the problem, a group of 20 customers volunteered to create a Wiki to replace our current sys-tem; since then, the community has taken the lead in maintaining and updating what has become the product’s documentation.

“Th is entire process has taught us a lot about the dynamics of cre-ating customer community. For example, reputation management

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and acknowledgement. Th e number one contributor to the Wiki became heavily involved with an internal project at his fi rm and his contributions tailed off ; in fact, the entire project stalled a bit. We im-plemented a new system that ranked contributors to the project and when our customer saw he’d dropped from the number one contribu-tor spot to number 10 it reenergized him to regain his ‘Top Dog’ spot.

“Th e entire experience led us to work with the high contributors on a more proactive basis. We reach out regularly with E-mail, the phone, and through a program of offi cial recognition at our an-nual user conference. We provide awards for most contributions to the documentation Wiki, one for most active Community Adviser, another one for people who drove product development the most through their great requests and ideas. Our development group also gets in the act and nominates and votes on the most interesting feature request of the year. Awards are plaques and gift certifi cates and are given out at our annual user conference; last year it drew between 700 to 800 people.”

What about the objection that by listening too closely to key cus-tomers you lose focus on new markets and opportunities?“Th at’s an interesting point. We’ve found that our community helps us identify and learn about new markets and requirements. For instance, we’ve been looking at new opportunities in the Brazilian market and reached out to our subscribers to learn more. An ex-ample of what we’ve learned is that under the Brazilian tax code, moving products from one location in a warehouse to another can trigger tax charges; this ties back to their VAT revenue system. It’s something an ERP for manufacturers needs to know and incorpo-rate into their soft ware to address local needs. We’ve also imple-mented a customer advisory board that’s cross industry and cross company size; this also provides us with insight into areas for busi-ness expansion.”

What have you replaced your product management system with?“It’s been an evolving process. We’ve recently created the title of Community Manager; their role is to engage with and guide the community along the lines discussed earlier in this chapter. But more specifi cally, at Plex, CMs:

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• Seed discussions on new topics.• Identify trends.• Host webinars and live events.• Connect prospects to customers.• Leverage social media with your customers

“Th e skills background is not that diff erent from that tradition-ally associated with PMs. Online social skills, likability and knowl-edge of our customer’s business — more geek chic than geek.”

What about the role of product marketing managers? Tradition-ally, they’re specialists in post-release marketing.“Th e problem is in the question since we don’t have traditional re-lease cycles. But aft er much experimentation, the function has sur-vived, as has the title. What’s changing is the scope and focus of their jobs. Without new product launches, we’ve had to rethink how we market. We now look to hire people who are or can become sub-ject experts in industries and/or localities. Th eir job revolves around content creation, subject matter expertise and business develop-ment. We look to develop publicity and market awareness around major events, research reports and vertical events that are important to customers.

“Th ese managers also have the responsibility to investigate and take our product to new markets. But the process we use relies on the community mindset. Instead of creating MRDs, our product marketing managers work with the community to learn more mar-kets and requirements, feed the information back to interested par-ticipants, and eventually identify someone in the community who will engage with Plex and develop a formal request for us to build new capabilities that help us enter that market.

“It’s the type of bottom-up dynamic that SaaS fi rms need to un-derstand and harness. SaaS fi rms have to stop thinking like soft ware companies and start thinking like online service companies. At Plex, we say ‘WWGD.’ Th at’s short for ‘What would Google do?’”

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Marketing Overview and ChallengesCivicPlus originally went into business in 2004 with the vision of supplying city and county government with specialized content management systems (CMS), dynamically created websites op-timized to manage pictures, fi les, messages, etc. Over time, the company discovered that the single biggest need of its government customers was to communicate with local voters and citizens via these CMS sites. As a result, CivicPlus repositioned its business to focus on a citizen engagement system that was tightly integrated into their CMS.

CivicPlus was well aware of the value of communities and before deciding to build their own community management system, had made the strategic decision that future product development would be driven by their subscribers. In evaluating the path the company

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SaaS Entrepreneur Case StudyCivicPlus: A Customer Engagement Company Decides to Fully Engage With its Customers

Company: CivicPlus Company HQ: Manhattan, Kansas Market/Industry: Community engagement and content management systems for government Company Principals: Ward Morgan, CEO, Deb McNew, VP of Operations Founded/Years in Business: Founded 2004 Company Privately held, Development Type: privately funded Number of Employees: 123 % of Revenue Growth 2009–2010, 42%, Over Last Th ree Years: 2010–2011, 42% Notable Customers: Burleson, Texas, Montrose, Colorado, Park County, Colorado, Richmond, California

should take in picking a community system, CivicPlus had four basic choices:

• Build its own community management system.• Use the popular social networks such as LinkedIn, Grouply,

Facebook or similar system.• Use third party forum and discussion boards.• Use third party ‘private’ social systems such as Yammer, Le-

verage, Jive, Lithium, Chatter and others.

Each approach has its advantages and drawbacks. If you choose to develop your own community system, you will hopefully end with something that is an exact fi t to your needs but developing it may not fall within your core competence and the system may never be fi nished and never work quite right. And upgrading and maintaining a community system may not be what you want your development group to focus on.

Using an existing and popular social network is tempting. Costs are low to start and these systems are easy to get up and running. Th e problem with them is you do not ‘own’ your community; the so-cial network provider does. For example, LinkedIn can and has shut down groups without providing prior warning to group owners for reasons that later proved to be invalid. Ditto with Facebook accounts. And in all good conscious, we cannot recommend Facebook for any B2B company as primary community system, though it can be useful for marketing purposes and as a way to ‘feed’ your community. Th e present security and privacy issues are simply too great and the sys-tem is not well designed for a more closed social environment.

In addition, social systems may have restrictions you fi nd un-acceptable or too confi ning. For example, LinkedIn only permits one message a week to be sent to your group. It provides almost no useful metrics that permit you to measure response to your notifi -cations and promotions.

Th ird party forums and discussion groups can be useful, but they oft en have limited contacts to the social networks, limited connectivity to external databases, and are regarded in some circles as ‘old technology.’ But they are relatively inexpensive and oft en provide tight control over content posting and behavior.

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Th e abilities of private social systems vary widely. Some are highly template driven and relatively infl exible. Others are more free form and can be more easily confi gured. Data integration and transferability varies widely from package to package.

Most of the current generation of community management products do not integrate closely with SaaS analytic systems. Over time, we expect this situation to improve, but it is a factor you should take into consideration when deciding what path to take in implementing your community management.

CivicPlus decide to go with the fourth option and subscribed to a private social system. Aft er a year, the company decided they had made a mistake. Th e system they had picked had many nice features, but was template-driven and too infl exible. CivicPlus had ample HTML design and resources internally, but even with these found it too diffi cult to customize the social system to meet the fi rm’s integration and ‘look and feel’ goals.

Fortunately, the company had learned a great deal about how communities work by observing how their subscribers interacted with their subscriber base — voters and citizens. At that point, the company decided it was time to ‘eat its own dog food’ and use its own technology to support its own subscribers. One of the prin-cipal factors in this decision was that CivicPlus’s system was built around a CMS; this provided it with a great deal of inherent fl ex-ibility in creating a more customized appearance.

Th e CivicPlus community system incorporates the following:• Discussion forums.• Social media linking.• File sharing and uploading.• Voting systems that allow subscribers to nominate new fea-

tures for development.• RSS feeds from government oriented sites such as

www.govloop.com, www.govtech.com and http://americancityandcounty.com.

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Figure 1-9. CivicPlus community management subscriber interface.

Th e community is managed initially by members of the CivicP-lus’ customer engagement group, which works with its subscribers and assists them in turn in building engagement with local popu-laces serviced by a CivicPlus CMS. Promotions to the community are managed by the marketing side of the company. CivicPlus does not have product managers but will be adding a community man-ager title to the organization.

Lessons LearnedYour choice of a community management system should be made carefully. Make sure you consider the following:

• How much control do you have over your community infra-structure? Can you back up your community membership, archives and other materials? What recourse do you have if a

SaaS and the Power of Communities 75

third party shuts down your community? (In the case of the major social networks, the terms of use terms you agree to give you practically none.)

• Is the system you pick confi gurable enough to meet your ap-pearance as well as scalability needs? If not, how diffi cult will be it be to transfer your community content to a new system?

• Can community analytics be integrated with your SaaS sys-tem analytics? Combining these two capabilities is a mea-surement and management dream.

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