Guest post by Lewis Miller, CEO Qvidian
Introduction from Michael Skok
I’m often asked about what it takes to build a successful SaaS business. And many times it’s by people who have legacy businesses, wondering if they can make the transition. It’s not for the feint of heart, but it can be done. And one such success story is Qvidian who I asked to share their story below. Lewis summarized it in the post below, but it’s really the overview. I encourage you to ask questions of Lewis in the comments below to learn from it. Enjoy!
TRANSITIONING TO SAAS; A RETROSPECTIVE
By Lewis Miller
Having just completed a successful and full transition to a SaaS business and delivery model, I felt others considering this transition may be able to benefit from our story. To give you some perspective and as we considered this journey 4 years ago, we had about 800 customers of which 400 were using our application on premise behind their firewall and on various versions of our code. The remaining 400 were using our single instance web version in our data center again leveraging various versions of our code. Our goal; all customers using one multi instance version of our code in our private cloud. Why?
As we initiated the project, we assessed the impact to the stakeholders that would be impacted by the project and the pros and cons of such a transition. Clearly, the investors in the company had great upside in this journey based on valuation multiples attributed to true recurring SaaS revenues as compared to on premise one time fees with a maintenance stream. However, investors also had to absorb the business risk associated with such a move. We then assessed the internal company impact. While there was large operational leverage for the Operations, Engineering, Professional Services and the Support organizations, there was tremendous fear within the sales organization. Fear that customers would leave, that commissions on a lower initial recurring revenue order would generate less commission and the general disruption to the sales process that such a transition would cause. Finally, we had to assess the customer impact and weigh the advantages and risks of such a move. At the end of the day, we determined that the advantages of a lower costs model, a more predictable and efficient operating relationship and the ability to engineer new capabilities at a higher velocity outweighed the risks.
We felt that if we put together a multi phased plan to execute the project that we would be less disruptive internally and with customers while lowering the overall risk to the business.
We knew that to accomplish our goal we needed to deal with a finite set of transition situations. So, our first step was to shut off the funnel of new on premise customers. We immediately developed a talk track for this phase, readjusted the commission and contract length plan to offset the lower initial order size and over incentivized sales of this type. It was almost a pay me now or pay me later kind of decision. In Year 1 we were successful in continuing to sell at past velocity and only had to give in to less than five customers which we determined to be strategic. We also informed those five customers that they would be taking the journey with us as we made the transition.
While we were executing Phase 1, we simultaneously began the process of evaluating the re-engineering effort with our software to provide a multi tenant version to our customers. We also began to assess and evaluate the steps and costs required to harden our data center offering to meet the most rigorous of standards. You see, commercial banking was one of our large customer segments at the time and we knew we would need to have a secure and compliant offering. We determined that the re-engineering process would take approximately two years and that incremental improvements to the data center over that time would be sufficient to successfully execute the project. If you are wondering about the timeline, and this was very controversial internally, with 800 customers we had commit to improving our software while we were re-engineering it at the same time. We commonly used the expression that we were saddling the horse while we were riding it.
What do we do about our 400 on premise customers? We decided that given the extended development cycle, a phased approach for bringing customers into the new environment was the least risky approach. So, we had to build the customer value story which included a lower cost of software, a more efficient operational model and a higher development velocity for new capabilities. We needed to convince our customers that this was in their best interest and that we were sensitive to the work that needed to be done within their environment, so we introduced customer incentives to migrate. We set up what was eventually 8 phases of migration with declining incentives over time to make the move. Remember that we were asking customers to change their financial model with us and to pay more money for the hosting portion of the SaaS fees.
Today, we have 1200 customers on one version of our application and a 100% recurring revenue model. While there were many bumps and turns in the road, we stuck to our plan, modified where necessary and communicated the plan internally and externally so there were few surprises. We maintained our 90+% retention rate throughout the process and surprisingly! made this transition with no additional investment capital.
A final word of caution. This is not a trivial exercise. Completeness of an executable plan and the commitment to carry this out to the finish is critical. You may decide in your business that the risks outweigh the benefits. In our case, it was like a skid of bricks being taken off our shoulders.
I hope the high level review of this process help you transition your business.
Please feel free to ask myself or Michael any questions in the comments below. We’ll encourage our network to help respond as needed too.