Thursday, 1 September 2011

ROI in The Cloud - Not for the Faint-Hearted

How do you produce an ROI for Cloud software selling or SaaS as we used to call it?

A lot is talked of business transformation by large vendors and how resellers should change their business model. But in a recent straw poll done in silence by me in a room with staff from a large vendor only one person had ever actually sold SaaS based software and that same person was the only one who had actually been MD of such a company and who had actually worked on an ROI model. That person happened to be me. But it was rather disconcerting to know that the large vendor staff were preaching 'transformation' to resellers and ROI when they had no idea what they were actually talking about. No change, there some might say. It is also fair to say that few, if any, of the large vendor front line people have worked inside channels let alone run a business there.

The scorecards for each of the large vendor staff was to get a certain number of seats of their software sold as SaaS seats by the end of their fiscal year. At this point, we were already some way into their fiscal year. So an esoteric question on ROI was considered. If the scorecard target was, say, 1,000 seats, then would it matter if the salesperson sold the 1,000 seats in the final month of the year or the first?

The answer to the question is that it matters a great deal. 1,000 seats sold in the 12th month of the year is recognised as only one twelfth of its value to the P&L even if all the cash is collected at once - such is the accounting of SaaS. So 1,000 seats sold in month one would have a full 12 twelfths of the P&L impact as opposed to one twelfth. It isn't rocket science but it is rather fundamental to the calculation of ROI and it's why those large vendor staff are at once at loggerheads with the resellers they sell to.

But traditional software salespeople work like that and it's why they are not good people to sell SaaS and it's why resellers fear the Cloud model in many instances because it immediately puts their traditional model of P&L and sales reward schemes into a spin. Give me an Oracle salesperson and I would tell you they might earn £250k a year but they would probably survive less than 3 months on a SaaS model and leave by mutual consent.

With SaaS you have to consider the long game. It's all about basic KPIs and selling each time you lift the phone up. It really is about starting small and growing.

So when you look at - they have only 77,000 corporations they do business with in the world. Microsoft have 4 million in the UK alone. Salesforce won hearts and minds by picking off pockets of users who had specific needs, proving ROI and building adoption. Microsoft's problem is that they are going to have convert a user base. Another problem is this. SaaS based salespeople like Salesforce had nothing else to sell - they ate their own dogfood because they used their own products every day. If they didn't sell their product, they were out of a job. Traditional vendors don't fear failure as much as they have have the old tree to hug if it all fails. And few, if any, of the traditional vendors actually use their SaaS based products daily to be able to understand it like a user and evangelise like a real SaaS person. It produces mixed messages by their senior management and Microsoft are a prime example of that but they are not alone by any means.

Back to ROI. Consider MS Office 365 at a sweetspot of £200 per user per year. For that you get hosted Exchange and Office 2010. The old Office was 2007 so it suggests a 3 year cycle of upgrade. Which means that you would expect a user to upgrade at around £300 per user every 3 years or £100 per year. In that period a new user of Office 365 would have paid £600 per user and the local Office client is not automatically upgraded in Office 365. The mathematics is flawed at the user end. True you have to consider the cost of upkeepeing and upgrading the Exchange server and the running costs of the old but immediately there is an ROI problem at the customer level even before you get to the reseller level.

In the process of transformation, resellers have to consider how to remodel their own business not just learn the end user justifications, so pressure is at both ends. It's why most large, non-SaaS traditional vendors are having such a terrible time converting. Some have used Telco companies as their vanguard but that's equally flawed. Telcos should understand the basics of annuity selling as they sell leased lines and line rentals but they get their real reward based on usage and users worry little about the technology. If a disaster happens, they rub their hands as usage goes up. In the Summer, when usage goes down, they go on holiday. SaaS requires a consistent, pragmatic approach as every sales call counts. Telcos also have the disadvantage of knowing nothing about software.

So how does a traditional vendor move software sales to Cloud if it cannot simply amortise the old costs and host the server? And how does it get ROI in a 12 month period and get resellers to change habits?

Riddle me that one. You have to start from a different place. SaaS veterans like me have been there and done it - we bear the scars but we sold in a completely different way, scaled our businesses differently, paid our salespeople differently, consumed and collected cash differently, and used a completely different model on costs and profit. It's one that doesn't come naturally to large, traditional software vendors. So when they try to engage their reseller and channel base, they inevitably have little experience to pass on other than what it said in their boss' slides.

That is a fundamental problem for the software industry and its channel if it wants to win. The main enemy in this world is the like of Google who know no such limits on thought. They don't worry about client upgrades - they gave 128 new features to users in the last 12 months alone for just $50 per user.

However, can anyone give me the name of a single Google salesperson and their phone number?
Channel enablement is the biggest single weapon that traditional software vendors have in the fight against the likes of Google. Use it wisely as it can be a fickle beast. But it's one that needs to be fed and right now it needs to be weaned. Enablement of the channel is the biggest challenge and the current method of 'transformation' is not successful as it does not address the fundamental questions on ROI either at the user level or the channel.
And that's because the vendors measure ROI in a totally different way. Listen up, people. You have to converge. Most vendors have recognised that that they will have to 'over invest' in order to win in the Cloud - some huge bets, in fact. However, they seem to think that their channel should also invest and produce them an ROI in the first 12 months. How daft is that? This is all about a 'Joint Leap of Faith'. While it is very hard to work out the ROI, the shifting sands of client technology is gathering pace as PC sales plummet and tablet sales grow. The announcements about what Apple's new iOS will deliver is a profound message to us all. Cloud will change the way we all buy software and what we buy. Not just consumers but business uses too.
It is a Leap of Faith, no doubt. But if vendors and channel cannot have mature conversations about working together then vendors risk losing vital weapons in their fight to hold their position and get new growth. Software purchasing has morphed profoundly over the years and vendors and channels have always adapted together to win over time. Another challenge is ahead and it seems the old allies are out of sync.
That must be music to the ears of Google and Apple.

- Posted using BlogPress from my iPad

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