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By Peter Longini
In the technology arena, there’s fast, and then there’s really, really fast. Software as a Service, or SaaS, is clearly in the latter group. And its velocity changes everything. Throughout his career, in which he has held key positions at technology companies including Legent/Computer Associates, Mallett Technology, Axent/Symantec, TruSecure/Verizon Business,, Logiclibrary and Cloakware, Greg Coticchia – now CEO of online law firm electronic billing provider eBillingHub – had grown accustomed to seeing things move quickly. But nothing of his experience in the world of shrink-wrapped and installed software prepared him for the warp speed of SaaS commerce.
“I went through a kind of personal journey,” Coticchia reflected. “A lot of my assumptions in coming into the company, turned out to be, well, different. Most folks, like myself, come into a SaaS environment and say, ‘Oh, software is software, it’s just delivered a different way.’ But it’s more than that. People in traditional software think they can just price it differently, pay their salespeople differently, host it somewhere, and they’re off to the races. But it’s different than that. It’s a different feel. And the culture is the most important difference.”
Culture Shift
Providing truly superior service is fundamental to that culture, because the customer is typically relying on you more than on their own internal IT resources, according to Coticchia. “Culturally, you have to be set up for people’s expectations that you’ll always answer the phone and be responsive to retain them and create a bigger entry barrier to your competitors,” he said. “Culturally it sounds simple, but really you have to think differently. It’s a faster pace; it’s a more frenetic pace than a standard enterprise software company.”
Those speed and culture differences may be exacerbated by today’s weak economy, where companies with costly installed ERM systems are trying to find ways of paring back expenses. “People right now are looking at all their maintenance agreements: Do we need that many seats? Do we have to pay this much in maintenance? Do we have to be on the current release? A lot of companies are going through that exercise trying to save money,” he noted.
But it doesn’t work that way with a SaaS provider. “When you have a business model like eBilling Hub, renewing a maintenance agreement is not a once-a-year event. It happens every month,” he said. “Every month you have to earn your stripes with increased functionality or the promise of increased functionality that you have to substantiate and deliver. Because the reality is that the customer can quit at any time. The beauty of quick installation and fast set-up also means that it can be de-installed very quickly too.”
Low Barriers
That results in a very different competitive environment from the one for installed enterprise software. “If you’re in a heavily competitive market segment, your barriers to entry and exit are substantially lower, which is a direct benefit to the customer,” Coticchia observed. “Our service can be up and running for a new account in 8 to 12 hours. That’s pretty stunning. But if you were talking traditional enterprise software, you may be talking about three to six months! So you’ve got a whole different level of effort in order to get that software installed and working. It also requires a different mindset for your professional services people, and what you can expect to earn from professional services. So your whole model and metrics change.
“But that low-entry also means there’s less initial commitment from the customer. If you’re unhappy with the service, if you are unhappy with the functionality, if you’re unhappy with some aspect of the product, you can change more easily because you’ve got less into it. Contractually you’re less into it; monetarily you’re less into it; even your time commitment – you didn’t spend six months getting this thing up and going. Instead, you spent a few weeks, and then said: ‘Okay that didn’t work out; we’re going to switch to something else.”
Those lower entry and exit barriers can cut both ways. “From my perspective, it’s good,” he said. “I can get a customer up in the same month I sell them, start booking them and starting counting the revenue. That’s great. But it’s bad in a highly competitive marketplace because they can also move out of my contract much easier.”
Faster installation and lower barriers to entry mean much shorter sales cycles, too. “I’m used to the classic 120 to 180 day cycles from suspect through customer for sales in the $50,000-100,000 range,” Coticchia said. “In this case, for just about the same amount of money, we’re getting from leads to close in 45 days. Recently, we went from a direct model to an indirect selling model, but that only added another 15 days. So we’re turning business in a 60 day cycle. People can try it and feel comfortable with it in a much shorter time frame because there’s less risk. They don’t have to get capital expenditure approval from a Big Committee. They can sign off on it and say that it’s just another expense on a monthly basis, a few thousand dollars. So it’s easier to get through.”
Getting Sticky
The higher speed of SaaS operations means a different style of management as well as quicker product development. “The pace is just faster and the need for demonstrable results is faster as well,” he said. “In most SaaS cases, you’re putting out some type of quarterly update. So you’ve got a 90 day turn in terms of updates, features, functionality, changes in the product, and so forth. That, plus the retention issue, and the need for superior customer service means you have to really move quickly.”
But even if you do all of it well, you still need to find ways of differentiating yourself from the competition, many of whom may also be doing things well. For eBillingHub, part of the answer is in its pricing. Whereas most software companies base their initial price on the core platform and then add on a variety of features, functions and services that can easily exceed the base price, eBillingHub builds all of it into the price upfront.
“We’ve simplified it that way, so that the customer’s got a fixed budget they can rely on,” he said. “There’s not the usual: ‘Oh its $2,000 a day for this service and the training is another $2,000 a day.’ The standard practice in the software business is to nickel and dime you for everything. In our case, even if the customer were still billing manually, they would have to pay an outside firm or have their IT staff built various formats to use in billing their clients. But we include an entire library, free of charge, where they can go to and get any electronic format and use it for billing.” So we come to the marketplace with a very different approach to doing business.
Time Bomb?
Even with – or perhaps even because of the down economy – eBillingHub has seen no signs of slow-down in sales. “In part that’s because it’s easier to acquire, it’s less risky,” he observed. “And our value proposition also allows people to get a lot more work down with less people.”
But there’s a cost crossover lying in wait a few years down the road, and it’s going to take a while to see how the SaaS business model fares. In essence, it’s that while the cost of installed software is initially much higher than a SaaS subscription, in subsequent years, it becomes much less – generally only the cost of a maintenance agreement, or about 20 percent of its initial price. With SaaS providers, however, the price does not decline from year to year. And after three years, you’re at a breakeven point.
“Years ago, when I was in the mainframe business, we used to do three-year licenses,” Coticchia recalled. “Most people said, ‘Three years, that’s about how long I’ll hold on to this.’ And it seems as though that financial metric has held up, at least in the pricing models of SaaS versus traditional ways of buying software. So from a payback time period, that’s what people are looking at; they’re going to start paying more incrementally beginning in year four.”
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