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What Is Software as a Service? The One & Only Law for SaasI have been working with SaaS companies for almost a decade now and I continue to be surprised by the “rules” and “laws” that constrain them. I recently posted about Installed-Software-as-a-Service (ISaaS) and then entered into a great debate on the LinkedIn SaaS group on the topic. I have strong views on SaaS. Here is one of them:

Maxwell’s Law for SaaS

When it comes down to it, what is software as a service? I believe there is merely one law that should dictate SaaS, compared to many freedoms that it offers and that companies should take advantage of: Software as a service must be packaged and sold as a service with service-level agreements (SLAs). 

In essence, a SaaS vendor is selling service levels in addition to the current and future functionality of the product. This is in contrast to selling a file of software.

The issue is quite simple if you think about snow removal (being from California and currently living in Boston, this is something that I unfortunately need to worry about). I could buy a snow removal product like a snow blower that comes with certain warranties and service associated with the product (spare parts, places to get the product fixed, etc.), or I could contract with a service provider to take care of it.

If I contract with the service, all I care about is when they come to remove the snow and how clean my driveway and walks are when they are done. I also care about the price. I don’t care about the products they use, how much labor they are using, or anything else.  Just the price and the SLA. It is exactly the same with SaaS!

The Many Freedoms SaaS Offers

I also believe there are many freedoms associated with SaaS:

  1. You can put your SaaS stack wherever you determine is best for your customer. This includes running the software in your own data center(s), putting it on one or more private, virtual private, or public clouds, running it on bare metal, any operating system, or any cloud infrastructure.
  2. You can architect your product however you determine is best for your customer. This could include single-tenant, multi-tenant, or any other architectural approach that will serve your customer well.
  3. You can include installed software, an appliance, or anything else that is valuable to your customers as part of your offering.
  4. Your software can be consumed by users any way that is best for them. This includes using thin clients, thick clients, or any other client, and your software can be consumed by other software via an API or any other interface that works well for your customer.
  5. You can build any whole product by surrounding your core product with any level of “people” services that will be best for your customers. This includes strategic services, customization services, installation and configuration services, training, customer service, or any other service that address your customers’ needs.
  6. You can price and bill for your software however you want, so long as it works for you and your customers.  This includes subscription pricing, one-time pricing, or any other pricing.  This includes one-time billing, annual billing, quarterly billing, monthly billing, or any other billing.
  7. You can sell your product and services any way that you want. This includes direct from your website, use of inside sales, use of field sales, and/or selling through indirect sales partners, or bundling your product with other products that are sold through another vendor.
  8. You can set any growth strategy for your company that you believe will make you successful. This could include building a capital-efficient company and growing/managing based on CAC ratios and magic numbers, an all out “own the market at any cost” winner-take-all strategy, or anything in between.
  9. You can do anything else that you want to do that will add value to your customers and/or help you build a great business.

Yes, I would like to see you minimize complexity, minimize labor, and have a great economic model, but most importantly, I would like to see you have a great competitive advantage and build a great company. And, of course, you need the freedom to figure out what that means for your specific situation!

The reason I wanted to approach this topic is that after working with SaaS companies for almost 10 years, there is still a lot of FUD in the markets about SaaS.  Many people restrict their freedoms and that can really have an impact on your ability to build a unique and valuable whole product for your customers and build a great company.

Note: I write this post using the term SaaS because it is a popular term. I actually believe the the right term is XaaS (“Zass”) standing for “Anything-as-a-Service,” so that it includes anything that the vendor wants to string together and offer as a service with SLAs (not just software).

What do your think? Are you blindly following the unnatural “laws” of others or are you freely deciding to build a competitive advantage with a great company growth strategy?

Scott Maxwell founded OpenView Venture Partners in 2006 and has worked in venture capital for over 13 years.

  • Joumana

    Two perspectives here…. the vendor and the customer.. You gave the example of snow removal concluding what SAAS is and after you talked about the benefits of SAAS for the developers… Of course the 9 points can be summarized in two words: Flexibility and control… It is ideal for the vendor however the experience showed that many companies opted to have its own customized service controlled by its proper authority (departments…)… Thus I can see SAAS as a paradigm looking at the software as an evolutionary service adapting itself to changes regardless its direct benefits to developers
    .

    • http://www.openviewpartners.com Scott Maxwell

      Joumana,
      I don’t understand your point.

      Scott

  • http://twitter.com/StevenForth Steven Forth

    This got me thinking about what could go into an SLA. I had a very narrow understanding of an SLA, basically a few technical measures like up time, but why can’t an SAL include business metrics? The SLA could commit the SaaS vendor to certain business outcomes like higher profitability or specific operational improvements. But why stop there, an agreement is two way, so it could also commit the customer to certain behaviours. What if one required a certain level of use without which the price would go up! (Trying to think outside the box here but there are some cases where this would make sense for both parties.)

    • http://www.openviewpartners.com Scott Maxwell

      Steven, thanks for the comment. Yes, the SLA could include business metrics and that is a good point. Perhaps vendors will explore this possibility, since that is what their products are really supposed to be doing for users! To some extent, some advertising vendors online do something like this by getting paid based on sales. Perhaps that is the next innovation in SLAs for XAAS vendors…

  • Greg Veres

    Hi Scott

    I think you could extend your snow removal example a bit to further illustrate your point. ISaaS is like the snow removal company deciding that they are going to leave a snow blower in your garage for their use when they come remove your snow. Maybe your drive way is small and you are the only customer who needs the “baby snowblower”. They would rather leave it with you rather than haul it around everywhere just to use it once.

    This seems very similar to all the Internet Service Providers. They provide a service to you but they do so by providing you with on premise equipment. That is their model, mostly out of necessity. And nobody could argue that an ISP is anything other than a subscription model. The ISP still has the right to log in and control the equipment that is sitting in your datacenter. I would assume that any company offering ISaaS would also do the same thing so that they can retain the same amount of control over the experience, do the upgrades etc that would happen for a pure SaaS play.

    Greg

    • http://www.openviewpartners.com Scott Maxwell

      Greg, thanks for the thoughtful comments. I agree with both of them and appreciate your ideas!

      Scott

  • Chuck DeVita

    Scott,

    Good article.
    I have forwarded it to my Selling SaaS to the Enterprise class at Stanford.

    Chuck DeVita

    • http://www.openviewpartners.com Scott Maxwell

      Sounds great Chuck! Let me know if you want to have a guest speaker sometime.

      Scott

  • http://www.innovationnest.co/ Piotr Wilam

    Scott, it is really important point that you make.

    Working as a seed investor with startups we encourage startups to “do anything to add value to their customers and build a great business”. Focus on value is crucial. We find that often especially points 3 to 5 are not that obvious for entrepreneurs.

    But on the other hand we prefer startups that limits their freedoms:

    1. In the first phase of growth at least majority of the user acquisition process is done through the Internet (versus direct sales, partners etc.).

    2. There is recurring revenue preferably monthly recurring revenue.

    • http://www.openviewpartners.com Scott Maxwell

      Piotr,
      Thanks for the note. On your first point, I would like to see all companies try to do as much “automated” customer acquisition as possible as well. Some market sectors are easier than others, but their is a benefit to working hard at it in all sectors. On your second point, I couldn’t agree more!

      S

      • Big T

        Scott,nnGreat article! What advice do you have for my partners and I that have a legacy “thick client” product that we have sold for 10 years and are just finishing up development on a “Next-Gen” SaaS product that we want to sell into the same market? The hope is to win business we are not winning (cheaper to get into and no IT infrastructure required by the customer) and also venture into many new vertical markets because we have genericized the labels and design of the product. We currently sell and market to construction mostly.nnChallenges / Concerns: nn1:Do we rebrand the new product and market it under a new name? The web site would be tough to modify to market both effectively without causing potential confusion and possibly delayed purchase decisions?n2. Do we hire different sales perople / channel managers so we do not negatively affect one product opportunity or another?n3. Do we split the business books so that we have 2 distinct exit strategies working for us instead of bogging the new opportunity down with the old? We do not want to have to “bundle” them and minimize our exit potential should we bring in outside funding or look for an potential purchaser for one product or the other?nnI would love your advice and perspective on the above if you are willing to share.nnThank You!nnSincerely,nnMike