5 Ways to Avoid Getting Burned by Cloudwashing
SaaS-querading, in which software vendors put a Software-as-a-Service marketing veneer over old software that has been re-engineered, has been going on since Brian Sommer coined the term in his 2010 article, “SaaS-querade: When on premise vendors try to pass as SaaS vendors.”
Back then, SaaS was poised to upend the software industry. Cloud hosting, multi-tenancy, extensible platforms and subscription-based business models were introducing new economies of scale and offering customers greater business agility at a lower total cost of ownership than customized on-premise solutions. Incumbent vendors responded to the threat by retooling their offerings by hosting their old solution in the cloud, bolting on applications and/or changing the payment model. But, they went to market with full SaaS marketing campaigns.
This is like taking 1990 Toyota Corolla, dropping in a lithium-ion battery, adding pop-up door handles, tacking on an extension cord and calling it a Tesla. “Customers who don’t see through the fakery,” wrote Sommer, “will get stuck with old, expensive solutions.” The situation, he predicted, would only get worse.
He was right. It’s gotten harder for buyers to figure out what they’re really getting. Vendors engaging in cloudwashing, as it’s now commonly called, have co-opted the language of SaaS while delivering modified versions of old solutions and business models that fall short of delivering on the SaaS promise.
What is that promise? In the legacy software world, since it was a perpetual license that was paid up front, vendors and services firms could make money regardless of whether or not the customer ultimately achieved their business goals. SaaS companies, however, align their activities and revenue with the customer’s success. A subscription to the software includes the services needed to achieve measurable business value. It’s not just different technology. It’s a different way of doing business.
The danger of buying SaaS that is not truly SaaS is that, not only can you wind up having many of the same struggles companies had with on-premise software, you could actually wind up getting less technology than before. Why is that? Customization is no longer an option and the configurability of retrofitted solutions usually leaves a lot to be desired, so some solutions actually offer less functionality.
So how can customers understand what they’re really buying? You have to go ask the right questions. Here’s a 5-point guide to telling real SaaS from fake.
1. Business model. SaaS is not a hosting or pricing strategy. It is a business model. The on-premise software world is filled with expensive gotchas because add-on fees are a significant source of revenue between the initial sale and the next upgrade. There are service fees for changes, maintenance fees, upgrade fees and the like.
In a true SaaS company, the bulk of the vendor’s revenue --two thirds or more is often considered a good benchmark--comes from ongoing subscription fees. Services are built into the subscription price, as are maintenance and upgrades. The vendor’s activities are aligned around a single service offering and making sure customers renew their subscriptions. Because subscriptions create a predictable revenue stream, there’s less pressure to drum up fee-based incremental business.
Nowadays many vendors host their software in the cloud and charging a recurring fee, so on the surface they look like SaaS. To understand the vendor’s business model, read their publicly available financial statements online to determine what percentage of their revenue comes from subscription fees. Or simply ask the sales rep.
2. Approach to services. Every software vendor has professional services, because you have to get the software system up and running. For a SaaS vendor, many services following implementation are included with the subscription. It’s not unlimited service; no one can offer that, but there are subscription levels with varying levels of service. Since the ultimate goal is getting the customer to a defined business outcome, there’s an effort to right size the subscription to avoid having to come back and ask the customer for more money.
Cloudwashers will also say that services are included, and they are—up to a point.
Legacy vendors are coming from a model of dependency. They depend on services revenue, and their software was built in a way that causes the customer to be dependent on services. So, even though services are part of the subscription, you need a lot of them. You need to call someone to make a form, change a workflow, configure master data or even to add a field. That can be due to both the technology and the way they do business. Oftentimes you really do need an expert to work on older, retrofitted technology. The upshot is that you’ll run through your allotted service hours quickly on tactical requests. If you need more, you’ll have to pay more.
True SaaS companies aim to empower business users to own and operate the platform themselves. The technology is much easier to use, so tactical configurations can be handed over to the customer, giving them much greater agility to respond to business conditions. Service hours can then be devoted to helping the customer meet their business goals and create measurable value by sharing best practices for process optimization. Once success is achieved, revenue growth for true SaaS vendors comes from adding more users or applications.
Ask a vendor for the kinds of things that you would need to call your company for? What if I need to change a form? Add new users? Configure a workflow? A true SaaS company will be able to show you in the software how you can do these things yourself.
3. Customer success. Ask how customer success teams are incentivized. In the on-premise world, after the sale, the customer is turned over to customer support and account reps. Support waits for the phone to ring and to solve whatever problem it was the customer is having, while account reps working on commission call on the customer periodically to check in, usually with the goal of selling upgrades and services.
SaaS companies renamed this function ‘customer success’ to signal a more proactive approach to partnering with the customer to achieve their business goals using the software. Many legacy software companies now also use the customer success title, but reps are still salespeople in disguise.
Customer success teams at SaaS companies may have incentives too, but these are tied to the customer hitting their business goals and renewing their subscription. There aren’t really any services to sell, because they’re all included.
4. Total cost of ownership. One easy way to uncover potential gotchas is to do a total cost of ownership model for what the software will cost to operate over a three- to five-year period. This is a fairly straightforward exercise for a true SaaS provider: TCO should be services plus subscription fee in year one, and just the subscription fee in subsequent years. A SaaS vendor should be able to commit to that. If a vendor dances around that, it’s a red flag.
When looking at a TCO model, look closely at what is and isn’t included. For example, a vendor may say up to 20 forms are included, but you may need more than 20. Ask what happens when you need a 21st form, or a 51st form. Ask what happens when you want to enable a new region, or integrate to an additional ERP.
5. References. You should always call several references. Ask whether they were empowered to run the solution alone, or whether they needed to call the vendor for everything. When they had a need that was out of the scope, were they able to configure it in the application, or did they have to create a change order?
Ask how many change orders they’ve had, and how much money they’ve spent with the vendor since signing. Was the money spent on expanding usage of the application or value added services, or on more services to get the application running properly? Ask if they’ve met their business goals.
The bottom line is that, in general, if the vendor has a way to make money without the customer being successful, then it’s not a true SaaS company. Because software companies have burned so many people in the past, buying software has become a game of avoiding the twin gotchas of hidden fees and systems that don’t deliver the promised value. SaaS is designed to be an answer to those gotchas. It’s much more than a hosting model or a payment model. The only way to unmask imitators is by asking the right questions.