Its very appealing for software vendors and large-scale enterprises to contemplate moving enterprise applications into the cloud and offering them (internally or externally) as SaaS.The financial rewards in terms of cost savings (for enterprises) or revenues (for MSPs) can be large and product managers can put together a compelling business case fairly easily. Spreadsheets models can be built which show economies of scale, monthly reoccurring revenue (MRR) streams and large margins all from offering an enterprise application as a SaaS solution.

There are, however, two areas that are easily overlooked but significant which if ignored will lead to erosion of margins and profits:

• As a Service Gaps
• Underestimated Total Cost of Ownership (TCO)

As a Service Gaps (aaS) are the result of thinking that one can take software and “point it at the Internet” and end up with a viable service. SaaS is a lot more complex than that. Think about the difference between a five-star hotel and a motel. Sure, both have rooms with beds, lobbies, parking lots, etc. The key difference (other than the quality of the furnishings) is THE SERVICE.

With a SaaS offering, the customer is buying a service, not the software. The software is part of the service but not the sum total of what the customer expects. The customer also expects to have all of the maintenance, care, feeding, and support of the software handled; preferably without needing the customer to be involved.

Planning A SaaS Offering

Once you decide to offer a SaaS solution and have settled on the core offering (e.g. CRM, Financials, Help Desk, Monitoring, etc.) a key next step is to design the complete service offering. Map out the SLA and customer contract and identify everything you plan to sell to the customer as part of the service.

The planning doesn’t end there. A crucial next step is to identify all the supporting services (many which the customer cannot see) and make sure tools, automation, processes and people are in place to render these services effectively.

If your core application is multi-tenant then many of these functions may be built into the offering already. If you are going to offer a single tenant application as SaaS then pay close attention to items such as those listed below:

• Provisioning
• Environment Refresh (prod to dev)
• Usage metering & billing
• Support Portal
• Diagnostics & instrumentation
• CMDB & CRM
• Monitoring & Alerting
• Notification
• Tenant Placement / Move tenant

For single tenant applications it’s particularly important to be able to provision and manage more than one instance of the application from some sort of admin interface. Ideally, you want a GUI for one-off operations and a scripted interface for building automation.

When you make a sale and provision a new customer, you need a single click or single command method of rapidly spinning that customer up. Self service provisioning is vital for trials and will greatly increase your margins through reduced labor (and fewer human errors).

Underestimated Total Cost of Ownership (TCO)

The customer also expects to avoid the costs of ownership associated with the same software if it was installed on their premises. For example, the customer of a SaaS solution expects that it will be backed up, and in an emergency a restore can take place. The SaaS customer is paying a monthly fee for the service which includes backup and restore. The customer is shifting this aspect of the TCO (for the backup system) to the SaaS vendor.

The backup system needed to backup and restore one customer is very different from the system needed to efficiently backup 50 customers. The scale of the equipment, storage and network is completely different.

Avoid Negative Economies of Scale

As a SaaS provider, if you fail to account for the full TCO required to operate your SaaS offering at scale you will create a negative economy of scale that will erode your margins, eliminate profits and put your customers at risk.

Plan for Profits

George Milliken, Director of SaaS Hosting at Nimsoft.

Part of your business plan should be to project what infrastructure, people and tools it will take to support your customer base as it grows from 1, to 10, to 50, 100, 500 and then 1000 customers (or more). Identify the financial scaling points that will occur as you grow the customer base and need more sophisticated support systems to maintain the service. Make sure you don’t have to scale the personnel as fast as the customers. Margins are better when the customer growth curve is steep and the headcount growth curve is flat.

In summary, identify and recognize the full TCO, automate the service and avoid “As a Service” gaps and your SaaS offering will be successful and profitable.

George Milliken is the Director of SaaS Hosting at Nimsoft. He has over 20 years of IT experience. Follow George online via Twitter and LinkedIn.

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