The Next Big Thing in SaaS and The Cloud: Costs linked to business outcome?

Should Software-as-a-Service vendors make the switch to charging for their offering based on business outcome? Laurent Lachal of Ovum believes so.

I was a delegate at the Cloud Computing World Forum a couple of weeks ago and out of a day of interesting presentations, the one that fascinated me the most was from Laurent Lachal, senior analyst and the guy leading Ovum’s Cloud Computing research.

The statement Laurent made during his 15 minutes presentation that made me sit up was his assertion that Software-as-a-Service (SaaS) vendors, specifically CRM system vendors, should look towards moving to their fee model to one based on business outcome: “Why not have a CRM vendor charging for their software by the number of leads?” he asked.

As someone involved in what we used to call “Hosted CRM” it hit me hard. Salesforce.com, in particular, has moved the Customer Relationship Management software market on by ridiculing the old model of customers paying a vendor heaps of money up front to install a complex system only, in many cases, to see it fail. SFDC has done much to champion the cause of Software-as-a-Service, delivering business applications over the web for an ongoing subscription fee, spreading the cost of applications over their lifetime as an operational expense, as an alternative to a large upfront capital investment. In fact, Salesforce.com has build an entire platform on this principle with the support of many other software companies whose applications are now available on the same basis. Even Microsoft, which has got the size it has through selling software licences, often emblematically packaged in a box, is now deploying applications over the web on a subscription basis.

“Success, not software” shouts the Salesforce.com website. But Laurent’s point is that customers are handing over money whether they are successful or not. Why can’t what you pay be linked to the rewards enjoyed by using the software?

I had to know more about want Laurent was thinking and he was kind enough to spend an hour with me this week to discuss the logic behind his comments.

Laurent harks back to the roots of Cloud Computing, where applications ran on remote mainframes. An example he gives is High Street travel agents, who sell flights from a screen linked to an airline reservation system – a “hosted application” a la SaaS. The application is available to them all day long and is pivotal to their business, but the service is provided free, with fees only paid when airline tickets are sold. Granted, the business model isn’t quite the same as, say, a consultancy company using a CRM system to track complex opportunities with their customers, but Laurent questions whether the same fee model couldn’t be used all the same.

His logic is that Salesforce.com, again as an example, holds a lot of back-end data on how many contacts each of their customers hold in their CRM systems; how many leads they have; what proportion of those convert to opportunities; and then statistics on revenue generated from those opportunities. Salesforce.com has the data to prove its system is helping to close leads and generate business; to shorten sales cycles. Why doesn’t SFDC bill based on the tangible difference it has brought to the performance of a customer sales team? Another example: email marketing applications from Vertical Response or Constant Contact bill you for emails sent, but they also hold data on who clicks through, so why not bill on traffic sent to your website instead?

It’s an interesting thought and it hadn’t really occurred to me that this data might exist and be usable. Laurent suggests that a vendor gives you the application for free but supports your own objective of gaining business benefit; and let’s face it, if the CRM system is making a big difference to your business then you’re unlikely to have an issue paying more than the current, for Salesforce.com, £65 per user per month for it. Those that need help to see business benefits would pay less, possibly nothing in the worst cases, but could be provided, potentially sold, additional services to improve uptake, increase data relevancy, refine sales processes, better use the marketing tools or whatever to see more effective use of the system: more leads, better conversion rates, shorter sales cycles, a bigger revenue contribution per sales head. The aim for both sides would be achieving greater business benefits from the system, bringing them to a point where they are paying a fair amount for the application, proportional to business outcome.

Outwardly this would seem to sway all the benefits in favour of the customer, and all the risk to the vendor, but if you think that it would be very much in the CRM vendor’s interests to see the system being used well and bringing real benefits to customers, then the balance evens out if the vendor is living up to its promises. It’s No Win, No Fee application provision.

I raised with Laurent the issue of data privacy, but we concluded that a vendor wouldn’t need to know the detail of a customer’s customers, just a rolled-up and anonymised view of overall performance for them to measure the efficacy of that customers’ use of the system.

Laurent’s thinking is so far from the norm that you can’t help but pick holes in it compared to what we have in place today. But traditional on-premise vendors started taking a kicking ten years ago when SaaS vendors like Salesforce.com, Salesnet, Upshot (which got bought by Siebel and is now part of Oracle) and Netsuite pitched in offering a subscription model which has since become the norm. With a stack of data now able to support claims of real business improvement, is it time to look at the fee model again?

Could one of the many new entrants to the Social CRM space looking to dislodge the new encumbents similarly upset the market with a billing model linked to business outcome?

Laurent has not yet published anything on this, but he’s serious about his thoughts and seems convinced that it’s likely to be the way SaaS application vendors will head. After an hour in his company I think it has merit and we are seriously considering it for our own Social CRM application.

I’d be interested to read your thoughts.

Ian Hendry
CEO, WeCanDo.BIZ
http://www.wecando.biz