A while back, the estimable Villi Iltchev published this outstanding piece on “Why SaaS consolidation is not happening.” It’s almost a year and a half old now, but has held up wonderfully. Villi points out a bunch of reasons why the SaaS market has not followed the same M&A path that on-premise software did in the 2000-2008-ish tech cycle, with a special emphasis on the importance of Customer Success in enterprise SaaS. I have some thoughts on enterprise SaaS that take it a step further, but as we close out 2017, his basic point has been proven correct. The Great SaaS Consolidation that many VCs were gambling on isn’t coming. Instead, we have something even better: a broad, burgeoning landscape of SaaS businesses whose need for outside investment is diminishing, whose customer bases are diversified, and whose destinies are bright as growing, independent companies.
Legacy Tech struggles with SaaS development
An underrated factor in the first wave of big SaaS success stories (think Omniture/Adobe Analytics, Salesforce, Demandware) was the role of iterative organizational learning. The “first wave” of enterprise SaaS was built from scratch, before all of the cloud infrastructure that we take for granted in 2017 (like AWS/Azure, Github, Cloudflare, etc.) really existed. If you reach back into the misty reaches of history of, oh, say 2010, “devops” was still barely even a thing, but certain companies (including all of those above) had essentially been learning/doing it on their own for years. There was no true blueprint yet – they just figured out what worked, and over time, either built their own tools or added new cloud service vendors who popped up.
More importantly, these organizations intentionally developed streamlined operations to plan, design, build, deploy and service SaaS products from the ground-up. They didn’t force a pre-existing model for software development and try to fit it into a SaaS context, because they quickly realized that those old models weren’t going to work. They were too slow, unresponsive and not designed for the core tenets of what makes SaaS such a great solution for customer and vendor alike: multitenancy, security, high availability and adaptability in the enterprise.
Thus, by the time SaaS was starting to become widely adopted in the enterprise, these companies had already been executing with a SaaS model for years. Product and Engineering had highly-developed, well-adapted development procedures in place. Devops, likewise, was able to rapidly distribute, troubleshoot and administer the product. Sales, Sales Ops and Marketing was completely focused on SaaS hunter/farmer customer acquisition models. Leadership and Finance had built in the investment levels necessary to make customers successful (more on this in a moment). The whole organization was attuned to the right rhythms of the business.
By contrast, look at IBM and Oracle, which have made big SaaS acquisitions but struggled to subsequently grow them. Many of those struggles have come down to organizational change – or the lack thereof. As a PM for Coremetrics at Big Blue, I personally saw the great pains IBM had with incorporating a rapid deployment model, devops, customer success, or even the basic subscription pricing model. Most often, they simply didn’t – the acquired SaaS now-business unit was forced to change its practices, rather than evangelize them to the larger organization. What that means is that once the acquired company personnel leave, the pressure to make those changes diminishes quickly. The SaaS book of business either grows much slower than it did, or, more likely, begins to steadily shrink. As I talked about at length in Adobe and Transformation, this was a big factor in Adobe’s purchase of Omniture. They weren’t buying just a book of business – they were buying the institutional talent and practice model for SaaS itself.
Investing in Customer Success
Another deeply underrated factor in the success of enterprise SaaS is the role of Customer Success. Villi alludes to this in his piece, but the key thing to understand is that customer adoption and engagement with a SaaS tool relies heavily on vendor onboarding and ongoing assistance. The most impactful enterprise SaaS solutions involve a high degree of customer education and support, troubleshooting and even coaching. Demandware’s Retail Practice team was one of the best examples of this I’ve seen. It was a combination of technical account management, new user onboarding, account feedback and even industry expertise, all packaged up and offered mostly at no charge to every customer. Customers loved it and adopted Retail Practice team support in all kinds of ways in their ecommerce operations.
Of course, that level of support isn’t cheap. Demandware had a higher price point than some other competitors (with a “skin in the game” revenue-share model that also made it unique), and we got flack for that. Many SaaS vendors are afraid of charging for higher levels of service, and instinctively try to compete on price. But I’ve become convinced that this is a mistake. Great Customer Success is a critical investment in your SaaS business, and needs to be accommodated in a company’s investment model. This is a major headache for legacy tech firms, whose capital allocation models are handed down from On High on stone tablets and where the Finance departments don’t want to alter them to accommodate some weird SaaS acquisition. These firms sometimes see acquisitions as ripe for wringing costs out to harvest the subscription run rate, only to discover too late that they’ve killed the golden SaaS goose.
Wars have been fought in big companies over what to invest in and why – that’s just part of the game. But I see a tendency to underestimate the leverage in Customer Success investment in acquired SaaS companies, while independents get it instinctively. As long as that disconnect exists, I don’t see the majors snapping up many of their SaaS competitors for the time being.
Staying independent
I would personally love to see many more growth-stage SaaS firms on a path to IPO, and over time, I suspect that’s what we’ll see. The big acquisition exits many VCs hoped for haven’t materialized, and I doubt they will. Accelerating or widening profitability and then going public once they hit a reasonable revenue mark is the tried-and-true path to make investors and employees liquid – and, importantly, give customers the stability they deserve.
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Blair Reeves 