White Paper Benefits of the SaaS Delivery Model

Author - Laura McCaughey New Momentum

August 2008

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Benefits of the SaaS Delivery Model

New Momentum defines software-as-a-service (SaaS) as an

application delivery model that is web-based, has a subscription-

based fee structure and builds upgrades into the subscription pricing

of the application. It is deployed as multi-tenant or single-tenant

standard code that is maintained and upgraded by the vendor.

Stuart Clifton and Joe Stafford founded New Momentum in 2005 to

fill the white space between the value chain management ($7

billion) and product lifecycle management ($14 billion) enterprise

applications market, specifically building a collaborative suite

targeting enterprise brand intelligence, enterprise sales intelligence,

and predictive supply chain risk intelligence.

Their strategy to build the New Momentum application suite as a

SaaS model rather than as an on-premise model was predicated on

their strong belief that in order to keep pace with the risks created

by outsourcing and other popular cost-cutting manufacturing

techniques, today’s enterprises need a solution that gives them

direct, 24x7 real-time access to global internet data. Bypassing the

long, costly deployments associated with on-premise enterprise

software is equally important, and the subscription-based pricing of

the SaaS platform makes it easy to get started. All of these factors

enable a customer to achieve a faster return on investment (ROI).

New Momentum’s enterprise risk management (ERM) solution suite

helps companies reduce risk in several areas, including the

following: combating counterfeits and gray market sales; gaining

visibility into price, availability and lead-time trends that assist in

strategic planning to avoid costly production shutdowns; receiving

early alerts regarding geopolitical events, natural disasters, merger

and acquisition activity, or financial conditions that could cause

strategic supplier failure; and having accurate and current open

market data for better inventory valuations and Sarbanes-Oxley

compliance. Such 24x7 real-time access to global internet data is

best delivered through a SaaS model.

New Momentum fills the

white space between

the value chain

management ($7 billion)

and product lifecycle

management ($14

billion) enterprise

applications market.

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Figure 1. The New Momentum SaaS Platform

Source: New Momentum, LLC.

Source: New Momentum, LLC.

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The SaaS Market Boom is Only Just Beginning

IDC estimates that by 2011, the SaaS market opportunity will reach

$14.8 billion, a 32% compound annual growth rate. The IDC

projection may be conservative: Gartner estimates that the current

SaaS market is around $6.3 billion (6% of the software market) and

projects that by 2011, the SaaS market will jump to $19.6 billion

(25% of the new software market). Supporting these robust growth

expectations, according to a report published by McKinsey & Co. in

collaboration with the SandHill Group, 74% of more than 850

enterprise software customers surveyed in 2008 are favorable

toward adopting SaaS platforms. These same respondents believe

that innovation is being driven by two major trends -- SaaS and

service-oriented architecture (SOA), which we at New Momentum

believe will continue to converge.

SaaS Companies a Hot Venture Investment

Another key model growth data point is that venture capitalists are

investing heavily in SaaS companies relative to on-premise software

vendors; indeed, software continues to lead all other sectors in

garnering venture investment. In the second quarter of 2008,

software companies garnered $1.25 billion in 219 deals, according

to PricewaterhouseCoopers and the National Venture Capital

Association. The lofty number of deals completed in software was

almost double that of the number-two Biotechnology sector.

$1.260

$1.095 $1.120 $1.098

$1.504

$1.103 $1.271 $1.271 $1.250

231

186 195 193

247

186

220 235 219

$0.000

$0.200

$0.400

$0.600

$0.800

$1.000

$1.200

$1.400

$1.600

2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q080

50

100

150

200

250

300

Dollars Deals

Figure 2. Quarterly Venture Investment in Software—Dollars and

Deals, 2Q06-2Q08 (Dollars in Billions)

Sources: PricewaterhouseCoopers, the National Venture Capital Association, and New Momentum, LLC.

Gartner estimates that the

current SaaS market is

around $6.3 billion (6% of

the software market) and

projects that by 2011, the

SaaS market will jump to

$19.6 billion (25% of the

new software market).

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M&A Activity Strong in SaaS Space

Merger and acquisition activity is robust in the SaaS space, despite

the current economic backdrop. At least 35 M&A deals involving

SaaS vendors were completed in the first half of 2008. The median

multiple for SaaS vendors currently is around 3.1x enterprise

value/revenues, compared with 1.8x enterprise value/revenues for

traditional license model vendors.

According to Saugatuck Technology, by 2010, 40% of traditional

independent software vendors (ISVs) will bring SaaS solutions to

market through acquisition, development of new single-instance

multi-tenant applications, or through virtualized (multi-tenant)

versions of their on-premise solutions. However, less than half of

these ISVs in transition are vendors that have unique

organizational, cultural, sales and marketing, and installed

customer base (transition/cannibalization) challenges.

We expect many of the smaller ISVs with strong horizontal and

vertical SaaS solutions to partner with vendors in complementary

spaces or to be acquired by larger vendors looking to build out their

SaaS solution set. Successful integrations will occur when the

acquiring and acquired companies quickly unify the code base, their

cultures “fit,” and together their solutions are scalable to a wider

customer base. Succinctly, 1 + 1 must equal 3…or more.

Figure 3. Median SaaS versus Traditional On-Premise License

Enterprise Value/Revenue Valuations

Sources: Software Equity Group, LLC and New Momentum, LLC.

Sources: Software Equity Group, LLC and New Momentum, LLC.

2.5 2.4 2.42.0 1.8

6.35.9

7.8

3.83.1

0

2

4

6

8

10

12

2Q07 3Q07 4Q07 1Q08 2Q08

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Enterprises are Entering the Fray as LOB Execs Find

Solutions for Pain Points

The McKinsey-SandHill survey also highlighted that by 2009,

companies plan to spend 21% of their software budgets on SaaS

solutions. This adoption momentum largely reflects SMB companies,

for which the initial deployment costs and ability to pay for what

they use on a subscription fee model are quite attractive. Recently,

enterprises are gravitating toward the SaaS model for certain

applications. There are many reasons for this, chief among them

that a lot of on-premise software is not used…and companies are

paying maintenance on this regardless.

Another important driver of rapid SaaS adoption is the trend of line

of business (LOB) executives driving this increased spending.

Gartner estimates that more than 85% of business application SaaS

deployments are departmentally focused. Market conditions enable

the business person to buy SaaS solutions, shortening the sales

cycle in any economy. The SaaS applications that are targeted to a

specific business pain point will be the ones to succeed because LOB

executives have the ability to relatively quickly justify the spend

and avoid a lot of red tape. For this reason, the SaaS solution user

interface must be user-friendly, as the product is being marketing

to someone who likely does not have a technical background.

Benefits Have More to do with Results and Innovation

than Price

According to former colleagues at AMR Research, Christa Degnan

Manning and Rob Bois, SaaS benefits have less to do with price and

cost and more to do with results and innovation.

Christa and Rob interviewed dozens of clients about what they

really thought about SaaS. Speed of deployment and value were

the most frequently cited benefits of the SaaS delivery model. In

addition, respondents stated that the solution has to be easy to

integrate.

The SaaS applications that

are targeted to a specific

business pain point will be

the ones to succeed because

LOB executives have the

ability to relatively quickly

justify the spend and avoid a

lot of red tape.

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The user community also sees great value in the frequent upgrades

enabled by the SaaS model, whether it be bug fixes, customer

requests, or new features.

In addition, the “outside-the-firewall” nature of SaaS has expanded

the number of business process automation areas that can be

improved, most notably sourcing and purchasing. This network

effect also can be found in the availability of best practice and

benchmarking services provided by the SaaS vendor, based on

implementation approaches and use patterns across all subscribers

in aggregate. For example, some procurement management system

SaaS providers have offered rate guidance based on geographic

location. This advantage can’t be matched by on-premise products.

Finally, many customers report that they are enjoying the benefits

of a quick return on investment (ROI) from their SaaS solutions. For

example, New Momentum’s enterprise brand intelligence product

was in place at a customer for one month. The study tracked ten

products. During that time frame, gray market activity on those ten

products was a whopping $6.5 million, and suspect activity was

$3.2 million. On an annualized basis, this suspect activity reached

close to $39 million. KPMG estimates that about 10% of all high

tech products sold globally are counterfeit. Thus, shutting down

counterfeiters on these ten products alone – and projections are

that about 25% of suspect activity can be recovered – would add

$9.7 million back to the customer’s revenue line.

Application Area Growth

Horizontal Solutions Widening…

Most people are aware of the tremendous success of SaaS customer

management (CRM) vendors Salesforce.com and RightNow, and

SaaS human capital management (HCM) vendors Salary.com,

SuccessFactors, and Taleo. Indeed, CRM and HCM (particularly in

performance management and recruiting) were the early horizontal

leaders in the space.

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NetSuite offers enterprise resource planning (ERP) and CRM

application software focused on the mid-market. The SaaS

ecosystem also encompasses consulting and implementation,

product development, and delivery-related managed services.

Collaboration (email and web conferencing, for example) is also a

first-mover horizontal space. Now, we are seeing knowledge

management/collaboration, business intelligence, sourcing and

procurement, supply chain management, and mobile computing as

particular growing areas of horizontal SaaS strength.

Software Segment SaaS Solutions

Customer Management (CRM)

Education

Enterprise Resource Planning (ERP)

Entertainment

Human Capital Management (HCM)

Knowledge Management

Outsourcing

Performance Management

Product Lifecycle Management (PLM)

Security

Supply Chain Management/RFID (SCM)

Supply Chain Planning

Systems Management

Wireless

Storage

…and Vertical Solutions the Future

The future of SaaS vendors will be in vertical industry solution

areas, which will spur more vertical business networks. Currently,

these networks are in place in manufacturing, healthcare, financial

services, and a few other industries. As vendors become more

specialized in specific verticals, the horizontal solution set will be

more scalable and repeatable, ever widening the prospective

customer audience.

Figure 4. Horizontal SaaS Adoption Graphic

Source: New Momentum, LCC.

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SECTOR/Industry ENERGY  CONSUMER DISCRETIONARY  Retailing  SOFTWARE Energy Energy Equipment & Services Oil, Gas & Consumable Fuels 

Automobile & Components Auto Components Automobiles & Motorcycles  

Distributors Internet & Catalog Retail Multiline Retail Specialty Retail 

Technology Hardware & Equipment Communications Equipment Computers & Peripherals Electronic Equipment, Instruments & Components Office Electronics 

MATERIALS Materials Chemicals Construction Materials Containers & Packaging Metals & Mining Paper & Forest Products 

Consumable Durables & Apparel Household Durables Consumer Electronics 

 CONSUMER STAPLES Food & Staples (Drug) Retailing 

Home Furnishings Homebuilding 

Food, Beverage & Tobacco Producers Household & Personal Products 

INDUSTRIALS Capital Goods Aerospace & Defense 

Household Appliances Housewares & Specialties Leisure Equipment & Products Textiles, Apparel & Luxury Goods 

HEALTH CARE Health Care Equipment & Services Health Care Equipment & Supplies 

Semiconductors & Semiconductor Equip. Semiconductor Equip. Semiconductors 

Building Products Construction & Engineering 

Footwear  Health Care Providers & Services  Telecommunications Services Telecommunications Diversified Telecommunication Services Wireless Telecommunication Services  

Electrical Equipment Industrial Conglomerates Machinery Trading Companies & Distributors 

Consumer Services Hotels, Restaurants & Leisure DIVERSIFIED CONSUMER SERV. Media 

Health Care Technology Pharmaceuticals, Biotechnology & Life Sciences Biotechnology Pharmaceuticals Life Sciences Tolls & Services (Med Tech)  FINANCIALS 

Commercial & Professional Services Commercial Services & Supplies 

Advertising Broadcasting Cable & Satellite 

Professional Services  Movies & Entertainment Publishing 

INFORMATION TECHNOLOGY Software & Services 

UTILITIES 

Transportation Air Freight & Logistics Airlines Marine Road & Rail Transportation Infrastructure 

  Internet Software/Services IT Services 

 

Figure 5. New Momentum -- Current and Future SaaS Vertical Markets and Networks

Source: New Momentum, LLC.

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The Customer -- How to Keep Those Revenues Recurring

A successful SaaS company gives users a clingy customer

experience, enabling a predictive revenue model. Pricing tends to

be competitive in order to onboard the customer. SaaS is perceived

to be a lower-cost sale than an on-premise sale, and SaaS vendors

must be careful that this actually proves to be the case. SaaS

customer satisfaction is a definitive must in a SaaS solution. It’s too

easy for a customer to rip out a solution and put in a new one,

negating the underlying financial positives of the SaaS model’s

predictive recurring revenue stream. For that reason, SaaS vendors

must keep their customers happy. SaaS vendor profitability

depends on a vendor’s ability to “land and expand.” Inevitably,

there will be some churn. In order to increase annual revenues, a

vendor must increase the annual subscription value (ACV) at any

given customer.

Much has been written about the profitability potential of a SaaS

company. We strongly believe that a SaaS vendor – no matter if a

start-up or a public company – must keep sales and marketing

step-in-step and keep a tight rein on expenses. When marketing

and sales are working together, the unified effort typically gets the

revenue ramp going. This is critical, as monthly recurring revenue

(MRR) is a primary driver of the equity value of a company. Once

revenue is ramped, the SaaS vendor should look to generate cash,

another big positive in terms of a company’s equity value.

SOA Supports SaaS Web 2.0 Technologies

As we said earlier, SaaS and SOA are converging. Speak with a

seasoned IT veteran, and you will hear that companies have been

employing SOA for many years – they just didn’t call it that. In a

nutshell, SOA is about agility and flexibility and supports Web 2.0

technologies, which promotes many aspects of the SaaS model.

Initially primarily prevalent in financial services and

telecommunications companies, SOA has become more mainstream

and is being deployed across many industries. According to AMR

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Research’s Ian Finley and Koppel Verma, however, a lot of

companies are just beginning to take a SOA approach, which should

lead to burgeoning growth. They believe that the main effect of SOA

is changing the competitive forces in existing market segments,

rather than creating large new ones.

SaaS Platforms

The most important aspect of SaaS platforms is that they must be

configured to best support the user. Platform development and

maturity will continue to be a customer-driven model – one that

must provide winning economics for both parties. In order to

accomplish this, vendors must enable the user to modify or

develop their own applications; provide an environment in which

these applications can be delivered quickly and at a lower cost

than a traditional application; and provide a means for the user to

be part of a broader community and collaborate with other users

in the ecosystem. A SaaS platform inherently must support multi-

tenancy. Virtualization supports the multi-tenant community’s

sharing resources and can increase capacity exponentially and

economically.

CleansingCleansing

Content Caching and ImagingContent Caching and Imaging

Data Collection EngineData Collection Engine

New Momentum Website ‐ ServicesNew Momentum Website ‐ Services

Enterprise Brand Intelligence Customers Enterprise Brand Intelligence Customers 

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Data Collection EngineData Collection Engine

New Momentum Website ‐ ServicesNew Momentum Website ‐ Services

Enterprise Brand Intelligence Customers Enterprise Brand Intelligence Customers 

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Figure 6. New Momentum -- SaaS/SOA Architecture Graphic

Source: New Momentum, LLC.

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SaaS platforms can be grouped in three ways: delivery platforms,

development platforms, and application-led platforms. Delivery

platforms are either managed hosting or cloud computing (see

more on this topic below). Development platforms are either

traditional, cloud-, or mash-up-based. Finally, application-led

platforms enable the customer to use tools either to customize the

vendor’s original offering or build new applications on the

platform.

New Momentum is Positioned for the Future:

Cloud Computing

We are in the nascent stages of the SaaS application being built

“in the powerful cloud.” The Platform as a service (PaaS) enables

the provider to be responsible for the development environment

and infrastructure, as is the case with some examples like

Salesforce.com’s Force.com, Amazon’s EC2, NetSuite’s

SuiteBuilder, Google’s App Engine, and Ning, a social network

platform. To us, these benefits look like even further enhanced

cost-savings and, thus, higher profitability for the customer

company. The cloud environment is particularly beneficial to

smaller companies that couldn’t afford to have the computing

power that the cloud offers. We also believe that cloud computing

will spur even more solution verticalization because so many more

people globally will have access to tools and unimaginable

computing power, leading to breakthroughs we can only dream

about today.