The Truth About SaaS Pricing

The current drive to SaaS (Software as a Service), or better known as subscription, and away from typical on-premise solutions is not a totally new phenomenon.  What is new is how many traditional software organizations are moving to replace their existing sales models with a subscription offering.  There is some truth to the ‘follow the herd’ mentality of software vendors, as there is greater protection in number from the regulatory bodies and political opportunists, but without a doubt there is a fundamental financial benefit to the publishers of subscription software.

From the purchaser’s perspective the financial calculations seem straight forward:

 

Capital Costs

Software Maintenance

Services

Total

Year 1

$835,000.00

$150,300.00

$115,000.00

$1,100,300.00

Year 2

 

$150,300.00

  

Year 3

 

$150,300.00

  

Total

$835,000.00

$450,900.00

$115,000.00

$1,400,900.00

TABLE 1 – Typical Capital purchase and 3-year support agreement

 

 

 Capital Costs

Software Maintenance

Services

Total

Year 1

 

$321,475.00

$115,000.00

$436,475.00

Year 2

 

$321,475.00

  

Year 3

 

$321,475.00

  

Total

$0.00

$964,425.00

$115,000.00

$1,079,425.00

TABLE 2 – Same product structured as 3-year subscription agreement

 

In Table 1 above, the final negotiated price presented as a capital purchase with the normal support and maintenance agreement which would include the required service level agreement for support calls and access to updates and patches, and may include limitations on how many generations back it will support etc.  Table 2 is the same transaction but presented as a hosted subscription.  For sake of simplicity, inflation is assumed to be negligible in all cases.  Comparing the above transaction, it does appear that the total cost is less on the subscription front: ($1.07M vs $1.4M).

Let us look at this over a 5-year horizon:

 

 

Capital Costs

Software Maintenance

Services

Total

Year 1

$835,000.00

$150,300.00

$115,000.00

$1,100,300.00

Year 2

 

$150,300.00

  

Year 3

 

$150,300.00

  

Year 4

 

$150,300.00

  

Year 5

 

$150,300.00

  

Total

$835,000.00

$751,500.00

$115,000.00

$1,701,500.00

TABLE 3 – Typical Perpetual License over 5 years

 

 

 Capital Costs

Software Maintenance

Services

Total

Year 1

 

$321,475.00

$115,000.00

$436,475.00

Year 2

 

$321,475.00

  

Year 3

 

$321,475.00

  

Year 4

 

$321,475.00

  

Year 5

 

$321,475.00

  

Total

 

$1,607,375.00

$115,000.00

$1,722,375.00

TABLE 4 – Similar purchase structured as subscription over 5 years

 

To make it more illustrative:

FIGURE 1 – Break Even Analysis TCO Perpetual vs Subscription

There is clearly a higher long-term cost to the subscription option ($1.72M vs $1.70M), even when incorporating the cost of any hardware or virtual machine and their associated operating costs. However, there is more than just a motivation for top line growth for the selling organization.

Let us look at an abbreviated P&L.  We already know that we should really be looking at comparing this over 5 years:

 

Year 5

Year 4

Year 3

Year 2

Year 1

On-prem

     

REVENUE

     

   Product

    

$835,000.00

   Services

$150,300.00

$150,300.00

$150,300.00

$150,300.00

$265,300.00

       Total Revenue

$150,300.00

$150,300.00

$150,300.00

$150,300.00

$1,100,300.00

COST OF SALES

     

  Product

    

$375,750.00

  Services*

$82,665.00

$82,665.00

$82,665.00

$82,665.00

$172,445.00

       Total cost of sales

$82,665.00

$82,665.00

$82,665.00

$82,665.00

$548,195.00

      

GROSS MARGIN

$67,635.00

$67,635.00

$67,635.00

$67,635.00

$552,105.00

Total

    

$822,645.00

*Assumes ABC allocation based on typical margin requirements.

 

 

 

TABLE 5 – Five-year abbreviated P&L for on-prem Sale

 

Year 5

Year 4

Year 3

Year 2

Year 1

SaaS

     

REVENUE

     

   Product

    

 

   Services

$317,300.00

$317,300.00

$317,300.00

$317,300.00

$492,420.00

       Total Revenue

$317,300.00

$317,300.00

$317,300.00

$317,300.00

$492,420.00

COST OF SALES

     

  Product

     

  Services*

$95,190.00

$95,190.00

$95,190.00

$95,190.00

$270,831.00

       Total cost of sales

$95,190.00

$95,190.00

$95,190.00

$95,190.00

$270,831.00

      

GROSS MARGIN

$222,110.00

$222,110.00

$222,110.00

$222,110.00

$221,589.00

Total

    

$1,110,029.00

TABLE 6 – Five-year abbreviated P&L for SaaS

As you can see above, the SaaS model is now more than 30% more profitable.

So far, we have been looking at just the sale to one customer.  The real profit accelerator for the SaaS companies comes with the scaling up of their customer base.  Again, comparing the On-prem for 5 years but this time let us assume 10 customers.  Along those lines the On-prem would have direct additive effect in the best case.  

However, 10 customers may have 10 different environments, different hardware, different OS versions, different virtual environments etc., and even different releases of the software solution.  In keeping with Service Level Agreements, the vendor will have to be able to support all these deployments and more than likely must have sandboxes that either replicate or emulate these environments to be able to test releases as well as troubleshoot problems.  It will need more staff at development, QA test and customer support level.

 

Year 5

Year 4

Year 3

Year 2

Year 1

On-prem

     

REVENUE

     

   Product

    

$8,350,000.00

   Services

$1,503,000.00

$1,503,000.00

$1,503,000.00

$1,503,000.00

$2,653,000.00

       Total Revenue

$1,503,000.00

$1,503,000.00

$1,503,000.00

$1,503,000.00

$11,003,000.00

COST OF SALES

     

  Product

    

$3,757,500.00

  Services

$601,200.00

$601,200.00

$601,200.00

$601,200.00

$1,299,970.00

       Total cost of sales

$601,200.00

$601,200.00

$601,200.00

$601,200.00

$5,057,470.00

      

GROSS MARGIN

$901,800.00

$901,800.00

$901,800.00

$901,800.00

$5,945,530.00

Total

    

$9,552,730.00

TABLE 7 On-prem abbreviated P&L assuming 10 customers

The table above assumes no increase in the costs of services (support) over the years, though that will normally grow for reasons expounded above.  

 

Year 5

Year 4

Year 3

Year 2

Year 1

SaaS

     

REVENUE

     

   Product

    

  

   Services

$3,173,000.00

$3,173,000.00

$3,173,000.00

$3,173,000.00

$4,924,200.00

       Total Revenue

$3,173,000.00

$3,173,000.00

$3,173,000.00

$3,173,000.00

$4,924,200.00

COST OF SALES

     

  Product

     

  Services

$475,950.00

$475,950.00

$475,950.00

$475,950.00

$1,428,018.00

       Total cost of sales

$475,950.00

$475,950.00

$475,950.00

$475,950.00

$1,428,018.00

      

GROSS MARGIN

$2,697,050.00

$2,697,050.00

$2,697,050.00

$2,697,050.00

$3,496,182.00

Total

    

$14,284,382.00

TABLE 8 – 10-year SaaS abbreviated P&L

What you can see now is that the Gross Margin is now 50% higher than when selling an on-prem solution.

FIGURE 2 – Cumulative gross margin comparison on-prem vs. SaaS with 10 customers over 10 years

In conclusion the recommendation when converting or comparing an on-premise versus hosted subscription license is to look at 5-7 years for effective comparison purpose. When assessing a new SaaS solution, keep in mind that if the vendor has a mixed customer environment (some customers with on-prem and some with Subscription) that the margin is higher in the latter and the salesperson will be better compensated on the latter as well. And finally, when looking at pure subscription licenses, the larger the customer base the greater the margin the vendor has. 

So you’re thinking about RPA?

Background

In its simplest form, Robotic Process Automation or RPA, is digitally automating repetitive and rules-based tasks: using bots to automate manual processes.  In other words, using tools to emulate humans interacting with systems in order to complete business tasks in a more efficient manner.
It is a powerful tool for businesses that need to streamline operations and can be effective within any function of an organization in just about every vertical.
This isn’t “robotics” per se…that’s automating physical tasks.  We are talking about digital automation through software robots.
Couple things to keep in mind up front:
  • Stock RPA is “dumb”.  [stop giggling – not dumb in that sense – it’s actually awesome!]  Dumb in the sense that it needs someone to teach it and keep it on track.  However, you can add Artificial Intelligence (AI) and/or Machine Learning (ML) to create Intelligent Automation or IA.  With IA, the RPA becomes smart and can learn the processes and associated tasks on their own to streamline and improve efficiencies even further.  More on that in a future post.
  • For those companies that have done their homework and are ready to fully dive into this, there is hyperautomation.  That is IA on steroids.  It’s using an agile approach to rapidly deploy IA throughout as much of an organization as possible, smartly automating as many processes as possible, and gaining all the associated benefits.  Not for the faint of heart and should only be done after you’ve had some early successes.

Use Cases

Anywhere there are repetitive tasks being done using software, there are candidates for RPA and these are just some of what are probably thousands of examples:
  • HR:
    • Team member onboarding
    • Attendance tracking
    • Benefits administration
  • Finance
    • Fraud detection
    • Month/year-end closes
    • Journal entries
    • Payroll processing
  • Gaming & hospitality
    • Flash/DOR reporting
    • Loyalty tier upgrades
    • Hotel room yielding
    • Guest service interactions
    • Fraud detection/AML
    • Marketing analysis
  • Healthcare
    • Account settlement
    • Claims processing
    • Patient care cycle
    • Compliance monitoring
    • Coding
  • Everywhere: Report creation, distribution, and analysis
If you’re familiar with any of these processes, you will immediately recognize how cumbersome and labor intensive they could be.  Well, RPA can minimize most of the associated manual tasks within and, in some cases, even automate them 100%!  [C’mon…I know your mind is racing now thinking about all the great things RPA can do in your world!]

Benefits

The benefits are immense as you could imagine:
  • Improved efficiency
  • Reduced errors
  • Reduced risk and greater compliance
  • Increased transactional throughput with the same FTEs
  • Reduced completion times
  • Granular data analytics
  • Seamless scalability
  • And so many more
Plus bots don’t get sick, they don’t call out, they work 24×7, and they will never go outside whatever lines you establish.
Think about all the downstream benefits to customers, team members, and ultimately your bottom line, as well as the sub-benefits for each.  Think about things like being able to reassign your teams to more strategic work, scaling up and down as demand shifts without workforce changes, improved guest service with consistent 24×7 interactions, and access to real-time data to be able to measure every step.  Pretty awesome.

Tips & guidance

So – truly an amazing technology that you should dive right into, huh?  Not so fast!  To be successful with RPA, there are some key things to keep in mind:
  • Implement organizational change management
You will be implementing solutions that will completely change the way business users work and, even if it’s for the better, it’s still change.  Especially if your organization suffers from a “we’ve always done it like that” mindset which will be detrimental to RPA’s success.  Consider their perspective, which may include fear for their jobs and a fear of the unknown, and adapt your approach accordingly with good organizational change management.
The way to offset these concerns and those mindsets is to communicate clearly and communicate often to create a culture of change acceptance.  Let team members know why you are doing this and get them involved in the planning.  In addition, it’s important to ensure you have buy-in at a senior level so those leaders can help to plant the RPA seeds and reassure folks that the efforts are in everyone’s best interest and will hopefully result in those same team members working on more strategic and higher-value tasks. 
  • Attain a deep understanding of the targeted processes & tasks
Collaborate heavily with all of the users involved in the processes that you are looking to automate through processes analyses and process mining.  Ask the hard questions to get to root answers so you can properly incorporate into your planning and ultimately the RPA solution. Utilize tools to help mine processes – tools that will be able to sift through application, database, and system logs to truly determine end-to-end processes.
Also, and this tip seems counter intuitive, but you want to be careful about automating completely inefficient processes. Obviously, those should be corrected or eliminated beforehand so that you are not simply automating broken processes.  The age-old adage of “Garbage In/Garbage Out” could not be more apropos in this situation.
  • Keep IT Involved
This is a heavily argued point with RPA, but I believe firmly that IT must be involved from start to finish.  Even if you think it’s an independent process change, get IT involved as there will be a ripple effect to utilized apps and technology including required integration and data points.  There are also security and compliance aspects involved that business units may not be aware of.
RPA is technology and something that IT will either directly or indirectly support post-implementation, so keep that in mind and keep IT engaged.  This is not a time for shadow IT and, if you choose that route, you will pay the price down the road.
  • Measure twice to cut once
As with any IT effort, you’ll want to spend a lot of time upfront on analysis and planning.  Consider who is going to run the effort, who it will impact, how you will fund it, and then plan accordingly.  In addition, think about whether this is going to be something that you purchase and support in-house or if this is an opportunity to outsource as a service for potentially more savings.  Both options exist – it really comes down to your internal capabilities and appetite.
Ultimately, if you can tie it to an overall digital transformation effort and your technology roadmap, the more effective this planning will be.  As part of that planning, establish baseline metrics and then efficiency goals as KPIs, then implement measures to track that performance and tweak as needed.  You will derive those from the current process tasks and the expected target levels through automation.
Lastly, keep cyber security and compliance paramount.  You will be introducing new technologies that could pose security risks if not handled properly and touching processes that may be governed by compliance standards.
  • Ensure that you have a good foundation
While sometimes unavoidable, try not to automate on legacy technology or broken tools.  RPA is not a band-aid so fix your foundational items first.  This includes not only the directly impacted applications and processes, but those downstream or integrated.  Think about things like your underlying enterprise architecture, networking, storage, compute technologies, etc.  If you must, make temporary RPA changes to capitalize on the benefits, but immediately build a plan to dovetail into future foundational upgrades.
  • Procurement is still the ‘Wild West’
This is a $5B industry and is expected to more than double by 2023.  The landscape is chock full of startups, consultants, and established vendors eager to get into the game and capitalize on the opportunity, with a myriad of products, solutions, and offerings.
At the same time, it’s still a relatively unknown practice in regards to how to deploy and maintain, so it becomes a target for purposeful overarchitecture.  Be wary of that with these tips:
    • Licensing is overly complicated; think “cloud provider-type of licensing fun” times 10.  Cases of customers being oversold are rampant.  They have no means to validate and no way to adjust after signing the contract.  Become familiar with the licensing models and only buy what you really need.
    • Service costs are typically triple that of your software investment.  Think about that…for every dollar spent, you are spending at least $3 on services!  Partners will try to squeeze every dollar out of the contract with perpetual upkeep instead of teaching you how to fish.  Figure out exactly what you need in your planning, then set up your contract accordingly.

Conclusion

Robotic Process Automation can take your business to the next level by streamlining and automating manual, labor-intensive tasks.  But it’s not something to dive into headfirst or it will be counterproductive to your goals and you may ironically end up with even more inefficiencies for round two!
Virtual Procurement Services (VPS) can help you through this process.  Our Procurement Services will ensure you are getting exactly what you need and at the best price possible while our free Technology Advisory Services can help you plan and validate your RPA approach.  And if you’ve already engaged a vendor, we can help you to evaluate & correct those contracts and recover money where feasible.
Reach out to us today to learn more.

Why the IT guy cares about culture

Background

It may seem odd that an “IT guy” is opining on culture, but I am passionate about it and perhaps that makes me unique. However, culture is the glue that holds an organization together. It keeps team members happy and engaged, pushes innovation and productivity to new heights, and can take your company to the next level.
Even though internal IT typically isn’t associated with culture, we know startup tech firms really challenged and shook up the “corporate landscape” creating fun and relaxed environments. Regardless, companies sometimes still view internal IT as the geeks in the basement that need some pizza and energy drinks every now and then.
I don’t like that. IT doesn’t exist just to fix computers and keep the network running – we are humans that are a strategic and integral part of any business.
 

My pizza and energy drink are happy team members and customers.

 
So I committed as an IT leader to disrupt outdated mindsets, ensuring that IT is viewed strategically and that culture is part of every IT team I lead. I created an associated IT strategy and the results have been amazing:
  • It not only leads with a team-first and guest-centric culture, but sometimes even pioneers the efforts within the company. It focuses on things such as positive physical environments, innovation time, constant communication and collaboration, team success celebrations, daily huddles, guest service reminders, and flexible schedules.
  • It sets up a framework for IT leadership to thrive in the culture to ensure success and happiness of their teams. It reinforces leadership concepts like radical transparency, empowerment, accountability, positivity, open door management, and forward-thinking.
  • It creates a positive viral effect to energize internal customers with which IT works. Communication and engagement with peer departments – essentially IT’s internal customers – is critical and provides an opportunity to spread the culture.
However, it is only successful in environments that have supported it. If the surrounding company culture becomes discouraging or toxic, it will end up consuming your own efforts. So it’s important to be sure that your company is compatible.
(For any IT leaders reading this, it’s also good insight to how IT is viewed. If culture takes a backseat, or IT isn’t a strategic pillar in the organization, that’s a sign of a dysfunctional organization. Either try to effect a change, or move on.)
 

Service-Profit Chain

For those not familiar, the service-profit chain links profitability to putting team members first. Putting trust in your teams and maintaining a fun, transparent, and collaborative culture creates happy team members. Those team members are energized and thus more productive. Innovation soars, projects stay on track, folks are more efficient, and ultimately that translates into better products and superior guest service. Energized guests then become loyal to your business, retaining and increasing their spend.
I have been a part of building that type of culture and it works.  Nothing is more rewarding than watching your teams thrive in an environment where they are empowered to do their jobs, have a voice, and ultimately have a chance to make a difference. Similarly, it is incredible to see smiles on your guests’ faces because of the memorable experiences you are providing.
This isn’t just rhetoric. There are powerful books, sites, and studies available that better explain the mechanics of the model, as well as prove the financial efficacy of this approach through some interesting case studies. In addition, technology has made it even easier to engage our team members and guests and instantly gauge success in the method.
 

Team-first Culture

Building a company culture is not easy. You are essentially defining the personality of your organization. It takes time, focus, reflection, and input from as many of your stakeholders as possible. Most importantly, it needs to truly reflect who you are as an organization and what you believe in. This is not a time to pretend to be someone else.
In defining your culture, you will memorialize your beliefs in your mission statement, vision, core values, and critical drivers. Ample research, consultants, and resources exist to aid in that process – too much for just one article. It is important to note since that is exactly where your culture is defined and becomes an eternal reference for your teams.
For a team- and guest-focused culture, here are the key points to consider as you are developing those tenets:
  • Team members are the center of your universe. Encourage servant-leadership. Surround yourself with smart, caring people and give them everything they need to succeed: empowerment, transparency, tools, training, respect, and a voice.
  • Guests deserve the absolute best products and service. Each guest should be treated like royalty, and each interaction should be an opportunity for a memorable experience.
These obviously wouldn’t be the only tenets of your culture, but they would be prioritized.
Your culture and associated mission, values, and drivers should never change once completed, unless of course your company is completely changing its reason for existence, which isn’t often. Spend the time up front to create them and don’t look back.
It doesn’t end there. It takes the right type of company and leadership to do it well. It also requires a strong commitment and some key considerations.
 

Keys to Success

There are several very important keys to making a team- and guest-focused culture successful. And each takes commitment.
  • You need to be GENUINE. You cannot just go through the motions.  Live the culture and faithfully believe in and evangelize your core values, drivers, and mission. In every decision you make, consider the culture.
  • You must ensure EVERYONE buys in. All levels need to be committed: line-level, CEO, Corporate, the Board, and so forth. Nobody is exempt from it and nobody is above it. It only takes one bad egg – especially if they are at a senior level – to destroy your culture. Hire accordingly: You can train for skills – you cannot for attitude.
  • You need to have the right LEADERSHIP. You need confident achievers wired with a passion for helping others. Authoritative, egotistical, paranoid, and/or insecure leaders simply don’t fit in this culture. They need to adapt wholeheartedly, or move on.
  • You must make efforts to SUSTAIN the culture. It is not set it and forget it. Relentlessly focus on immersing the culture in ALL aspects of your business EVERY DAY. Include it in your strategy, planning, projects, communications, meetings, huddles, staffing, etc. Everywhere, every day. Measure the success regularly and course correct as needed.
The “sustain” piece is critical. I have experienced companies that once set the bar in great culture and service slip into sterile and toxic environments. The reason: They attained leadership that didn’t fit who changed foundational tenets to suit their needs and eventually the company lost their focus on culture. Good people left, remaining folks were afraid, innovation was stifled, productivity plummeted, and internal relationships were broken. It created a chaotic environment with a direct impact on guest service and ultimately revenue.
Though it is fixable, it is not easy. I have been recruited in the past to revitalize IT departments impacted by toxic cultures and, while successful, it took a toll on the company. It takes a lot of time and energy to repair – energy better spent on maintaining a good culture and on strategic priorities.

Conclusion

A team-first culture can truly differentiate your organization and create tremendous positive change.  You need genuine company commitment, the right leadership, and an understanding that it takes effort to sustain it. Not every company is capable and not every company is built for that type of culture. However,  if you do implement it and are successful, it’s an amazing and rewarding experience.
If you want loyal and happy guests, take care of your team first. And forget the pizza and energy drinks – give them a culture in which they can thrive!
Through our free Technology Advisory Services, VPS can help to evaluate your current IT environment and collaboratively implement changes to ensure you have a culture that supports empowerment, transparency, and collaboration, which will ultimately increase productivity, decrease turnover, improve vendor communication, and ensure optimal  IT performance.
Reach out to us today to learn more.
 

References:

Service-Profit Chain: Heskett, J., W. E. Sasser Jr., and L. Schlesinger. The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value. New York: Free Press, 1997.[/vc_column_text][/vc_column][/vc_row]