The Phases of SaaS Grief

Over a decade of helping on-premises and licensed software companies through the transition to “Something as a Service” – whether that be Software (SaaS), Platform (PaaS), Infrastructure (IaaS), or Analytics (AaaS) – has given us a rather unique perspective on the various phases through which these companies transition. Very often we find ourselves in the position of a counselor, helping them recognize their current phase and making recommendations to deal with the cultural and operational roadblocks inherent to that phase.

While rather macabre, the phases somewhat resemble those of grieving after the loss of a loved one. The similarities make some sense here, as very often we work with companies who have had a very successful on-premises and/or licensed software business; they dominated their respective markets and “genetically” evolved to be the “alphas” in their respective areas. The relationship is strong, and their past successes have been very compelling. Why would we expect anything other than grieving?

But to continue to evolve, succeed, and survive in light of secular forces these companies must let their loved one (the past business) go and move on with a new and different life. To be successful, this life will require new behaviors that are often diametrically opposed to those that made the company successful in their past life.

It’s important to note that, unlike the grieving process with a loved one, these phases need not all be completed. The most successful companies, through pure willpower of the management team, power through each of these quickly and even bypass some of them to accelerate to the healing phase. The most important thing to note here is that you absolutely can move quickly – but it requires decisive action on the part of the executive team.

Phase 1: Denial This phase is characterized by the licensed/on-premises software provider completely denying a need to move to an “X” (something) as a Service (XaaS, e.g. SaaS, PaaS) model.

Commonly heard quotes inside the company:

• “Our customers will never move to a SaaS model.”
• “Our customers are concerned about security. IaaS, SaaS and PaaS simply aren’t an option.”
• “Our industry won’t move to a Cloud model – they are too concerned about ownership of their data.”
• “To serve this market, a solution needs to be flexible and customizable. Proprietary customer processes are a competitive advantage in this space – and our solution needs to map exactly to them.”

Reinforcing this misconceived belief is an executive team, a sales force, and a professional services team trapped in a prison of cognitive biases. Hypothesis myopia and asymmetric attention (both forms of confirmation bias) lead to psychological myopia. In our experience, companies with a predisposed bias will latch on to anything any customer says that supports the notion that XaaS just won’t work. These companies discard any evidence, such as pesky little startups picking up small deals, as aberrant data points.

The inherent lack of paranoia blinds the company to the smaller companies starting to nibble away at the portions of the market that the successful company’s products do not serve well. Think Seibel in the early days of Salesforce. The company’s product is too expensive and too complex to adequately serve the smaller companies beneath them. The cost of sales is simply too high, and the sales cycle too long to address the needs of the companies adopting XaaS solutions. In this phase, the company isn’t yet subject to the Innovator’s Dilemma as the blinders will not let them see it.

Ignorance is bliss…for awhile…

How to Avoid or Limit This Phase

Successful executive teams identify denial early and simply shut it down. They establish a clear vision and timeline to move to the delivery of a product as a service. As with any successful change initiative, the executive team creates, as a minimum:

1. The compelling reason and need for change. This visionary element describes the financial and operational benefits in clear terms that everyone can understand. It is the “pulling” force necessary to motivate people through difficult times.
2. A sense of fear for not making the change. This fear becomes the “stick” to the compelling “carrot” above. Often given the secular forces, this fear is quite simply the slow demise of the company.
3. A “villain” or competitor. As is the case in nearly any athletic competition, where people perform better when they have a competitor of equivalent caliber (vs say running against a clock), so do companies perform better when competing against someone else.
4. A “no excuses” cultural element. Everyone on the team is either committed to the result, or they get removed from the team. There is no room for passive-aggressive behavior, or behaviors inconsistent with the desired outcome. People clinging to the past simply prolong or doom the change initiative. Fast success, and even survival, requires that everyone be committed.

Phase 2: Reluctant but Only Partial Acceptance

This phase typically starts when a new executive, or sometimes a new and prominent product manager, is brought into the company. This person understands at least some of – and potentially all of – the demand side forces “pulling” XaaS across the curve of adoption, and notices the competition from below. Many times, the Innovator’s Dilemma keeps the company from attempting to go after the lower level competitors.

Commonly heard quotes inside the company:

• "Those guys (referring to the upstarts) don’t understand the complexities of our primary market – the large enterprise.”
• “There’s a place for those products in the SMB and SME space – but ‘real’ companies want the security of being on-premises.”
• “Sure, there are some companies entertaining SaaS, but it represents a tiny portion of our existing market.”
• “We are not diluting our margins by going down market.”

The company embarks upon taking all their on-premises solutions and hosting them, nearly exactly as implemented on-premises, as a “service”.

Many of the company’s existing customers aren’t yet ready to migrate to XaaS, but discussions are happening inside customer companies to move several solutions off-premises including email, CRM and ERP. These customers see the possibility of moving everything – they are just uncertain as to when.

How to Avoid or Limit This Phase

The answer for how to speed through or skip this phase is not significantly different than that of the prior phase. Vision, fear of death, a compelling adversary, and a “no excuses” culture are all necessary components.

Secular forces drive customers to seek a shift of risk. This shift is analogous to why one would rent instead of owning a home. The customer no longer wants the hassle of maintenance, nor are they truly qualified to perform that maintenance. They are willing to accept some potential increase in costs as capex shifts to opex, to relieve themselves of the burden of specializing in an area for which they are ill-equipped.

If not performed during the Denial phase, now is the time to remove executives who display behaviors inconsistent with the new desired SaaS Principles

Phase 3: Pretending to Have an Answer

The pretending phase starts with the company implementing essentially an on-premises solution as a “SaaS” solution. With small modifications, it is exactly what was shipped to customers before but presented online and with a recurring revenue subscription model. We often like to call this the “ASP” or “Application Service Provider” model. While the revenue model of the company shifts for a small portion of its revenue to recurring services fees, the solution itself has not changed much. In fact, for older client-server products Citrix or the like is often deployed to allow the solution to be hosted.

The product soon displays clear faults including lower than desired availability, higher than necessary cost of operations, higher than expected operating expenses, and lower margins than competitors overall. Often the company will successfully hide these “SaaS” results as a majority of their income from operations still come from on-premises solutions.

The company will often use nebulous terms like “Cloud” when describing the service offering to steer clear of direct comparisons with other “born SaaS” or “true SaaS” solutions. Sometimes, in extreme cases, the company will lie to itself about what they’ve accomplished, and it will almost always direct the conversation to topics seen as differentiating in the on-premises world rather than address SaaS Principles.

Commonly heard quotes inside the company:

• “Our ‘Cloud’ solution is world class – it’s the Mercedes of all solutions in the space with more features and functionality than any other solution.”
• “The smaller guys don’t have a chance. Look at how long it will take them to reach feature parity. The major players in the industry simply won’t wait for that.”
• “We are the Burger King of SaaS providers – you can still have it your way. And we know you need it your way.”

Meanwhile, customers are starting to look at true SaaS solutions. They tire of availability problems, response time issues, the customization necessary to get the solution to work in a suitable fashion and the lack of configurability. The lead time to implementation is still too long.

Sales people continue to sell the product the same way; promising whatever a customer wants to get a sale. Engineers still develop the same way, using the same principles that made the company successful on-premises and completely ignorant of the principles necessary to be successful in the SaaS world.

How to Avoid or Limit This Phase

It’s not completely a bad thing to launch, as a first step, a “hosted” version of a company’s licensed product. But the company must understand internally that it is only an interim step.

In addition to the visionary and behavioral components of the previous phases, the company now must accept and be planning for a smaller functionality solution that will be more likely adopted by “innovators” and “early majority” companies. The concept of MVP relative to the Technology Adoption Lifecycle is important here.

Further, the company must be aggressively weeding product, sales, and technology executives who lack the behaviors or skills to be successful and seeding the team with people who have “done this before”. Sales teams must act similarly to used car sales people in that they can only sell “what is on the lot” that will fit customer “need”, as compared to new car sales people who can promise options and colors from the factory (“It will take more time”) that more precisely fit a customer’s “want”.

Phase 4: Fear

The company loses its first major deal or two to a rival product that appears to be truly SaaS and abides by SaaS Principles. They realize that their ASP product simply isn’t going to cut it, and Sales people are finally “getting” that the solution they have simply won’t work. The question is: Is the company too late? The answer depends on how long it took the company to get to this position. A true SaaS solution is at the very least months away and potentially years away. If the company moves initially right to the “Fear” stage and properly understands the concepts behind the TALC, they have a chance.

Commonly heard quotes inside the company:

• “We’re screwed unless we get this thing re-architected in order to properly compete in the XaaS space.”
• "Stop behaving like we used to – stop promising customizations. That’s not who we are anymore.”
• "The new product needs to do everything the old product did.” [Incorrect and prone to failing]
• "Think smaller, and faster. Think some of today’s customers – not all of them – for the first release. Understand MVP is relative to the TALC.” [Correct and will help drive success]

How to Avoid or Limit This Phase

This is the most easily avoided phase. With proper planning and execution in prior phases, a company can completely skip the fear stage.

When companies find themselves here, its typically because they have not addressed the talents and approach of their sales, product, and engineering teams. Sales behaviors must change to only sell what’s “on the car lot”. Engineers must understand how to build the “-ilities” into products from day 1. Product managers must switch to identifying market need, rather than fulfilling customer want. Executives must now run an entirely different company.

Final Phase: Healing or Marginalization

Companies successful enough to achieve this phase do so only through launching a true XaaS product – one that abides by XaaS principles built and run by executives, managers and individual contributors who truly understand or are completely wedded to learning what it means to be successful in the XaaS world.

Summary

The phases of grief are common among many of our customers. But unlike grieving for a loved one, they are not necessary. Quick progression, or better yet avoidance, of these phases can be accomplished by:

1. Establishing a clear and compelling vision based on market and secular force analysis, and an understanding of the technology adoption lifecycle. As with any vision, it should not only explain the reason for change, but the positive long-term financial impact of change.
2. Ensuring that everyone understands the cost of failure, helping to instill some small level in fear that should help drive cultural change.
3. Ensuring that a known villain or competitor exists, against which we are competing to help boost performance and speed of transition.
4. Aggressively addressing the cultural and behavioral changes necessary to be successful. Anyone who is not committed and displaying the appropriate changes in behavior needs to be weeded from the garden.

This shift often results in a significant portion of the company departing – sometimes willingly and sometimes forcefully. Some people don’t want to change and can find other companies (for a while) where their skills and behaviors are relevant. Some people have the desire, but may not be capable of changing in the time necessary to be successful.