Software companies are going through a period of intense transformation. According to estimates by ABES (Brazilian Association of Software Companies), 40% of members will have to migrate to the SaaS (Software-as-a-Service) model in the next four years or they are in danger of closing their doors. Much more than a technology change, from a client / server environment to browser access, SaaS or PaaS (Platform-as-a-Service) is a new business model.
With SaaS, the manufacturer does not receive 100% of the sale price of the software, but soft monthly payments, which represent 35% of the value of the cash sale. In one year, the impact of this change is a loss of revenue of almost 2/3 of revenue. In the following years, when the manufacturer would receive approximately 20% in the traditional model for annual maintenance, the company continues to receive the 33% for the first year, and thus indefinitely.
In this model, the user is no longer the “owner” of the software or application and becomes a subscriber to a common service, such as electricity, telephony, internet, gas, water. This movement is what the Anglo-Saxons call facilities and, in order to adapt to the new demands, companies will have to rethink their entire economic model.
The first impact is financial. Companies will have to sacrifice between 55 and 70% of annual revenue, expecting an increase in demand for the reduction of the initial cost of purchase and for the monthly payment. This is a heavy bet in economic terms. However, this does not mean just a change in the value of a product, but a transformation of the structure to adapt to the economic and financial reality.
The biggest challenge is to migrate from an annual revenue model to a monthly revenue model. As a consequence, there will be a sharp drop in yield and companies will have to adapt their economic structure to the new times. Not only will they have to adjust to the expected fall in the first year, but they will also be able to adjust their cash flow.
The capital needs to make the transition is another challenge because the business emphasis shifts from the technical and commercial to the financial areas, which will be responsible for raising the necessary resources for migration, whether from shareholders or banks.
The transition creates a true “Valley of Death”, which must be financed by the company itself. That is why, at this moment, the support of development entities, such as FINEP, BNDES, leasing or financing companies, as well as investors, is essential. The field that will open up will be huge: why risk my investment in a startup, without customers, products and technology, if I can help traditional companies, with all these attributes to make the migration?
An important point is always emphasized by the Director and Coordinator of the ABES SaaS Committee, Lauro de Lauro: the probability of finding a Unicorn in startups is very low, they are companies with high mortality and financing costs. In general, the transition from traditional companies is much less risky.
Another crucial point for SaaS is the SLA (the service quality agreement), which will be a determining factor in obtaining competitive advantages. At that moment, technology enters and the whole process starts to run in the cloud - in addition to guaranteeing security, proof against cyber attacks and lack of power or communication, as well as customer support, 24 hours a day, seven days a week. .
To assist the sector in this moment of transformation, in 2014 ABES created the SaaS Committee, with the objective of understanding not only the technology, but the business model and trying to find answers to the challenges that will affect 40% of the associates. Among the main actions, the initiative seeks to raise awareness among companies about the importance of these disruptive technologies and assist them in migrating to this new business model. According to Lauro de Lauro, director of the SaaS Committee who has led research on the subject, a company must focus on nine steps for a successful migration:
1. Clearly define your strategy;
2. Understand the maturity of your product and market;
3. Define customer service as the key to your success;
4. Rethink the product architecture;
5. Design the product for scalability;
6. Design a dynamic infrastructure;
7. Integrate environments and applications;
8. Invest heavily in the security of cloud applications and data;
9. Make a mixed transition, with the two models running concurrently, adopting technologies that allow the immediate creation of a SaaS model.
A good example of migration to the SaaS model is Microsoft. In 2014, when the company announced that it would adopt a “rent, don't buy” model for Office 365, revenue fell 18%, despite having increased the number of subscriptions by 27%, totaling 7.1 million users. In 2017, with 120 million active users (equivalent to 10% of the total number), the business model represents more than 50% of Office revenue. This long-term gain is justified by factors such as the expansion in the number of users and a significant reduction in piracy.
To survive the “death valley” of the transformations in the software market, companies need to rethink the structure, first the financial one, then from the product architecture to customer service. This new challenge requires preparation for a new strategic, technical and, above all, financial management.
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