Best of 2020: SaaS : The Dirty Secret No Tech Company Talks About

As we close out 2020, we at DevOps.com wanted to highlight the five most popular articles of the year. Following is the third in our series of the Best of 2020.

Software as a service (SaaS) in its purest form is amazing—like compound interest, it grows upon itself and just keeps growing. Given the current climate in tech, the growth-at-all-cost playbook has been replaced with a focus on efficiency of growth. This rings very loud in enterprise SaaS.

SaaS products are supposed to be easy to deploy and adopt. That’s the dream. It’s the reason SaaS companies trade at astronomical multiples, why they can open and expand markets faster than ever, and why venture investors (and public market investors) give them seemingly crazy valuations.

The dirty little secret I have found is that, in most cases, this promised state just isn’t the case. The more SaaS companies I’ve seen, the more I’ve witnessed great companies forced to become service businesses to scale. Having a services team isn’t bad; it can even produce a lot of benefits for customers. But many times it ends up being necessary in SaaS.

As with all things that involve consultants, it’s going to take longer and cost more to get your product(s) live.

Put frankly, this process sucks, and it’s not the SaaS dream. Especially today, when organizations need to do more with less, adding heads just to get your product live seems like another problem to deal with, not a solution. SaaS products were supposed to be delivered via the cloud almost instantly. The same SaaS product was going to work for every customer, and once we built a brand, it was gonna be glorious. WTF happened?!

I grew just as frustrated as some of you likely are. As part of the founding team at Behance (think Linkedin for the creative world), I lived this myself. We built a beautiful portfolio-sharing platform employed by millions of people, which we eventually sold to Adobe. Our platform became the engine that powered portfolios for design institutions including the Rhode Island School of Design (RISD), Savannah College of Art and Design (SCAD), School of Visual Arts (SVA), and the American Institute of Graphic Arts (AIGA), among others. We would fight for these deals with design institutions where we could step-function our member base and establish credibility in the creative world quickly just by signing up a single design school. What we found, though, was that implementations stalled for avoidable reasons. These delays would cause our team to scramble and delay accordingly, impacting critical messaging to millions of our customers.  Customers and vendors were using a different language. It drove us nuts.

When I started angel investing in SaaS, I began to see the same story of avoidable delays all over again. Companies would have a great quarter and book more revenue than ever, but two quarters later they still hadn’t realized any revenue! What was happening?!?

As I studied it, the issue became more and more clear: Adding more heads to an org, coupled with tons of manual processes, actually decreased operating leverage in the businesses. The teams leading implementations would dig through Excel files to try and pinpoint where the hold-ups were occurring, but there never was a good reason and everyone was blaming each other.

I was suspicious this was a market-wide problem, but I wanted to be sure, so I started asking some friends who had built, scaled and exited large startups if they, too, were experiencing this conundrum. Carsten Thoma, who founded Hybris and later sold it to SAP for $1.5 billion, told me numerous stories about the difficulties he had getting information from his team. “I distinctly remember one senior executive meeting about a customer crisis. I kept asking seemingly simple questions and kept getting conflicting information. We just kept opening Excel spreadsheets, and it took 48 hours to get an answer that I should have had in five minutes regarding what was stalling the project,” he said. “You can imagine how the problem is compounded by a company’s size, complexity of partner network, geographic distribution and newly integrated products.”

Carsten clearly identified that, regardless of size, companies need a way to manage and view the process of how they, and their partners implement their products. The best companies he had seen and been a part of found ways to standardize and automate processes to improve areas of inefficiency. While many times the mantra is to do things that don’t scale early to be close to customers, Carsten preached that “a process that involved the whole company and worked to get your first five customers live can’t be relied on to bring your 100th customer live.”

To get a view from the other side of the table, I talked with some investor friends. Peter McCoy, a partner at Activant Capital, told me that during diligence his team looks to understand if a company can acquire customers efficiently. To hone in on this, he highlighted the relationship between net-new product revenue and professional services spend. This spotlights the maturity of product operations and the product itself. If the product operations are still early in their maturity, you will see a 1:1 or greater ratio. Typically this results from the company signing clients and not getting them live, overhiring in professional services to add bandwidth to non-scalable processes, and the destruction of marketing capital.

There’s a trend here: Companies that don’t implement their products well end up hurting themselves in the long run via lower profitability and margins and fewer growth opportunities. I wanted to know more about how companies could systematize and create better processes for this workflow, so I asked Kristine Vallila, a customer success expert, about organizations she’s seen conduct implementations successfully at all scales. Kristine worked for several unicorns including Endeca and Demandware and then led customer success at NewStore.

“So many of the delays present during implementations are the result of the same scenarios being repeated over and over. There is a need for some central fit-to-purpose tool that can provide visibility that I can compellingly champion to my executive team,” said Kristine. “More importantly, this would allow me to spend my team’s time and talent on value-add programs rather than merely delivering the table stakes. Competition in software is fierce, and customer relationships are made or broken during implementation.”

Kristine had seen it all, yet still had the same problems. I’ve always been a runner, so I started calling her issues “false starts.”  Kristine, like everyone else, had no way to know across multiple hundreds of projects which issue would hold up which project before it happened as there was no standardization across projects to compare them and no real-time visibility into the projects to surface insights. Further, due to manual compilation, she spent the majority of her week asking for updates from clients and internal teams.  More than once, canary-in-the-coal-mine signals from existing customers were ignored because they were brought in as anecdotal examples that could not be supported with massive data. The executive team was missing out on the most important customer feedback channel via the services team.

Having heard these stories, I’ve identified four principles by which SaaS companies must operate to survive:

1. Optimize for product-driven growth, but consider the services team your first and most important customer feedback channel—just keep it margin positive!
2. Standardize from day one so that all members of the company speak the same language and all projects can be compared using the same yardstick.
3. Report to stakeholders frequently—provide information to the executive team and the client regularly about implementation progress, not just on Monday morning status/standups.
4. Quantify your process—Create an internal NPS for implementations with clients, know where things get held up and systematize those processes.

It might seem unreasonable that some clients who live in a world where they know within a five-minute window when their pizza will arrive hold similar expectations for tracking the progress of their enterprise-wide software projects. But it is very reasonable for them to expect better management and far clearer visibility into the critical projects for which they’re responsible.

Earlier I stated that SaaS was like compound interest. The most important factor in compounding is to understand which variable it is applied to. My team and I hope to usher in the age of “efficient” growth. “Efficient” means that companies generate 4x every dollar invested operationally by using process, systems and structure to enable their products to be deployed with customers instead of just people.

The dirty secret is out. It’s time for a standard here.