Transforming Your Saas Business

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Transforming Your Saas Business Transforming your SaaS business A strategic guide for optimizing business performance kpmg.com/SaaS Contents 2 Executive Summary 4 Background: Evolution of an Industry 11 Business Model Dynamics: A New Way of Doing Business 18 Business Drivers: Optimizing Performance for Success 39 Leading Practices: Critical Steps for Achieving Success 44 Appendix: Strategic Drivers: Formulae and Examples Featured Industry Contributors 1 Mark Hawkins, CFO, Salesforce.com 2 Neil Williams, CFO, Intuit 2 Steve Cakebread, CFO, Yext 5 Mark Culhane, CFO, Lithium Technologies 5 Bob L. Corey, CFO, CallidusCloud 7 Ron Gill, CFO, NetSuite 8 Mark Garrett, CFO, Adobe 9 Kevin Bandy, Chief Digital Officer, Cisco 13 R. Scott Herren, CFO, Autodesk 15 Mike Kourey, CFO, Medallia 16 Matt Quinn, CTO and EVP Products & Technology, TIBCO 21 Clyde Hosein, CFO, RingCentral © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Revolutionary changes in technologies have come in waves -- it brought us the mainframe, “the client-server and the cloud. From our experience, the cloud is exciting in that it enables us to help our customers connect with their customers in a whole new way. As the pioneer in Cloud SaaS offerings, we have witnessed disruption across industries and the globe as people embrace this dramatically improved technology. In 2015, the worldwide As a CFO, the big opportunity is how best to market for SaaS software support our respective companies in these application sales will be times of innovation and disruption, pivoting to new technology models and business models $33.4 billion in order to meet the modern day expectations with projections to grow and demands of customers and investors. more than double that, to This publication, Transforming your SaaS $67.2 billion, business, A strategic guide for optimizing business performance, serves as a useful by 2019. guide to gain a deeper understanding of the Source: Gartner, “Market Trends: Future Look at SaaS in the drivers and metrics across the balancing acts Application Markets”, November 25, 2015 of growth, margin expansion and long-term sustainability and competitiveness. Using this knowledge, SaaS and software companies have a greater opportunity to accelerate their business transformations, improve their competitiveness and amplify their future financial success.” – Mark Hawkins, CFO of Salesforce.com © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. TransformingTransforming your SaaSyour SaaSbusiness business 1 1 Executive summary The Cloud Service Providers (CSPs) solutions, either as an additional offering “ Transforming your SaaS market, and more specifically or as a replacement of their on-premise business” is thorough and portfolio. Companies that enjoy a large the Software-as-a-Service (SaaS) comprehensive. It’s always good maintenance revenue stream have market, has evolved considerably adopted a hybrid strategy where the on- to step back and remember the since its inception in the 1990s. premise and SaaS offerings coexist, while strategic rationale for some of Whereas it began as a niche some are pursuing a complete business the choices we work with day offering, primarily used by start- model transition to SaaS offering. Some by day. As the article describes, providers have also started adopting a ups that recognized the benefits of "freemium" licensing model, providing the I believe the SaaS model is a computing in the cloud, it has since software code for free and charging for better way for customers to use gained strong adoption among services and support. software and for companies to enterprises around the globe. 3. Integrated Technology and Product build and deliver it, as it actually With lower operational costs than on- companies: These include integrated enables faster development, premise software, quick deployments, technology companies (IBM, HP and delivery and adoption.” rapid product upgrades, flexible Cisco) and product companies (GE and —Neil Williams, CFO of Intuit configurations, seamless integration, Siemens) that have integrated SaaS scalability, high availability and inherent offerings into their core businesses. security, there are tangible, competitive With their subscription-based model, advantages for adopting a SaaS solution. the SaaS offering allows them to earn recurring revenue streams. As enterprise adoption has increased, the “ Transforming your SaaS number of SaaS solution providers has A new way of doing business business" is a complete tutorial The SaaS business model differs grown commensurately. With varying and describes the proper metrics markedly from that of traditional software operational models and capabilities, and measures needed to have these providers can be grouped into the businesses, with unique challenges following categories: for product and pricing, research and successful SaaS business. development, sales and marketing, service All the metrics described are 1. Pure-SaaS solution providers: and support and finance. As a result of important to have a successful These companies were designed these differences, SaaS companies must from the outset with a cloud/SaaS- be managed differently than traditional on- SaaS company. The key based product offering. This category premise software companies. metrics I focus on are Growth includes pioneering, cloud companies in Customers, Growth in ACV, SaaS business drivers (Salesforce, NetSuite), as well as a Growth in Deferred Revenue and number of startups and emerging high As a result of this distinct management growth companies. approach, the SaaS business requires Growth in Cash Operating Cash a different set of drivers and metrics Flow. These metrics help the 2. On-premise software providers: to measure business performance and company focus on improving the Responding to the increasing demand efficiency, for each type of SaaS company for cloud-based solutions, and to provide — pure-SaaS, on-premise software value of the business.” more predictability, some on-premise company, integrated technology/ product —Steve Cakebread, CFO of Yext software vendors (Oracle, Adobe, Intuit) company—weighing the significance of have transitioned to providing SaaS these metrics differently. This paper highlights the transformational priorities and critical challenges for the SaaS business, with an underlying goal of providing a framework for achieving long-term success. For more information about this publication, or to learn how KPMG can help your Cloud (SaaS) business, please Prasadh Cadambi Satya Easwaran contact us: Partner, Technology Industry Partner, Advisory +1 650-793-4129 +1 650-391-5365 [email protected] [email protected] © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2 Transforming your SaaS business Metrics Blueprint for SaaS Businesses: A Strategic Framework This publication provides a strategic Because of their inherent complexity, methodology for each metric in the framework for increasing growth, these drivers and metrics must be appendix. profitability and sustainability for the SaaS measured and interpreted correctly The road to success business. We present strategic drivers in order to be applied effectively — Successful implementation of the metrics along with key metrics used to assess whether internally, externally or both. blueprint is a top-down challenge for performance at each stage in the business Throughout this publication, we describe SaaS companies, which must review lifecycle — launch, scale/optimization and these metrics in detail and explain how and transform their existing enterprise stabilization (see illustration immediately to incorporate them into a successful performance management frameworks below; highlighted metrics are “must business strategy, providing calculation haves” for success). and operating models. Key stages of growth Launch > Scale and Optimize > Stabilize > Strategic Drivers Customer Growth Customer Growth Customer Growth – Customer Lifetime Value – Customer Lifetime Value – Customer Lifetime Value – Number of customers – Subscriptions/customer – Billings/customers – Billings Customers Revenue Growth Revenue Growth – Total Contract Value Revenue Growth – ACV – Backlog – Total Contract Value – Bookings – Annual Contract Value (ACV) and Average – Backlog – Calculated Billings ACV – ACV and Average ACV – Recurring revenue – Bookings – Bookings Growth – ACV to Billings ratio – Calculated Billings – Recurring Revenue (ARR/MRR/QRR) – ACV to Billings ratio – Average Revenue per User or per Account – Recurring revenue – Deferred Revenue – Average Revenue per user or per account – Time to recognize deferred revenue – Deferred revenue – Time to recognize deferred revenue Costs Costs Costs – Customer Acquisition Costs – Cost to Serve – Cost to Serve – Research & Development Costs/Sales – Research & Development Costs/Sales Margins – Sales costs/Sales – Sales costs/Sales – Recurring Margins – Marketing costs/Sales Margins – Gross Margins Margins – Recurring Margins Cash flow – Recurring Margins – Gross Margins
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