In the past few years, software as a service (SaaS) has grown from a speck on the horizon to a thriving industry. A significant increase in demand for SaaS has led a large number of companies to enter the market, including start-ups and legacy providers of SaaS lawyer on-premise software. Our company has worked with dozens of these new market entrants, and we’ve noticed some commonalities among the companies that have thrived. The really successful SaaS businesses behave differently than companies that sell on-premise software. They think and act more like Web companies than traditional software companies. To paraphrase a car company’s slogan, successful SaaS companies live the understanding that “this is not your father’s software business.”
This makes sense, because just about everything involving SaaS is different than on-premise software. Successful SaaS companies know they can’t develop software, market it, sell it, deliver it or support it in the same way as on-premise software. In fact, they can’t even structure their companies and business plans the same way. Why? The answers lie in the many differences between SaaS and on-premise software.
Technical, development differences: Some of the technical differences between on-premise software and SaaS are obvious. With SaaS, multiple customers use the Internet to make use of a single copy of an application that runs on an Internet-connected server. This requires designing the software to support such multi-tenancy while keeping each customer’s data separate and secure. But that’s only the beginning of how SaaS must be handled differently than on-premise software.
Another difference involves the entire development process. SaaS companies can constantly see how their users are using their applications in real time. They immediately analyze what is working well and what isn’t. Successful companies use this information to respond quickly by implementing software updates with a shorter cycle than is possible with on-premise software.
On-premise companies typically spend at least a year creating, testing and distributing each new version of their products. They must ensure their revised products will still work on a wide variety of customer hardware. Because SaaS software updates only require changes on a single platform at centrally located servers, rolling out updates is much simpler. This means companies can implement improvements in SaaS products more often, and the most successful companies do just that. Quarterly, monthly and even weekly updates enable SaaS companies to respond more quickly to customer issues and requests. Such iterative software development requires successful SaaS companies to structure development teams and processes much differently than an on-premise company does.
Financial differences: The revenue flow from Software as a Service is completely different than it is for on-premise software. Even the most successful SaaS companies rarely see significant revenue during the first three years their applications are live. And all the initial sales are much smaller than they are with on-premise software. This requires SaaS businesses to structure their finances differently, or they could run out of operating cash before the applications have a chance to take hold.
It also means a completely different approach to marketing and sales. With SaaS, th