Innovation and Digital Transformation
In my early days at Microsoft, we used the term “Digital Nervous System“ to refer to the agility a superior IT environment provided for responding to customer needs and reacting to competitive threats. That was in the 90s, so IT infrastructure at the time centered on networking and email (yes, the wheel and fire were already invented).
Most people think of product when it comes to innovation. In the age of cloud computing, product innovation occurs in a less disruptive way. New capabilities must be valuable enough to sustain customer value, but not change so much as to incite consideration of and defection to competitors. Disruptive, “bet the business” product innovations are no longer required after the initial SaaS offering is delivered. Instead, it is better to innovate without introducing breaking changes. Focus major innovations on product extensions and adjacent areas instead (see Product Ecosystem).
Subscription pricing delivers the gift that keeps on giving: recurring revenue. Steady growth with recurring revenues and high customer retention rates yields better company predictability and therefore higher valuations.
The broader opportunity is to bundle products and services such that the combination generates more customer value that the individual offerings alone. This worked for Microsoft Office in the 90s (anyone remember Lotus 1-2-3, WordPerfect, and Harvard Graphics?) and applies to SaaS partnerships today. SaaS solutions are deployed quickly, and integration with other systems is exceptionally fast. Multiple SaaS solutions can even be deployed in parallel. Distributors have taken steps toward providing marketplaces for cloud products, but the innovation opportunity remains to aggregate a portfolio of related cloud solutions to target common industry scenarios. For example, where is the A-to-Z startup manufacturing company SaaS suite (beyond ERP)? Instead of innovating through just your own products, think about complementary applications and services that could enable holistic, customer-centric solutions. That is the line of business platform of the future.
Organization changes are necessary as ISVs transition to SaaS products. Salespeople will gravitate toward a bigger ticket perpetual license unless commission structures incent them for subscription licensing. It is sometimes easier to create a parallel sales organization with compensation models that account for lower, recurring revenues rather than force fit a traditional sales organization that is used to a higher touch/higher cost customer selling process. Note there are development-related organizational improvements (e.g., scrub, agile, low code platforms) that are covered elsewhere.
Providing too much or the wrong kind of support can eat up SaaS profits. Understand and implement the “minimum viable support” requirements for your products. Consider innovative approaches to support (e.g., AI/knowledgebase-driven customer service bots that escalate to human support) that can keep customers satisfied while keeping costs low. In addition, invest in post-sales support that accelerates adoption. These “customer success teams” should enable adoption of cloud solutions at existing customers to maximize usage and secure the recurring revenue stream.
Opportunities exist to innovate through marketing including branding, social media, and lead nurturing. Traditional ISVs must adjust to SaaS marketing, developing more online qualification and transaction capability and relying less on direct sales involvement.
Digital Transformation is about leveraging the power of software and cloud economics to revolutionize business models, solutions delivered, and markets served. Software companies can innovate in ways beyond product development to affect their own digital transformation and better enable their customers’ digital transformation journey.