Monday, March 5, 2012

SaaS acquisitions can be tricky

Having lived through several acquisitions during my career in technology companies, I have some idea of what the folks at SuccessFactors (acquired by SAP last year) and Taleo (acquired by Oracle a few weeks ago) are going through. Some of these combinations go well, others not so well.

One reason behind the acquisitions of software-as-a-service (SaaS) companies is the high cost of sales and marketing. In essence, it helps to be bigger and richer.

Under the SaaS business model, companies pay for sales and marketing now, but don't collect revenues until later. I call it the Wimpy effect, after the cartoon character who promises "I'll gladly pay you on Tuesday for a hamburger today. (See "SaaS market consolidation. Blame Wimpy.")

Early in its life, for example, SuccessFactors actually spent more for sales and marketing than its entire annual revenues. Even well-established SaaS companies typically pay 40 percent or more of their annual revenue on customer acquisition.

The need to make that kind of large investment over a long period favors companies with deep pockets (as well as strong stomachs.) Hence the advantages of being acquired by a much larger, richer company.

The unique challenge of marketing both SaaS and on-premise solutions

From what I've seen, all tech company mergers and acquisitions run into speed bumps of one kind or another - departure of key people, cultural clashes, loss of focus, and other glitches.

When established companies buy SaaS companies, it's even trickier. They need to figure out how to sell and market the newly acquired SaaS solution alongside the existing on-premise solution.

It is possible for one company to sell both on-premise and SaaS solutions simultaneously. Lots of companies do it, and in many cases it makes good business sense.

For one thing, keeping two horses in the race means there's no need make an abrupt switch from on-premise to SaaS. That kind of switch can be painful. Some brave companies like Concur have done it, even as a public company, and they have come through it successfully, but I don't imagine it was easy.

Second, companies often prefer to sell both on-premise and SaaS in order to offer their customers a choice. "Choice" is so much more attractive to customers than "my way or the highway."

But offering customers a choice doesn't come without a price for the solution provider.

In some ways, offering two different solutions - an on-premise solution and a SaaS solution - means running two different companies.

The differences span the entire business: finance, operations, support, development, sales and, of course, marketing. (See "The Ten Essentials of Software-as-a-Service Solutions Marketing.")

Different audiences, messages, & processes

For SaaS marketers, we may be talking to different audiences. For example, while we may not have paid much attention to existing customers for on-premise solutions, those folks and their continued renewals are vital to our SaaS business.

The messages we deliver about the SaaS solution may differ as well. Unlike an on-premise solution, we're not just talking about the features that are delivered at the time you buy; we're talking about the on-going stream of functionality that the customer will get over the life of the subscription. And we're talking about the entire experience - reliability, security, deployment, upgrades, etc. - not just product functions.

Even the marketing processes for SaaS solutions may be different. We may be delivering enhancements more often, which means we'll need a way to keep our marketing material up to date. And we'll need to be super-efficient. Not that we can spend carelessly to market on-premise apps, but we need to be especially careful to get our money's worth when we market SaaS solutions.

I'm sure we'll see lots more acquisitions of SaaS companies, and there's lots of speculation about which companies will be bought next. Just as interesting is what will happen after they're bought.

Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License.