August 22, 2006

SaaS firm expensewatch.com answers the question: Where does all the $$ go?

by Adam Stone, Senior Writer, SoftwareCEO

Where is all the money going?

That's the question CFOs are always asking.

And it's a question that expensewatch.com says it can help answer, with software they call "on-demand expense control and compliance."

Essentially, the company enables small and mid-sized companies to track and control their expenses.

And expensewatch.com is expanding fast. The company grew roughly 400 percent in each of the past two years. In 2006, it's shooting for another 400 percent.

Since it was founded in 2000, the company has signed up 7,000 users in 15 different countries. Each user pays, on average, $230 a year per module to access the software-as-a-service (SaaS) offering.

What do customers get for their money?

expensewatch.com creates electronic versions of paper-based forms to help a company get better control over things like travel expenses, accounts payable, and purchasing.

At the same time, the system helps companies comply with both internal policies and external regulations.

To sweeten the deal, expensewatch.com takes care of all the messy installation, maintenance, and hardware-tweaking for its clients: The company delivers its software as a service (SaaS).

This combination of hot product and economical service has attracted attention.

expensewatch.com was one of five finalists for Best Financial Software Solution in the 2006 Codie Awards organized by the Software & Information Industry Association (SIIA).

And in December 2005, expensewatch.com landed $7 million in angel money, to be used primarily for sales and marketing.

In all, the company has attracted about $14 million in financing, and it's up to about 50 employees.

And yes, they eat their own dog food: expensewatch.com uses their own software to watch their own costs.

Four software startups later...
Driving the momentum at the company, based close to Philadelphia, Pa., is Bill Vergantino, who this May replaced founder Todd Palmieri as president and CEO.

(Palmieri left for personal reasons, Vergantino says, and remains actively involved in the company.)

Before joining expensewatch.com, Vergantino served as VP of global sales at both Relicore (acquired this year by Symantec) and Acta Technology (acquired in 2002 by Business Objects.)

In fact, he's been involved in four different software startups, every one of which was acquired or went public. Meanwhile, Vergantino keeps his eye on the ball with a pragmatic business philosophy.

"Every move we make should retain or acquire a customer," he says. "If it isn't doing one of those two things, we shouldn't be doing it."

So just what is he doing?

We asked Vergantino to walk us through his business plan, and especially the ins and outs of the SaaS business model. Here's what he told us.

SaaS growth tip #1: Find a problem where software can come to the rescue.
expensewatch.com has the wind at its back in several ways.

Sarbanes-Oxley, for instance, has forced many companies to watch their financial paperwork with extra scrutiny, something expensewatch.com handily supports.

At the same time, workplace trends are creating pressure to better monitor expenses.

For instance, the Association of Certified Fraud Examiners says U.S. companies lost six percent of their annual revenues to fraud in 2004. In most sectors, inflated expense claims were behind much of the loss, accounting for about 20 percent of the total.

The ACFE reports that 60 percent of companies rely on whistle-blowers to uncover this kind of fraud. That leaves a lot of firms looking for a solution.

Software to the rescue, says Vergantino.

SaaS growth tip #2: Get the inside story on how customers actually use your software.
Do your customers actually use your software? And how well?

Those are critical questions for any software company, Vergantino says. If customers don't know how to use your product properly — or to its full potential — they may be disappointed enough not to renew their contracts.

And they probably won't recommend you to any of their colleagues.

That's a reasonable assumption, given what Vergantino's clients have on the line. Half his customers are on contracts two years or longer. To renew, they need to succeed.

That’s why an expensewatch.com subscription includes not just updates, implementation, and training, but also a routine post-sales analysis of usage trends.

As a customer ramps up their usage, expensewatch.com technicians conduct in-depth explorations of how the software is being used, with an eye toward helping that customer maximize their productivity.

Vergantino says this is one of the big advantages of the SaaS model, which gives his people a deep inside view of customer usage.

By allowing service technicians to track customer behavior and offer guidance for improved usage, "the on-demand approach really enables us to maximize customer satisfaction."

With licensed software, on the other hand, "you really hope the customer is maximizing the potential, but you don't have that visibility to know for sure," he says.

SaaS growth tip #3: Small buyers have small budgets. Give them a small price tag.
As Vergantino looks over the landscape and ponders what companies need from software, he sees a very basic equation.

Corporations make a profit when they drive revenues hard, while at the same time controlling spending.

The software world has responded admirably to the first need, with diverse tools such as CRM to help manage the revenue pipeline.

"There hasn't been any similar approach for helping organizations control and reduce their operating expenses," he says.

In most cases, companies track expenses using paper records, an approach that burns up time, and leaves a trail of potential errors and inaccuracies in its wake.

Multi-billion-dollar enterprises have tackled the problem largely through big-ticket software.

"Software has solved this at the top end, where companies have a lot of money and a lot of resources," Vergantino says. But that leaves thousands of companies under-served.

To carve out its niche, expensewatch.com has targeted the small to mid-sized market, companies of $5 million to $500 million in revenues. These smaller companies demand a lower price-point.

And Vergantino says the on-demand model makes it possible for his firm to deliver that affordability, and still offer a quality product. SaaS does this by reducing his company's costs of development, distribution and support.

"We are maintaining one architecture, built on one platform, so when new features and functionality are released, we don't need to port it to three or five or 10 different architectures. We are only maintaining one architecture, versus a client/server product that has to go to Windows, and UNIX, and so on."

SaaS growth tip #4: With SaaS, resist the urge to have multiple versions with different features.
There's another way to keep the price down.

Vergantino is adamant about selling everything he's got in a single package, rather than charging for additional functions and services beyond the basic offering.

"A lot of software companies will offer a basic set of capabilities, but then add on a lot of à la carte capabilities," he says.

"We want to simplify things for our customers. That's how we want to differentiate ourselves: You budget for the subscription, and you get all that we offer."

This also simplifies things for his own operation. Having only one version that everyone uses avoids a lot of administrative overhead.

SaaS growth tip #5: Make friends with firms with complementary products.
As Vergantino makes his marketing plans, he sees partnerships taking on an ever-more significant role.

To reflect that, this spring expensewatch.com pumped fresh energy into its sales force, recruiting John Neri as VP of direct sales, and promoting Marie Floria to VP of strategic partnerships.

The idea is to forge marketing ties with other companies whose products dovetail naturally with expensewatch.com's own, and then find joint ways to market the compatible solutions.

Take, for example, an existing partnership with Comdata, a credit card processing company that encourages SMBs to use plastic for all major expenses. A good fit, surely. First, this is a product that touches directly on the realm of expense reporting.

And if any company wants that much automation on the expense side, Vergantino figures, it could well be looking for some tech-based controls to manage that usage.

In some cases, a partner would wrap up expensewatch.com as part of its own solution. In others, it would act as a marketing partner, selling the two solutions in tandem.

Revenue-sharing would depend on the particular marketing model, says Vergantino.

In the near-term, he'd like to formalize ties with a CRM vendor, on the assumption that any firm looking to manage and analyze its revenues would likely want to take a similarly close look at its expenses.

That being said, strategic partnerships are just beginning to assume a place in the expensewatch.com marketing program.

"Even if you want to partner, it's a very difficult thing to do until you have credibility, until you have a mature product, until you have customers and users," Vergantino says.

With 7,000 users signed on, "we're at a point where we are able to reach out to partners that make sense to us."

SaaS growth tip #6: Make sure your sales people have skin in the long-term game.
As a SaaS vendor, expensewatch.com rarely sees a payment arrive in one lump sum when a sale is made.
Rather, customers make monthly payments on the basis of contracts that run a year or more.

This naturally raises the question of when to pay the sales staff. A traditional up-front commission on the entire value of the contract makes no sense, when the cash comes in over many months.

So Vergantino pays out as slowly as the cash comes in.

If a customer signs a five-year contract and agrees to pay it out a year at a time, the salesperson will be compensated accordingly: one year at a time.

"It incents our salespeople not only to sell longer-term contracts, but also to encourage pre-payment," Vergantino says.

Such up-front payments do more than help Vergantino manage his cash flow.

"When a customer is willing to commit their cash to this relationship, we know they're more likely to be invested in its success," he says.

In this scenario, cash represents a kind of emotional buy-in on the part of the customers. With the money already paid, they are more likely to push for success.

SaaS growth tip #7: You don't need to visit. You can sell from a distance.
expensewatch.com has a sales force of 10 direct sales people.

Ten is all it takes, Vergantino says. His people can make the pitch on the phone, demonstrate the software remotely, and seal the deal from a distance.

The proof: In two years his salespeople have made just two field visits to meet prospective customers.

"When you have a demonstrable piece of software — the way ours is — the need to meet in person, and the need for our company to take on that cost, all that is avoided."

Talk about reducing expenses, and keeping the price tag low. This is a textbook example of what you must do to sell to the SMB marketplace.

SaaS growth tip #8: Sarb-Ox-dot-com-o-matic? Why be just another voice in the crowd?
At the intersection of business and financial control squats the legislative behemoth of Sarbanes-Oxley.

This massive system of regulations is intended to ensure that every financial transaction in a corporate environment is properly documented and accounted for.

How nice for expensewatch.com.

After all, that's a big part of what its software does: tracking, charting, and ultimately archiving a broad range of financial activities. The software delivers a detailed audit trail of who created what form, who approved it, and all the relevant steps along the way.

Certainly Sarbanes-Oxley compliance fills a place in the marketing toolbox for expensewatch.com. But it's not the only tool there. Sure we can help with compliance, Vergantino suggests, but let's not get carried away.

Why not? Because who wants to be one more voice in the crowd?

"People try to find something they can latch on to, something they think will create a compelling reason for people to spend money on their software," he says.

It reminds him a lot of the internet boom.

"Everybody changed their name to something-or-other dot-com," he says. "You become lost in the numbness of the topic."

He sees the same pattern unfolding today.

Sarbanes-Oxley is huge. It touches anything that might have to do with money — and that's virtually everything. Financial controllers have been eager to find help, and some software companies have perhaps been over-eager to offer it.

"They are all chasing Sarbanes-Oxley, all saying they are the solution for it," Vergantino says.

He has no problem touting his services in this regard, but he wants to keep things in perspective.

"While Sarbanes-Oxley is on the forefront of peoples' minds, and while there is a budget for it, certainly we will maximize it," he says. "But that is not our focus."

His real focus? Telling small- and medium-sized business people where their money's going. Remember?

SaaS growth tip #9: Listen with your customers' ears.
expensewatch.com is the sixth startup Vergantino has been involved in.

What would he say is the biggest challenge every time?

"Sifting though the noise."

He's not just talking about the flood of messages that wash over his desk every day. Sure, it can be tough to separate the flotsam from the substance in those endless communications from clients, employees, cohorts, analysts, and even strangers at the next table.

But even more important, he says, is "trying to listen to all the messages that are coming at your customers, and determine what they're hearing."

Think about it. When your sales person calls a prospect about controlling their expenses, they already have many preconceived ideas, from a range of sources.

"They have a payroll provider. They have a CRM system. They may have a consulting company. They probably talk to analysts," says Vergantino.

"What messages are being conveyed by all those individuals? And as a result, when that prospect hears our message, what are they really hearing?"

It's an interesting question.

While others worry about how to get their customers' attention, Vergantino is working on a higher plane. Suppose you've already got their attention — maybe because you're talking about how to cut fraudulent expense claims, save them money, and all that.

Now, what do they think you're saying?

To understand how your words sound on their side of the desk, Vergantino says, you've got to hear the same tide of messages your customers are hearing. How do you do that?

"We talk to the other constituents, we talk to our partners, we talk to the analysts, and we look at our competitors' websites."

Even then, he does a final check to make sure that he's getting the same thing as his customers.

"You may hear all this, but you may not hear it exactly as they do. So you marry what you hear with going to your customers and asking them how they heard it," says Vergantino.

"As a result of all that, we determine what our messaging should be."

In the end, it's about drilling down to a customer's perceptions, and then aligning your marketing message accordingly.

expensewatch.com may be fortunate, since they can engage customers in one of most people's favorite subjects: how to save money. But this approach would likely help clarify a message in any market, for any type of software.

SaaS growth tip #10: Develop to interoperate with the systems your customers intend to buy.
We love the way Bill Vergantino talks about product development.

Consider new features and functions: Most of the time software executives tell us these choices are driven by customer request, or maybe by the ongoing evolution of the industry.

Vergantino comes at it differently.

He argues, in essence, that software development should be driven not by the software's potential, but rather by everything else in a customer's enterprise.

"Every company needs to move beyond thinking that they're a self-contained universe," he says.

Rather, he describes expensewatch.com as just one weapon in the customer's arsenal, standing along many other tools, all of which should work in unison to promote better productivity.

This means that as he plans product development, he wonders aloud what features he can build that will complement the other products his customers already use.

For example, the customer may already use a payroll provider, an outside firm that cuts checks for employees, travel, and other expenses. Vergantino will build an interface to integrate all that information into the wider pool of expensewatch.com data.

The point is to use the power of expensewatch.com to leverage the value of the customer's existing software and partnerships.

To bring this philosophy into practice, a VP of strategy and management at expensewatch.com tracks all the potential points where the software might connect to a customer's larger efforts.

"This person has inputs coming in from our customers, our partner organizations that we deal with, our competitors and what they are doing, the analysts and what they are communicating to the market, and our own people internally," says Vergantino.

The result is a development plan that looks 18 months ahead, taking into account whatever new steps customers might be planning, and then building forward to help extend those new investments.

"That plan then drives all other aspects of our business," Vergantino says.

In other words, he's developing to mesh with the future systems that his clients are planning to roll out, rather than developing to hit a features list that his clients are interested in today.

SaaS growth tip #11: Zero in on a niche. Don't try to be all things to all people.
Reviewing the history of expensewatch.com, Vergantino says the company made a mistake early on.

It tried to approach too many markets at once.

"The company has done well to this point, but I still think the organization has been reactionary at times. I mean 'reactionary' in the sense of trying to be everything to everyone.

"You can't have a $5-billion organization wanting to use your software, and at the same time have a 20-person organization using your software. You can't expect to give them both the same level of service.

"It's critical at some point to focus on the subset of the market that you are best suited to service in a profitable way."

This year the company attained that focus, by deciding to concentrate on those smaller customers. It was a decision based to a great extent on the availability of resources to service clients effectively.

To sell to a $5-billion client, a software company needs at least two dedicated salespeople making repeated calls. And that demands a selling price that will likely make the product unattainable for any smaller customer.

Targeting bigger clients also requires a far greater investment in product development.

"If you are going to sell to a $5-billion company, the features that need to get into the product are dramatically different than what needs to go in for a company with 50 employees," Vergantino says.

By picking a focus — in this case the SMB market — a company can do more than just determine strategies for sales, development, and other business processes.

SaaS growth tip #12: Make sure you're objective is crystal clear to everyone in your company.
Having a focus helps align the entire enterprise with a common goal.

"It helps you make sure everyone in your company understands what your objective is, and it helps you make sure every function operates in an optimal way in pursuit of that objective," Vergantino says.

"You want to make sure you have crystal-clear areas of accountability that are delineated in the effort to pursue that objective. Areas of grayness and uncertainty make me shake."

SaaS growth tip #13: If you're not already doing it, prepare for the onslaught of on-demand.
Vergantino is an on-demand evangelist.

He expends almost as much energy preaching the virtues of SaaS as he does hawking his own software.

That's because software-as-a-service is so much better, it's going to radically change the software industry, he says.

Basically, he thinks that if you're a licensed software firm, SaaS is going to eat your lunch.

Founder Palmieri has been quoted as saying that what used to cost an SAP customer $1,000 can be done for less than $100 with expensewatch.com. That dramatic shift in value proposition can keep a licensed software CEO awake at night.

"Among traditional software companies, some will go out of business. We will see household names in software go out of business," predicts Vergantino.

Just as client/server took out mainframes, SaaS ups the ante yet again.

He points to a recent report from Aberdeen saying the interest in SaaS is growing fast. About three-quarters of 146 companies of interviewed for the report say they would consider or are already planning a SaaS application.

And of course, Gartner and other analysts have been banging this drum for some time now.

Part of this has to do with the evolution of technology. Since the dot-com crash, new technologies have been few and far between, argues an expensewatch.com white paper.

This has left enterprises in various sectors hungry for new tools, eager for the next wave of software that will deliver new degrees of efficiency.

Enter SaaS.

Vergantino envisions a time, not too far off, when leading licensed software vendors will be chasing their tails in an effort to change over to SaaS.

"They're going to scramble to come out with on-demand solutions, but they are not going to have cost structures internally to make that work," he says.

So, Mr. Cheerful, what should a traditional software firm be doing to move to this new world of on-demand delivery?

"First, they need to determine whether their customer base is suited to the on-demand model, because not all customers will need it."

If the target market is in fact suited to SaaS, he says the next step is to look hard at your costs.

"They need to ask themselves: How are we going to create an on-demand solution? How does that impact your existing employees? How does that impact your present customers? What do you need to do to make that transition?"

The point is: Delivering SaaS takes a lot more than just repackaging your existing product.

It demands a fundamental rethink of your business processes, a profound examination of exactly what value your product delivers, and to whom, and at what price.

And it means asking yourself if your employees are flexible enough to cope with a business that's changing every one of its givens.

Even if licensed software is still the answer for some applications and some clients, Vergantino says, the rising popularity of on-demand requires software executives to start asking these questions now — before it's too late.