September 15, 2009

How software firm Sabrix switched to SaaS

by Adam Stone, Senior Writer, SoftwareCEO

Still wondering about software-as-a-service (SaaS)?

Sabrix is busy showing how it's done.

In 2007, the San Ramon, CA-based company launched a SaaS offering to help SMB people calculate sales taxes.

A year later, the company switched all its licensed sales to a three-year subscription model.

Since 2007, recurring revenues almost doubled from 36 percent of income to 65 percent… close to the goal of 70 percent by 2011.

Company Snapshot
Sabrix
Basics
Founded:	2000
CEO:	Steve L. Adams
HQ:	San Ramon, CA
Headcount:	150
Revenues (US$)
2006:	$18 million
2007:	$28.2 million
2008:	$30 million
2009:	$29 million (proj)
Clients
• Franklin Covey • HP • Lenovo • Steve Madden • Swiss Army
Awards / Honors
• #1,136 on Inc. 5000 for 2008 • Codie Award finalist for best financial software, 2008 • American Business Awards (Stevies) finalist for best new service, 2009

The company's revenues may look flat for three years, at $28 million, $30 million, and $29 million projected for 2009. In reality, those revenues have been transformed into solid gold, since they're now two-thirds recurring.

Any investor or finance person prefers recurring revenues to one-shot deals. They're predictable, they flow in continually, and they eliminate the need to constantly hunt for bigger deals.

How did Sabrix pull off such a dramatic change? With careful market analysis, specific goals, and strategic organization.

Since its inception in 2000, Sabrix has provided tax management software and tax research to Global 2000 companies.

Financial supporters Mohr, Davidow Ventures, Trinity Ventures, and Venture Strategy Partners ("VSP") Capital have backed that effort with about $50 million in five rounds of financing.

And here's 12 tips on how CEO Steve Adams has deftly managed the conversion to SaaS.

Moving to SaaS success tip #1: Show them the money, quickly
You might think it's easy selling SaaS, with its small footprint and low monthly payments.

But that quick setup means SaaS customers expect rapid value for their money. And if you don't provide it, they can easily unplug.

"The most important thing about the model is time to value for the customer," says Adams. "In SaaS and on-demand, the time between when you close the order and the time the customer is realizing tangible business results is compressed dramatically.  I think that's about the most important thing in this model."

All his other decisions must serve this ultimate goal: To give customers good value, and keep on delivering it all year long.

Moving to SaaS success tip #2: Understand why else they want SaaS
As Sabrix reached beyond its traditional core of large enterprises into the SMB space, Adams thought he knew what the new audience wanted.

He didn't.

"We were thinking we would go into the SMB space with a pure SaaS offering. They would have no implementation, they would have no ongoing maintenance, all with subscription-based pricing," he says.

"What we learned was that they appreciated those ideas, but they didn't have anyone to log into the apps. They didn't have the domain expertise."

In other words, SMB people were having trouble doing their sales taxes, keeping up with changes, and getting them in on time.

"So we needed to solve that third component, which meant going to market with a model not dissimilar from payroll services, where we would completely outsource the business process."

Adams paid marketing consultants Tallman Insights about $30,000 to draw this diagnosis out of some 500 financial professionals who they queried.

The responses hurt. After all, Adams didn't set out to become a tax service provider, carrying headcount for a team of data-processing folks. He needed a revised plan.

So Sabrix opted to pull the bulk of the sales tax functions that SMBs needed into the software, and to top that up with a service to keep all customers to-to-date on the latest sales tax regulations.

A happy compromise: Customers no longer had to mess with tax regulations, and Adams could deliver value with minimum effort and expense.

"There are a lot of us software CEOs transitioning our business from a one-time licensing model to a subscription-based recurring model — and it is one of the toughest transitions you can make."

Make it easier by not making assumptions about your market.

You're probably right about the virtues of SaaS… but you may need to learn more about your clients before you can make them an offer they can't refuse.

Moving to SaaS success tip #3: Use your sales comp plan to reward the right sale
If you're asking salespeople to pitch something new, give them a good reason to sell it — and a good reason is usually $$.

After releasing its SaaS offering in 2007, the next year Sabrix switched on-premise sales from a perpetual license to a three-year subscription model. The transition was swift and effective.

In 2007, only 12 percent of on-premise deals were subscriptions; in 2008, that jumped to 74 percent.

Certainly the economic downturn helped: Most customers prefer a monthly fee to a big upfront payout. But it took a revised commission structure to really seal the deal.

Adams says the revised comp plan generated "a greater percentage of commission paid for recurring revenues than for one-time fees."

The table shows how it goes, roughly.

The company bills for a year of SaaS at a time, even though it can only recognize that revenue one month at a time. There are no recurring commissions for recurring fees down the line.

In the abstract, the math sounds complex.

In practice, it means a salesperson gets paid considerably more for selling a subscription than a perpetual license.

"The most significant step you can take is to make sure the commission structure appropriately motivates the sales-individual to sell that pricing model," Adams says.

Moving to SaaS success tip #4: Dig out metrics from your peers
Adams examined the market valuation for many software companies, and saw that the market clearly favors recurring revenues.

He'd done that exercise before, when he joined the company in 2002.

"At that time, we went into EDGAR Online and looked at enterprise software companies founded from 1989 to 1992 that had a liquidity event of some kind, and looked at all the metrics. Except for Siebel [now Oracle] they were all plus or minus five percent: how they grew over five years, what their revenue growth was, what their revenue mix was," says Adams.

"So we had a target where we wanted to be in five years. We put in that model in July 2002, and we hit it almost head-on," he says proudly.

They repeated that process when they started in SaaS.

"We wanted the same kind of data, so we looked at a lot of SaaS companies. Some are public, so we could get their data."

But what really opened the databanks was the relationships he's formed with investment bankers that underwrite software IPOs.

"We shared with them where we were, and they shared their information with us.

"It became very clear that you can build a set of metrics that the successful SaaS companies are performing against," he says.

For instance, all successful SaaS firms have at least 75 percent recurring revenues, and a compounded annual growth rate over 30 percent. Or more.

Moving to SaaS success tip #5: Set some practical objectives
Once Adams had those metrics, he used them to guide his team on their journey.

"For any software CEO out there making the transition from a traditional on-premise business to SaaS, there are technical issues, there are financial issues in terms of booking sales and revenue, but by far the single biggest issue is a cultural one," he says. "How do I get my people to change?

"The most concrete step we took right up-front was to establish the corporate-level objectives we wanted to achieve. Then we prioritized those objectives, and explained why."

"What" included the big ideas, like the move to recurring revenues. "Why" was the strategy to grow.

To push people toward a new model, show them industry metrics to validate the plan, then lay out a clear set of priorities that move the company along.

Moving to SaaS success tip #6: Give a new product a new team
Starting a new business line? Start fresh.

To give the SaaS offering a clean launch, Adams created a business unit focused solely on it. Existing managers headed up two parallel units, one for the existing product line, and the other for SaaS.

"There were a set of shared services, things like product management, product development, our tax research group, our finance and administration," Adams says. "What was not shared was general management, sales, product marketing, demand generation, and professional services."

There was some redundancy, thus some added expense, but Adams believed a clean break was needed.

"We needed to organize a separate business unit so that we could have people very focused on getting that new business started."

(Adams got rid of some of that redundancy this year by merging the two units back into one, once the SaaS product had taken off. As a result, headcount dipped from 170 in 2008 to 153 in 2009 in spite of solid revenues.)

Moving to SaaS success tip #7: To be acquired, think IPO
Adams wants Sabrix to make a lucrative exit in two to three years. He thinks it might be an M&A deal, but he isn't working with that in mind. He won't take the risk of identifying a specific potential buyer or two, and then building with their needs in mind.

"You don't build with an acquisition in mind, because it skews your view if you have a particular buyer in mind," he says. If that sale doesn't materialize, you could have an operation too specific to entice others.

Yet an acquisition will likely be the outcome for Sabrix.

"The holy grail that is promoted is the IPO — but if you look at the data since 2000, you'll see that nine out of 10 successful exits for software companies were actually M&A transactions, not IPOs. So you build to be a strong IPO, and if you do that, you become a strong candidate for an acquisition."

[We agree; based on SoftwareCEO's 2008 Software Industry M&A and IPO roundup, the IPO is practically dead for the time being.]

So while an M&A is the likely outcome, the surest way to get there is to create an IPO-ready company.

That's why Sabrix went SaaS, "explicitly in order to drive our valuation as a software company. We saw that was what the market was valuing," says Adams.

How do you become IPO-worthy? Work like a public company.

"Public markets look at everything on a quarterly basis, and so that's how we've structured our business, our financials. We also  tried to understand what contracts need to look like, what document control needs to look like from a compliance perspective.

"A year ago, we started doing our own internal audit against Sarbanes-Oxley requirements so we would be fit in that respect.

"Don't wait until the time comes. You build in a lot of bad habits if you wait until a year before an IPO to clean up those things."

The takeaway messages: Don't strive to court a specific buyer. Do good work, structure the company for an IPO, and you'll be ready for whatever opportunity arises.

Moving to SaaS success tip #8: As a new CEO, prove yourself early
To succeed as a newly-hired CEO, the first task is to show your board that you're on your game.

"You have to demonstrate to them very quickly that they were right in their decision in hiring you."

So within six months of taking the job, Adams had:

• Established a set of operating principles.
  For instance: "Every issue, task, program, or project has only one owner. The owner has the responsibility to bring the task, program, or project to its successful conclusion."
• Developed an operating plan, sought board approval, then handed his team the success metrics to hit.
• Set out major objectives for the first six months. These were tangible goals like, "Close six marquee accounts that validate our positioning, pricing, and value proposition."
• Hired experienced executives in sales and marketing, and quickly developed a go-to-market strategy.
• Instituted quarterly executive reviews and dashboards.

In short, he did what he promised to do — build the infrastructure and set a course — all within the first few months.

"It's all about results. If you produce the desired results, you deliver them in an ethical and legal manner, you harm no one unfairly, and you keep your soul intact, you are the right choice."

You might call this another example of "fast time to value."

Moving to SaaS success tip #9: Keep the past chief vital
Adams came in as the first post-founder CEO at Sabrix.

It's a tough gig. Founders often don't like to relinquish power. They meddle. People can have mixed loyalties.

Everybody wins if you can find a suitable place for these capable leaders.

First off, is the existing CEO ready to let go?

"Can they define for you why they need a new CEO to run this thing? Can they really explain it from a business perspective?" asks Adams.

If they can, there's hope for a fit. Still, they may "understand" the need, but not really feel it in their guts.

"Will there be emotional pieces that come into play in decision-making? Will those come into play in a kind of influencing when you are not around, a kind of shadow-managing?"

To avoid this turbulence, Adams recommends giving the outgoing CEO meaningful work. Don't put him in some token slot. Make sure he earns his keep, just like the rest.

Founder Gary Allen has stayed on at Sabrix as a senior VP.

"The founder has to have an operational role, and I don't mean some trivial CTO role," Adams says. "I mean a functional responsibility where they have objectives, where they are monitored and measured just like every other manager.

"You have to respect the founder's status, but it is not relevant from an operational perspective. You give them an operational role, and you make sure their title and compensation are commensurate with their operational value."

Ex-execs who stay become part of the flight crew: Not above it, not beyond it. This serves the company and is — arguably — the most sincere form of respect.

The former owner, boss, CEO, whoever: You invited them to stay because they still have something to give. Now put them to work.

Moving to SaaS success tip #10: Prioritize R&D projects by potential payoff
Sabrix plays to two audiences: enterprise users and SMBs. To prioritize R&D projects, Adams has learned to rank projects by potential payoff.

"Looking at development, highest priority is going to go to those functionalities that are a requirement for both my on-premise customers and my managed tax service [SaaS] customers.

"Then the second criteria is: What is going to contribute to the highest growth?"

Not sure what to build next? First consider what fits the greatest number of customers, then look at one-offs that can meet the biggest demand.

This may sound like a no-brainer — but too many software firms get entranced by the cleverness of their own technology, and waste millions on R&D that benefits no one.

Moving to SaaS success tip #11: In slow times hire for R&D, not sales
Adams is cautious about how he uses his cash reserves. For now, in this economy, he's hiring for R&D, not sales and marketing.

"We've had a distinct shift in focus in our hiring. It makes more sense to focus on a product right now, rather than pouring money into sales efforts."

Specific hires have bolstered not just R&D, but well-defined mission-critical aspects of the cycle.

"We selected specific areas — such as integration with financial systems and reporting — that would improve customer satisfaction within our installed base, and protect our recurring revenue."

In other words, think defensively until the economy turns around. Focus on the things within your grasp.

"We felt that we could make meaningful progress with the activity we could directly control," he says, "while no amount of investing in sales and marketing was likely to alter the overarching effects of the macro economy."

Lean times call for strategic spending. For Sabrix, this focus on strengthening a core offering has paid off.

Moving to SaaS success tip #12: To become CEO, take jobs that move you up the ladder
Adams came to software the long way around, from a PhD in literature, through jobs in academia, to bottom-of-the-ladder tech work.

His advice: To become CEO, take positions that move you in your chosen direction.

He started in 1984 as a technical writer.

"I spent the first 15 years of my career explaining to everyone who interviewed me why I could do this job, despite being an English major," he says.

"I knew that I brought with me the ability to articulate and communicate ideas. There is a tremendous value in that, whether you're raising funding or developing messaging for your sales team."

And his ambitions were clear.

"I felt I should be the CEO of a software company. I saw that my route was going to be through marketing and sales. So I positioned myself on that track.

"From the beginning of my career, I took jobs on the basis of whether they would teach me the things I needed to learn."

He was VP of marketing for Novell's groupware division; SVP of worldwide marketing for Citrix Systems (now Cisco); back to Novell as SVP of worldwide marketing, and then president and CEO of Uniscape, a pre-IPO startup (now SDL.)

Adams worked his way up the ladder, just as planned.

His advice to anyone else with a non-technical background who wants to get into the software biz?

"Don't be embarrassed… There are a great number of skills from other disciplines that you can bring to bear in high-tech environment.

"One example I always use is Geoffrey Moore, who's regarded as one of the most brilliant minds in software marketing, yet he has a masters degree in English."

He points to other vital "soft skills" like research, analysis, communication, and understanding people.

"Understanding how human beings are motivated is important when you need to build an organization and scale it," he says.

No one stopped him from learning those skills in another discipline, and then applying them in one software company after another.

About the author: Adam Stone is an award-winning journalist who follows trends in software, wireless, government IT, and general business. With more than 20 years experience, Stone writes about entrepreneurs, HR, business financing, and industry verticals for numerous business publications.