ISV Model: Evolution at Play?

Broadband and ubiquitous Internet access have fed the growth of the World Wide Web (WWW) and led to the  birth and growth of cloud computing and Software as a Service (SaaS), which in turn have started affecting the traditional Independent Software Vendors (ISVs). ISVs were instrumental in defining and giving momentum to the software market during the 1990’s and 2000’s.  Today, however, SaaS is driving the world’s 60 fastest-growing software companies. Existing ISVs are feeling the pressure from pure SaaS start-ups. Calls from the market for SaaS alternatives to their traditional licensed product offerings further add to their woes. What’s an ISV to do?

These market and technology driven onslaughts are compelling ISVs to look for alternatives.  On their part, ISVs can respond by digging in and marketing the advantages of the licensed product model over the SaaS approach by using lower prices, suite-based offering and bundled services. Alternatively, they can compete on the cloud battlefield.  Digging in will do little except forestall the inevitable.  While there are certainly benefits to the licensed product model in some circumstances – and some market niches where it will remain a strong, if not the dominant, model of software distribution – the growth of SaaS alternatives will steal market share in most product categories.  This will leave traditional licensed product vendors fighting over a ever shrinking slice of the pie.

As ISVs move to compete in the SaaS marketplace, they will need to change their approach to overcome some core challenges to success.  There are two basic strategies they can adopt.  The first is to repackage their existing product offerings as SaaS solutions.  The second is to embark on the development of a new SaaS solution that either complements or replaces their existing product offerings.

Repackaging an existing commercial off-the-shelf (COTS) product as a SaaS solution often leads to disappointing results.  This is not because the strategy is not valid, but more often due to the business’ motivation to get something into the marketplace as quickly as possible with little investment.  This approach demonstrates a basic misunderstanding about the differences between a COTS and a SaaS offering.  A successful SaaS offering requires an operations organization and would involve changes to the culture and marketing and sales departments of the company.

What many do not understand is that making the transition is more than just re-architecting the software .It is often a fundamental re-examination of the business itself to fully understand the organizational and cultural transition issues that are required for a company shifting from a product- to services-based focus” – Transition to SaaS: An ISV Cookbook, C. Burns, December 29, 2008

The R&D organization must learn that to develop a successful SaaS product requires devoting as much effort to providing operational and administrative functionality for both operators and users as it does to providing solution functionality.  This would include items such as self-service on-boarding, subscription management, e-invoicing, payment processing and delegated user administration.

An ISV needs to recognize that an operations organization will need to be created with experienced personnel.  This requires a significant investment that often can only be made by reallocating funds from existing departments.  Needless to say this usually results in significant organizational friction.  The success and failure of a SaaS-based offering can just as often be traced to the operations as it can to the functional strengths of the solution in the marketplace.

The result of the growth of SaaS in the marketplace is that traditional ISVs will either be displaced by pure-play SaaS start-ups or they will transform themselves from ISVs to SaaS vendors providing services instead of products.  In either case, it spells the end of the ISV model as we know it.

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