Let’s face it—the world is growing more challenging for software vendors. Sure, today’s software companies continue to excel at software development, but now they face a new challenge—how to adapt to new delivery models that are adding layers of complexity onto the already-complicated processes of financing, producing and billing for software licenses and related maintenance and services.
With the traditional, perpetual-license model, vendors could book new or upgraded licenses as one-time sales, and could keep margins relatively high. This model can become complicated when sales are combined with maintenance renewals and reseller or referral partnerships, but it’s not nearly as complex as the newer business model, Software as a Service, or SaaS.
With SaaS, the customer pays for software usage on a monthly or quarterly basis and the vendor recognizes revenue only as it is received. This has repercussions throughout the business, from cash flow and revenue recognition to sales compensation and customer success. Even though SaaS adds another layer of business complexity for vendors, more software companies are willing to take on its challenges to meet growing customer demand and build predictable revenue streams.
In fact, many software companies are managing both models simultaneously, with perpetual-license vendors increasingly adding SaaS products to combine with their traditional offerings. This improves competitiveness, but puts additional pressure on organizational and business systems.
And the rules for software companies continue to evolve rapidly. For instance, new FASB rules ASU 2009-13 and ASU 2009-14 (also known as EITF 08-01 and EITF 09-03) have introduced additional complexity around how software companies recognize revenue. With today’s challenging economic, technological and regulatory conditions, software companies should position themselves to succeed by promoting best practices in these five disciplines:
• Finance: Build strong revenue recognition processes for current and future needs
• Service: Equip everyone to manage customer success and renewal, while balancing cost-to-serve realities
• Sales: Sharpen sales focus and effectiveness in light of business model changes and new offerings
• Visibility: Maintain transparency across sales, service and finance
• IT alignment: Ensure that business systems are aligned with the business direction.
Through NetSuite’s experience in pioneering the SaaS model and helping thousands of businesses maximize their performance, we’ve been able to build a set of best practices. For a closer look at these best practices and how they can help your software company, download our complimentary white paper, “How to Survive—and Thrive—in the New Software Industry.”
Posted on Tue, November 23, 2010
by Ranga Bodla