As SaaS model becomes more mature and moves beyond Sales Automation into the more involved functional domains of Human Resources Management, Project Management, Supply Chain and Financial Analysis,  IT executives in companies now have to define the right process to procure SaaS offerings. While it is still a software that you are buying, the dynamics on both the technology and business side are vastly different.

If you are an IT Executive
One of the first things you will see that is different, is the primary application management is not your main imperative. That said, while your team might not be directly responsible for managing the actual infrastructure and its upkeep, they will still be responsible for the following

• Program Management of on-boarding business community
• Planning and Uptake of upgrades
• Managing and Certifying integration with the back-office (on-premise) applications
• Provisioning of Access to the applications
• Service Levels to the business community

Once it is established that the application and the data is going to be hosted outside your premise and managed by others, three things that pop into your mind should be data security, scalability, vendor lock-in. Besides those, a company should understand many nuances of buying a SaaS solution before they ink the contract.

Being on the receiving end of these questions myself for the last couple of years, helping key deals at a SaaS vendor, I thought it would be useful to put together a reference guide for the buyer to help them procure a SaaS solution.

Let us start with the high level vendor qualification stuff

Financial Stability

Given all the turbulence in the market, ensuring that the vendor of your choice is financially stable is paramount. Outside of Salesforce, RightNow, Omniture and handful of others, most SaaS vendors are private and hence there will not be much financial information available to you publicly. So as a proxy to that I would look for some of these characteristics –

• Check up on the VCs that are backing the company. The key thing to  check is to see if those VCs have a good track record in guiding companies in similar space. Good VCs back their investment to a hitch. If you can get information on how the funding levels are, revenue run rate etc that would give you a better idea. As much as you prohibit, nothing is out of bounds to a sales guy trying to close the deal so go ahead and ask anything else you need about the company – off the records, obviously.

Management Team

Any vendor is only as good as its management team. While the product fit is critical to ascertain, ensuring the vendor has a good management team should give you more comfort. Having a good team should give you the assurance that they will execute on the vision they are selling you on despite where it is at the moment.

While looking at the management of the company, here are some things to look for

• A team that includes executives from the industry domain.
• A industry leader as a CEO. As goes the leader, so goes the company.
• A passionate leader of customer support. Insist on talking to the executive in-charge of Support as part of your finalization process. An executive with no passion for serving customers in not someone you would want to deal with. As IT organization responsible for the support you don’t want to be caught between rock-and-a-hard-place. A angry business user and a non-compassionate support team from vendor.

Focus

SaaS model works best when the solution is purpose built, niche with a set of configurable options to tailor to specific nuances at each company. Any (small) vendor that claims that their solution can meet the needs of large and small companies alike clearly highlights the lack of strategy on their part and should throw a caution flag. There is no way a smaller, leaner SaaS company can afford or be able to meet all the needs of small and big companies alike. A General Electric and a small electronic parts manufacturer operate completely differently and so will be their needs. If you are the smaller electronic parts manufacturer then the vendor better be focusing on smaller customers like you or you will be in the queue behind the big customer who contributes to more than 30% of the revenue.

In terms of the target market, the needs of multiple industries might be similar to an extent, but the business demands will eventually diverge. So it is important to ensure that the current customer base of the software vendor has enough names that belong to your industry to ensure your industry will continue be a focus area.

Organization Structure

While understanding the vendor also try and understand how their organization is structured – # of engineers, # of support analysts, # quality engineers. Each of those point to the value a company puts in those corresponding disciplines.

Here are somethings to put things in perspective. For example:

• if the # qa engineers are less, guess what, you are going to be their qa. Vendors across the board are trying to cut costs and stay slim and if you know software vendors guess who they cut first – you are right – it will be QA.
• Less support engineers would mean you will have to compensate by having a team on your end to answer to your business.

Pricing Terms and Billing

Typical pricing in SaaS is by subscription. Vendors usually require customers to sign a one year or three year contracts. Based on the unit price, be it a user-based, transaction-based or tiered price or some combination of user+module price you should make sure the terms are elastic. The turnover in people, mergers-divestitures-layoff can create changes in usage so pay special attention to escalation clauses. Also ensure the billing/payment terms are clearly outlined in the contract. If the you plan to put uptime guarantees in the SLA terms, service credits, penalties should also be accounted for in the billing.

One of the things you will need to look at would be the switching costs. You should also make sure termination process is clearly worked out as part of identifying the vendor. More of that later in the Governance part.

Technology

Majority of the SaaS solutions are built on some flavor of Multi-Tenancy architecture. That is the only way the vendor can establish economies of scale and provide you a all-wrapped-in-one subscription fees. You will hear a lot about web services, but check to make sure it is the flavor you are looking for. Most of them would involve you buying additional paid IT services to adapt them instead of working out of the box. To effectively integrate the technology into your business process, including customizations on your end, you should also look at the technology being used by the vendor. Specifically, you should have your architects look at the architecture, redundancy infrastructure, scalability considerations, provisioning made by the vendor.

Customers

Checking who uses the solution before making your decision is absolutely critical. As the first order of business, check the news and events section of a site to check the press releases. Any company worth its salt would do press releases when they sign new customers (or a set of new customers). Check for the quotes from those customers in those press releases. The names there would serve as good reference checks. If you are lucky you might already have them in your network. Besides throwing names, a vendor should be able to provide references and case studies of successful implementations. While you are at it, also check for customers who have renewed their contract at least once. A customer who has renewed the contract (after the initial term of 1 or 3 years) is much more convincing reference than a new customer just couple of months old.

Product Roadmap

Evaluating a product fit to your business need no doubt would be the first thing you look for. Granted that you would verify and ensure the product meets most of your current needs. A product roadmap with concrete list of items for at least the next six months and candidates for future releases are a good measure of a quality vendor. That said, you will also want to ensure that the vendor is agile enough to change course and priorities as business needs demand.

Governance

If you thought the imposition of regulatory mandates in recent times in onerous already, implementing them with a bunch of SaaS vendors might create some additional challenges. The governance processes implemented by the SaaS vendor should be of particular interest to you. Who manages the application, backups, upgrades, change management, infrastructure, security model, data center resiliency, data retention policies, disaster recovery all should be high in your criterion while considering a vendor. Most small vendors, understandably, have some form of ad-hoc processes but it is important for you to vet that against your own SOX-404 process needs. Despite the fact that software is hosted outside your premise, the burden of proof of compliance rests with you. Your auditors might not have yet gotten their arms around how to audit SaaS applications in their audits, but rest assured it is coming. So stay ahead of the curve. Ensuring your vendor has SAS 70-Type II certification done – regularly – should also be something you should insist on – and incorporate in your SLA terms.

The Technology Evaluation and Governance areas around buying a SaaS solution merit their own posts and I will cover more details in their own posts.

Update:

You can read them at

Part II: SaaS Buyer’s Guide: Technology Considerations

Part III: SaaS Buyer’s Guide: Governance Controls