The SAASy Lifecycle

In the 80's, Wall Street types searched for weak financially preforming companies with strong asset balance sheets to exploit. The sweet spots were cash rich, real-estate rich and asset rich companies whose stock price valued the company less than its assets were worth if the company was broken apart and sold off. Second and third generation companies that took care of their employees with generous self-funded pension plans found themselves in the center of the bullseye of these "Gordon Geckos" inspired corporate raiders.

Life was good for these "company liberators" and even for the management weak majority shareholders. Life was not so good for the millions of employees and small towns that hosted these companies. Savvy business articles were written explaining that these corporate raiders were doing our society a favor by allowing the "invisible hand" of capitalism to work its magic. Weaker companies should fail to make room for better, more efficient and profitable replacements. Weak Board of Directors were the problem, and it was just a public service to help rid society of them!

Studio 54 called, and they want their Cristal sipping, powder sniffing bankers back! Now, two decades into the 21st century, the Brooks Brothers, Manhattan dwellers have traded their luxury penthouses and wingtips for Cayman Island yachts and flip flops. Gone are the days they hunt for companies with assets to exploit. The 80's are so passe, what company now bothers to accumulate assets?! The exploit de jour for our Cayman Island pirates are companies with healthy revenue streams.

Enter the attraction of Software As A Service (SAAS) companies. To understand how SAAS developed let’s harken back to the dot.com era of the 90's. Back then, software companies developed their software the old-fashioned way and sold them as a product that consumers owned. It was sometimes dubbed "shelfware" because the box of disks with instruction manual rested on a shelf after installation into a computer. When the company developed improvements, an upgrade would be purchased and a timely, and oft frustrating install would ensue. SAAS changed that business model by exchanging the software ownership model to a software rental venture.

The benefits of SAAS to the end user was an elimination of in-house servers and networks to secure and maintain as well as gaining access to a "living-breathing" and constantly improving software. The benefit to the SAAS developer was a continuing and renewable monthly revenue stream, and that stream funded innovation and growth. From the surface, SAAS is a win win for both user and developer. I, for one, like SAAS because it allows our company to truly operate in the tech innovation world without developing and maintaining our own systems and solutions.

Now, let's talked about the unwritten and unspoken underbelly of SAAS companies. To do that, we need to understand the SAAS business lifecycle. Here is the typical SAAS company maturation:

1. A supersmart software engineer develops a software solution to a problem
2. Supersmart software engineer meets supersmart business and marketing guru and forms a SAAS company
3. On a shoestring budget, the SASS company attends industry trade shows and starts gathering customers.
4. Initial success of SAAS product in conjunction with enough customers to prove viability attracts private equity.
5. Flush with cash from private equity, SASS company greatly expands sales and marketing efforts to broaden customer base.
6. Broad customer base paying monthly contracted fees help fund additional SASS innovations and expanded products through development and/or acquisition.
7. Having achieved a robust cash flow business model, the SAAS company primes itself for an IPO or sale to a much larger company seeking revenue streams.
8. Initial SAAS founders and private equity investors reap massive profits for sale of SAAS company, upgrade their private yachts and sail off into the sunset; thus, leaving their loyal monthly supporting customers in an operational quandary because new owner of SAAS only cares about revenue and knows nothing about the original company's purpose or culture.

This is the lifecycle of a SAAS company. What is lost, especially in the last stages of the lifecycle, is customer service and innovation. Once a SAAS company has gone public or been sold off to a much larger company, the entire business model revolves around contracting for additional monthly fees and not innovation. The SAAS customer / developer partnership comes to an end as subscribers are now merely a means to an end as a revenue provider to the new SAAS conglomerate.

I realize this is a harsh and somewhat dismal view of SAAS companies but in my business career, I have seen it happen time and again. Restaurant companies are huge users of SAAS. In our industry, Point of Sales (POS) systems, reservation systems, labor scheduling programs, payroll products, accounting and analytical services are all vital to efficient restaurant operations. All the aforementioned are now monthly SAAS products. Over and over, initial software companies I have contracted specifically because of their cost effectiveness and innovation, have been swallowed up by larger, revenue hungry, corporations. The most obvious revenue grab has been ISO credit card processors. Several years back, these ISOs started buying up every restaurant POS company and making the credit card processing exclusive to the ISO. This singular move has rendered restaurants unable shop credit card fees on the open market without making the costly decision of jettisoning a current POS system in exchange for a new "lower credit card rate" ISO partnered POS system.

Those of us customers of SAAS products know the drill. Revenue hungry conglomerates often alter the contracts after a SAAS acquisitions. One common adjustment is to turn a month-to-month agreement to an annual auto-renewed agreement, often without proper or prior notice. Consumers usually don’t realize the change until they want to switch to a new more innovative and supportive company. It is at that point that they realize that they are on the hook for months of payments for a SAAS company they no longer wish to use. Another frustrating by-product of acquired SAAS companies is that customer support suffers. Support issues that previously were solved in minutes or hours can take days or even weeks to resolve when a SAAS is “under new management.” Finally, the worst part of finding out that your favorite SAAS company has been sold to a new “Multinational global revenue devourer” is the lack of human interaction. Ever try reaching a human at Oracle for a support issue? My money is on the second coming occurring before an actual human picks up the phone to solve a problem in a newly christened SAAS acquisition!

Most restaurant groups are not fully paying attention to the total cost of SAAS products. These expenses are scattered about the P&L statement in merchant fees, computer supplies, maintenance contracts, reservation expenses and utilities. At my last count, our company contracts over 15 unique SAAS companies to secure and run our businesses. Moving forward, we will be adding a SAAS sub account to our P&L statements and moving all SAAS expenses under that banner. That expense category will now be measured and managed as a percent to total revenue. I recommend all restaurant CFOs make this change so that we, as an industry, start to measure and control our SAAS partnerships.