We’ve heard from Independent Software Vendors (ISVs) that the technical aspect of building a Windows Azure application is sometimes the easier part.  Coming up with the business strategy and transitioning a traditional company to Software-as-a-Service (SaaS) is often more challenging. My team, part of the Developer and Platform Evangelist (DPE) organization, works with ISVs who are building on Windows Azure.  We’ve been talking to our early adopter ISVs to see what they’re doing and how they’re mitigating the risks.  We’ve found some interesting trends, which I highlighted in a session at the Worldwide Partner Conference (WPC) last month.  Here’s a recap.

The first trend involves organizational structure.  Rather than change from within, many partners create entirely new entities to pursue SaaS, whether to isolate and reduce  conflict between the new and established business, or to hire new for the right skill set.  We’re seeing this all over the world from all types of ISVs, and even systems integrators (SIs) who are becoming ISVs.  For example one of our global ISVs, MetraTech, who is a leader in on-premises billing software, recently launched Metanga, a dedicated multi-tenant, cloud-based billing service on Windows Azure.  There are many other examples; here are just a few:

• UK:  eTVMedia creates Enteraction, which enables businesses to “gamify” their applications
• Brazil:  Connectt creates Zubit, which enables online brand managers to monitor social sites
• Mexico:  Netmark creates WhooGoo, an online content and game platform for tweens.

The second trend focuses on packaging and pricing.  Many ISVs evolve their businesses from within and restructure, retrain and hire new employees to succeed with SaaS.  But because per-user, per-month subscription pricing can have a dramatic impact on traditional sales, billing, accounting and more, ISVs sometimes package and price their SaaS apps to mirror traditional on-premise pricing as closely as possible.  For example, Xterprise built a new SaaS version of their RFID inventory solution.  However, pricing for the SaaS app still uses an upfront license fee. There’s also an annual fee for support and maintenance – billed upfront.  The main value for customer is not cost reduction, though there is some.  Rather it’s a light footprint, ease of delivery and no need for IT on site.  For Xterprise it’s essentially just a new SKU, with billing that is largely consistent with their on premise solution.  Win, win.

My WPC panel session focused on three ISVs using the approaches above.  David MacLaren, CEO of VRX Studios and MediaValet, had an existing business focused exclusively on the hospitality industry.  When their new Windows Azure-based digital asset management solution began getting interest from diverse customers, his existing sales force didn’t have the expertise to effectively field requests that weren’t coming from hotels.  He created a spinoff for MediaValet and hired new sales people.  The spinoff now has the right sales and marketing personnel to serve a much more diverse customer base than the parent company, but it can still tap into VRX Studios for important resources. such as C-level executives, who split their time between the two companies. The spinoff also benefits by receiving free cash flow from the parent company, and sharing office space.

Markus Eilers, CEO of runtime and pulsd, is another example of creating a spinoff to market and sell a Windows Azure-based app.  The parent company offers CRM and business processsolutions for medium sized businesses.  pulsd was designed to reach the smallest SMBs.  As a result, the direct sales approach they had been using was no longer tenable.  They had to switch to marketing driven demand generation.  By creating a spinoff, Markus was able to hire the right talent, including a new brand agency that helped create a good looking, easily navigable web site for effective digital marketing.  Another important factor leading to the spinoff was the rapid update cycle of their SaaS apps.  The requirements for rapid almost continuous updates had profound effects on developers, engineering and marketing.  It required a very different approach from the parent company.  Quite simply, it was easier to start anew than to change from within.

On the other hand, DMTI Spatial is changing their company from within.   They provide digital mapping data and Geographic Information System (GIS) software to large enterprises in Telecommunications, Banking, Insurance and the Public Sector.  They have already moved their flagship address recognition application, LocationHub, to Windows Azure, and they intend to move several more.  Arthur Berrill, VP Technology explained that it hasn’t been easy.  The sales force was very concerned with LocationHub moving to the cloud.  Used to very large deals with very large commissions, they wondered how they could make money on the SaaS version.  Additionally, accounting and billing asked how they could possibly bill for each transaction. So the company decided to price primarily through large blocks of transactions, billed up front.  Think of it as a massive prepaid phone card.  The result mirrors the billing size and frequency from the previous LocationHub and minimizes the needed internal change. 

For those of you embarking on building SaaS apps on Windows Azure or advising ISVs that do so, here are some business strategy questions to consider:

• What customers will the SaaS applications serve?  The same? New?
• What are the goals with the existing traditional on premise business?  Keep it going? Retire it?
• How will the new applications be priced?  Different or similar to the existing business?

DMTI Spatial serves the same customer base with the new version of LocationHub. They want to migrate each and every existing customer to this new version and retire the existing non-SaaS version within 2 years. And they’re currently pricing in a very similar manner to traditional software licensing.  As a result, they didn’t need to create a separate entity, but rather re-organized the company to align to the new goals and focused on internal change management to be successful.

With their new internal tool, MediaValet evolved to a product when they discovered external interest.  It then logically evolved into a separate entity because it was focusing on a much broader customer base.  Their existing team at VRX Studios, focused squarely on hospitality customers, couldn’t meet the needs of the new customers.  With pulsd, they went from serving medium enterprises to very small businesses, which required marketing led demand generation instead of direct sales.  Additionally, their pricing is dramatically different, using a freemium model – free entry-level apps, with fee-based versions after a certain threshold.  As a result, the “learn, try, buy” experience is entirely self-serve.  Lastly, their rapid product iterations had internal ripple effects but especially for engineering and marketing.  Both VRX Studios and runtime created new entities in order to successfully pursue the opportunities created by their Windows Azure applications.

I think what our ISV’s are doing with Windows Azure is very interesting. and demonstrates that the cloud is definitely not just a technical decision.  Stay tuned; I’ll continue to share things we learn and trends we’re seeing with ISVs using Windows Azure to grow their business.  Also check out case studies on these panelists: VRX Studios, runtime, DMTI Spatial. 

Yvonne Muench, Group Manager, Azure ISV Market Insights

Azure ISV Incubation Team, Developer and Platform Evangelism Group

Yvonne’s team provides business and technical readiness and co-marketing support to ISVs building on the Windows Azure platform; the team also provides research and insights about those ISVs.