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How do you know if your SaaS provider is healthy? Here's the scoop

How do you know if your SaaS provider is a good choice? A session at the recent MIT Sloan CFO Summit provided some insight that might prove useful the next time you’re vetting a SaaS provider.

The panel was billed as a primer on what CFOs need to know about cloud computing, featuring the top financial executives of four SaaS providers. Far more interesting than the familiar chatter on the promise and pitfalls of cloud computing, however, was the panel’s response to a question from the MIT research scientist and moderator George Westerman on how SaaS providers gauge their own financial health.

Like any subscription-based business, the telltale heart of fiscal health for a SaaS provider is customer acquisition and retention, with the emphasis on retention. “I think of our business in terms of lifetime value,” said Harpreet Grewal, CFO of Constant Contact, an online email marketing provider. The key indicators for his company are how much revenue it is generating from customers, how long it is retaining them and how many customers it is adding to its core base. The cost of acquisition is high, so a smart SaaS provider “has to win over the customer every day,” Grewal said, because it is so easy for customers to switch them off. Panelist Ron Gill, CFO of NetSuite Inc., the maker of Web-based accounting and business software, said that the key metric of a SaaS provider is “net add” to annual revenue.”Basically, it is a game of building up a base of recurring revenue, keeping it and adding to it,” he said. That net add is a more important gauge than whether a SaaS provider meets quarterly guidance, the SaaS providers said.

Because recurring revenue is the mother’s milk of a SaaS business, CFOs claim they have more time to think strategically, rather than sweating every quarter about whether or not the last 20% of revenue is really coming in. That’s probably a good thing.

A prediction one of the panelists made was that the SaaS vendor landscape is poised for huge consolidation, similar to the software business shakeup that occurred after the advent of client-server computing and the release of R/3. “In 10 years, the real winners are those that offer platforms and are not just focused on building applications,” said Gill.

Yes, but what about security?

While security is a concern commonly voiced by customers when vetting a SaaS provider, the panel insisted it is the price of admission for any company that deals with sensitive data and hopes to remain in business. A couple of pointers on security:

1. When your SaaS or cloud provider says it is Statement on Auditing Standards No. 70 (SAS 70)-certified, make sure that applies to the data centers where your information is located, and not just a headquarter location, said Joyce Bell, CFO of ClickSquared, a provider of on-demand marketing software.

2. Read the SAS 70 report to determine if the controls are built into the processes the SaaS provider is running, and if the controls actually matter to your business, advised NetSuite’s Gill.

3. Your SaaS provider should give you a way to measure the controls yourself, said David Frenkel, CEO of Panviva, a maker of enterprise desktop software, or measurements are “as meaningless as the paper they’re written on.”

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