Since 2018, we’ve watched as business after business has made the shift to transition to SaaS models, but it is not without its challenges.

Inspired by stories of firms like Adobe, whose net income plummeted nearly 35 percent following the launch of Creative Suite’s subscription version — but whose stock price nearly tripled four years later — a research team from Technische Universität München set out to understand how traditional software companies can more smoothly transition to SaaS models. They studied the stock market’s reaction to publicly listed firms’ announcements about new SaaS offerings.

The team reported on its findings in a recent article for Harvard Business Review.

While a SaaS announcement on average neither decreases nor increases company value, we find big differences depending on the specifics of what’s announced. Investors preferred new SaaS products over product conversions and valued having a product fallback option. These choices may change the intra-day stock valuation by as much as 3.5% and 2.2%, respectively. In addition, we found that partnering with an external cloud service provider to deliver SaaS (instead of building and managing the cloud infrastructure on your own) leads to a further 2.9% increase in stock price on the announcement day.

-How Investors React When Companies Announce They’re Moving to a Saas Business Model, HBR, January 2017

3 Steps for Managing the Transition to SaaS Models

Based on these discoveries, the researchers recommend that decision makers follow these guidelines in order to manage the challenges of the transformation:

1. Do not give up on the on-premise option yet.

While running two business models simultaneously is certainly a challenging prospect, requiring duplicate resources and prohibiting economies of scale, investors actually increase their valuation of a vendor’s stock by an average of 2.2 percent when the vendor provides the SaaS offering alongside a perpetual licensing model.There seems to be variety in customers’ requirements, meaning that software vendors would not be able to tap into the whole market without a perpetual license offering.-How Investors React When Companies Announce They’re Moving to a SaaS Business Model, HBR, January 2017

2. Make sure existing products, processes and culture do not prohibit the SaaS model from blossoming.

The study found that, when companies converted existing product portfolios to SaaS models rather than introducing new products, valuation dropped by about 3.5 percent. This indicates that, despite the extra resources and challenges involved in launching both a new product and a new model, software vendors should prioritize the structural and cultural shifts required to allow the SaaS model to flourish.

The researchers cite APM vendor Dynatrace as an example of a company that juggled the new product launch with the transition to SaaS:

Dynatrace, a leader in application performance management software, has shown the importance of developing SaaS products from scratch, in isolation of existing product lines. It established an independent entity, Ruxit, in 2014 to develop a line of SaaS products in complete separation from Dynatrace’s established product lines and organization. The new business was given time and space to grow in isolation before being integrated into the Dynatrace portfolio two years later, in July 2016.-How Investors React When Companies Announce They’re Moving to a SaaS Business Model, HBR, January 2017

3. Collaborate and partner with cloud platform services.

Finally, vendors who partnered with cloud infrastructure and platform providers saw valuations about 2.9 percent higher, on average, than those that took a DIY approach.

For example, consider Zynga’s decision, announced in 2011, to build its own datacenters. Only four years later, in 2015, Zynga backtracked on the decision and started hosting its games on Amazon Web Services again.-How Investors React When Companies Announce They’re Moving to a Saas Business Model, HBR, January 2017

This finding comes as no surprise, as the transition to SaaS comes with plenty of infrastructure challenges. For a business to build its own platforms requires significant investment in equipment and personnel. Further, as the system takes off, glitches and bugs will reveal unanticipated requirements and, eventually, the system will become such a patchwork that it won’t be able to support the growth it was designed to spur. Most software vendors are better off partnering with cloud-based platform providers that can streamline the transition and manage the new models efficiently and effectively.

Of course, one of the requirements of the transition to SaaS models is the implementation of a new billing system. Gotransverse has the leading intelligent billing platform to support software vendors as they transition and grow.

For more information about how we can help your organization implement SaaS models for new and existing products, check out our Gotransverse for SaaS overview and contact us at today.