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The 2008 Softletter Chief Financial Officer (CFO) Survey is Now Open

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Dear Colleague:

 

As you may know, Softletter, now in its 24th year of publication, publishes a series of annual salary surveys that cover senior job titles in the software industry. This current questionnaire covers Chief Financial Officer (CFO) compensation.

We're looking for some fairly standard information--in particular, a comparison of "base salary" vs. "variable pay" (bonuses, commissions, etc.) for your most recent full year and for the previous year. We'll use this data to identify trends and current compensation benchmark that you can use to see how your own salaries compare to pay levels at comparable companies.

In addition, we compare salaries based on company development stages, an important factor that's rarely taken into account in other salary surveys.

Everyone who supplies data for this survey will receive a complimentary copy of the summary report in an upcoming issue of Softletter. Of course, all responses will be strictly confidential. We won't disclose or identify data about any individuals or about participating companies. Also note that we will be sending the summary results via E-mail; if you provide us with a non-working address you won't receive them. We're sorry, we don't have the time to deal with whitelist verification and suggest you add softgram@softletter.com and rickchapman@softletter.com to your approved recipients lists to ensure you receive the survey results.

Please pass this invitation along to a colleague in the industry who you feel should participate.

Final survey results will appear in a January 2009 issue of Softletter.

For more information on subscribing to Softletter and Softletter publications such as The Softletter Financial and Software as a Service Reports, please go to http://www.softletter.com.

 

Many thanks for your help!

Merrill R. (Rick) Chapman, Managing Editor
Softletter

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October 31st, Summary Results from the Softletter 2008 SaaS Survey, PartI IV of IV

 

We conclude the summary results from our 2008 SaaS Survey. Findings of particular significance are bold faced. Numbers are averages unless otherwise indicated.

 

SaaS Marketing and Budgets (cont.)

 

Please tell us what percentage of your overall gross revenues are spent on your SaaS marketing activities. (Please do not include sales salaries, expenditures for sales support software such as contact management/CRM, sales pipeline management, sales training, internal sales incentive programs and similar activities or costs.) Percentage (no percentage sign, please)	Responding	%
Average	121	11.4%
Median	121	10%

These numbers track exactly with the 10% median reported in our 2007 survey and are lower than the 12% to 15% numbers we typically see reported by privately held, on premise/client server firms. (We thought we might see higher numbers before the survey was launched because of more competition in the market due to the increased acceptance of SaaS; however, the median held.)

SaaS companies enjoy some inherent marketing costs advantages over on premise/client server firms because the application is more easily demonstrated, can be quickly made available to potential customers for testing and integration evaluations, and initial sales are often made to business units and personnel who are in a position to make (relatively) quick decisions on buy/don’t buy free from the need for deep involvement by IT staff. .

 

October 15th, Summary Results from the Softletter 2008 SaaS Survey, PartI II of IV

 

We continue with the summary results from our 2008 SaaS Survey. Findings of particular significance are bold faced. Numbers are averages unless otherwise indicated.

 

Product Architecture and Development (cont.)

 

Are you developing a SaaS product on top of a third-party platform such as Force (AppExchange), Intuit’s QuickBase or similar system?	Responding	%
Yes	14	11%
No, but we are evaluating this option	20	15%
No	97	74%

These numbers are largely unchanged from 2007’s response and indicate that despite the attention given to SaaS platforms, the providers of such systems still have a lot of work to do in persuading software firms to commit to any one vendor’s offering. The issues of lock in, competition from the platform provider, and the problem of a platform provider’s disappearing because of business failure have not been adequately addressed by any platform company.

 

September 30th, Summary Results from the Softletter 2008 SaaS Survey, Part II of IV

 

SaaS Company Profiles (cont.)

 

Primary Market for Your SaaS Product?	Responding	%
Business	140	88%
Consumers (includes social sites, games, education, virtual worlds, etc.)	7	4%
Both	12	8%

 

These numbers represent a small, but significant shift from 2007, where 94% of respondents stated their SaaS product was targeted at B2B audiences. At that time, we predicted the numbers would begin to shift towards more companies targeting consumer markets; in 2008, this appears to be taking place.more...

 

September 15th, Software Leasing During a Financial Crisis

by Thor Christianson, Commercial Lease Solutions

 

Not a single business, regardless of industry, will avoid some impact of the damaged financial markets. It is a very unfortunate situation and it has dramatically altered the lending community. As the industry changes, your customers are going to turn to you for the answers.

 

Software leasing has become commonplace for large numbers of providers, integrators, resellers, and VARS. It helps alleviate the barrier to entry for fledgling firms, and often helps satisfy the budget restraints of the middle market. Arguably, there is no better equipment to lease for both buyer and seller than software. So what happens when the commercial lending market freezes? Is software leasing dead?

 

The death of software leasing is fortunately not on any immediate horizon, but changes are definitely here and those that can adapt will benefit.more...

 

August 31st, Conserving Your SaaS Cash

 

SaaS companies face the problem of conserving cash while ramping up for growth. It doesn’t seem an insurmountable obstacle, in our 2008 SaaS survey, two thirds of the reporting companies stated they were profitable, with an aggregate 56% seeing revenue increases of 30%+. But to develop a better understanding of how SaaS companies are keeping guard over their piggy banks, we spoke with Todd Gardner of SaaS Capital. SaaS Capital is a SaaS “bank,” a firm that loans money to SaaS startups based on an evaluation of their customer base and growth prospects.

 

Todd, how can SaaS companies best conserve funds as they grow their sales and build towards a stable recurring revenue stream?

 

First, I think we realize we can discuss this in term of company types. SaaS is often a tale of two companies. One tale is of a firm trying to get big fast and grab a major part of a marketing landscape. It’s also a question of creating value; so much of your approach to cash management is based on growth opportunity.

 

Salesforce.com created a tremendous amount of shareholder value by remaining unprofitable for as long as it did. Yes, the company is not as profitable Oracle, SAP, or Microsoft; these are firms in consolidation mode who aren’t looking for (or achieving, at least right now) growth in new markets but are sitting in consolidating or static arenas in which they’re the dominant player. These types of companies throw off lots of cash but they’re playing a different game.more...

 

August 15th, Joel Spolsky Grows Up!

 

I’ve just read an article by Joel Spolsky in Inc magazine which had me smiling a bit. Joel’s JOS blog is one the most successful in high-tech, but his article on the positive frisson he’s enjoying by hiring some middle managers at his small but growing firm (Fogcreek) illustrates how companies and people seem driven to learn the same lessons again and again for themselves. Learning by example is not highly thought of in high-tech (just read some of the negative reviews of In Search of Stupidity on Amazon to get a sense of what I mean).

 

In Joel’s case, he tells us how aeons ago (the 90s) he discovered this wonderful business division that had no middle management! The company was a GE unit that made airplane engines and it appears to have been a utopian worker’s paradise. He describes it as:

 

“...a factory that had more than 170 employees but just one boss. All the engine technicians reported directly to the plant manager, who did not have the time or the inclination to micromanage. There was no time clock, and people set their own schedules. Pay was egalitarian (there were only three pay grades), and workers who assembled the engines could switch tasks each day so their jobs were not monotonous. The result? In terms of quality, the plant was nearly perfect. Three-quarters of the engines it produced were flawless, and the remaining 25 percent typically had only a slight cosmetic defect.”

A couple of points. First of all, this business unit did not exist (as described). more...

 

July 31st, SaaS Deal Basics: Product Management and SaaS: Changing the Game

 

In our Atlanta and Boston SaaS conferences, while listening to Patrick Fetterman presenting on how SaaS companies can grow revenues after the initial sale, we heard a statement that made our ears perk up. When discussing how his company manages new features and the requirements cycle, he stated his company had no product managers. Now, Patrick is the chief marketing guy at Plexus, a very successful SaaS-based ERP firm that managed the tricky transition from on premise, client server to pure SaaS. And we know that any on premise, client/server ERP firm of any respectable size and market share has product managers. So we asked Patrick and Plexus CEO Mark Symonds to explain further how Plexus does without traditional product management.

 

Mark, when you say Plexus has no product managers (PMs), what do you mean? Without exception, once a software company reaches a certain size, and certainly within the enterprise space, it begins to implement a formal product management process.

 

First let’s define what PMs traditionally do. They’re usually keepers of the MRD (marketing requirements documents) and the PRD (the product requirements document). Normally, they spend a lot of time running around talking to customers and different groups within the company about what should be on the MRD and particularly the PRD. The cycle runs about a year or so, and there’s lots of arguing, negotiating, and winnowing of the feature list. Finally, something emerges from the process that no one likes and everyone tries to subvert; then you move forward with your product release. more...

 

June 30th, SaaS Deal Basics: What Needs to Be in Your Software-as-a-Service Customer Agreements, Part II of II

 

By Gene K. Landy, Esq., Ruberto, Israel & Weiner, P.C., author of The IT/Digital Legal Companion, Syngress, 2008

 

The current licensing model used by software companies has been in place for over a quarter of a century and by the early 90s had stablized and achieved wide-spread market acceptance. But as more companies move to the SaaS model or incorporate SaaS systems within their product lines, the issue of licensing and terms of service (TOS) arise anew. This article is an overview of Software-as-a-Service (SaaS) customer agreements, with an emphasis on ways that SaaS agreements are different from conventional “on premise” software licensing and provides practical, timely advice on on how software companies can create effective TOS’s that protect both customers and your bottom line.

 

Pricing in SaaS Agreements

 

There are many ways that vendors price SaaS offerings. The general idea is to find a reasonable metric to quantify the customer’s use of the service. SaaS pricing provisions are often more flexible then in conventional license agreements. In addition to a wide variety of basic priciing models, which includes named users, concurrent users, usage, storage, and bandwidth, SaaS companies charge over a wide variety of time periods—monthly, yearly, quarterly, in some cases even daily. Some SaaS offerings are “try and buy” or allow termination at will on short notice from the customer. Some SaaS offerings, on the other hand, have a “lock-in” requiring the customer to subscribe for a minimum duration, which often can be a year or more. more...

 

June 30th, SaaS Deal Basics: What Needs to Be in Your Software-as-a-Service Customer Agreements, Part I of II

 

By Gene K. Landy, Esq., Ruberto, Israel & Weiner, P.C., author of The IT/Digital Legal Companion, Syngress, 2008

 

The current licensing model used by software companies has been in place for over a quarter of a century and by the early 90s had stablized and achieved wide-spread market acceptance. But as more companies move to the SaaS model or incorporate SaaS systems within their product lines, the issue of licensing and terms of service (TOS) arise anew. This article is an overview of Software-as-a-Service (SaaS) customer agreements, with an emphasis on ways that SaaS agreements are different from conventional “on premise” software licensing and provides practical, timely advice on on how software companies can create effective TOS’s that protect both customers and your bottom line.

 

The SaaS Model is Different

 

The SaaS business model is different from traditional commercial software licensing. In traditional “on-premise” commercial licensing:Software is delivered and licensed to the customer. Licenses are granted for a term or, more commonly, are granted permanently. License fees are normally paid upfront. Software maintenance is normally sold separately, most commonly on a yearly basis. Software is updated with deliveries of updates and upgrades, which the customer normally has to install. It is the customer’s responsibility to obtain hardware to operate the software as well as the rest of the operating environment, security software, the Internet connection, etc. The data processed by the system is in the customer’s possession and control.more...

 

June 15th, Five Ways to Improve Your Software Sales Results With Better Quotes and Proposals

 

Scenario: You’re a busy software sales professional, working for an up-and-coming developer/publisher offering a hot application in the SaaS (Software as a Service) business model. Your company has spent their marketing dollars wisely, and has put world-class customer acquisition processes in place. The company has also really focused on customer retention, with terrific after-sale support and a glowing community of reference able customers.

 

All is well, except…you have a mountainous backlog of proposals to produce, and existing customers clamoring for quotes to expand their systems. Yes, a CRM system keeps you up to the minute on customer and prospect activity, but it doesn’t help you get your proposals prepared and delivered. Customer configuration options require care and attention, and you’ve got three deployment and payment options for customers to choose from—and every time you revise the proposal for a prospective customer, you’ve got to recalculate those payment options. Your company has thought about ways to automate the process, for example, letting customers create their own quotes—but your product is technical in nature and customers need your help. Besides, there are many up-sell opportunities and options to work through with the customer. Your proposal backlog (total number of proposals requested but not delivered) and average time to quote (the average time it takes to deliver a quote or proposal from request to delivery) are growing daily. You’ve got a great product to sell, but you’ve got competition as well. You’re in the “Quote/Proposal (Q/P) Chasm”, the gulf between well-controlled customer acquisition processes and well-understood customer retention processes. more...

 

May 31st, Softletter Case Study: Building a SaaS Reseller Channel

 

In our 2008 SaaS report, 41.2% of respondents reported they were using a reseller channel with another 11.4% stating they planned to build one. The trend is clear—for many SaaS companies, channels will be an important part of their revenue plans. But the current channel structure, in place for decades, is increasingly out of date in the developing SaaS model. To understand what a SaaS reseller channel will look like, we’ve been speaking to different software companies about how they’re building their programs.One of our best conversations was with Adam Ross, VP of Sales and Alliances at Infusionsoft, a CRM firm that started life in a strip mall in Mesa, Arizona. Now located just outside Phoenix, the company has reached over $14m in revenue and received $9m in venture funding from Mohr Davidow. Infusion software targets SMBs with its system and believes channels are key to the company’s future growth.

 

Adam, why did Infusionsoft make the decision to develop a reseller channel?For scalability purposes. We believe that for the company to achieve its growth and revenue goals, we need to create a reseller channel. more...

May 15th, Social Marketing Today: What Works, Where, and Why

 

Social marketing is all the rage these days. Twitter. Facebook. MySpace. “Comment sniping” systems. Digg, Technorati, et al. And of course, there are still the old standbys such as blogging, forums, and related systems. Social marketing is hot, hot, hot and many gurus are proclaiming that social techniques and tactics are the wave of the marketing future. We decided to speak with Rajiv Parikh, CEO of Position2, a leading search engine firm that doesn’t overpromise results (Rajiv will addressing using social and search engine marketing as it applies to SaaS firms at our Boston SaaS University seminar in June) on what’s new, what works, what doesn’t, and where you should consider placing your marketing bets and dollars.

 

Rajiv, at Softletter we tend to break social marketing systems into two basic categories; old and new systems. Blogging, forums, USENET we put in the old column. New systems include the various book marking systems such as Technorati, the social networks including MySpace and Facebook, and “cutting edge” technologies such as Twitter. What do you think?That’s a fair characterization but I’d take USENET out of the mix; USENET is dead in so far as social marketing is concerned.I also want to focus on what primarily differentiates these two classes of social systems.

 

“Old” systems such as blogging and forums operate on a very open paradigm, with anonymity normally protected and in some cases encouraged. And “old” systems are far from dead; blogs can be effective marketing tools (and yes, I’ve seen Softletter’s research on the topic) and old systems can mutate into new forms such as JuicyCampus (and I strongly urge your readers to avoid such sites like the plague).

 

April 30th, Avoiding the Shelfware Syndrome

 

The derisive term “shelfware” first seems to have appeared in the late 90’s during the height of the Internet boom. Shelfware is software that is bought, purchased, and in the most extreme cases, discarded, the process often being accompanied by screams from upper management, wails from IT, desperate gasps from software vendor sales attempting to placate customers and, in some cases, satisfied sighs from attorneys enjoying continued gainful employment during a lawsuit.

We sat down to discuss how software firms can avoid creating shelfware with Chris Dowse, president of Neochange, an IT consulting firm. In conjunction with SandHill, Neochange recently completed a study of software usage in the enterprise after the sale and its implications in the development of shelfware. With 159 companies participating, we wanted to examine the research results and develop insights into how you can avoid creating your own shelfware product line.

Chris, what percentage of software sales turn into shelfware?

Our research is oriented towards enterprise-class sales, so I’ll focus on the numbers in that sector. Our surveys found that fewer than 10% of buyers say their effective usage of their software purchase reaches 70% 12 months after the sale. Nearly two-thirds say their usage levels are under 50%; 16% reported utilization rates under 20%; at that juncture, we think you’re looking at a shelfware scenario more...

 

April 15th, The Windows Vista Positioning Disaster: Strategies for
Recovery, Part I of III

 

by Merrill R. (Rick) Chapman, Softletter

 

In the July 15th, 2007 issue of Softletter I wrote about the Vista positioning fiasco; as events since that article have unfolded, the Windows positioning fiasco has turned the rollout of the product into the most catastrophic marketing failure in Microsoft’s long, and mostly storied, history. At the time I was writing both versions of In Search of Stupidity: Over 20 Years of High-Tech Marketing Disasters, I made the statement that the chief reason for Microsoft’s success over the years was that the company had avoided making major stupid mistakes, in sharp contrast with most of its competitors. With Vista, this record of avoiding stupidity comes to an end. The marketing campaign supporting Vista was profoundly stupid and repeated easily avoidable mistakes made by MicroPro, Borland, Novell, and others.

 

Before going further, it’s only fair to address the technical objections surrounding Vista. In the main, these have been solved, and before much longer Vista will be a solid, useful operating system (though no compelling reason has ever been offered by Microsoft for using it in lieu of XP). But no one cares. Vista is massively tarnished and while many people are using it, in the main it’s because they have no choice. Using your monopoly position in a market to force feed people something they don’t want is not good marketing. And while Microsoft can survive one Vista-class mistake, even it can’t afford to make two of them.

 

Before we contine with this exercise, it’s important to accept that none of the options we’ll be discussing will easy to execute and pay for. Because a positioning failure impacts every aspect of a company’s sales and marketing operations, repairing or ameliorating the fallout is always ugly, painful, slow, and unsatisfactory in many respects. It’s why a company should avoid making them in the first place. Let’s work through Microsoft’s different options and discuss the pros and cons of each.more...

 

March 31st, Valuing Options While Running the Compliance Gauntlet, Part II of II

 

It is important to note again the differences between FASB 123R and IRC Section 409A as they appear to be similar but approach the valuation of options and securities from different perspectives. FASB 123R concerns stock option valuations for financial reporting purposes and is measured from the issuing company’s perspective. The objective is, in the case of privately-owned companies, to place a value on stock options in order to treat its value as an expense on an income statement.

 

IRC 409A is concerned with the issuance of stock based compensation—either in the form of stock options or other types of securities—by either publicly-owned or privately-owned firms. The objective is to ensure that the securities being granted, whether in the form of stock options or stock, are granted at fair market value. If they’re not, the individuals receiving the stocks may be socked with taxes, interest and penalties.

 

Under either regimen, the value of the underlying security—the common stock—is critical in determining the value of a stock option. For publicly-owned companies, obtaining the price of the common (share) is as easy as opening the Wall Street Journal (or going online). Privately-owned companies do not enjoy the same luxury.more...

 

March 15th, Valuing Options While Running the Compliance Gauntlet, Part I of II

 

by Edward E. Pratesi, CPA, Brentmore Advisors, LLC

 

Value, as we know is in the “eyes of the beholder.” Certainly we know that transaction value is important in “pricing” rounds of venture capital financing and is critical in determining exit multiples during an IPO or M&A event. But distinctions should be drawn between “transaction” oriented valuations and what is often called “compliance” based valuation. Compliance-based valuation refers to a business valuation assigned to such assets as:

 

The value of stock options or stock based awards issued by either publicly-traded or privately-held companies (FASB 123R, IRC Sec. 409A, SEC “Cheap Stock” review).
The allocation of the purchase price and determination of goodwill in the context of a business combination (FASB 141R).

The testing for impairment of goodwill acquired in a business combination (FASB 142).

Both publicly traded and privately traded companies are impacted by these compliance and reporting requirements. For financial reporting purposes (GAAP accounting), the Financial Accounting Standards Board (FASB) has promulgated reporting standards under 123R, 141R, 142 and 157 – which defines the concept of “fair value” for financial reporting purposes. The Internal Revenue Service, with Code Section 409A and its proposed regulations, impact any firm considering stock-based compensation. And finally the Securities and Exchange Commission (SEC) encourages adherence to the standards promulgated by the FASB and provides oversight on the valuation and issuance of stock-based compensation and stock options.

 

The cost of being out of compliance with one or more of the above rule making bodies can result in additional taxes, penalties and interest under IRS rules to a possible restatement of financial statements for additional compensation expense and possibly other sanctions by the SEC upon an IPO event.more...

 

February 29th, Converting From a Licensed to a Subscription Model

by Javier Rojas, Kenet Partners

 

The market for SaaS has gone mainstream. Corporations are increasingly open to buying software in this way. As a result, revenues are growing rapidly for the right sort of application vendor in virtually every segment. Aggregate turnover for stand-alone public SaaS companies has reached nearly $750 million annually. What is more, there are significant financial incentives for entrepreneurs to shift to a SaaS model. The public equity markets are placing a high premium on SaaS vendors, with market values averaging 5x forward revenues. A company with expected revenues of $50 million in 2007 and a median growth rate may well command an IPO or trade sale valuation of $250 million or better.

 

As a result of this dramatic shift, private investors are focusing on promising SaaS vendors and are highly selective regarding license software companies in which they are willing to invest. In both the private and the public markets, SaaS companies are being valued at a premium because of the visibility afforded by the recurring revenue model, the low marginal cost afforded by the multi-tenancy delivery model, and the reduced cost of selling on-demand solutions.more...

 

February 15th, Open Source and the SaaS Development Connection

 

In our last issue of Softletter we published research from our recent SaaS survey indicating that SaaS software firms, particularly smaller ones, were turning to Open Source to build their products. We were curious to discover more about this trend and spoke to Wayne Hom, CTO of Augmentum, a major outsourcer and development house focusing on resources from China. Augmentum recently finished a major development effort for Etology, a SaaS-based firm that creates a virtual ad marketplace for niche publications (such as Softletter).

 

Wayne, our recent Softletter SaaS survey indicated that almost 50% of SaaS companies under $1M in revenue were basing their products on Open Source software. What is your take on this trend?

 

Open Source can definitely assist a startup in getting to market faster. With SaaS, time to market and reliable delivery of services is key because of the extended ramp up to profitability.

 

Where Open Source truly shines is in its ability to function as a community-driven store of components that can drive a new product’s underlying architecture. In this sense, Open Source replicates, but on a non-proprietary scale, the platforms being assembled by firms such as Salesforce.com and Netsuite. A new company looking to get up and running can rummage through a vast array of Open Source projects and often find valuable resources that can substantially speed their initial development efforts.more...

 

January 30th, Gaming Innovation

 

Readers of Softletter know that we’re fans of business simulations as training tools. Alas, few companies take our advice; encouraging people to play games during work just doesn’t fit most corporate zeitgeists. But then most companies haven’t met Spigit. Spigit is a fascinating new simulation system that combines social networking, communities, reputation ranking, and the monetization of participation in the aforementioned into a coherent whole. We spoke with Paul Pluschkell, CEO of Spigit, to discuss the system and it’s purpose.

 

How do you define Spigit?

 

We call it social productivity software. Spigit is designed to allow companies to unlock internal productivity and innovation. Web 2.0 technology has generated a revolution in the ability of people to communicate within their immediate circle. Sites such as LinkedIn, Facebook, MySpace, Jive, etc., are all good examples of this.

But one of the problems with social sites is that they don’t really work well in assisting people to work with quality contacts outside your immediate circle. Again, take a look at LinkedIn and MySpace, for example. Both of these systems encourage you to build networks of “contacts” or friends but the truth is you spend very little time interacting with your virtual “buddies.” more...

 

 

 

And unlike licensed software, in most cases you’re not going to be able to rely on that big $1m dollar deal to bail you out; SaaS in most cases grows organically over time, but in the meantime you’ve got bills to pay. To discuss this dilemma in greater detail and discuss your options, we talked to Jeff Mills of SaaS Capital. Jeff launched SaaS Capital in 2007 and prior to that was a partner at Blue Chip Venture Company where he focused on investing in early stage software companies, many of them ASP/SaaS plays more...

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Things are changing rapidly in the software industry, as our recent SaaS and upcoming virtualization surveys are demonstrating. SaaS in particular is having an immediate impact on the role of product managers (PMs). We recently interviewed half a dozen PMs at various SaaS-based companies, all competing in different market sectors, to get their take on how this model impacts their jobs both strategically and on a day-to-day basis. These are some of the highlights of our talks.

 

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Asia Is Coming

Despite the lack of clear regulations and inadequate transparency, we continue to observe rising deal values in the Asian M&A markets, with overall numbers reaching $360B. The anticipation of lucrative growth opportunities seems to outweigh the perceived risk despite expectations of higher interest rates that will increase borrowing costs and put pressure on capital and consumer spending. Nevertheless, Asian companies are targets of acquirers desiring access to the soon-to-be world’s largest economies.

 

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