The New Consulting Metrics (for SaaS)

Suppose a consulting firm is helping your company choose between upgrading your ERP software or replacing it with a new SaaS (software as a service) solution. If the functionality is close, which solution would they recommend?

Some clients might be surprised to learn that a consultant would recommend the on-premise solution over the cloud/SaaS solution for reasons that might not be obvious or disclosed to the client. Here are some potential reasons:

1) The consultant must meet a specific sales quota annually. If the on-premise project generates more fees, then this is job security for the consultant as he/she can more easily make quota. Moreover, this also means the consultant needs fewer clients or projects to sell to make quota. So, all those cost savings you should be hearing about cloud solutions could be going out the window if the consultant, personally, makes less money on this deal.

2) The consultant’s firm has tens of thousands of personnel dedicated to running ‘centers of excellence’ around the on-premise application software. Those employees are a significant cost to the consultancy and that beast has a huge appetite that must be quenched with lots of new client work. It doesn’t matter if the on-premise software is old, obsolete or falling out of favor, the consultant will do what’s in his/her firm’s best interest (NOT YOURS) to keep their processes running. Remember, are you choosing software for your firm or for your consultant’s firm?

3) The consultant has a large team of local practitioners who are trained in an on-premise solution and like the previous example, the bench cost of these workers is significant. Again, make sure you choose what’s right for your firm not the consultant’s.

4) The consultancy makes more money, short-term, via a commission or marketing program fund if they recommend the on-premise product. Since most on-premise solutions have large up-front license and maintenance payments (and SaaS products often don’t (see previous post)), then the on-premise vendor can afford to pay more for a new customer. This is made more lucrative if the customer signs a multi-year contract.

Always remember: People do what they're measured on or rewarded for. Few do what's right for others if it means personal sacrifice.

Recently, I’ve dealt with two SaaS vendors who are falling under the spell of old-school integrators/outsourcers. The SaaS vendors see these integrators/outsourcers as having great distribution or sales channels that they’d like to exploit. That’s great and true but it will only work if the integrator has:

- changed how it compensates its executives so that the sale of SaaS services is equivalent to on-premise services. This is unlikely as top-line revenue is the key metric for most service firms. They care a lot less about whether they’re doing the right thing for the client and a lot more about their own career survival (or bonus payments).

- decided what it will do with all of its on-premise solution centers, application maintenance outsourcing centers, etc. These huge capital and headcount investments are often found in India and Eastern Europe. They may represent half of the integrator’s headcount. Can a SaaS vendor reasonably expect the integrator is just going to shutter these operations? No – the integrator can’t afford to this. Does the integrator have a strategy for re-purposing these operations to be focused on cloud-based SaaS solutions? I’ve only heard rumblings of one such plan and it was really limited.

Bottom line: Make sure you really understand how a consultant arrived at their software recommendation and whether the consultancy has fully disclosed how they benefit from this decision. Caveat Emptor folks.