Into the vortex
Software enters a new SaaS era
uncommon sense
ABOUT THE AUTHORS
Øystein Moan is executive
chairman of Visma, a leading
business solutions provider
in Northern Europe, focusing
on business optimisation and
management tools for SMEs and
enterprise companies.
Øystein was CEO of Visma from
1997 to 2020, executing a private
equity-funded, acquisition-led
growth strategy that has enabled
them to secure Nordic market
leadership. Their current investors
are Hg; GIC; Intermediate Capital
Group; CPPIB; Warburg Pincus;
TPG; General Atlantic and
management. Before founding
Visma, Øystein was previously co-
founder and CEO at Cinet AS.
Øystein holds a MSc in Computer
Science from The University of
Oslo.
Colin Tyler, James McGibney,
Justin Walters and Urszula
Rakowska are members of
OC&C Strategy Consultants’
TMT Practice. OC&C Strategy
Consultants is the leading
global strategy consulting firm
that brings clear thinking to
the most complex issues facing
today’s management teams and
investors. OC&C’s client roster
includes some of the world’s most
respected companies throughout
the technology, media, digital and
private equity sectors.
Our software, telecoms and
technology clients include some
of the leading hosting, SaaS
and IT service providers across
Europe, US and Asia, ranging
from mass-market focused brands
to software, data and hosting
companies focused on mid-
market and enterprise customers.
We work with some of the
smartest, most ambitious leaders
in business – people dedicated to
creating change in their industry,
not just conforming to the status
quo.
02 | OC&C and Øystein Moan Into the vortex
The most critical trend we observe today
in software companies is a growing
tendency for the most modern SaaS-
based software ‘power brands’ to keep
on winning. This cycle is seen in the
growth rates and valuations of the major
cloud-based software firms in each
segment, often supported by the strong
growth of software into new use cases –
and the gradual erosion of the long tail
of legacy software providers.
The returns to power brands’
market/category leadership
in software have never been
higher, and the new era of
SaaS is creating a powerful
vortex supporting the growth
of the winners
OC&C and Øystein Moan Into the vortex | 03
In a way this might be expected – software
has always been defined by economies
of scale, the largest players will have
advantage – but a vortex of mutually
reinforcing commercial and technological
trends have accelerated this tendency
far beyond its origins in the low marginal
costs of software.
This is certainly not to say that we expect to
see global winners – far from it. If anything,
we observe a vertical and geographic
fragmentation as leading software firms
emerge that meet specific needs better
than anyone else. Global firms will always
have their field: the largest firms, the
largest markets, the most universal use
cases. But we see power brand winners
emerging – with huge amounts of value
created and captured – in more and more
niche areas. Leadership can be defined
at a geographic or local level (example,
Visma’s own e-conomic in Denmark); or it
can be at a global / international category
level (Bullhorn in recruiting; Twilio in APIs
for voice comms).
What does SaaS mean?
Software, and specifically enterprise software, was for years deployed
‘on-premise’ meaning that each customer had their own copy of the
software installed separately on their computer, or on their office’s server.
The emergence of cloud connected technologies changed that as software
became able to be accessed remotely from ‘the cloud’, with software vendors
initially hosting a ‘copy per customer’ or single-tenant version of software, but
more recently shifting this towards a single cloud-hosted version of software
that is accessed by multiple customers – this concept has become known as
multi-tenant SaaS (Software-as-a-Service).
Put simply: the returns to power brands’
market/category leadership in software
have never been higher, and the new
era of SaaS is creating a powerful vortex
supporting the growth of the winners.
These returns are driven by:
• The critical importance of brand in
being the ‘safe choice’ as previous
unpenetrated customer segments
(e.g. micro businesses, new verticals)
adopt software in order to remain
competitive
• The enhanced ability to cross-sell
when you are providing a critical
product (usually with ‘platform’
characteristics) – to be the central
product onto which other products are
‘bolted on’, and to be trusted to meet
customer needs with new solutions
(which often are E2E integrated)
• An increasingly intense pace of
innovation (e.g. around automation
technologies) which sub-scale software
firms struggle to keep up with
• The benefits of high volumes of data
– e.g. for developing and training
algorithms, and delivering insights at
scale
• The network effects which these
businesses increasingly incorporate
via marketplaces/ecosystems
• The channel relationships which
many businesses have developed
which enable highly scalable sales,
marketing & implementation and take
years to build up
• Greater access to transformative M&A
opportunities
All of which creates a vortex
– these factors are self- and
mutually-reinforcing over time.
04 | OC&C and Øystein Moan Into the vortex
We see these ‘vortex’ trends as
marking the emergence of a new era
in SaaS businesses. We have had the
early days of SaaS – characterised
by the novelty of the delivery and
economic models. Then came the
democratisation of software via
greenfield adoption and on-premise
migration. Now we see the firms that
have emerged as power brands from
this second era entering a new era,
defined by ever-growing returns
to market/category leadership.
A new era
OC&C and Øystein Moan Into the vortex | 05
Evolution of SaaS
businesses
SaaS is born
Greenfield adoption +
On-premise migration
Power brands
Key characteristics
• Early days of SaaS
focused on better delivery
– online vs on premise –
and attractive economic
model – monthly
subscription, low upfront
costs
• Drove much wider
software adoption - both
greenfield and migration
from on-premise – via:
– Often lower cost /
freemium model
– Much greater usability
• Growing strength of key
brands and platforms –
many ‘born in the cloud’
• Data-driven insights and
AI/automation
• Customer monetisation
via cross-sell
• APIs and marketplaces
creating network effects
Usability
• Medium/ low: Often a
legacy user interface
• High: ‘Consumer-grade’
GUI
• GUI (if exists) is ‘consumer-
grade’, often mobile-first
• APIs can form easy-to-use
‘building blocks’ – often
with no GUI, involving
software-to-software
relationships
Typical customer size
• Enterprise
• Enterprise, mid-market,
SMB
• Enterprise, mid-market,
SMB + anyone
Typical revenue model
• Monthly subscription
per seat
• Monthly subscription
per seat
• Monthly subscription
per seat
• Also increasingly volume-
based (per API call, per
transaction)
Typical time to implement
• Months
• Typically weeks / days
• Varies by solution – can
be extremely rapid
deployment
1st
2nd
3rd
Era
Era
Era
06 | OC&C and Øystein Moan Into the vortex
This increasing role of power SaaS brands can
be seen across a range of SaaS-based enterprise
software providers:
The
evidence
The trend is most advanced in horizontal
software with its higher rates of SaaS
penetration: from Salesforce in CRM,
to Hubspot in marketing, Twilio and
RingCentral in cloud communications,
Stripe in payments, Shopify in
ecommerce, Workday in enterprise HCM,
Xero, Intuit & Visma in SME accounting
(and increasingly SME software more
generally), the US ‘Pays’ (Paycom,
Paylocity) in US payroll, and Coupa in
procurement.
The trend is already well underway in
selected more penetrated verticals:
e.g. Bullhorn in recruitment in English
speaking markets, Toast in US hospitality.
Our hypothesis is that these market
segments are a vision of what is to come
in other less SaaS-penetrated segments
– whether geographic, customer size
or vertical. Which has one crucial
implication: the race to win in these less
penetrated and fragmented segments
has very high stakes indeed. Parts of the
market are still wide open – but savvy
founders and investors are moving
quickly. Witness Silver Lake Partners’
investment in Cegid (legacy French ERP
software player) and Silae (fast moving
French SaaS payroll pioneer)… the prize
of being the horizontal SaaS software
winner in France is potentially enormous.
These more penetrated market
segments are a vision of what is to
come in other less SaaS-penetrated
segments – whether geographic,
customer size or vertical
OC&C and Øystein Moan Into the vortex | 07
What about ‘disruption’? In a way
this story goes against the classic tech
narrative of disruption – each generation
exists only to be disrupted by the
next. Surely a paradigm shift in AI, VR/
AR, voice, or IoT etc. will be next to
disrupt these cutting-edge players?
We would argue (and we know we are
in good company) that in fact today’s
large winners increasingly have major
advantages that will keep them winning
in a world defined by massive scale – and
that these new technologies merely build
on the fundamental foundations of cloud
+ mobile that leading firms have already
mastered.
Add to this the inherent stickiness of
enterprise software – which only grows
with further cross-sell, data integration
and ecosystem/network effects
development – then you have some firms
with very large ‘moats’ indeed.
08 | OC&C and Øystein Moan Into the vortex
To bring to life how
these leading software
firms are deepening
their scale advantages
we consider three
topics in further detail:
Cross-sell, AI/automation,
and M&A.
How do
winners win?
Cross-sell
Cross-sell is a major driver of value in leading
SaaS businesses. These players take a large
existing customer base and then increase
average revenue per customer and reduce
churn by selling in complementary solutions
that meet customer needs. In this way their
core product forms a ‘platform’ onto which
other products are bolted on. We see a clear
best practice playbook in place:
BEST PRACTICE IN CROSS-SELLING (SMB-FOCUS)
‘Hard’
internal factors
‘Soft’
internal factors
Customer data /
intelligence
Incentives
Marketing
automation
Customer ‘vision’
Expertise
Single, fully accessible customer database that includes thorough
intelligence on customers (incl. current product portfolio) to help
tailor marketing efforts and track inbound interactions across the full
product-suite
Incentives need to reward both sales team members who originate
and who convert leads regardless of the P&L ownership of the cross-
sold product
An automated approach to sales and marketing efforts is crucial
to reaching customers at scale. This must be tailored to customer
need / type and can be achieved through in-product AI pop-ups,
personalised emails via Marketo etc.
There must be a ‘vision’ for both customer product journey and end-
game product mix in each segment in order for effective targeting and
comms by sales and marketing teams (e.g. begin with FMS, cross-sell
in payroll and HCM etc.)
Sales teams should be specialised by vertical and product, but all sales
staff must also have knowledge of potential complementary products
that sit outside their area of expertise
OC&C and Øystein Moan Into the vortex | 09
Xero provides a strong
example of this in
practice:
CASE STUDY
XERO’S CROSS-SELL APPROACH
• Xero has reached high penetration in its home geography of
New Zealand
• Due to this, Xero is now focused on driving revenues by
increasing average revenue per customer via cross-sell and upsell
• A major focus of cross-selling for Xero is payroll, which can add
up to 25% to ARPC
– Payroll is characterised by strong customer loyalty given
challenges of switching
– Once a customer is on payroll, Xero also becomes the
customer’s employee database, thus opening up more
cross-sell opportunities…
– Xero Expenses & Xero Projects both run off the employee
database
– …and supporting Xero’s target to become “the small business
platform”
– Accountants also have an incentive to help Xero cross-sell in
payroll, as the highly automated solution increases efficiency
for them
• Data and automation are critical to driving cross-sell at scale
for Xero:
– Xero identifies opportunities to displace 3rd parties with its
in-house modules by using its extensive data on customers’
use of 3rd party applications via APIs…
– …It then uses automated sales approaches via Marketo to
cross-sell in Xero’s own solution
• Often provides a video explanation of Xero’s solution, and a
6 month free trial offer
TYPICAL XERO ARPC OVER
CROSS-SELL JOURNEY (INDEXED)
INDICATIVE
Visma is also driving similar growth around key platform FMS
products like e-conomic in Denmark, Netvisor in Finland and
Tripletex in Norway. SME customers often start with these brands
and then cross-purchase a range of other Visma solutions to
unlock more utility, including payroll, HCM software, e-invoicing
and small business loans.
150
25
25
100
Cross-sold
customer ARPC1
Accounting
solution only
Expenses
Payroll
10 | OC&C and Øystein Moan Into the vortex
IN-APP SALES AND MARKETING
In an increasingly noisy marketplace
it is becoming harder to reach the
best customers. In Europe, GDPR
also limits many of the more dynamic
marketing automation techniques. In this
environment in-app marketing to current
users can be highly effective. Careful and
not too intrusive exposure of active users
to new functionality, upgrades or new
features is a low cost shop-window to
demonstrate highly relevant and value-
added features to qualified customers.
After all, cross-selling is not really what
these software vendors want to achieve,
but rather they want cross-purchasing,
where customers reach out and buy more
because the incremental functionality
obviously adds value for relevant work-
tasks, for customers such approaches are
convenient and friction-free.
Already having a large population of
active users clearly makes these in-
app sales more effective for the power
brands. Thus the largest players have an
advantage that is hard for smaller players
to match with traditional sales and
marketing automation.
AI/automation
Winning SaaS firms are already well
advanced in incorporating intelligence
into their propositions. The critical
informational advantage that SaaS
gives over on-premise – visibility of
real-time data – is being put to good
use. That said – not all AI/automation is
created equal. We see a range of types
being applied, with some delivering
mere tables stakes and some offering a
truly differentiated proposition:
The critical informational
advantage that SaaS gives
over on-premise – visibility
of real-time data – is being
put to good use
OC&C and Øystein Moan Into the vortex | 11
A question we are often asked is: how far can these developments in AI/automation
actually be monetised by software firms, vs being competed away as table
stakes that all customers will come to expect? The answer depends on several
factors, in short – to have high monetisation potential, AI/automation solutions
in software firms will have to be able to create high value for each customer, and
have characteristics that are difficult for competitors to replicate (e.g. proprietary
training data, or be based on internal knowledge and capabilities).
Data
Classification
Tools
Customer
Chatbots
Invoice & Receipt
Scanning
Robotic Process
Automation
Engines (RPA)
Process
Optimisation
Customer
Insights
(Lead Generation
/Churn
Prevention)
Table Stakes:
• Automatic
classification
of messages,
data or files by
a pre-defined
rule set
Table Stakes:
• Improve
customer
service
response times
• Automate
responses to
simple and
common
queries
Table Stakes:
• OCR image
recognition
to scan and
upload receipts
and invoices
Table Stakes:
• Automate a
standardised
manual
business
process of
executing a
task or activity
Table Stakes:
• Optimisation
of simple
repetitive
processes
Table Stakes:
• Simple
prompts for up-
sell / cross-sell
based on other
customers
Differentiated:
• Custom
rules and
classification
categories built
and designed
to customer
specifications
and trained
on unique
customer data
Differentiated:
• Desktop
based digital
assistants
designed
tailored to fit
each customer
(e.g. Oracle
Finance Bot)
Differentiated:
• Automated
processing of
invoices etc.
in accordance
with local
VAT and tax
regulations with
full traceability
and audit trail
Differentiated:
• Custom
technology or
engines built to
interpret and
manipulate
data specific to
an organisation
or function
Differentiated:
• Utilising
knowledge
of customer
workflows
or access
to datasets
to optimise
planning /
maintenance
/ production
given the
specific
constraints that
an organisation
is facing
Differentiated:
• Tailoring sales
processes
to specific
customers
depending on
their activity
(e.g. Cisco
identified
>$1bn of new
business with
SAP Leonardo)
• Cash flow
and financials
forecasting
EXAMPLES OF SOFTWARE VENDOR AI AND AUTOMATION TOOLS
Many of these tools and products are developed using AI engines from 3rd parties (e.g. Amazon Alexa NLP, IBM Watson AI,
botxo.ai for chatbots etc.)
Functionality / customer use casesExample vendors Table Stakes
Differentiated
12 | OC&C and Øystein Moan Into the vortex
M&A
Power brands also often deepen their
winning position via highly strategic
and well-executed M&A. These
acquisitions serve multiple purposes
- but above all mean these firms stay
innovative by buying in cutting-edge
new technologies and continue
growing rapidly by acquiring growth.
This helps these firms avoid becoming
victims of their own success, unable to
change fast enough due to the scale
of their commitments and vested
interests.
Strong M&A execution is consequently a
critical source of competitive advantage.
We see companies with the strongest power
brands - with Salesforce, Microsoft and Visma
all good examples - employing in-house M&A
teams dedicated to identifying, acquiring,
and integrating the best possible targets.
Having a clear playbook for integration means
these firms can often pay more than others
for a given acquisition - as they are able to
extract more value once it is acquired. Doing
this without killing off the entrepreneurial
spirit of acquisitions is a true art - making the
acquisitions more successful, and - once a
track record is established - making it more
likely for founders to choose them as the
acquirer.
Strong M&A execution
is a critical source of
competitive advantage
OC&C and Øystein Moan Into the vortex | 13
CLOSING REFLECTIONS
This new era is a testament to the value
these SaaS firms are adding to their
customers. Software is being applied to
more verticals and more processes within
those verticals, and its ability to add
value to customers in these applications
is growing every month. The growing
market concentration of SaaS software
is thus in some ways an ironic side-
effect of SaaS enabling more effective
competition in industries outside
software. As the frontier of competition
in all industries is increasingly in the
digital realm, it is increasingly these SaaS
companies who enable this.
14 | OC&C and Øystein Moan Into the vortex
COVID-19
impact
OC&C and Øystein Moan Into the vortex | 15
In such a setting, legacy desktop-based
computing becomes very impractical.
Software needs to be accessible from
anywhere, and it needs to be secure
from anywhere. Computing and security
therefore must be centralised, and not
depend on the resources in a local
device. Thus, we expect most desktop
Windows applications to be replaced by
cloud computing by 2025.
We are approaching a tipping point
where on-premise device installed
software will become forbiddingly
expensive to operate, and a hassle to
use and manage. Software companies
well established as cloud providers will
benefit from this accelerated change;
the laggards are likely to see their gap
behind the winners widen even further.
Software needs to be
accessible from anywhere,
and it needs to be secure
from anywhere
We expect the
advantages of size and
incumbency to be further
enhanced by the impact
of COVID-19. Many
software users have spent
months getting trained on
flexible and increasingly
home working. These new
hybrid ways of working
will likely have become
the new normal, with far
less commuting, more
video-meetings, working
from anywhere and being
online from anywhere,
anytime and especially,
working from any device.
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Key contacts
Colin Tyler, Partner
colin.tyler@occstrategy.com
Justin Walters, Partner
justin.walters@occstrategy.com
James McGibney, Associate Partner
james.mcgibney@occstrategy.com
Urszula Rakowska, Manager
urszula.rakowska@occstrategy.com