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Bonus Your Way to a Retention Strategy

NEW YORK —- Nice way to earn a bonus. Entice customers to renew their software-as-a-service subscription (in a sector that already enjoys a high retention rate), and you pocket more fun money.

That's what one software-as-a-service (SaaS) provider is building into its compensation packages for certain employees.

Speaking at a panel on SaaS at the Cowen and Company technology conference here, Jim McGeever, chief financial officer at NetSuite, said "from now on, bonuses will be based exclusively on retention," for all employees other than salespeople.

Although SaaS vendors preach that their business models give customers more freedom, the vast majority of customers stick with vendors once they have completed an implementation.

McGeever said that churn, the industry term for customers switching to another vendor, only happens during the initial implementation phase.

"Once we've implemented," he said, "retention is incredibly high. It's like watching an iceberg melt."

Michael Topolovac, CEO of product lifecycle management (PLM) SaaS vendor Arena Solutions, agreed. He claimed the retention rate with Arena customers is 95 percent.

Ken Neff, vice president of technical services at DreamFactory Software, noted that the very nature of the business model tends to favor customer retention.

"We win our customers based on the quality of the solution, but we keep them based on the quality of service," he said.

According to Neff, DreamFactory often reacts to customer requests for updates within 24 hours.

That, he explained, is why SaaS vendors have nothing to fear from their on-premise competitors.

"On-premise vendors don't get that [the software] is not a package that acts like an anchor; it's a service that solves their business problems."

The panelists practically whistled happy tunes about SaaS.

"We no longer have to convince them that the model is secure and reliable," said Topolovac. "Issues like who owns the data, the viability of the business model, and security, have almost completely gone away. In fact, security is not an issue, and SaaS often gives a solution to that problem. It's a dramatic shift in perceptions."

Saugatuck Technology of Westport, Conn., estimates that a third of all companies will have at least one SaaS deployment by the end of this year, and that SaaS will achieve 40 percent market penetration by the end of 2007.

William McNee, founder and CEO of Saugatuck, said SaaS will also begin to penetrate the large enterprise market in the latter years of this decade.

"There's a large opportunity for SaaS applications as legacy systems mature and large enterprises are forced to make upgrade decisions," he said.

According to the Saugatuck study, 12 percent of corporations are running at least one SaaS instance, 14 percent are in prototype stages, and 14 percent plan to begin an implementation later this year. Another eight percent of companies plan to implement at least one SaaS deployment in 2007.

More tellingly, said McNee, many companies have more than one SaaS implementation. Enterprise companies in particular tend to run more SaaS solutions than they realize because there is a significant amount of decentralized buying.

"Most organizations do not recognize the penetration that has occurred," he said. "We've seen one large financial services company that has over 40 SaaS apps running."