From Legacy to Start-Up: How Software Consulting Services LLC Transitioned Their Licensing Model for Sustainability and Growth
Bethlehem, PA, June 10, 2022 (GLOBE NEWSWIRE) -- Like many small to mid-sized software development companies, Software Consulting Services LLC (SCS) had a sales and implementation model that revolved around a substantive upfront capital purchase of software followed by ongoing technical support.
After the economic collapse in 2010, this purchasing model began to yield fewer returns. By 2014, SCS was facing shrinking revenue, less development and prospects that could no longer afford the large, front-loaded purchases. The purchasing model was broken and threatened to slowly destroy the company.
Fortunately, current owner and managing member Kurt Jackson had a solution.
In 2015, Jackson worked directly with the previous SCS owner to reinvent their purchasing model. Over the next year, they realized almost everything would need reinvention for the subscription model to restart the engine of the company.
It was at that moment that they decided to return to the days of the start-up. It was time to challenge and rework all aspects of their 30-year-old software development company. In 2015, they signed their first new customer with a subscription agreement.
Today, subscription revenue makes up 70% of their annual recurring revenue (ARR), with traditional support contracts and on-boarding services making up the rest. By early 2020, monthly ARR had blown past their monthly operating costs and continues to climb. 2021 has been the best year for SCS in the last 17 years.
With initial subscription terms between 3 and 5 years and annual auto renew after the initial term, the 7-year value of a new customer has doubled. Their annual churn is approximately 6% and their 7-year Compound Monthly Growth Rate (CMGR) is 10.4%.
Their vision and innovation at SCS likely saved the company. Not only that, it created a new path forward, re-energizing the team and generating greater revenue than ever before. Jackson and SCS built a roadmap of change, and now they want to help traditional software development companies realign for the future and secure a reliable and dependable ARR revenue stream.
How to Beat the Odds and Transition to Service-Based Recurring Revenue
Although SCS was able to reinvent themselves with SaaS licensing and sales models, their transformation was not without its challenges. Jackson has identified six essential points to consider when transitioning to a subscription model. In doing so, small- and medium-sized software companies can make the change more effectively – and possibly avoid costly missteps along the way.
1. Expect and plan on cash flow issues
As Jackson explains, they initially underestimated the stress the transition process would have on cash flow. Companies must remember they are exchanging upfront cash for longer-term subscriptions.
“Be sure to educate your lenders as to the nature of the process and what you may ask from them,” Jackson says. “We had to extend our credit line from $250k to just over $800k, and for at least 3 years, we used it. We would pay most of it back in Q1 each year but without it, we would have been in trouble.”
From the beginning, they kept a detailed plan as to how many subscriptions they would need to meet the inflection point of ARR surpassing expenses.
Update your lenders often, and if the line is trending up, they will likely keep up the funding.
2. Build belief within the sales staff
Along with a new type of SaaS or managed service agreement, companies must rework their sales compensation. For any of this to work, the sales staff must believe they can make more money with this new model.
“Our subscriptions average $3k per month, so for us, basing the compensation around the monthly fee along with a percentage of the on-boarding cost did the trick,” Jackson says. “Once the sales staff had one or two of these under their belt and could see the additional dollars in compensation, we were off to the races.”
Depending on your average MRA per sale and the frequency of sales, you can adjust accordingly.
3. Become a leaderless organization
During their transition, Jackson realized that legacy companies have entrenched processes and management hierarchies that cripple new product innovation and creativity. They needed to break up the entire development staff into 2 or 3 person teams. These small teams needed to be fluid, meaning they can change without hierarchical approval to suit the task. In essence, everyone deserves the right to become a leader.
“We also had to make major changes to our software,” Jackson said. “We could not wait for endless specs and revisions of specs to get where we needed to go.”
“The Starfish and the Spider” by Ori Brafman and Rod Beckstom is a great reference when considering restructuring your development and on-boarding process.
4. Understand subscription and SaaS metrics
According to Jackson, there are significant metrics that must be monitored every day, so companies should familiarize themselves with these terms:
CHURN, ARR, MRR, CAC, CMGR, NRR, ACV, and LTV.
“You must monitor these metrics every day,” Jackson stresses. “When considering SaaS and Subscription licensing, understanding these metrics and their relationship is a requirement.”
Jackson recommends “The SaaS Metrics That Matter” by David Sacks and Ethan Ruby as a great primer to help understand these data points.
5. Heavily market your new licensing model
Customers and prospects need to know that your organization is changing, Jackson explains. You must act like and become a start-up by recasting your software for faster on-boarding, and you must provide a service environment that is unparalleled. To accomplish this, Jackson offers several strategies.
“Track your success metrics such as churn, customer acquisition costs and average subscription value,” Jackson says. “Invite your entire organization into the transition and new journey. It will be necessary to completely disrupt your company and staff.
“They must understand the plan and that the goal is in their best interest as much as it is yours.”
6. Focus on new and freeze the old – in other words, innovate
Traditional companies often have a robust collection of legacy software that is very feature rich. Some of these applications may have reached the end of life. Jackson says this is the time to stop legacy development and focus on innovation and new products.
“We decided to develop add-on products as well as a few new products to fill out our product line,” Jackson says.
He recommends “First, Best or Different” by John Brady Jackson when deciding which projects to work on and which to leave behind.
“Understanding that concept for niche product development and marketing was core when deciding what products to work on and which to not,” Jackson says. “Your customers need to see additional value when you begin offering subscription licensing.”
The key component for Jackson and the SCS team was to not remain tethered to the past. By fearlessly and relentlessly moving forward, they were able to build a new model that has changed their entire company.
As Jackson explains, the best companies do fear the future. They create it.
“Legacy software development companies must recast themselves to survive and transition to a recurring revenue model,” Jackson says. “Don’t be afraid to wreck most of the organizational structure and process to transition the company.”
About SCS
Software Consulting Services, LLC is a software development company for the publishing industry. Their mission is to help customers realize operational and creative savings through better technology.
Kurt Jackson talks about challenges to the publishing industry.
To learn more, please visit www.newspapersystems.com.
Contact Information:
Kurt Jackson
Phone: (800) 568-8006
