Many companies have a growth challenge: They expect to get as much as 50 percent of their revenue from new businesses and products by 2026 but are not on a path that will take them there. Among the strategies nontech incumbents should consider is taking a close look at developing software-as-a-service (SaaS) products.
We know from our previous work that one of the most important factors in driving growth is operating in a sector or area that’s growing. SaaS checks that box. The global SaaS market is currently worth about $3 trillion, and our estimates indicate it could surge to $10 trillion by 2030. The median revenue growth rate of 100 public SaaS companies in the United States with revenues above $100 million was 22 percent as of mid-2021, with the top quartile’s growth rates above 40 percent.
There’s a lot to like about SaaS beyond its revenue potential. For one thing, the asset-light nature of SaaS means it has lower overhead and logistical costs than physical products. Second, it frees traditional companies from doing some of the most complicated technical work by themselves—they can partner with major cloud service providers. And third, since software at its core is a series of 1s and 0s, it’s easy to scale, especially when combined with the cloud’s extensibility and elasticity.
As exciting as the SaaS new-business-building opportunity is, however, nontech incumbents aren’t set up to transform themselves quickly into SaaS operators. In fact, these companies’ long-standing practices in product management, funding, governance, and performance management may be hindrances to launching SaaS businesses.
Our experience in helping more than 20 nontech incumbents build new SaaS businesses highlights six key areas they should focus on to succeed.
1. Innovate through rapid test-and-learn cycles
Large incumbents have for years honed tried-and-true processes for product development that have served many of them well. But those approaches are not always well suited for the faster learn-and-adapt cycles that are the foundation of innovation at successful software companies and core to SaaS product development. Like any good product or service development, it’s crucial to start with the customer.
While many incumbents have a strong understanding of their customers, they often lack the creativity to translate that understanding into innovation. Their approaches often focus on “how to improve X” rather than on completely rethinking “how to create Y.” This is partly why they have proven so vulnerable to start-ups. Incumbents often treat customer data as “inputs” that are translated into requirements and only infrequently consult the customers themselves. Innovators, however, go deep on understanding pain points and work much more closely with customers along the development journey, from testing and adjusting minimal viable products (MVPs) with real customers to co-creating products with them. For B2B solutions, getting feedback from the first four to five customers is particularly valuable because it amplifies the customer voice in shaping the product by defining customer needs before the product is launched broadly.
The key point in enabling this more iterative and collaborative approach is to bring software engineers, data scientists, and designers into the ideation process from the very beginning. They are then on hand to not only get a much deeper appreciation of customer needs but also rapidly adjust the prototypes based on real customer feedback. These test-and-learn cycles can take as little as a day and should be driven by a “fail-fast” ethos.
The Washington Post Company embraced this co-creation approach when it decided to offer its proprietary content-management system, Arc XP, as a SaaS product. It first offered it for free to about ten universities, both to understand how they each wanted to use it and to determine what would be required to support it for each institution. As it learned how to support multitenant architectures and resolve customer issues, it started working with increasingly larger players, including Canada’s Globe and Mail, which committed to working with the Post’s developers to improve the product.1 The Arc XP platform now powers more than 1,900 sites around the world, reaching more than 1.5 billion unique users each month.
Would you like to learn more about our business-building practice, Leap by McKinsey?
2. Capitalize on existing digital and data assets
One of the biggest assets nontech incumbents have is their own data and digital tools. However, they are not always aware of this and, indeed, sometimes take quite a narrow view of the value potential in digital assets they own. A maker of construction equipment, for example, might see its data as merely an aid to internal reporting instead of as a proprietary asset that can generate significant revenue. An insurance company may send out ad hoc reports or analyses that could instead be enhanced, automated, and turned into a SaaS product.
This too-narrow focus is reflected in the fact that most nontech companies don’t have a clear and comprehensive view of their data. Some of it may be under the control of IT teams, while, in other cases, operations manages it. This is a missed opportunity. Top companies look across all their digital and data assets to identify those that aren’t readily available in the marketplace but meet a specific customer need. This review is a creative business process—not finding something that already exists but imagining something completely new—to identify possibilities and courses of action. In some cases, for example, it requires assessing data gaps and how to fill them by adding data from the outside, or implementing smart devices to generate the data that’s missing. The leadership of a data strategist and product manager is generally necessary to get to this level of sophistication.
Anheuser-Busch InBev (AB InBev) saw an opportunity to create a new SaaS business on the back of its existing millions of data points, from its logistics and distribution networks to its customers’ purchasing habits. It launched a B2B SaaS e-commerce platform called BEES, a partner portal that small and medium-size retailers can access by an app to do a range of tasks, from ordering products to tracking customer preferences locally to monitoring the delivery of their orders. BEES also uses machine learning based on customers’ previous interactions with AB InBev to provide personalized recommendations through “suggested order” features. Launched in 2020, the platform is live in 17 markets, with 2.7 million monthly active users as of Q1 2022.
3. Plan for scale from day one
While the digital nature of a SaaS product allows it to scale much more quickly than other products, that advantage can be captured only when companies put in place two key elements:
- A dynamic and detailed road map. SaaS product road maps differ from the typical road map in that they incorporate much more flexibility and rapid turnarounds. Tracking progress happens daily in many cases, with leaders reviewing what pivots, if any, are necessary and what to test next. This allows teams to course correct quickly and build momentum. SaaS product road maps also have explicit plans for feature innovation based on specific key performance indicators (KPIs), an important element for customers who want to know that the product they’re buying will not just be supported but will continually get better.
The road map should also explicitly lay out how to grow beyond the first five or ten customers, which are often existing relationships and might not provide a full representation of the larger marketplace. That means identifying multiple new customer segments, based on feature and functionality needs as well as their willingness to pay.
Johnson Controls has taken this approach with OpenBlue, the digital platform that it launched in 2020. The 137-year-old company created a road map that laid out a vision for launching a suite of connected solutions that enable services, including clean air, energy optimization, and advanced safety monitoring. By thoughtfully and deliberately sequencing the solutions it rolls out so that it can build on previously developed capabilities, the company has been able to expand the range of services it offers to customers.2 - Flexible technology architecture. For a SaaS product to be able to continually evolve and grow, companies need to put in place a technology architecture that scales. Human-capital-management software provider Workday focused from the beginning on separating out its platform development from its application development so it could scale. This allowed it to continue to iterate on applications even when it had to make changes at the platform level, enabling the business to grow and scale quickly.
This means building around microservices and APIs that create simple and well-defined interfaces to data, algorithms, and processes. This is what enables teams to quickly swap out features. Partnering with the right hyperscaler to take advantage of platform as a service (PaaS), including services such as data and AI, and infrastructure as a service (IaaS) is a critical component of scaling the infrastructure.
To take advantage of cloud, nontech companies must develop capabilities in “CloudOps” (cloud operations) to deliver, adjust, optimize, and manage the performance of workloads and services that run in the cloud. Incumbents will also need to master FinOps (financial operations) to track and manage consumption, storage, and network costs, which can vary significantly from on-premises models.
SaaS, open source, and serverless: A winning combination to build and scale new businesses
4. Target talent by going deeper and wider
Finding good SaaS talent is a well-known challenge, especially for critical roles such as product managers, software developers, and data scientists. There is simply not enough supply to keep up with accelerating demand, which is driven by competition from software companies and nontech companies going through digital transformations.
To better compete for talent, nontech incumbents can shift and expand their current talent sources. Getting involved with communities such as GitHub or open-source communities and arranging hackathons, for example, can attract different kinds of tech talent. Some companies have turned successfully to coding competitions to identify prospective job applicants.
Others are combining databases of talent information (such as those from colleges and career portals) and using analytics to help identify trends in skills to better anticipate needs. Still others are identifying relevant current employees for upskilling, while the most progressive firms are partnering with workforce-development companies to identify often overlooked workers who have aptitude and ambition but lack access to traditional pathways.
The other important factor in finding the right talent is to target traits, not just skills. Our research has shown that successful software developers are mission driven and have a passion to build things that end users want rather than just “work on platforms.” Nontech companies have found success by focusing on candidates with a deep interest in the company’s sector—healthcare, aerospace, or energy, for example—and the work the company does. This approach helps avoid direct competition with Silicon Valley businesses.
To make themselves more attractive to the best talent, companies need to update their employee value proposition to emphasize, for example, variable and tailored career paths, use of advanced cloud-based coding practices, and opportunities for people to build their skills and networks.
5. Orient pricing and selling around product usage
The ability to integrate tracking mechanisms at almost every feature level in a SaaS product allows companies to understand the value of a given feature based on how it’s used, which is a big difference from the typical product or service. With these insights, companies can then be much more targeted and flexible about pricing based on customers’ feature needs and usage—essentially, on how much the customer values that feature. That brings possibilities of subscription pricing, cost per use, cost by volume of usage, cost by time of day, cost based on value the customer captures, and so on. By the same token, companies can tailor or create SaaS product features to be responsive to customers, even easily testing and trialing them to see how customers actually respond. Some human-capital software providers, for example, tie their pricing to employee satisfaction or experience.
In this way, companies can be much more responsive to their customers’ actual needs while also opening up new revenue streams. In fact, leading SaaS businesses put as much attention into caring for existing customers as they do into acquiring new ones. For this reason, they also invest heavily in customer-success managers, who provide their customers with support throughout the entire sales process and help ensure a successful customer experience.
To support this more flexible model, companies need to train their sales reps to sell differently. Many sales reps are offered incentives to sell products, but compensation instead needs to be tied to actual software consumption by their customers. New training, product collateral, support, and digital-product demos need to be developed with a clear eye on customer preferences. McKinsey research indicates, for example, that eight in ten B2B decision makers say that omnichannel is as or more effective than traditional methods, which means salespeople need to know when to engage with customers directly and when to offer them digital options.
6. Protect the funding, and focus on leading growth metrics
Every new business needs dedicated funding. Companies tend to expect particularly fast results from SaaS businesses, however, and when they don’t materialize, the temptation is great to pull back funding. Patience and continued support are needed, which is why it is crucial to protect funding and tie it to performance.
Making this work requires companies to step away from some of their established capital-commitment yardsticks, which are usually focused on lagging indicators, such as margin and revenue. In SaaS, in order to avoid stifling the budding business line, it’s crucial to use growth-oriented leading indicators, such as number of interested partners, the volume of interested leads, and the success rates of concept tests. One of the most important metrics to track, in fact, is net retention.
Some companies have turned to external partners for capital and expertise. Besides helping to spread risk, this approach brings in an external voice with additional experience to push the SaaS business forward and guard against loss of focus.
Launching new SaaS businesses needs to become a priority for nontech incumbent companies looking for new sources of growth. Their existing capabilities, expertise, and position in their own markets give them a great head start. To succeed, however, incumbents need to understand and embrace the unique needs of SaaS products.
