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CASE: SM-219 DATE: 02/06/14 BASWARE IN 2013: TRANSITION TO SOFTWARE AS A SERVICE The technology transition is a complicated and difficult task, but the end is in sight. Changing people's mindset remains the largest obstacle. Basware CEO Esa Tihil INTRODUCTION In 2013 Basware CEO Esa Tihil was leading the 114 million company, originating in Finland, through a large and critical transition. Basware was the global leader in two complementary businesses. First, it was a software vendor for automated Purchase-to-Pay solutions for Businessto-Business (B2B), focusing on the Accounts Payable side. Second, it was an electronic invoicing (e-invoicing) operator through its open commerce network. Basware called this business \"Automation Services.\" As a software vendor, the company's products interacted with customers' existing systems such as enterprise resource planning (ERP) systems that integrated and managed information across an organization. Basware's software business historically had three parts: License Sales, Maintenance, and Professional Services (consulting). In the previous decade, the enterprise software industry had begun a major technological and business model shift. It was moving from selling perpetual licenses, in which the software was installed onsite, inside customers' firewalls and on customers' own servers, to selling Software as a Service (Saas). With SaaS the vendor stored a client's data in an external server or in the cloud, and serviced and maintained the software and relevant hardware. With license sales, customers paid hundreds of thousands of dollars upfront for software installation, whereas with SaaS, customers paid as they went based on usage. Basware was in the process of making SaaS available for its existing 2,000 Nordic and global license customers, while reaching out to new customers with the SaaS model. Tihil said that while the new roadmap was clear and the end was in sight, the transition from license to SaaS remained bumpy. Debra Schifrin and Professor Robert A. Burgelman prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 2014 by the Board of Trustees of the Leland Stanford Junior University. Publically available cases are distributed through Harvard Business Publishing at hbsp.harvard.edu and European Case Clearing House at ecch.com, please contact them to order copies and request permission to reproduce materials. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means -- electronic, mechanical, photocopying, recording, or otherwise -- without the permission of the Stanford Graduate School of Business. Every effort has been made to respect copyright and to contact copyright holders as appropriate. If you are a copyright holder and have concerns, please contact the Case Writing Office at cwo@gsb.stanford.edu or write to Case Writing Office, Stanford Graduate School of Business, Knight Management Center, 655 Knight Way, Stanford University, Stanford, CA 94305-5015. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 2 At the same time, Tihil was rapidly growing the Basware Commerce Network, through which the company automated transactions (e-invoicing, purchase orders, and product catalog messages) between 900,000 active suppliers and buyers in 100 countries. There were an estimated 63 million transactions in 2013, and the number of transactions was growing at a fast enough rate that Tihil targeted 150 million transactions by the end of 2015. The Automation Services business was growing at 50 percent a year in volume and revenue. Tihil believed speed was the name of the game in growing this commercial network, both because each transaction brought in money and because the network's size was Basware's competitive advantage. The shift to the SaaS model was critical for Basware. The company's software licensing and installation business had seen a sharp decline in the previous few years, and the company's profitability had dropped almost 40 percent in 2012. Because of the losses in revenue from declining licensing business, overall company growth was just 5.5 percent, despite the very fast growth of its other businesses. (See Exhibits 1 and 2 for Basware financial data and key figures and Exhibit 3 for Purchase-to-Pay overview.) A challenge for Basware was that since customers using SaaS paid for the software as they used it, revenue was divided over several years rather than all coming upfront, which had an immediate impact on the profit and loss statements (P&L). However, Tihil said the recurring revenue model created a longer-lasting, closer, and more lucrative relationship with customers in the longer term. Basware was also introducing a new generation software solution called Alusta, a cloud-based platform for business-to-business transaction collaboration. Alusta was created from the ground up to optimize SaaS offerings. Basware was trying to get existing customers to switch to Alusta and sell the technology to new clients. However, launching Alusta was proving more expensive and time consuming than management had expected. All these changes constituted not only a strategy shift but a culture shift as well. The sales force had to be retrained, and a new incentive structure needed to be created. Also, Basware began monitoring its operations more closely and switching some employees' focus, which met with some internal resistance. Tihil had spearheaded many of Basware's changes and had a clear agenda for the company's future. Basware was already the leading e-invoicing operator in Finland and the rest of the Nordic region, Germany, and the Benelux countries, and had presence elsewhere, but Tihil wanted the company to become a global leader. To achieve this goal, Tihil invested in growth, moved from a geographic model to a functional model, and standardized Basware's offerings. He also wanted to maximize Basware's transaction volume, and connect as many suppliers and buyers to the Basware Commerce Network as possible. In addition, he wanted to increase future profitability through smart investments, and complete the transition from onsite licensing to SaaS and the cloud. (See Exhibit 4 for Basware Strategic Direction.) BASWARE HISTORY Basware was founded in 1985 as a technology consulting company called Baltic Accounting Systems (BAS), and its main activities were supplying mainframe-based software systems from the U.S. to Finnish companies and building financial planning systems. In 1990, five members of This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 3 the management team bought the company,1 after which Basware went through an important change in strategy and function. (See Exhibit 5 for timeline of Basware's major milestones.) Matti Copeland, senior vice president for strategy, said the legend was that during the summer of 1997 Basware was running out of projects, so it began reaching out to clients and asking if they had anything for Basware to work on. Some of the corporate executives with whom Basware had been working were returning from vacations and had huge piles of invoices on their desks to be approved. And they said to Basware \"Can you come up with some software that would automate this process?\" And that led to the thinking within Basware about how that would work and how that process could be done. And that was the birth of Basware as it is now. 2 In 1998, BAS came up with its first software in Invoice Processing (IP) and Accounts Payable Automation and renamed the company Basware. At that point, Basware turned from mostly a consulting company into a software company and launched functions such as support and development. In 2000 Basware was listed on NASDAQ OMX Helsinki Ltd. It was one of the most successful initial public offerings (IPOs) in Finnish history. In 2002 Basware began its e-invoicing business, and in 2004 the company launched its Procurement Management (PM) system to complement the Invoice Automation software (software used in Accounts Payable Automation.) A year later, Basware launched its full Purchase-to-Pay solution. Basware hit a big milestone in 2010 when it broke 100 million in revenues. As the company grew in revenue and personnel, there remained a strong owner's voice, as the five founders still owned a large part of the company and some served as board members. Tihil, who became CEO in 2011, was the first CEO who was not a founder. BASWARE'S ENTERPRISE SOFTWARE PRODUCTS Enterprise Resource Planning (ERP) Industry Overview ERP products were giant pieces of software that tied together and supported a wide range of internal business processes, including those important to Basware: procurement, invoicing, spend tracking, and other accounts payable (AP) and accounts receivable (AR) functions. Worldwide revenue for ERP was $42.5 billion in 2012, a growth rate of 4.6 percent over 2011, which had been a 11.3 percent growth over 2010. According to global market intelligence firm IDC, the market was forecast to grow to $57.6 billion by 2017.3 1 The five members of the management team who bought the company: Kirsi Erkangas, Antti Pllnen, Sakari Perttunen, Ilkka Sihvo, and Hannu Vaajoensuu. 2 All quotes are from interviews with case authors unless otherwise noted. 3 IDC Competitive Analysis, \"Worldwide Enterprise Management Applications 2012 Vendor Shares,\" July 13, 2013. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 4 The top five ERP vendors based on revenue were SAP, Oracle, Microsoft, Infor, and Sage. They accounted for 39 percent of the market, and there were predictions of further consolidation within the industry. SAP had the largest market share at about 17 percent, with revenues of $7.3 billion and a growth rate of 2 percent. Oracle had 10 percent market share with about $4.35 billion in revenues and an over 8 percent growth rate. Next were Microsoft (5.4 percent), Infor (3.2 percent) and Sage (3 percent). Some small ERP vendors were growing much faster than the market leaders. Those included Workday, which grew 117 percent in 2012 (to 0.4 percent of the market), Workforce Software, Ventyx, and NetSuite.4 ERP products were critical for businesses, but there were downsides to traditional ERP systemsthey were rigid, expensive and had to be constantly updated at the expense of the company. According to Copeland, \"In ERPs you will find both the AR and AP modules, but the ERP is not addressing the detailed needs of clients, and that is what has resulted in the market being able to accept and let the best of breed in AR or in AP (Basware) find a place in the market.\" Basware's Accounts Payable Automation Basware's Accounts Payable Automation provided a more intelligent, streamlined, speedy, and efficient way for customers to handle invoices. The software included an advanced matching solution that automatically associated, validated, and approved a buyer's invoices against purchase orders and payment plans. It also automated time-consuming manual processes such as invoice coding, workflow, review, and approval. Basware's small, medium, and some large customers used automation software with fewer features, and Basware made it easy to add functionalities as the customer's business grew. Basware's largest customers required very tailored Enterprise Solutions, and Basware designed custom solutions for them. Although some automation services could be done with paper invoices, once a company shifted to e-invoicing it could take advantage of a much higher level of Basware's automation offerings. (See Exhibit 6 for Automation steps and Exhibit 7 for customer cost savings.) Basware's e-Procurement Basware also offered e-Procurement solutions for a company's purchasing process. Basware's eprocurement was designed with the end-user in mind; by putting products from approved catalogs side-by-side, employees could more easily make comparisons and find the best products. There was also a robust analytics component, which allowed management to track spending against budgets, ensure compliance, and manage supplier performance in real time. It gave immediate visibility over all invoice spend by category, supplier, organization, and geography. E-Procurement was a newer offering from Basware. The European market had focused less on e-procurement and more on accounts payable. This was in contrast to U.S.-based companies, which were more advanced on e-procurement offerings. The U.S. e-procurement market had revenues 100 times larger than Europe's. 4 Louis Columbus, \"2013 ERP Market Share Update: SAP Solidifies Market Leadership,\" Forbes, May 12, 2013, http://www.forbes.com/sites/louiscolumbus/2013/05/12/2013-erp-market-share-update-sap-solidifies-marketleadership/. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 5 Basware's Purchase-to-Pay Basware Purchase-to-Pay (P2P) services were designed to provide control and visibility over the entire transaction lifecyclefrom how an item was ordered to the way the final invoice was processed. Beyond e-invoicing and automation, Basware's P2P services helped buyers ensure the best value sourcing of products and services, negotiate and manage contracts with suppliers, ensure compliant purchasing of all products and services, implement proactive payment strategies to capture discounts, and continuously improve financial process performance through Key Performance Indicators (KPI) analysis. (See Exhibit 8 for benefits across functions.) Basware's P2P offering was delivered by two pieces of software: Procurement Management (PM) and Invoice Processing (IP). Management said having two separate pieces of software was not ideal, but the new technology Alusta would package both into one. (See later section on Alusta). BASWARE AS E-INVOICE OPERATOR (AUTOMATION SERVICES) The bulk of Basware's Automation Services business was e-invoicing transactions made through the Basware Commerce Network. In 2012, for the first time, Automation Services revenues were larger than the company's licensed sales business and represented 21 percent of the company's revenues. While Basware's other two businesses (the Maintenance and Professional Services businesses) were still the largest in terms of revenue, top management said that Automation Services became the most important business because it was the future of the company. (See Exhibit 2 for net sales by business operations.) E-invoicing Basware's e-invoicing service allowed companies to send and receive invoices electronically over Basware Commerce Network. Invoices went directly into a company's invoice processing or ERP systems. Basware's e-invoicing system also handled data validation, format conversion, legal compliance, and digital signature verification. It was designed to eliminate costly and time consuming paper-based invoice processes that were prone to human error. Basware said that each invoice that was sent electronically instead of with a paper-based process created a cost savings of up to 80 percent. The company acted as an intermediary and blocked invoices where there was a discrepancy between the required standards or fields in the invoice. Basware sent those invoices back to suppliers with a note that said they were missing a field or a reference number did not match the buyer's number, etc. Basware focused on the Accounts Payable side and provided its clients multiple ways to receive invoices from suppliers. Suppliers could send invoices directly through their billing system through Basware Commerce Network, via e-mail, by sending or scanning them to a Basware facility, by printing them directly to Basware, or by using Basware's Supplier Portal. Basware then delivered the e-invoices to clients in their preferred format. (See Exhibit 9 for further explanation of Basware's e-invoice transmission options.) This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 6 Automation Services History In 2002 Basware began its e-invoicing business, but Tihil said the company did yet understand how e-invoicing fit into its business context. A turning point came in 2008 when management learned that one of their global customers, Heineken, had been able to automate over 90 percent of its 500,000 annual invoices by using Basware's matching tools together with providing their suppliers with exact purchase orders in electronic form and requesting them to send back electronic invoices against all deliveries. Tihil said, \"Then we understood its critical importance and said, 'Hey - this is the answer to our daydreams, this is the way we can get to the high level of automation.'\" Tihil saw that not only would using e-invoicing make Basware's software work much better, but also every transaction that went through Basware Commerce Network could generate revenue for the company, and it was recurring revenue. He said, \"Then the race started. We knew that every missed opportunity is a lost opportunity forever. And that was the starting point of automation service.\" Tihil, who founded Basware's Automation Services, said the business was small at the beginning, \"but then began to grow nicely. And then we realized that this was the future of the company.\" But the company almost divested the e-invoicing business in 2008. Its management at the time saw Basware as a software business and thought e-invoicing did not belong in its future. According to Tihil, \"The business was very small and not very attractive, and we had some trouble with that solution at the time. We were selling our e-invoice offering, but buyers didn't want to pay very much for it, and we felt that they should.\" However, Basware listened to the strong favorable customer feedback it received about the benefits of its e-invoicing offering and the increased level of accounts payable automation that it enabled. That feedback, coupled with the major business opportunity that acting as operator could bring, convinced management not to divest the business. Growing Basware Commerce NetworkOpen Network Approach In 2013 Basware was the largest independent business commerce network in the world. It was open in nature, meaning it was possible for Basware customers to interact with companies that were connected to another service providers' network via an interconnection arrangement between the operators. (It was much like the roaming service used from one cell phone network to another.) An innovation spearheaded by Tihil and his team was making the network independent from any particular AR or AP software but also independent on the e-invoicing service provider, so it was not Basware specific. In doing so, Basware made its network available to everyone regardless of what software or ERP they used or which operator the customer used to send out the invoices. This made it possible for Basware to grow the business beyond its own 2,000 software clients to those clients that might not use Basware software but that wanted to send or receive invoices electronically. Indeed many companies used Basware's network but did not use its software, allowing the e-invoicing business to grow to 900,000 active users. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 7 Basware's main rival Ariba, a major SaaS provider of supply chain software acquired by SAP in 2012, had adopted a closed network approach. (See Exhibits 10 and 11 for Ariba and SAP financial data.) This meant that Ariba's P2P customers needed all their suppliers to also join the Ariba network in order to send them e-transactions. While Basware had been successful in deploying its open network strategy, the ecosystem lock-in created by Ariba had been a powerful deterrent for certain Ariba customers to consider alternatives. Basware netted an average of just under 0.40 per transaction on its network. In 2013 most of the transactions were e-invoicing, but in the future the company wanted to transition to increasing other types of Purchase-to-Pay transactions as well (such as purchase orders, payment notification, and shipment documents). Tihil said if everything was functioning properly and the infrastructure was good, Basware could add more transactions without adding any cost: We realized that this is the opportunity for a gold mine and that we have to go for it. If and when this is profitable enough and we have enough critical mass of transactions in it, then it starts to generate profit at a different speed than it is doing today. So this is the beauty of this. And now you have to drive the engine toward higher transaction numbers as quickly as possible. However, Tihil said there was a debate among board members about whether to focus on value, dividends, quick growth, or short-term profit. So, Tihil had to do a balancing act; he knew good profit margins were important, and so the growth investments had to be made in service of that goal. Intersection of Software and E-invoicing Although the software and e-invoicing businesses were two separate businesses, they were very synergistic. The more customers moved from paper to e-invoicing, the more they would be able to use the full functionality of Basware's accounts payable automation services. Having both businesses was a competitive advantage for Basware over companies that had only software or only network offerings. BASWARE'S TRANSITION TO SOFTWARE AS A SERVICE Evolution of ERP from License to SaaS and the Cloud Salesforce.com, which went public in 2004, made the first major foray into Software as a Service (SaaS), which was a game changer for companies offering enterprise software deployment. In 2013, SaaS made up 12 percent of the ERP market share (by revenue), and by some estimates it was projected to grow to 17 percent by 2017.5 Other estimates put it as high as 20 percent by 2016.6 While this was not yet breakout growth, in certain areas the trend of SaaS cannibalization of on-premise enterprise applications was especially prominent. Information technology research 5 Louis Columbus, \"2013 ERP Market Share Update: SAP Solidifies Market Leadership,\" Forbes, May 12, 2013, http://www.forbes.com/sites/louiscolumbus/2013/05/12/2013-erp-market-share-update-sap-solidifies-marketleadership/. 6 Gartner Market Trends: SaaS Varied Levels of Cannibalization to On-Premise Applications, October 29, 2012. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 8 company Gartner predicted that SaaS-based Customer Relationship Management (CRM) would increase from 39 percent in 2012 to 48 percent in 2016.7 A Gartner survey showed that the primary reasons enterprises were considering SaaS adoption were: they perceived a lower Total Cost of Ownership (TCO) than on-premise solutions; they considered SaaS to be easier and/or faster to deploy than on-premise solutions; and they saw SaaS as the best option for regional deployment.8 But many in the industry were finding the transition difficult, including ERP software incumbent players like SAP and Oracle that had turned to acquisitions for SaaS solutions. For example, SAP spent $4.3 billion to buy Basware rival Ariba in mid-2012. Cloud Computing Cloud computing allowed customers to move away from local servers and use a network of remote servers hosted on the internet to store, manage, and process data. Leading cloud computing companies included Amazon, IBM, Hewlett Packard, Microsoft and VMware. There were three types of cloud computing: Infrastructure as a Service (IaaS), where customers rented use of server space from cloud providers such as Amazon or AT&T; Platform as a Service (PaaS), where customers also rented the necessary system software; and Software as a Service (SaaS), where customers additionally rented application software and databases. Gartner estimated the cloud computing market to be $131 billion in 2013.9 (However, cloud computing market size figures varied widely based on how exactly cloud computing was defined, for example whether it included related hardware, software, and IT services to build cloud infrastructure.) Basware's SaaS transition Traditionally, the majority of Basware's business had consisted of software license sales, and the accompanying maintenance and professional services (consulting) divisions. In 2013 on-premise installations and maintenance fees still contributed a significant part of Basware's revenues; there were not many customers that had left Basware for competitors. However, between 2011 and 2012 Basware saw a ten-fold increase in SaaS deals with the company's primary product line. By the third quarter of 2013, SaaS made up 40 percent of all Basware's ERP software sales. Tihil said that the transformation from a software company to a services company was profound and required Basware to change its business model and operations. This transformation also required changes in all of the different functions (Marketing, Sales, Product Development, Delivery, Customer Support, and Administrative functions). In the beginning of the industry transition to SaaS, there was generally a hosted server that was just for one customer. Data was sensitive for many customers, who did not jump into SaaS 7 Ibid. Louis Columbus, \"SaaS Adoption Accelerates, Goes Global in the Enterprise,\" Forbes, October 31, 2012, http://www.forbes.com/sites/louiscolumbus/2012/10/31/saas-adoption-accelerates-goes-global-in-the-enterprise. 9 \"Gartner Says Worldwide Pubic Cloud Services Market to Total $131 Billion,\" Gartner, February 28, 2013, http://www.gartner.comewsroom/id/2352816 (accessed November 8, 2013). 8 This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 9 instantly because they had security concerns about going into a pure SaaS database where other companies had their data. Therefore, most vendors had neither a pure cloud nor pure SaaS offering. Tihil felt strongly that Basware's transition from software licensing to Software as a Service was the correct strategy for the future, and the revenues gained in the new areas had shown that to be correct. But Tihil also found that the transition was slower and harder than he and other senior managers had anticipated. According to Chairman of the Board Hannu Vaajoensuu, after the transition Basware would have the most powerful and advanced software in this area, so the company had a good foundation to become very successful and meet its own strategic objectives. But he agreed with Tihil that Basware had challenges in the transition that made it much slower than anticipated: \"We were too optimistic and unrealistic. We wanted to believe that it would be easier and faster. So our expectations were at the wrong level when we started the transition two years ago.\" He added that there were some unpleasant internal surprises in Basware's product development and some other smaller things that had a large impact. Basware was seeing the transition challenges reflected in the company's financial performance. When the company began the transition, management thought it would take 12 months, and its growth and profits would go down only for that amount of time. But after that first 12 months the company was still struggling with its profit and organic growth, which were both below market expectations. In response, the company had to cut some costs, but needed to balance that so it did not impede the company's competitiveness and the pace of growth that top management felt was necessary. According to board member Anssi Vanjoki, most of the pressure from analysts did not come from whether the strategy was right or wrong, but from the speed of transition: \"They are kind of right in blaming the fact that the transformation is not quite in control.\" He added that the transition and the transformation of the skill set and approachranging from research and development (R&D) to saleswas also more difficult than management had anticipated. They realized it would require some tougher measures, as well as tighter management and investment to make that transformation happen. He added that to some extent the transition would mean replacing some people: \"The tolerance for waiting for somebody to be able to convert should not be that long. If you draw the conclusion that somebody is not going to turn, then it may be that he is a good guy in the wrong place. So there has been some new blood that has been brought in, but that needs to be accelerated.\" Lastly, with the transformation, Basware had to make sure it had a balance sheet that was strong enough to make acquisitions and ensure that the company's cash flow continued to be positive in a way that it was fueling the transformation. According to Vanjoki: Basware started this transformation from a strong position. The acquisitions we have made have brought in new business, but they have also consumed the balance sheet. And since they have not been performing quite to the expectation we had in the beginning, there is also a cash flow implication. These kind of things need to be put high on the agenda if you are serious about transformation. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 10 Basware's valuation was $350 million in 2013, but Tihil believed the real valuation could be much higher in a few years if the transition was successfully completed. But as a publicly listed company, this transition also put Basware in a position where it needed to simultaneously manage both the internal and external stakeholders carefully throughout the change process. Alusta: Basware's New Platform Simultaneous to building up its SaaS business, in 2012 Basware launched a new generation platform called Alusta, which was optimized for SaaS. Basware's earlier generation of products was almost 20 years old. Alusta was Basware's way of confirming to the market that it was serious about SaaS; building Alusta involved rewriting the entire software code. With migration to Alusta, Basware's 2,000 software customers would have the choice of on-premise installation or SaaS, and in the early phase of SaaS some customers wanted a combination of both. By launching Alusta, the company had two different transitions underway at the same time: Migrating from software products to services (a business model change), and taking the old generation of software to the new Alusta (a technology change). Tihil said that technological transformation was critical and the end goal was in sight, but making the change was an enormous task. Alusta brought in a new set of Basware cloud-based Purchase-to-Pay (P2P) software that was more like being on web-based technologies. It also packaged Basware's two P2P softwares procurement management (PM) and invoice processing (IP) - into one to provide full P2P functionality. The platform included some unique features that made it the first of its kind to enable open collaborative commerce for a wide range of businesses. Those features included neutral network connectivity, total visibility from a single platform, mobility, real-time social collaboration, multi-tenant SaaS packages, and process-as-a-service. (See Exhibit 12 for further explanation of Alusta features.) But Basware had to do a balancing act between the old and the new. The new technology did not automatically support all the functions that Basware had been building up in the previous product, but it did certain functions much better than the old generation. On the sales side Alusta created a complicated situation because Basware offered two options during the transition period. The older application was very robust and functional, while the new one had an excellent interface and user experience but was unfinished. Basware management said it was impossible to completely test the first version of a software project of that size internally, so it had to install it and start using in it productionknowing it would take a year to have a very solid and highquality software product. Basware was ramping up the new product line; in 2012 it signed about 25 deals with customers wanting Alusta, but that was still a small fraction of entire customer deals. The company expected that number to increase considerably in 2013. In addition to seeking new customers, Basware envisioned converting many of its 2,000 existing clients to Alusta over the next two years. Copeland said Basware had a roadmap ahead of it, which kept the company to a certain extent in some transformation phase until the full roadmap was released in the first quarter of 2014: This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 11 \"Unfortunately it is a long journey, but we honor our thinking that we want to have the next generation software, which from the beginning would be a product leader in functionality.\" Vanjoki said that on the R&D side, resources for other projects were being put on hold because of Alusta: There is no release of resources until you hit the milestones. And obviously there has been a fairly big miscalculation about how much work is necessary to complete the Alusta platform, which when it is complete will allow much better resource fluidity into the new areas. So these resources are tied up in getting the old base into the new platform. He added that the traditional business was still significant, so Basware had to manage the resources between the old and the new. In 2012, Basware's R&D expenses were about 18 million, which equaled around 16 percent of net sales. Largely driven by Alusta's development, those expenses increased by 8.5 percent over the previous year. Three hundred and fifty employees worked on Alusta162 of whom were based in India. Cultural Change Challenges Tihil said with the technological transformation nearly completed, it was employees' attitudes and actions that were still his major concern: The technology transition is a complicated and difficult task, but that's only half of the picture. That transition will be mostly done at the end of 2013, and the essential parts of the software already are transformed to the new technology and new ways of doing things. So I don't worry about that. But the people's minds and behaviors are still my concern. Changing people's mindset remains the largest obstacle. He added that the company began conducting daily or weekly reviewing and monitoring, which was a big change for employees: People feel that big brother is watching them. So we are doing education about being punctual and decisive and escalating issues proactively instead of waiting for someone to wake up and see it. We want employees to ask, \"Am I the victim of the organizational change, or am I the solution for the challenges we are facing?\" Basware ran different kinds of transformation programs for management and middle management. Training included subjects such as understanding how to handle various situations, make decisions, and comprehend and seize challenges and opportunities within the organization. Tihil said: This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 12 There are managerial activities that are more monitoring and reviewing things and making sure that we are reacting on the weak signs, whatever they are. But then there are the behavioral leadership activities as well, trying to encourage people, empower people to make decisions, take a lead, and make the decisions by themselves, giving more authority for them also in terms of the operation. Basware's management said that in many ways it was easier to develop software than a service that was based on software. This type of development required a different skill set, including sales, but Basware had the same sales force in place. Tihil said for selling SaaS, \"The mindset is 'I'm in the business to advise you [the client]. This is the way you need to do it.' But at Basware, people's minds were not there.\" Basware historically had been very flexible with customer requirements, but the company was trying to move to a mode that had a much more standardized packaged offering. Then Basware tried to sell the products in higher volume to get to scale, but still wanted to be able to cater to the customers' needs. This put heavy pressure on the sales people to convince companies to accept this model, which for long-time sales people required a lot of legwork and training. Basware also had to design a new incentive structure for its sales force that aligned with the SaaS business. The company had to determine how to give commissions if the customers only paid for what was usedmeaning Basware did not know how much revenue would come in from a new customer. According to Copeland: When sales people are expected to deliver a much larger quantity of transactions per year than previously, the way they think about their own incentives and the way we need to incentivize them is different. If a sales person was driven to bringing on two or three very large license deals per year, if we move the customers to start to take that on a SaaS basis, then you get into discussions about what the basis is for paying commissions. Is it the annual revenue? Is it the total cost of transaction or the contract? COMPETITIVE DYNAMICS IN 2013 Basware had direct and indirect competition in both its e-invoicing and software businesses. ERP Software Competition Basware's biggest ERP software competitor was SAP-acquired Ariba, which was the number one player on the purchasing side and the biggest standalone player. Ariba had similar types of offerings as Basware: workflow invoice handling and P2P processes. (Ariba also competed with Basware on the e-invoicing sidesee later section for details). Oracle was also a big player in the ERP software space, but neither SAP nor Oracle had focused on the kind of offerings Basware provided, rather it was more of a side business for them, and Basware management said its customers saw Basware as best of breed. A competitive advantage for Basware was that SAP and Oracle had a huge installed base and had built a lot of tailor-made systems for customers, so making the transition to SaaS and standardizing its offerings could present a challenge. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 13 However, SAP had enormous resources, so if it decided to build up something larger in the ERP software area, it could be a direct threat to Basware. Basware was also engaged in a brand game; in Europe Basware was relatively well known, but it was unclear how big a proportion of CFOs worldwide would recognize the Basware name. Competition could also arise if a company like India-based Infosys,10 or another information services company that provided a wide variety of service offerings, decided to throw in services similar to Basware's for free. E-invoicing Competition Basware executives said the company's biggest e-invoice competitor was indirectpaper and traditional methods that companies used for the relevant tasks. Given that the e-invoicing market was still in its infancy in many ways, Basware management wanted to concentrate on growing faster than the market and executing well, rather than focusing on the competition. But of course Basware had direct competitors. Tihil said he knew the competition well because he was the first chairman of the European E-Invoicing Service Providers Association (EESPA), and he knew all Basware's main competitors' CEOs and met with them on a regular basis. All EESPA members were competitors, but in the spirit of open network were also partners via interoperability agreements. Basware's main e-invoicing competitors were Tungsten and the many postal services that had business units in electronic document exchange. Tungsten was an investment vehicle founded in 2012 that consisted of London-based OB10's e-invoice network, which connected 122 large corporate and government buyers and 140,000 suppliers, a U.K. bank, and a five-year license of analytic software technology. Tungsten's business model was to create a cloud-based trading network with banking capabilities, through which it could offer invoice discounting to suppliers on the OB10 network against approved e-invoicing. Tungsten was floated on the London AIM stock exchange in October 2013 and raised gross proceeds of 225 million.11 The IPO was oversubscribed with strong demand from institutional investors. Also, many ERP vendors that were software competitors were also moving into network operations. For example, SAP purchased Ariba to serve as its network. The companies Coupa and Concur were good examples of SaaS software vendors that were talking about moving into operating networks in connection with software offerings. But Basware believed it had a competitive advantage because it had been building its global invoice network for 10 years, and that it would be hard for competitors to quickly build a similar network. TARGETING GLOBAL GROWTH One of Basware's main goals was global growth in both the software and e-invoicing businesses. To achieve this goal, Basware needed to make investments in growth and make changes in its 10 See Stanford Graduate School of Business case, \"Infosys Consulting in 2011,\" SM-195. Authored by Debra Schifrin and Professor Robert A. Burgelman. 11 Tungsten website, http://www.tungstencorporationplc.com/content/history-and-background. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 14 strategy and business model. In 2011 the majority of Basware's business still came from the Nordic region. In order to solidify its position as the largest business commerce network in the world and become a truly global company, Basware needed to expand its international business, especially in Western Europe and the United States. (See Exhibit 13 for net sales by location and Exhibit 14 for geographical division of personnel.) Its strategy for driving global growth fell into three buckets: buy, build, or partner. Basware divided the world market into three tiers. In doing so, it was able to clearly define the five geographical areas where it wanted to put the strongest foot forward. The first tier areas were: the U.S., U.K., Benelux, Germany, and Sweden. The second tier included Australia, Denmark, France, Finland, and Norway. The third tier would be places where the company did not have operations including Southern and Eastern Europe, Russia, India, and China. Basware management knew that it would have been impossible to jump into all countries at once because the company's idea had to be sold to various markets, all of which were at different technology stages. For example, Basware management realized that expanding into France in 1999 or 2000 was too early, but in 2002 it saw that it was the right time to step in because the country's technology had matured. Educating a new market was also critical. For example, when Basware went into Sweden, one of its tier one countries, it had to start from scratch, which surprised the company. Basware had to educate the market and sell the idea of something new to what it saw as \"rather conservative financial people who have everything under control and their processes are fine.\" This education process took more time than Basware expected. The company looked at its success in Finland and thought that when it went into Sweden the company would skyrocket right away. Basware traditionally had a strong direct sales force in Finland and so was able to cater to the smaller enterprise segment in addition to larger companies. However, that was not the case in other markets, where the company had a smaller sales force. Therefore, the company size of clients abroad tended to be larger than in Finland. When it entered a new country, Basware discounted its pricing very heavily, realizing that it had to get three to five first customers where price would not be the issue before beginning to sell its products at full value. Re-organizing for Global Software Growth In the software license business, Basware operated on a country model. Each Basware country organization had a degree of autonomy and responsibility for the country's P&L. Coordination with the rest of Basware's country units was often not necessary. But in the service business, Basware had a global infrastructure, and to take advantage of that the company had to behave the same way everywhere. A standardized and controlled approach for implementing systems in the production was critical, so Basware was not dependent on an individual or country unit. Therefore, Basware changed to a global functional organization; Marketing, Sales, Implementation and Customer Support were run globally for every country. This allowed the company to be more scalable. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 15 While there were upsides of the country model, in that each country unit could provide more intimate service for customers, Tihil felt that with a global model Basware was able to provide more standard, expected and auditable quality for its services. But he added that this change met with some resistance within the company, as responsibilities changed for some country level managers. Middle managers felt that they had big been bosses, but were now much smaller bosses as the number of their direct reports dropped from say 50 to 4. But we don't believe this perspective is true. The growth opportunity is huge and a sense of urgency is needed to go after those opportunities, and not just optimize a group's happy family approach and the certain number of customers that it has. There are plenty of opportunities outside of it. Global Growth in Automation Services (e-invoicing) Strategic Acquisitions To help reach its growth goals in the e-invoicing space, Copeland, who ran the acquisition activities for Basware, said the company had a strong emphasis on acquisitions. Between 2005 and 2012, Basware made five acquisitions.12 Then between mid-2012 and mid-2013 Basware acquired two major network providers in Germany and Belgium and planned to acquire one or two more similar network operators in the near- to medium-term. Basware had been consolidating the e-invoicing network in the European market, and wanted to further that consolidation. Basware's focus was on being a very targeted serial acquirer to achieve consolidation in the space, rather than doing one huge single acquisition. Basware's 2012 and 2013 acquisitions and the related goodwill that it held on its balance sheet was substantial: 40 million of its 130 million balance sheet value. (See Exhibit 1 for Basware's financial statements.) Consolidating the European e-invoice operators' space differentiated the company as the largest network and operator. Copeland said, \"This pulled both the suppliers and buyers toward us. The market is offering a very logical road for us to act as a consolidator because we are probably one of the few companies in the European space that has the financial resources to do that.\" The first criteria Basware applied for its acquisitions included strategic fit, which led it to do deals in important geographies such as Germany and Benelux. Second was looking at which companies would add transaction volume and growth, and Basware looked into how many suppliers and buyers would be connected to any acquisitions target. Third, it looked at a target's technology, although Basware was likely to quickly convert it to its own technology. Fourth, it looked at the business model. Lastly, it looked at whether there was a cultural fitwhether the target company wanted to be part of a larger establishment. Basware's 12.2 million acquisition of the German company First Businesspost GmbH in January 2012 made Basware the largest e-invoicing company in Germany, a key market. The 12 Analyste (FIN), Digital Vision (UK), Contempus (NOR), Itella's Invoice Automation Solution Business (NOR), and TAG Services (AUS). This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 16 German company was the champion in terms of connecting tier two and tier three suppliers on behalf of the automotive industry. (Tier three companies supply tier two companies, which supply tier one companies, which directly supply the auto manufacturers.) Its clients included all the major German car manufacturers. Copeland said the German operation also had a very good product innovation: \"Virtual Printing\" for the lower end of e-invoicing; it enabled suppliers to print their invoices virtually directly to Basware. It was a good product for Basware's clients that were fairly small companies. (See Exhibit 9 for further explanation of Virtual Printer.) In January 2013, Basware acquired Certipost, a Belgium operator, from that country's post office for 18.2 million in cash. Certipost had established a way of working with large suppliers of einvoice senders. While Basware had a very large number of customers who had been utilizing its Purchase-to-Pay software on the receiving side of the invoices, Certipost had a large number of customers sending hundreds or thousands of invoices a year. This was an area that Basware had fairly little knowledge in. With that acquisition, Basware become the largest e-invoice operator in Benelux, another key market. But as mentioned earlier, some of these acquisitions were not performing as well as had been expected, and Vanjoki said problems came up because the integration was more difficult than Basware had foreseen, and there were some items that did not come to surface before integration. According to board member Pentti Heikkinen, these acquisitions were still fairly small \"and we have seen some misuse already, causing delays and putting Basware behind in its original business plan. We needed to materialize the synergies quickly, which we did not do in some areas.\" He added that Basware needed to be stronger in the acquisition area for it to penetrate the U.S. market and those markets where purchase-to-pay had a more important role than in Europe. In the U.S. market especially, Ariba was a competitive consolidator. Scaling Benefits and Challenges By using its global infrastructure, Basware was able to improve its profit margin per transaction. Tihil said that without doing this there was a high probability that costs would develop parallel to revenue increases, and the company would not gain anything out of its global growth. He said to achieve the level and speed of growth it needed, Basware had to consolidate businesses into the same model (or close to each other). He gave the example of the auto manufacturers that Basware worked with, who expected the company's service to be the same everywhere in the world. However, according to co-founder and board vice chairman Ilkka Sihvo, when the machinery itself and the operation were scaling very efficiently, the company had to constantly invest in the sales side. \"When we get a customer we will contact all of its suppliers and try to connect them to the network. So it is somewhat targeted, but it is one of the problems at the moment. How can we utilize various ways to force the market without investing into personnel all the time?\" Sihvo added that Basware could put the sales force into the free market selling e-invoicing, but that would drain all the profits that the company gained: \"So it is a zero sum game if you do it like that. We have to solve the market sales with the modern technology.\" Connecting Small and Medium Enterprises (SME) In order to be able to create a truly global marketplace for both buyers and suppliers, Basware needed to connect hundreds of thousands of SMEs into its network over the next few years. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 17 Historically, large corporations with a substantial volume of paper-based transactions to convert favored electronic transactions. Therefore, Basware tended to activate large companies first because SMEs traditionally had little incentive to convert their paper based processes to etransactions. Basware also had experienced problems selling to medium-sized companies because Basware offerings were expensive to use and run. In addition, those companies had to get the content from suppliers, many of which did not have e-invoicing capabilities. Some smaller suppliers found that e-invoicing was not worth doing because they only sent invoices a few times a year. Due to the focus on larger enterprises, the market leaders were best equipped to service these segments, with little focus on SMEs in either the sales approach or the offering. The SME segments typically had been serviced by local companies and increasingly by start-ups focusing exclusively on the SME space. Partners Basware started to look into working with partners to help it achieve global growth. Basware initially struggled with making the international partner sales channel model work (compared to its direct sales efforts) in newly opened countries. Between 2000 and 2006 Basware did not have very many successful partners; it did not have an early market window or the technology success it had elsewhere. The company found that having three to five partners and one of Basware's own sales subsidiaries in a country painted a false picture of Basware's strength in that market, and the company lost a year or two in some geographies because it thought that everything was going well. One major problem Basware identified was that partners did not invest enough in marketing and training their salespeople and consultants. Gradually this improved as Basware gained reference customers and Basware's brand became more visible. The company's goal was to find a model where partners could embed Basware's e-invoicing service as part of their total solution. For example, in 2011 Basware partnered with MicrosFidelio in Finland, a company that provided leading enterprise-wide applications, services, and hardware for the hospitality and retail industries. Micros-Fidelio had a large installed base of customers all over the world, and its service processes generated many invoices. Through Basware's e-invoicing services, Micros-Fidelio could provide its customers, mostly hotel chains, with the ability to send all invoices to their customers from their Micros-Fidelio system in electronic form, leading to increased automation and savings. STRATEGIC CHALLENGES AND OPPORTUNITIES BEYOND 2013 Moving from Customized to Standardized packages Basware management knew the company could achieve better gains if it moved from mostly customized to standardized packages. Basware's sales cycle was typically long; it was not uncommon to have a four- to six-month process in order to get the offering fully productized. But with standardization, that speed was much faster. For example, with a client in the U.K., Basware was able to deploy the new platform in 30 days, which was an important sign that standardized offerings sped up development and gave Basware faster access to revenue. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 18 Basware's big volume deliveries were standardized, but it delivered a customized solution as well to a few very large customers, such as Siemens and ABB (Asea Brown Boveri), which Basware's management said could never be standardized. But Basware was targeting its existing customer base to move from tailored solutions to standardized offerings. According to CFO Mika Harjuaho: We try not to do tailored things, and that is a challenge with these companies when we say that we cannot tailor these to you because in the future we will have 10,000 similar customers, and we will run one service and provide that one similar service with one similar support process. So we are trying to tell the customers that it is beneficial to both parties not to start tweaking their contract models. But we are still on the journey here. That is one thing that can slow down the process. Managing the Risk of Commoditization Basware faced the risk of commoditization of its offerings, and there had already been a certain price erosion in the market as new entrants were actively coming into the market and using aggressive pricing or giving their services away for free to try to scale. However, one thing mitigating the threat of commoditization for Basware was that an invoice tended to be a strategic document, and companies were selective about whom to trust with their invoices. Basware had an advantage because it was the largest e-invoicing company and it had name recognition, and therefore could bring some pricing power its way. Big Data and Value Added Services Opportunities As the e-transactions moved more toward a commodity business, the value of business commerce networks would emerge from the massive amounts of data that Basware could extract and store from the transactions that flowed through its network. The value from this data could be captured both directly by charging for data access from third parties as well as in several indirect ways, for example via value-added services. This was a shift in value creation and commercial capabilities to find the right partnerships, business models, and value added services, which Basware saw as part of its future. BASWARE AND MASTERCARD PARTNERSHIP In late 2013, Basware partnered with MasterCard to create a new single global payment solution. The partnership connected Basware Commerce Network (which enabled e-invoicing services) with MasterCard's global payment network (which leveraged MasterCard's entire suite of payment products and its data and technology assets). Connecting these two networks sped up the entire payment process and created cost savings and efficiency for buyers and suppliers. In addition to benefits that Basware's e-invoicing offerings provided, the partnership would provide buyers with extended payment terms and easy, fast, and secure payments. Suppliers were ensured quick and guaranteed payments (in as little as two to three days after invoice approval). On top of that, both buyers and suppliers had lower costs for cross-border payments, lower risk, and better invoice tracking and reconciliation. (See Exhibit 15 for Basware and MasterCard partnership visual.) This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 19 CONCLUSION Basware was in the midst of enormous multidimensional change. Basware's Automation Services were growing at about 50 percent a year, the number of transactions were set to almost triple by 2015, and the company had a new technology that would help it speed up the transition from software licensing to SaaS. But profitability had taken a big hit in 2012, and the question was whether the company could complete its transition fast enough to reverse that trend. Tihil also had to convince his employees that the transition was the right strategy for the company and for them. Tihil said he was telling employees that it was okay to be the winner and the leader, and he was encouraging them to behave like the leaderto be humble, but also decisive: \"And we have nothing to be afraid of. We know we are good. We are better than the competition, and everything is dependent on our own actions. So what we do by ourselves is the most relevant thing here. Nothing else matters.\" He added that this was part of the company's overall transformation, saying: \"We have been kind of a small, friendly company, but this is not the case any longer. Some people do not want us to win any longer because we are a threat. We are dangerous competition for them. It is not just about the new skills and technology, it is also the mindset of our employees that it is okay to be the leader.\" These were the opportunities and challenges that faced Tihil as he looked toward 2014. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 20 Exhibit 1 Basware Financials Key Figures 2011-2012 Source: Basware 2012 annual report. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 21 Exhibit 1 (continued) Basware Financial Statements Balance Sheet In thousands of Euros Source: Basware 2012 annual report. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 22 Exhibit 1 (continued) Basware Financial Statements Balance Sheet In thousands of Euros Source: Basware 2012 annual report. This document is authorized for use only by Kirt Seale (Kirt.Seale@us.gt.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Basware: Transition to Software as a Service (SaaS) SM-219 p. 23 Exhibit 1 (continued) Basware Financial Statements Income Statement In thousands of Euros Source: Basware 2012 annual report. This document is authorized for use only by