How to Diligence the Risks of SaaS Scope Creep
GRAPH has diligenced many SaaS companies, and as we all witness there is a particular trend towards software companies seeking to build a “complete platform” stemming from an original best-in-breed point solution. In the quest to grow revenues, increase stickiness, drive value, and attract investment, companies are expanding their feature-sets. This scope-creep poses a very real risk of diluting the core value proposition of product – and creeping into scopes that compete poorly against core competencies of larger players.
As an example, we recently diligenced a SaaS company that had quickly established itself as the market leader in a relatively nascent, niche category. As they grew, they added on additional functionality and features, seemingly inadvertently creeping into a very competitive, saturated market where they had little right to win. On the surface, their strategy to add additional features/modules was sensible – it could theoretically increase the stickiness of their tool and grow the number of seat licenses needed for an organization. However, it became clear to us in speaking with customers that the company had diluted a previously clear product vision, demonstrating an under-appreciation for the reason customers chose them in the first place (as a best-in-breed point solution). Instead, the expansion was being driven by pressure as they took increasing rounds of investment to build new features – which coincided with an over-responsiveness to any and all customer feature requests. The sad irony is that the company spent considerable resources to develop this new module that then had to be substantially discounted by the acquiring company, which had no interest in trying to use a newly built, untested, lightweight system to compete with core capabilities of major ERP systems.
Another recent case involved a variant of this theme, where a mid-market software company was rolling out additional modules around their core platform in an effort to increase their service offering – i.e., as a “TAM expansion play.” However, the Voice-of-Customer was clear that winning with these new modules would require selling a new product to new customers (well-known as the riskiest of innovation bets) within large enterprises – serving decision makers and processes that have virtually nothing to do with one another other than sharing a common theme .
That said, many software companies successfully expand into adjacent offerings: the unifying factor for most of these companies is a clearly articulated product vision that is well-understood by employees, customers, and investors. Ultimately, most expansions should enhance the value of the original offering, and encourage retention; too often, expansions offer additional features simply for the sake of offering more, and not because they complete a vision of a problem to be solved.
We caution that some SaaS expressions of new scope may be a red herring of a case of a management team having insight that there is diminishing core growth prospect and are seeking to distract investors with the new prospect comes promoting scope expansion.
By demanding that new modules be articulated with a clear product vision and not just invoke the magic value of “adjacencies,” management teams (and their investors) can build out their offerings strategically. And in so doing, they mitigate the risks of product scope creep and the risks that the next commercial diligence again confirms the need to discount major investments in poorly considered expansions.
Copyright © GRAPH Strategy LLC