Franchises are for Pizza and Burgers, Not SaaS and Banks

I get a feeling that some mediocre MBA read a case study on franchising and the huge profits it has delivered to companies behind the big pizza and burger brands, and decided to apply it to software. Add the failed ASP model to the inappropriate franchise model borrowed from pizza and burger chains – and you pretty much can figure out the product and go to market strategy of the last generation software vendors when it comes to SaaS.

As a public service, I am providing a maturity model for these companies that aspire to be SaaS winners.

Pizza Pie Maturity Model for Franchising: Pizza and Burgers, Banks and SaaS

This is a very simple maturity model. I know big companies like maturity models (see here) rather than straightforward examples. The following are the maturity levels I am proposing for those rushing to market with their half-baked SaaS offerings:

Level 1 – Pizza Delivery: Yes, pizza delivery is the first step in this hierarchy. In order for you to deliver a pizza consistently and of good quality, you need a set of tools, some training and then hire low cost teenagers – and you get the cheesy goodness of pizza, delivered to your home by a freckled teen. Most franchising opportunities such as laundromats, burger joints function well when you are delivering a simple product or service that is easy to deliver, has minimal security/quality/reliablity constraints and is easy to replicate. I recommend the INSEAD case study referenced in the MIT Sloan Management Review article.

Level 2 – Banking: As you can guess, delivering banking services is slightly harder. You need to make sure thieves can’t steal your customer’s money, that you provide certain level of services and if you have online banking – you need to ensure that customer’s accounts are not hacked and money stolen. As a customer, you entrust valuable assets (money) to your bank and it is the trust that a bank has earned over years, if not decades that helps you feel safe coupled with certain regulations and assurances from the federal government. Banks do not have franchises – you cannot pay Bank of America $50,000 – get trained and then start operating a bank with their logo, system and processes. The reason is that the trust earned by banks cannot be delegated away nor can the brand be put to risk or diluted.

Level 3 – SaaS: Yes, SaaS is higher on the Pizza Pie Maturity Model for Franchising than banks. As with banks, customers trust valuable assets (data) with the SaaS company. The SaaS provider must earn the trust of the customers one day at a time by providing the right service levels, ensuring security and business continuity. Just as with a bank, the trust embodied in the brand of the SaaS provider is of great value – and this trust cannot be delegated in a simplistic manner. Providing software (and perhaps some training and best practices) to the SaaS Franchisees does not take care of the most critical elements of SaaS:

• Reliability: How do you ensure that the SaaS Franchisee has architected its end to end systems to provide reliable service?
• Security: What kind of processes are in place to ensure data is not lost?
• Performance: How will the brand owner ensure that the SaaS Franchisee provides the right performance?

You may be wondering:
Why is SaaS higher than Banking on the Pizza Pie Maturity Model for Franchising?

I have two good reasons for this:

1. Data Loss vs. Money Loss: Data is lost when someone performs a successful read operation without your permission. If I read your mental health records, I don’t have to steal them. With bits and bytes, reading is stealing. With money, not so much. Just because you know my bank balance, I haven’t lost my money. (Yes, there is loss of privacy and trust is eroded but its not the same. You don’t call a cop because someone read your bank statement but if I read your critical health data you would have to call the cops.)
2. No FDIC: A small bank or cooperative can be insured by FDIC and therefore provide sufficient protection to a customer but with SaaS you are relying on the trust earned by the brand. How comfortable do you feel having your data in a Uncle Billy’s HealthCare On-Demand App that runs on software from NanoSoft?

Reliable Platform, Trusted Brand: What you need is a reliable platform from a trusted brand in Software as a Service. A multi-tenant platform with customers sharing one single system ensures that all customers and ISVs running their applications and trusting their data with the platform are receiving the same high level of security, reliability, availability and that any issues that are discovered are resolved for all tenants.

The approach taken by some vendors to deliver SaaS without true multi-tenancy or even worse, entrust third-parties with running copies of their software takes the Level 1 Pizza Delivery franchisee approach.

What do you think? Want more debate on SaaS styles?

You may want to consider force.com Platform as a Service from salesforce.com for business applications. (Please read full disclosure at the bottom of the blog. No MBA’s were hurt in the writing of this blog.)