The high-tech and software sector continues to accelerate away from a license product model and toward a subscription-based or software-as-a-service (SaaS) product model. According to research firm Gartner, SaaS subscription services are expected to deliver a compound annual growth rate of 12% over the next five years.
The economics – stronger revenue growth, higher margins, a more predictable revenue stream, and higher multiples – remain attractive: On average, companies that derive majority of revenue from SaaS and subscriptions are seeing enterprise value multiples of around 10 times revenues, about double that of software license models and six times greater than hardware models. The strategic benefits are important, too—especially the increased customer engagement and access to usage data, which can be critical to remaining competitive in an evolving market.
And while private-equity (PE) backed players move forward, non-PE-owned counterparts lag.
Transformation to a subscription model represents an acute shift to a different way of operating and engaging with customers. From our work with PE firms and their software portfolio companies that have successfully made the transition to a SaaS model, we have identified these areas of focus that can help accelerate that shift and, thus, potential value.
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