August Update: Vendor Consolidation

In building Third South, we gave very little premeditated thought to the topic of vendor consolidation. After owning and operating assets for two years, we now have opinions!

Each of our portfolio companies does two things, more or less: deliver a web-hosted service to a customer and accept payment for those services. Exactly how each company does the service delivery varies.

Some are apps in an ecosystem where significant infrastructure is provided by the ecosystem host. Others are more traditionally built SaaS, where we are responsible for all aspects of service delivery from development to deployment.

Our Preferred Stack (details below)

• Stripe

• Cloudflare

• Amazon Web Services (AWS)

• Help Scout

• OnlineOrNot

• OpenPhone

• Metabase

Payments

In terms of accepting payments, unsurprisingly, we have found Stripe to be the leader in this space. In an ideal world, all our portfolio companies would use Stripe. While we have not had any material issues with other platforms that we use, Stripe provides excellent capabilities. Stripe comprises ~50% of our revenue. About 10% of our revenue exists on an ecosystem-based platform that we cannot change. The balance is on PayPal and Paddle. On an infinite timeline, we would migrate these businesses to Stripe - but the potential for friction, as well opportunity cost in higher return projects, have dissuaded us from any migrations so far.

Vendors and Service

In terms of delivering services, one of our biggest spend categories is Amazon Web Services. While we have right-sized certain provisioning in specific cases, we haven't gone any further than that. In places outside AWS, we have worked through vendor consolidation and tool selection.

Our First Trip in Vendor Consolidation: Running Support with Help Scout

Over time, we have bought over half a dozen businesses. For each, we've inherited different structures for support emails and documentation. One of our first projects was to consolidate most of our businesses onto Help Scout. We've found Help Scout to be scoped well for our needs - support for multiple inboxes, AI bot capabilities for website integration, and knowledge base hosting for our various websites. Our migration to was planned, intentional, and saved us money.

A Less Intentional Migration: Managing Domain Hosting and Much More with Cloudflare

When we close a transaction, we typically inherit several domains. Depending on how founders have set up their organizations, sometimes we cannot immediately migrate from their domain host of choice. At points in time, we have had several providers, including some we have run into operational difficulties with. As a result, we have consolidated our hosting to Cloudflare. It's quick and easy to use - and can always help you procure .horse domains, a favorite pastime of ours. We also use Cloudflare for its other many great services.

Tools We Love

There are plenty of uptime monitoring tools in this world. We value the simplicity and reliability of OnlineOrNot and have it integrated into our Slack workflows. Thank you Max!

As a team, manage authentication credentials and vaults securely. But we still do have a need for SMS authentication. When you have multiple team members who need to have access to specific accounts, it's great to have a service like OpenPhone.

We use Metabase for various dashboards and reporting. We didn't inherit Metabase - we chose it as the final brick in our HoldCo reporting foundation project (a large ETL workstream we will share more about). It has served us quite well thus far.

Reflections on Vendor Consolidation in SaaS

I have spent a lot of time thinking about optimal vendor spend in my career - but in a completely different industry than SaaS. When I worked in industrial manufacturing, cost of goods sold was 30%+ (even in healthy, robust businesses with 10-15% EBITDA margins). I saw first hand how doing more business with a company's best suppliers allows for improved profitability (from volume) and better manufacturing operations. 

At first, I thought there would be little overlap about how to think about vendors in physical world operations and how we manage our vendors at a software holding company. Basically, my thinking was - what does improving product quality in plywood have to do with AWS bills? As it turns out, there is at least one key common philosophy. We aren't just looking for the lowest price in a vendor - we are looking for the best overall experience for our customers combined with price.

While cost savings are less impactful in SaaS relative to heavy direct material businesses, working with our preferred vendors and improving our customer experience is worth more than just price.