Not All VARs To Survive Move To Software-as-a-Service: Report

Solution providers that want to sell software-as-a-service (SaaS) applications are going to have to make big changes in their business model, from the kinds of expertise they offer their customers to the way they pay their sales representatives. And some VARs aren't going to survive the transition.

That's among the conclusions of a new report from International Data Corp. examining the impact of SaaS or on-demand applications on the channel. The study finds that while the business models for how the channel will work with SaaS technology are still emerging, a new crop of solution providers will likely emerge that are more business process-focused than today's resellers.

"Maybe it's not going to be the traditional VARs that evolve into this new generation of solution provider," says Darren Bibby, IDC analyst and co-author of the report. "Change is very difficult for companies."

While SaaS technology has had a minimal impact on the channel so far, major announcements of on-demand initiatives and products from vendors such as Cisco, Microsoft, SAP and Symantec have created fear, uncertainty and doubt among solution providers, Bibby says. While Microsoft talked a great deal about its Microsoft Live efforts during its Worldwide Partner Conference in July, for example, Bibby says channel partners still lack many details about how they fit into the Microsoft Live picture. SAP's recent announcement of its SAP Business ByDesign on-demand applications was likewise vague on channel participation details, he says.

The IDC report groups all SaaS offerings into three categories: business software such as on-demand ERP and CRM applications; on-demand application infrastructure products such as hosted e-mail and collaboration tools; and system infrastructure software, including on-demand security and online backup products.

Vendors of on-demand business applications and application infrastructure software are looking for channel partners that can play a trusted advisor role with customers, providing configuration and business process consulting services, the report says. Solution providers and vendors share the relationship with the customer and vendors provide the hosted application directly to the customer. In addition to the service fees channel partners generate from customers, they can earn agent fees of up to 40 percent from vendors on SaaS software deals they initiate.

Large service providers and systems integrators such as IBM Global Services, Computer Sciences Corp. and major telecommunications companies will be the main conduits for on-demand system infrastructure software, the report says.

As SaaS becomes more prevalent Bibby expects a new generation of solution providers to emerge, either as startups or spinoffs from existing VARs, which emphasize expertise in business processes and vertical industries. Rather than delivering technical implementation and break-fix services, these new solution providers will focus on configuring SaaS applications to match customers' business processes.

While some such solution providers have emerged " New York-based Bluewolf is a high-visibility example " Bibby says banks, law firms and travel agencies could become SaaS solution providers within their own industries given their domain expertise. The analyst knows of an on-demand security software vendor that counts among its channel partners several law firms that provide on-demand security software configuration and security process services to other law firms.

To prepare for a SaaS world Bibby advises solution providers to develop more business process and vertical industry expertise. "I don't think they need to freak out at this point. But they have to start investigating what these changes mean to them," he says.

SaaS technology will also have a major impact on solution provider finances. Solution providers today are very focused on top-line sales and the big check they get for one-time sales and implementation projects, Bibby says, while SaaS projects generate a recurring revenue stream of subscription and service fees. "That can drastically change the economics for a VAR," the analyst says.

Even the way sales representatives are compensated will have to change since many earn commissions for big, up-front software sales. That issue will be particularly tricky for solution providers that try to sell both on-premise and on-demand applications, Bibby says.