On-Demand Software: Threat Or Opportunity For VARs?

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Zeroedin has one foot firmly planted on either side of the software-delivery divide.

The Corona, Calif.-based solution provider specializes in integrating Microsoft's Retail Management System with back-office applications. As part of its work in the retail industry, Zeroedin resells Microsoft's Dynamics NAV on-premise ERP software package as well as NetSuite's on-demand ERP applications.

That dichotomy, says managing partner Amy Servi, puts Zeroedin in prime position for a software-as-a-service (SaaS) future. "We will have a distinct advantage in that we understand that whole on-demand licensing model," she says.

As much as 25 percent of new business software will be delivered as a service by 2011, up from just 5 percent in 2005, according to market-research firm Gartner. And market researcher IDC predicts on-demand software sales will exceed $8 billion this year alone.

Numbers like those represent both a threat and an opportunity for solution providers. As established software vendors and start-ups adopt the SaaS model for delivering application functionality, VARs that make a living from big implementation projects or by following the traditional route of loading applications onto a server and selling turnkey systems will, at the very least, lose out on new business opportunities.

"With software-as-a-service, there's no box-moving. It's a service play," says Minneapolis-based Tier 1 Research analyst Mike Mankowski. "This is a new mindset in software. In fact, it's not even software; it's selling business functionality."

Solution providers that offer value through managed services, business-process expertise, vertical-market know-how and experience integrating on-demand software with other applications can thrive in a SaaS world. Mankowski sees opportunities to lead on-demand software-sales efforts to small and midsize businesses—those with 50 to 500 seats—whose on-demand implementations require customization and configuration.

But as on-demand software becomes more prevalent, solution providers must adjust to doing business differently, including new cash-flow realities. Resellers have traditionally made a big chunk of their revenue through up-front sales, installation and periodic system upgrades. With SaaS, the hardware infrastructure is owned and operated by the hosting company and software upgrades are automatic. "You're not going to be seeing these $100,000 upgrades," Servi says. "Now that's all going to be up to the vendor."

In the past, nearly half of all professional-services work performed by solution providers was related to IT infrastructure, says on-demand software consultant Eric Berridge, co-founder and principal of Bluewolf Group. "That 50 percent is gone in the software-as-a-service world," he says.

While demand for solution providers' implementation, integration and business-process-management services will still be highest during the initial customer engagement, getting that big check up front for a software sale may also be a thing of the past. "With on-demand, you make your money in subscription renewals," Servi observes. "VARs are going to have to get their heads around that recurring revenue model."

NEXT: The flip side of the equation.