Software As A Service: Nightmare Or Dream Margins?

Their nightmare vision is of a flock of Salesforce.com clones pumping out software services from their own servers, managed by them, billed by them, to customers far and wide. Traditional resellers might get a onetime referral fee—Salesforce.com, for instance, offers 10 percent—but then bubkes. That’s not enough scratch for survival, let alone profitability.

It certainly didn’t help that when Microsoft trotted out its consumer-focused SaaS pitch in November, there was nary a public mention of any solution provider role. (Well, one slide mentioned resellers, but it was skipped during the presentation, according to reporters at the San Francisco event.)

That raises a haunting question: If the partner-centric Microsoft can’t articulate an inclusive SaaS plan, what hope is there for partners dealing with less-channel-savvy companies?

Some forward-thinking software vendors are making the move to SaaS more palatable by cutting partners in not only on up-front sales, but on the recurring subscription-type revenue stream SaaS engenders.

NetSuite, for example, is launching a sales development kit aimed at helping partners sell more software—not even necessarily just NetSuite’s software—and at helping them learn how to hire and mentor inside and outside salespeople, said Adam Ross, vice president of channel sales at the San Mateo, Calif., company. Next month, NetSuite plans to launch an analogous partner program for market development.

SOFTWARE-AS-A-SERVICE PIONEERS >> CRM: salesforce.com, RightNow, DigiPrize >>  ERP: NetSuite >>  FINANCIAL SERVICES: Digital Insight >>  HUMAN RESOURCES: Taleo, Employease >>  MARKETING ANALYTICS: Websidestory >>  SERVICE PURCHASING: Rearden Commerce >>  CONTENT MANAGEMENT: CrownPeak >>  DATA MIGRATION AND COMPLIANCE: Zantaz Source: Accenture

But smart partners aren’t waiting for vendors to lead.

“From a customer point of view, SaaS can make a lot of sense,” said Scott Jenkins, CEO of EBS Group, Lenexa, Kan. “Many companies do not want to make intensive investments in licensing and re-upping and patching software. They want someone to handle that. Customers say, ‘I have skill gaps internally. Why do I need so many [database administrators]? If I can run software as a service, and I can redeploy my internal people on things, that helps me compete.”

EBS characterizes itself as a professional services specialist in enterprise portals, business intelligence, ERP/CRM, collaboration applications as well as application integration and J2EE development. While it can and will resell software—from Oracle and other partners—a growing part of its revenue comes from services.

“SaaS provides predictable SLAs [service-level agreements] and keeps the environment current and running and the customer happy,” said Jenkins. “We’re moving more into that; we’re moving to manage your environments and run the applications.”

Solution providers like EBS are transitioning their own businesses first from product-centric sales to more of a services model and from there to software-as-a-service. They know an army of solution providers will deliver the “last mile” of application customization. They will “verticalize” the software, analysts and providers said. And for this, they will be paid.

Many will private-label and adapt software services from ISVs like SMBLive, Apptix, NetSuite and others. Webex, through its WebOffice collaboration service, for example, lets partners self-brand. WebOffice, which offers group calendaring and scheduling along with messaging, whiteboarding and instant messaging, can be billed directly from Webex—typically at $10 per user, per month in volume. Or the partner can bill, marking up the service as appropriate, said Rich Faulk, president of Webex Small Business, Burlington, Mass.

So, smart solution providers aren’t despairing, although they also watch their vendor partners warily. Everyone knows that in the battle for more profit, account control will be hotly contested. In SaaS scenarios, in which the billing entity tends to be the software company, that raises the anxiety level.

Where’s The Model?
There are a lot of questions yet to be answered.

One East Coast Microsoft solution provider is therefore weighing his options. “I haven’t seen a [good SaaS] business model yet from anyone. I’ve heard that the market is going that way and I believe it, but we’re still feeling it out. As a Microsoft partner, I’m looking for more direction.”

Asked what he thinks Microsoft’s game plan is, he shrugs. “It’s not baked yet. Everyone talks about this revolution, blah blah blah, but it’s not done. We make money on software, but we’ve already made the transition largely to services to insulate ourselves [from software margin erosion],” he said.

He is not alone. Amy Wohl, president of Wohl Associates, a Narberth, Pa., consultancy, says the transition will be tricky but worthwhile. “Everyone has to figure out the model, but there’s a lot of opportunity,” she said. “Software vendors and ISVs have to understand that to sell into the tier below the largest companies, you need system integrators and VARs. This stuff does not sell itself. You need partners to sell this stuff and you need to pay them to do that and, by the way, the way you pay them is to offer them recurring revenue for ever and ever as long as the customer is there,” she said.

For those willing to navigate the move from software-license-sales-plus-ancillary-services to a model where the software and service become more of a utility meted out, and billed, over time, there is the promise of an annuity or ongoing subscription revenue.

“SaaS has many [comparatively] attractive financial components,” said EBS’ Jenkins. “Now, you might do a large license transaction but it’s typically so heavily discounted that at the end of the day what you keep is fairly meaningless, maybe 2 or 3 points. With SaaS done right, you can do 30, 40, 50 points and get recurring revenue.”