On-Demand Software: Threat Or Opportunity For VARs?

The flip side of the equation is that VARs no longer have to tie up huge amounts of capital to buy hardware and software and then wait weeks or months to be reimbursed when their customers pay their bills, says Bobby Napiltonia, senior vice president of worldwide channels and alliances at Salesforce.com, the on-demand CRM application vendor generally viewed as the bellwether for the SaaS model.

Rather than "moving boxes," SaaS allows solution providers to focus on higher value services, such as application integration, customization and implementation, business transformation and user training, Napiltonia says. Many of those complementary services can be delivered via the Web, making it easier for SaaS solution providers to offer their services globally, he adds.

Zeroedin is well-positioned to work with SaaS vendors and on-premise apps, says managing partner Amy Servi (with co-managing partner Tony Bone).

"The value of solution providers in the past was physical presence," says Kristen Brown, vice president of channel sales and alliances at NetSuite. Today, solution providers can develop expertise in what Brown calls "micro-verticals" and pursue market opportunities globally. NetSuite, for example, has a reseller that focuses on distributors of commercial flooring products.

Selling on-demand applications also allows solution providers to do more with their limited resources. The Gatestone Group, a Columbus, Ohio-based provider of IT solutions for SMBs, resells Cisco and EMC hardware, and Microsoft and Trend Micro software, along with Visitar's call-center, customer-support and sales-force-automation on-demand applications. SaaS lets Gatestone use remote management to provide maintenance and support services to its Visitar customers. "We can support more customers with the same amount of resources," says Gatestone founding partner John Frazier. "That allows us to scale more quickly than we could with the traditional model." That's important for a company that's expected to grow sales to $5 million this year from $1.8 million in 2006.

But it's the software vendor-solution provider-customer relationship chain where SaaS is likely to have its greatest impact. The potential danger is that on-demand software offered directly to customers could cut solution providers out of the picture or reduce them to a minor supporting role.

So far, that isn't happening. In many cases, solution providers and resellers own the relationship with the customer while the software vendor remains in the background, providing its on-demand applications as a utility. Occasionally, the vendor takes the lead, with the solution provider offering its services as a subcontractor. Sometimes the two are on more equal footing. There's no dominant business model—not yet anyway.

One glance at Salesforce's list of business partners illustrates how many ways solution providers of all types can work with SaaS vendors. Referral partners such as BigMachines and BetterSell Solutions earn referral fees by generating sales leads for vendors' direct-sales forces, while consulting partners such as Bluewolf and Astadia Consulting provide a range of implementation, training and business-process-design services around Salesforce apps. More than 500 independent software vendors showcase applications that complement Salesforce's software on its AppExchange Web site. And a relatively small number of VARs sell and customize Salesforce CRM apps for vertical markets. Also on the list of partners are global strategic players such as Accenture and Deloitte, and technology partners such as device manufacturers and computer-telephony-integration companies.

Bluewolf and Astadia work with Salesforce customers to overhaul their business processes, and implement and customize Salesforce's on-demand applications to match those processes. They don't resell Salesforce's services, although on occasion they will refer customers to Salesforce when they think there's a fit, and sometimes Salesforce refers customers to them.

Executives at both consulting companies say they aren't motivated by referral fees and emphasize their vendor neutrality. "We really need to maintain objectivity with our clients," Bluewolf's Berridge says, noting that sometimes his company competes with Salesforce's professional-services organization. Under its referral program, Salesforce pays solution providers fees based on the value of the first year of customer contracts and additional seats co-sold by partners.

Unlike some other on-demand software suppliers, Salesforce generally bills customers directly even if a partner is involved. "So I would say we co-own the relationship," Napiltonia says.

Astadia president Brent Mellow echoes that: "We would, each in our own way, own our piece of the business. We're extensions of each other in many ways."

NEXT: Who owns the customer relationship? (Hint: It better be you.)