How To Build A SaaS Business

When proponents of software as a service (SaaS) started calling the new application delivery model a revolution and began predicting that it would result in a bloodbath for traditional software vendors and their channel partners, many hype-weary solution providers didn't bat an eye.

Fortunately, the hype around SaaS has subsided, even as its influence has continued to grow. Yet, no consensus has emerged in the channel as to which way to approach this game-changing delivery model. Many industry experts say SaaS has a very real potential to disrupt channel business models, but vertically focused VARs that can integrate SaaS systems with their legacy on-premise solutions will continue to see a steady stream of business for the foreseeable future. At the same time, hard-core SaaS proponents like Salesforce.com and NetSuite, along with their solution provider partners, insist that traditional VARs must radically change the way they do business, or risk losing out on a mountain of untapped opportunity.

What everyone seems to agree on is this: There's no upside to waiting around. Now is the time to figure out your SaaS strategy. Here are some of the important issues solution providers must grapple with as they develop their response to SaaS.

Impacts Of SaaS

Solution providers whose vendor partners are gravitating to SaaS should be aware that the long-running revenue streams they've enjoyed with on-premise software will be threatened by SaaS, particularly in cases where clients are concerned primarily with finding the lowest price.

As it has done in other markets, Microsoft is wielding price in its battle against entrenched SaaS rivals. The software giant allows partners to host their own SaaS offerings, but some VARs worry that Microsoft's plans to offer its own hosted services to customers could eventually eat into the channel's share of the pie.

Brian Williams, president of Advantech NW Inc., a Gresham, Ore.-based solution provider and Microsoft Small Business Specialist, acknowledges that Microsoft's services could eventually erode sales of bread-and-butter channel products like Small Business Server, but doesn't believe that will fundamentally change the vendor's relationships with channel partners.

"Does that mean the role of trusted IT advisor is going away? No, it just means that you need to modify your portfolio of products and have a good understanding of when to recommend SaaS, SBS or another solution," said Williams.

The speed with which SaaS makes it possible to deliver applications is also causing implementation cycles to accelerate dramatically, and the challenge for the channel is to figure out how to structure business and sales processes to account for that, said Frank Lee, president of Workopia Inc., a San Francisco-based Microsoft CRM specialist. "All VARs need to change how quickly they close the deal -- it has to happen not in a matter of days, but of hours," said Lee.

Solution providers also need to speed up sales cycles because they're earning smaller amounts of revenue in each deal than they would be getting from traditional on-premise projects, said Mick Gallagher, CEO of LS Technologies LLC, a Fallbrook, Calif.-based solution provider.

"With on-demand services, the vendor takes the top line revenue, and partners only get paid a commission," said Gallagher. "There can be 10-to-1 revenue difference between the on-demand and on-premise offerings, and to account for that, you have to do faster implementations."

Infrastructure Requirements

VARs on the sidelines may not be aware of the up-front costs involved in preparing their business for delivering SaaS solutions, which include acquiring talent and building a scalable network infrastructure that's capable of handling heavy traffic levels.

"You're basically hosting a data center for your clients, and the reality is, you will have some infrastructure costs," said Eric Berridge, co-founder and principal at Bluewolf Inc., a New York-based ISV and integrator that partners with Salesforce.com. "You can scale, as you bring clients on board, to be more efficient, but you don't need to build to support 100,000 users up front."

Security solution provider Vigilar Inc., last June unveiled Atlas, its inaugural SaaS offering, which handles asset and license management, technical support, log management, authentication management and systems maintenance functions.

To support Atlas, Vigilar set up a 24x7 security operations center and then built out its back-end infrastructure, an effort that included setting up co-located sites in geographically dispersed data centers, said Ryan English, vice president of products and services at the Atlanta-based company.

Vigilar also assembled an internal software development team to build an application on top of its existing ticketing system that allows customers to track their status online, which helps the firm provide better customer service, English said.