How To Build A Business Around SaaS


Tips on how solution providers can navigate the transition to the new world of software as a service


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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.

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 Corp. is wielding price in its battle against entrenched SaaS rivals. The Redmond, Wash.-based 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," Williams said.

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 dealand#8212;it has to happen not in a matter of days, but of hours," Lee said.

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," Gallagher said. "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."

Next: Infrastructure Requirements

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.

Yet, building a SaaS business involves more than just hiring a bunch of technical wizards, Berridge said.

"You have to bring in people that are multitaskers and who can manage multiple streams at once and that think in a very iterative fashion. MBAs don't necessarily thrive in this sort of model, and I've also hired many senior level project managers that didn't make it," Berridge said.

Setting Proper Expectations
VARs getting their feet wet in SaaS should educate their customers as to the realities of the technology, which includes breaking down customers' preconceived notions about SaaS and making sure they're aware of the multifaceted changes they need to promote to make their businesses SaaS-ready.

"Many customers assume that because they're going the SaaS route, they'll be able to leverage the application sooner," said Berridge. "...The challenge is to temper that expectation."

One risk that solution providers take with SaaS is that clients will demand more flexibility, scalability and security in a SaaS model than they would have in the client-server model.

Service outages are another reality of SaaS that newcomers need to account for, and cover, in clearly worded policies. Vigilar's procedures for dealing with service outages are based on proactively communicating with customers when an outage occurs, to ensure that the trust they've built up with clients isn't damaged, said English.

"If our user interface goes down, we notify customers immediately," said English. "While no one wants to see an outage happen, people do want to be notified when it does."

Software upgrades have always been a primary cause of service outages, and customers are asking more questions about whether their data will be protected if an outage occurs, English noted. SaaS providers should always inform customers about upgrade schedules, because this helps minimize the impact of service outages, he added.

Drawing up service level agreements (SLAs) that are fair and realistic helps strengthen the customers' trust in SaaS providers, English said. "We're extremely realistic in our SLA. Some companies go too far, and it becomes more of a marketing tool, but it's pretty dangerous when you're setting your uptime claims too high," he said.

With SaaS, VARs that used to conduct on-site software deployments can deliver services without stepping onto the client's premises, and Workopia's Lee said that makes the issue of setting proper expectations even more important. "Some customers expect because everything is online, they can click a button and their entire business gets automated. But that's unrealistic," he said.

Software is still software, even when it's hosted in the cloud, said Lee, and SaaS deployments require a combination of training and resources between the VAR and the client.

Next: Potential Pitfalls

Potential Pitfalls
While SaaS offers many benefits to the channel, things can quickly turn ugly when clients decide to change providers or switch to an in-house solution. That's why some solution providers advocate sitting down with clients prior to deployment and mapping out a migration or exit strategy; otherwise, the VAR runs the risk of being blamed for SaaS circumstances beyond their control.

This is especially true with business-critical functions such as CRM and Exchange, because of the amount of configuration involved in setting up a service and tailoring it to a specific environment, said Advantech's Williams.

Williams outlined a scenario in which a small business deploys Microsoft Home Server with Hosted Exchange services, and for several months, finds that the mix of file sharing, automated backup, shadow copy, remote access and mobile synchronization more than meets their needs.

However, if the Hosted Exchange provider suffers an outage or two, and the client informs the VAR that they're looking for another provider, the VAR must take care to explain the huge amount of re-configuration that will be necessary after such a move, said Williams.

Security should also be part of that discussion, according to solution providers. While most customers aren't concerned with the security implications of having someone else host their pre-sales data for CRM as a service, hosting sensitive data for financial applications is a different story, said LS Technologies' Gallagher.

Customers are also asking more pointed questions about the physical security of the data centers in which their data is hosted. As a security VAR, Vigilar is accustomed to dealing with these types of questions. For that reason, the company decided to employ heavy physical security in its building, in addition to power backups and generators, English said.

"The crux of the SaaS model is building customer trust, because customers don't have physical ownership, but instead are buying the value that the company is delivering," English explained.

Staying On The SaaS Path
Whether you're building a SaaS business from the ground up, or adding it to an existing business, staying committed to the model is of paramount importance, said Berridge, who notes that companies like Microsoft, SAP America Inc., Newtown Square, Pa., and Oracle Corp., Redwood Shores, Calif., are positioning themselves as on-demand while also maintaining ties to their on-premise businesses.

Ken Rudin, CEO and co-founder of LucidEra Inc., a San Mateo, Calif.-based ISV that sells business intelligence SaaS applications, said it's far easier for solution providers to be successful by partnering with vendors that have focused on SaaS from the beginning, and don't have an additional on-premise focus.

"It's not because of technology, it's just that the cultures between the two are so different," Rudin said. "It's almost impossible for a company to be successful in both areas: The thought processes have to be so different, and the competing business models can cause a civil war."

However, LS Technologies' Gallagher disagrees with the notion that SaaS and on-premise models are mutually exclusive within the purview of a solution provider's business. "How would they conflict? In the case of Salesforce.com, partners don't sell the licensing, they do the implementation," he said.

LS Technologies, by virtue of its partnerships with Oracle and NetSuite, has one foot in the on-demand world and the other in SaaS. Gallagher says the mix of selling products and implementing SaaS solutions is a sound business practice that isn't going away anytime soon.

"When you can say either-or, you're in the best situation. If you generate 10 leads, your success rate of close will be much greater, and it helps to be able to speak intelligently about the difference between on-site software and SaaS in the cloud," Gallagher added.

However, just as the SaaS model is disruptive to software vendors, it's equally disruptive to the partner ecosystem, and not all solution providers will be able to make the jump, according to Rudin.

"Those that do make the shift see greater efficiency: They don't have to send consultants on site; instead, they can do teleconsulting, because it's all in the cloud anyway," Rudin said. "They can also work with more than one customer at a time, multitasking from client to client from their own location."

LucidEra works with a range of solution providers and ISVs that have successfully made the shift to SaaS. These companies are known as consulting services partners, and deploy sales force automation, business intelligence and CRM solutions to companies in multiple verticals, including health care, manufacturing, and financial services.

These partners also act as a de facto channel for LucidEra, but aren't traditional VARs who make revenue from implementation, coding and changing internal data structures, said Rudin. "We work together on opportunities, or they can sell it themselves as channel partners," he said.

Berridge said the channel partners of the future will provide ongoing services to clients that allow them to take advantages of the new functionality SaaS vendors roll out on a continual basis, but which some companies are able to keep pace with.

"The next generation SaaS channel partner will act as third-party support organizations," Berridge said.

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