Software As A Service: New Model Brings Account Control Crisis

At issue is who -- the ISV or the implementing partner -- will "own" the customer relationship going forward. To date, enterprise software players have tied themselves tightly to customers via the direct sales model. The customers don't only buy the software license up front, but pay a hefty percentage -- typically upwards of 20 percent -- of that fee each year for ongoing support and maintenance.

"On a practical basis, it'll be very hard for SAP and Oracle to do on-demand things that cannibalize their existing businesses. Account control, they don't want to give it up," says Peter Sobiloff, managing director with Insight Venture Partners, a New York-based venture capital firm. Sobiloff and other industry watchers and participants spoke at Software 2006 in Santa Clara, Calif., on Tuesday.

On the plus side, the intransigence of enterprise software powers opens up opportunities for "young innovative companies" to grab those pieces of the business, Sobiloff said.

As the model moves from big-bang license sales to more of a month-by-month subscription, that customer relationship could easily swing to the integration or VAR partner that has the vertical or domain expertise that customer needs, industry observers say. That's all good for those partners but not so perky for the vendors that want to retain as much of the transaction margin as possible.

Of course, software as a service (SaaS), pioneered by Salesforce.com, NetSuite, RightNow, Salesnet and others, is still in its infancy and the legacy players --- everyone from Oracle and SAP to Microsoft -- are figuring out how they can play.

"In the midmarket, hosted apps will find a receptive audience among companies at the low end. Microsoft is moving up more into the midmarket, because they will host these applications," said Rich Sherlund, partner with Goldman Sachs, the New York investment firm. "Oracle and SAP are trying to move down [to the midmarket] but their business model hasn't let them address the midmarket well."

A VC attending the show said account control will continue to be a point of contention in software going forward. As for sharing account control with partners, "Oracle and SAP will never do that well," he noted. For Microsoft, with its thousands of channel partners pitching into tens of thousands of accounts, it's a different story, he noted.

Also at the show, a series of keynoters painted the current state of the software market in semi-rosy light.

Consolidation of power remains a concern. "Eighty percent of all revenue is concentrated in 15 enterprise software companies. Eighty percent of profit comes from three companies and over half of that profit comes from one company -- Microsoft," said Ray Lane, partner with Kleiner Perkins Caufield and Buyers, the Palo Alto-based venture capital company.

It's hard for a limited-budget startup to compete with companies like those that spend 20 percent of their revenue in R&D, he added.

Still, there remains "white space" for companies that can fill it with new functionality, he said.