Getting SaaS-y

From CRM to e-mail, SMBs need the same kinds of software the big guys do only they may not have the time, money or human resources to implement a premises-based solution. The answer to this dilemma, for them and their channel partner consultants, is a simple one: software as a service.

The SaaS model lets companies pay a per-user, monthly fee to an SaaS provider to access Internet-delivered licensed software, which can be up and running in a matter of days or weeks as opposed to months for an on-premises implementation. A worker need only sign on from anywhere via an Internet portal and have access to an application as though it were residing on his or her desktop. On the surface, it means no upfront costs, quicker time-to-market, no support requirements, and automatic updates and configurations, which lessens the drag on the IT department.

Dig a little deeper and the benefits multiply. For instance, SaaS is a fit for companies that have seasonal requirements. A company can simply call and add another seat, and adjust their subscriptions up and down, one month at a time, explains Bob Bye, executive vice president at SaaS provider nGenX. There is a contract, but within that you can scale down the number of seats as necessary. SaaS also offers the ability to easily support a distributed workforce, delivering increased productivity and improved support for mobile workers and road warriors all of which translates into large competitive advantages for the SMB set, and an opportunities for partners who typically receive a monthly recurring commission on the sale.

In fact, there are several things that conspire to give the SaaS market legs for the channel, according to Steve Hilton, an analyst at Yankee Group Research Inc. On the demand side, when you talk to SMBs themselves, they have a lack of IT staff to be able to handle the on-premises install and ongoing support of applications. They also have a lack of capital dollars, he explains. On the supply side, you find you have vendors offering the solution with a channel program, so now the channel is incented to sell SaaS, whereas before they werent.

On this last point, Hilton notes that the hardware-oriented channel made up of VARs, integrators and interconnects has traditionally structured its business around time and material, which offers a one-time compensation. The opportunity grows with projects, but you have to get more people to staff those projects, and invest more in hardware, so margins are slim and its a volume business, explains Hilton. SaaS creates an annuity stream for this channel, so a channel partner can grow without staffing up, and that blows that former model out of the water.

19Marketplaces John Krzykowski

For the more services-oriented partners, such as agents, SaaS allows diversification the ability to start selling software without requiring the accompanying IT expertise. The agent doesnt have to understand a lot about software, because its essentially self-provisioning, says doug Turpin, CEO at master agency Venture Group Enterprises. VGE is partnering with nGenX to roll out SaaS applications like Microsoft Office to its own agents, and is striking relationships with other master agents to deploy the solution to their channels. The channel program launched in October 2007; VGE has helped nGenX design the offering, from order entry and commission reporting to portals for real-time status and inventory. In our case, were providing agents on the street a means to get a hold of an nGenX software engineer and let them close the deal if necessary. The idea is to make it very easy to sell, says Turpin.

He believes the opportunity will translate into at least a $100 million per-year channel opportunity within two years, and a billion-dollar one within five. VGE is recruiting integrated ISVs and VARs, but we want to approach the traditional telephony market as well, which can upsell their existing customers, Turpin says. Agents can go in and talk to clients about more than just connectivity. They can in fact lead with this, and come back with the circuits to support it, so its sort of a Trojan horse.

SaaS also represents a way for partners to better hang on to customers. If you look at traditional network services, they tend to be pretty easy to move one buyer to another, says John Krzykowski, general manager at 19Marketplace, which provides software on a subscription basis via agents, like McAfee, St. Bernards anti-spam, Microsoft Exchange, WebEx conferencing and the extranet application Web Office. Our services tend to be sticky, and you rarely get churn. Its an opportunity for partners to increase their revenue from the customer, and also provide more value.

nGenXs Bob Bye

nGenXs Bye says his company has only ever lost two customers. One company was acquired and the other went out of business. The services are about to become stickier, as well; nGenX and VGE plan to begin offering VoIP and data as a SaaS bundle this quarter. Giving an IP Centrex-type functionality is a natural extension to all this, Turpin says, and its something that youll have to stick a fork in the customers eye to get them to move off of it.

Selling SaaS does require a consultative approach to business issues. For instance, the most relevant applications to be adopted in an SaaS model have a revenue impact for the SMB, rather than a cost-savings impact, Hilton notes. So CRM, salesforce automation, merchant processing applications, e-commerce, Web hosting things that drive revenue will be adopted first, he explains. Finance and accounting packages, document control, project management, ERP solutions and so on will come later if at all.

Above all, Hilton says, applications that point toward mobility are ripe for future explosive growth. SaaS is a leading indicator for mobile adoption, Hilton notes. So the channel is in an interesting situation where they dont just need to think about SaaS, but also how they get these apps to work on a smartphone or a tablet PC. How do you make sure the application is appropriate for that mobile device, and that the app and network is smart enough to know which to use at a certain time?

The nGenX Nfinity Architecture

Nfinity makes use of virtualization techniques that offer security and a scalable back-office profile.

If fact, identifying a business problem is the key to offering SaaS successfully. A lot of the partners I talk to want to understand how to sell it how to sell, how to up-sell, says Krzykowski. You have to sit down and talk to the customer. Is it a home office company that needs to be up and running quick, but needs data to be backed up? Or is the company looking to offload the overworked IT department? Many businesses look for someone to take [Microsoft] Exchange off their hands during renewal periods, or whenever Microsoft announces its not supporting a certain version anymore. Then theres remote backup do companies have the resources to build whole new infrastructure, or do they just want to subscribe to a service?

Krzykowski says the biggest challenge is that SMBs dont know what they dont know. Many dont know this alternative exists, he says. There is huge value and opportunity for partners with the relationship with customers to explain this.

Education also is necessary to overcome one big challenge in the market: explaining why SaaS is different from the ASP model that bubbled then crashed in the 1990s.

Because the ASP model didnt work well, the market really hasnt jumped into this, says Turpin. It took a long time for this to come back, and it has had to be organically grown because venture capital went away after the bust. We can partition servers much more effectively now, and we now realize the market is about more than just rolling out a cheap hosted Exchange. Theres demand for disaster recovery and HIPAA compliance and a whole list of requirements.

Source: 2006 Yankee Group U.S. Small & Medium Business Applications and Web Survey

Also, broadband penetration is much better than it was. data cards give incredible speeds, and bandwidth will continue to get better and faster, so more software companies will be willing to go with this model, says Krzykowski.

And, the back-office aspects of SaaS solve some of the business model issues ASPs faced. The ASP model that came out in the 1990s failed because it took an application and just put it in a data center, and you still had to update each customers application separately, says Krzykowski. The end result was no cost savings, and it was really a headache. Now, the application sits on one operating system and theres one database and one instance of software. So if you do an upgrade, everyone gets it.

The user experience has improved, too. Its analogous to movies on demand, explains Clark Easterling, vice president of product marketing at Perimeter eSecurity, which offers firewalls and other services on demand in an SaaS model. Initially, it was very cumbersome, you had to call with an access code, give someone your phone number, and so on. Now you click and its there. A similar thing has happened in hosting.

VGEs Doug Turpin

Another challenge is to ensure the presence of good channel programs. SaaS puts another tool into the channels bag, just like hosted VoIP gives them another tool into their premise-based PBX bag, says Hilton. Some SMBs will always want a premisesbased solution, and some will want SaaS. But we still need to have parity with premises-based solutions for channel to really sell it. We dont have it in terms of the support programs and compensation models.

Providers are working on it. 19Marketplace offers a two-tier structure for partners who receive evergreen commission based on volume. The SaaS portal offers additional applications for customers to sign up for online; if they do so, the agent gets credit.

For its part, VGE believes an evergreen approach is the only way. Our agents are guaranteed to get paid as long as customers are billing, says Turpin. So customers and agents all have an interest in making sure this is a long-term. VGE partners make residual income along with upfront commissions paid upon installation; commissions are tiered and increase based on billing.

Ultimately, SaaS will be a fixture in the communications universe as more companies see the benefits vis a vis having a premises-based solution. In fact, larger businesses and enterprises will become SaaS targets, too, as they learn that a hosted offering will give them the same control over their software while freeing up IT staff to focus on core projects. When I was growing up, if we had a power outage we would call Fred, the guy who worked for the electric company we knew him and we knew where he lived, says Easterling. When customer care changed over to an 800 number in the 80s, it was a bank of Freds handling 200 calls, and it felt very impersonal. But eventually we realized that to migrate to better service, you have to let go, and thats what is happening here.

Looking for More?
Yankee Groups Steve Hilton, nGenXs Robert Bye, 19 Marketplaces John Krzykowski and Perimeters Clark Easterling will be on hand for an educational session on SaaS at the Spring 2008 Channel Partners Conference & Expo, March 10 – 12 in Las Vegas.


Perimeter eSecurity
Venture Group Enterprises
Yankee Group Research Inc.

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