On-Demand Software: Threat Or Opportunity For VARs?

Zeroedin has one foot firmly planted on either side of the software-delivery divide.

The Corona, Calif.-based solution provider specializes in integrating Microsoft’s Retail Management System with back-office applications. As part of its work in the retail industry, Zeroedin resells Microsoft’s Dynamics NAV on-premise ERP software package as well as NetSuite’s on-demand ERP applications.

That dichotomy, says managing partner Amy Servi, puts Zeroedin in prime position for a software-as-a-service (SaaS) future. “We will have a distinct advantage in that we understand that whole on-demand licensing model,” she says.

As much as 25 percent of new business software will be delivered as a service by 2011, up from just 5 percent in 2005, according to market-research firm Gartner. And market researcher IDC predicts on-demand software sales will exceed $8 billion this year alone.

Numbers like those represent both a threat and an opportunity for solution providers. As established software vendors and start-ups adopt the SaaS model for delivering application functionality, VARs that make a living from big implementation projects or by following the traditional route of loading applications onto a server and selling turnkey systems will, at the very least, lose out on new business opportunities.

“With software-as-a-service, there’s no box-moving. It’s a service play,” says Minneapolis-based Tier 1 Research analyst Mike Mankowski. “This is a new mindset in software. In fact, it’s not even software; it’s selling business functionality.”

Solution providers that offer value through managed services, business-process expertise, vertical-market know-how and experience integrating on-demand software with other applications can thrive in a SaaS world. Mankowski sees opportunities to lead on-demand software-sales efforts to small and midsize businesses those with 50 to 500 seats whose on-demand implementations require customization and configuration.

But as on-demand software becomes more prevalent, solution providers must adjust to doing business differently, including new cash-flow realities. Resellers have traditionally made a big chunk of their revenue through up-front sales, installation and periodic system upgrades. With SaaS, the hardware infrastructure is owned and operated by the hosting company and software upgrades are automatic. “You’re not going to be seeing these $100,000 upgrades,” Servi says. “Now that’s all going to be up to the vendor.”

In the past, nearly half of all professional-services work performed by solution providers was related to IT infrastructure, says on-demand software consultant Eric Berridge, co-founder and principal of Bluewolf Group. “That 50 percent is gone in the software-as-a-service world,” he says.

While demand for solution providers’ implementation, integration and business-process-management services will still be highest during the initial customer engagement, getting that big check up front for a software sale may also be a thing of the past. “With on-demand, you make your money in subscription renewals,” Servi observes. “VARs are going to have to get their heads around that recurring revenue model.”

NEXT: The flip side of the equation.

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.

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.”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.

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.)

Owning the relationship with the customer or, at the very least, clearly delineating the solution-provider and vendor roles and responsibilities, is critical for channel partners. Without that, customer confusion and channel conflict can result.

“We own the relationship. That’s the value we bring to our customers,” Gatestone’s Frazier says. While Visitar hosts its software, Gatestone works with Visitar to implement it and provide the first level of customer support. Gatestone also handles the billing and earns margins of up to 35 percent on Visitar’s monthly fees, based on the number of seats it sells. Gatestone even white-labels Visitar’s applications.

Zeroedin is usually the relationship-holder with its clients, but in some cases NetSuite is the primary contact. The key is that one party or another takes the lead. “At the end of the day, it’s going to be very confusing for the customer not to have one point of contact,” Servi says. In either situation, NetSuite handles the sales transaction and billing, and communicates with clients about such issues as planned downtime for service maintenance.

Technology consulting firm Moulton Strategic Partners integrates on-demand applications from Salesforce and Business Objects for its independent financial-planning-firm clients, and provides its own wealth-management software, report templates and technical expertise. But the relationships among Moulton, its customers and the software vendors can differ. When Business Objects’ Crystalreports.com on-demand reporting application is part of an implementation project, Moulton handles the billing arrangements with the client and earns a percentage of the sales price, says vice president and principal Bruce Moulton. But Moulton’s customers work directly with Salesforce to order and pay for the vendor’s CRM apps, with Moulton sometimes earning a referral commission. “That’s the way they work. That’s their model,” Moulton says of Salesforce.

There’s no shortage of start-up companies offering SaaS applications, either. And that’s creating more opportunities for solution providers. Vocus relies on channel partners to resell its on-demand corporate communications and public-relations applications. Likewise, Alert Logic, a supplier of on-demand network-security and vulnerability-assessment applications, has acquired about half of its 150 customers through its channel partners. In December, Alert Logic added 15 VARs and service providers to the Vanguard Partner Program it started last August.

Business Security Solutions resells Alert Logic’s on-demand apps, offering it as a managed service to its customers, says president and CEO Larry Dannemiller. “We’re really the front end of Alert Logic’s sales organization, the lead gatherer,” he says. Business Security Solutions earns fees based on initial contracts and renewals. “It’s a nice revenue stream,” he says.

Reseller Data Return white-labels Alert Logic’s services, handles the customer billing, and manages the connections between the customer and Alert Logic’s back-end network-activity-analysis services. “As far as our customers are concerned, they are getting their network-security monitoring through Data Return,” product line manager Tony Savoy says.

Neocase Software, which offers on-demand and on-premise versions of its customer-service applications, launched a channel program last September to enlist solution providers with the ultimate goal of driving some 95 percent of its sales through channel partners, says Tara Ryan, senior vice president of global marketing. In December, the company announced it had signed up more than 20 channel partners, including some Microsoft resellers, such as ISS Group, Tribridge, Altico Advisors and Navint Consulting.

On-demand project-management-software developer eProject takes a similar tack, relying on solution providers with expertise in best-practice, project-management methodologies to help customers implement eProject’s PPM6 product. Some of eProject’s partners are more traditional resellers to 20 percent of the company’s sales are through partners; while others focus on consulting and let eProject take the sales lead.

David Blumhorst, founder and president of Effective IT Group, is an example of the latter. EProject calls Blumhorst in when customers need advice about prioritizing and executing projects and managing project resources. “It’s easier to bring the business-process expertise into play with a SaaS; tool,” he says. “It frees the customer up to work on the business-process side.”

The SaaS world continues to evolve. In November, Business Objects acquired Nsite Software, an on-demand application platform through which Business Objects will offer expanded on-demand data-analysis services and allow ISVs and channel partners to build add-on SaaS analytical applications, says Steve Lucas, vice president of on-demand software and services.

Also, Salesforce unveiled plans last December to create a partner-referral program to boost ISV sales through its AppExchange network and direct-sales representatives.

SaaS means more emphasis on business expertise, value-added services and nurturing ongoing relationships with subscriber customers, and less emphasis on big-bucks implementation projects. “More and more of what we do is tied to online applications and less and less to physical implementations,” Moulton says.