Can resellers make money out of Software-as-a-Service?

The software as a service (SaaS) model represents a fundamental shift in the dynamics of the computer industry. David Bradshaw, principal analyst with the IT market watcher Ovum outlines issues for resellers - which are also relevant for accountancy firms who get involved with SaaS providers.

Software products provide the 'feedstock' for a wide range of other players in the overall software and IT services market. The switch to software as a service has profound effects on many of these players.

SaaS is becoming an important element of the overall software market, and while it is too early to tell what share of the software product market it will take, we can see that it is likely to rise to at least 20% in the next five years, and potentially much higher. (Gartner Research predicts that 25 percent of business software will be delivered as SaaS by 2011.)

Contrary to what many observers thought, SaaS is taking root in the large enterprise market. One advantage here is that most SaaS providers have already shown that they can scale up to many thousands of users - often a key requirement for large enterprises.

Most elements of the IT services market, including project services, support services, and outsourcing, depend at least in part on the software market. SaaS affects the business models of these players very significantly.

When an SaaS application is the focus of an implementation project, it significantly reduces the technical complexity, timescale, and likely cost of the project. At its most extreme, there is no software to install, so there is no installation phase. Integration with other systems remains an issue, though we anticipate this will lessen over time. And since the vendor does all the support work on the technical infrastructure, SaaS also reduces the requirement for support services.

While these may seem serious challenges to services players, they are actually continuations of existing trends. Applications vendors in particular have made a great deal of progress in reducing the time and technical challenges involved in getting their software up and working. They did this because they needed to - implementation and version upgrade issues had become a serious barrier to new sales and existing customer loyalty. Moving to SaaS is a continuation of the software vendors' strategy to make implementation easier, rather than a new departure. Depending on the speed of SaaS adoption, it could accelerate the process considerably.

While this trend is reducing some of the work that services companies do, it by no means removes all of it. Indeed, some of the greatest problems that user organizations have to confront still remain. One of the biggest problems with any application is how to use it to maximum effect within the user organization. SaaS can give user organizations the impression that they can just switch it on and start using it, but organizations that do this almost inevitably end up using it sub-optimally. (There is one clear exception: where there is a pilot program of early users whose aim is to learn how best to use an application to address their requirements.)

The role of the services companies has to evolve to being more about enabling their customers to gain business value from the software they are using. The service industry has been proclaiming this as its goal, but now it really must deliver on this proclamation or face sharp falls in revenues.

SaaS also fundamentally affects resellers of software, and this is the area where there is the greatest uncertainty. The world's largest software vendor, Microsoft, sells almost entirely indirectly to its end customers. It has made it clear that it is moving towards SaaS and that it expects its channel to follow. However, it is still working on how to deal with the channel - and not surprisingly, since this is a major area of difficulty.

This is going to be a universal problem throughout the industry. As vendors switch all or part of their business to SaaS, the biggest challenge will be the sales remuneration, and the question is the balance of reward between revenues recognizable in the period and total contract value. For example, if a customer signs a three-year agreement for $200,000 per year at the start of the year, the recognizable revenues will be something close to $200,000, while the total contract value is $600,000. If you reward the salesperson on the recognizable revenues, then they will get, say, 1 percent of $200,000 or $2,000. Conversely if you reward on total contract value, they might get $6,000. Clearly, the net present value of a three-year contract is greater than the one-year contract, but there is also a considerable degree of uncertainty that the company will get the future revenues.

Furthermore, there is a balance to be struck between incentivizing new sales and rewarding sales staff for keeping existing customers on board. Trying to find a balance between incentivizing the salespeople and containing sales costs is difficult, and there are many different approaches. The problem becomes even larger for channel partners, as they have the added complication of dealing with the SaaS vendor's reward system and managing the reward system for their own staff.

And a final issue is going to be how to transition from one to the other. If it is any comfort, these are issues that the SaaS players have often been through themselves, so they will be able to provide advice.

However, any organization that is beginning to resell SaaS products over the next year or so should be ready for a period of uncertainty. We realize that this is not altogether reassuring advice! This may appear to be a considerable risk, but not getting involved in SaaS would be an even greater risk.

By David Bradshaw

About the author
David Bradshaw is principal analyst in Ovum's software group. His specialization is customer relationship management, but he also works on the licensing and pricing of software and software business models. The full version of this comment is available from Ovum's website.

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