Debunking myths about the SaaS partner channel

There are a couple of widely-held myths about the SaaS partner channel that I saw being debunked in the closing months of 2008. No, neither of them were the hoary old myth that SaaS vendors don't need partners because they can use the Web to sell direct — the dot-com bust proved that one wrong. Solution providers are still alive and well on the Internet, but to succeed they have to ignore some common preconceptions. Here are two statements I often hear from vendors and other experts when talking about SaaS:

• SaaS vendors need channel partners because customers will only buy business solutions face-to-face
• SaaS partners have to run lean operations because their margins are slimmer

Both of these assertions are just plain wrong — and I have to confess, that's not something I would have expected until I heard the evidence.

First up is the assertion that SaaS business solutions have to be sold face-to-face. I heard this point made very firmly by SAP last year talking about its experiences with its Business ByDesign offering. It had originally hoped this would be bought self-service via the Web, but later found it required at least a day's face-to-face requirements discovery. This led SAP to conclude that it would have to rely on partners with specialist vertical expertise or existing local trust relationships. It seemed a logical conclusion, knowing that another SaaS business suite vendor, NetSuite, operates a network of regional sales offices precisely so that it can be close to its customers.

But then in November I moderated a solution provider discussion at the SIIA OnDemand conference in San Jose, in which four solution providers who work with, respectively, Intacct, Intuit, NetSuite and Microsoft, spoke from their own extensive experience. There's a very good video of the complete session online now. The most surprising insight of this very informative panel discussion was that SaaS solution providers are getting smart at using the Web to sell, close and deliver solutions remotely — often without any face-to-face contact at all. What this tells us is that the trust factor that determines whether a customer is prepared to go ahead or not is more complex than simply a matter of direct personal relationships. Branding, web presence and competence (ie how effectively the vendor and the solution provider each conduct themselves via the Web) all play their part. I'm sure there are still plenty of cases where face-to-face meetings are needed, but they're not the only trust mechanism.

The second fallacy about margins stems from the calculation that solution providers miss out on two big chunks of upfront revenue when they switch to a SaaS model. They lose the technology implementation charges they'd have made when selling a conventional on-premise software package, and instead of getting the full perpetual licence fee as a lump sum, they have to make do with a monthly subscription payment. The conclusion reached is that they receive much less revenue and therefore margin in the first year of a SaaS deal than they would from a conventional on-premise solution.

What this calculation ignores is that a SaaS solution also includes the hosted infrastructure, and the customer now pays the provider to run that infrastructure — money that used to be spent on in-house resources and which therefore never reached the vendor or its solution partner. I was reminded of this when I heard that Microsoft's own sales force makes more money selling its Online Services than it does when selling server licences because the overall revenue is higher, even though the margins are lower. Actually, the margins don't need to be lower, that's just a by-product of the chosen price point and operating costs.

I hosted a webinar in September in which Herb Prooy, CEO of SaaS enabler SaaSplaza, talked through an example of solution provider margins when offering Microsoft Dynamics NAV as SaaS [disclosure: this was a paid engagement]. He showed that it's possible for a solution provider to make more money in the first year of providing a SaaS solution than from selling the same solution outright as a conventional on-premise implementation.

One element that helps is that Microsoft's service provider licence agreement (SPLA) is a baseline price to which the partner adds a margin of their choice, rather than being a list price from which the customer tries to win a discount. But the main factor is the lower cost of providing the infrastructure as a hosted solution compared to the customer's total cost of ownership for running the on-premise implementation. What the customer would have spent on running their own servers becomes potential margin for the solution provider. To see the figures for yourself, listen to the webcast. Prooy's margin calculations start at about 35 minutes in.

Of course, SaaS channel partners still have to run lean operations — but then, everyone does to stay competitive these days. The important takeaway from the findings I've outlined here is that the SaaS business model holds a lot of surprises, both for ISVs and for solution providers. And that some of them are pleasant ones.