Bridging the gap of death

When did software-as-a-service emerge from the shadows and take centre stage? Xero’s emergence from a lightweight accounting product hosted on the cloud to a platform with its own partner ecosystem is as good a herald as any. For many in the software-as-a-service (SaaS) industry, it proved their time had come.

New Zealand-based Xero, a provider of accounting software services, may have made headlines last year with a $180 million investment and user base shy of 250,000, but it wasn’t the only SaaS vendor that made major strides. In 2013, SaaS and cloud started to become the default option for many customers, and partners needed a compelling reason to suggest an on-premise solution.

According to interviews Telsyte did with 324 Australian CIOs and IT decision-makers, SaaS penetration is as high as 63 percent. Telsyte predicts software spending to rise 5 percent this year as CIOs seek greater interoperability and certainty in subscription costs.

Looking ahead to 2015, CRN believes that partners without a go-to-market cloud strategy are at risk of irrelevance.

Alongside established SaaS vendors Dropbox, Salesforce, Evernote and Google Apps, a cohort including AccelOps, Custora and Rootstock offer fresh opportunity. However, partners may not need to go past existing relationships as vendors buy or build cloud solutions.

Time to research, audition and build relationships with promising SaaS vendors is the number one barrier. “The cloud has taken away a lot of systems integration complexity,” says Xero managing director Chris Ridd; in its place “the concept of a cloud integrator is starting to emerge”.

• The origins of software-as-a-service

• Can incumbents challenge disrupters in SaaS?

• The SaaS accounting war

For resellers, the SaaS opportunities are leavened with fear, uncertainty and doubt. How will I manage my cashflow as it transitions from big, upfront sales to annuities? What is to stop the vendor wedging between my customer and me? Won’t I have to cannibalise my existing products that have high profit margins?

While these are valid questions to ask, the fear can be over-amplified, says NewLease head of cloud strategy Stephen Parker.

“One of the great myths was somehow there would be this big dip in revenue,” Parker says.

“But you’re either a start-up in the cloud with low overheads who builds the book quickly or you’re an existing player who is going to continue selling what you’ve always sold and just a percentage will diminish as more cloud stuff comes onboard.

“How do you manage the transition? You have to say, ‘I’ll sell cloud in everything I do and the hybrid will shift over time’ or ‘I’ll have a start-up unit that I’ll load all the costs into’.”

Resellers must understand that consumption patterns have changed. The long, slow burning and big-dollar deals were replaced with rapid decision-making and incremental features. Think of SaaS like the discretionary lollies that line the supermarket checkout aisle. Now, imagine the whole supermarket is like that – that’s what selling SaaS is like.

“In a world where a customer can turn off a service, you must have great customer satisfaction because time to value is critical,” Parker says.

“The smart thing isn’t to sell $1.5 million of software but to deliver just enough to get a quick win and then come back in a month because I don’t want to complicate things. But for an extra $1 a mailbox I can give you the advanced reporting model.”

Next: Microsoft vs Google

No conversation about the rise of SaaS is complete without referencing the battle between Microsoft and Google for the productivity space. Microsoft has had worthy contenders to its crown as productivity software king in the past, notably Novell, Corel and Word Perfect, but it sent them packing. Google’s SaaS model for the cash cows of email, word processing and spreadsheets is the first to change the fundamentals of software delivery in a meaningful way.

After the initial hubris of ignoring an indirect channel, Google has sought to enable partners, many of which record the fastest-growing revenues in CRN’s annual Fast50 list.

“For businesses, moving to the cloud means a more simple, secure and affordable IT experience,” a Google spokesman says.

“It can also mean an increase in demand for services from the channel as people look for experts to help provide hands-on deployment or technical support.”

Google and partners such as Cloud Sherpas booked impressive wins last year including Woolworths, which shifted its 26,000 employees on to the SaaS platform to use Gmail, Google Calendar and Google Talk.

Microsoft, which ends its Telstra exclusivity for Office 365 in a few months, claims the cloud suite is the fastest growing commercial product in its history – worth in excess of US$1.5 billion a year.

Microsoft Australia channel director Dean Swan says Office 365 is just the most obvious wisp of the vendor’s cloud strategy that also includes Azure, Windows InTune and customer relationship management platform Dynamics.

“Locally, we’ve seen over the past 12-18 months a very sharp hockey stick in terms of adoption of Office 365 across the board from SMB to enterprise,” Swan says.

“Mobility is big – organisations, irrespective of their size, are trying to cater to a highly mobile workforce. People are able to work from home, their customers’ premises and whatnot and a big enabler of that are technologies in the cloud and unified communications. Office 365 offers all that.”

Microsoft research found its resellers that adopted cloud had profit margins and revenue growth 1.6-times and 2.4-times higher than traditional partners, respectively (some of that could be explained by the likelihood that many of those partners were start-ups).

For Microsoft partners looking to take on new business, Dynamics is the black horse in a race with cloud-based CRM industry leader, Salesforce, Swan says.

Another area where partners should focus their energy is on creating their own intellectual property (IP) or business processes as a service, such as insurance claims processing.

“The highest point of the evolution is IP services – value-based, unique IP that you build on a platform like Office 365 and you drive that out,” Swan says.

An IP strategy helped Paradyne, which was eighth on the 2013 CRN Fast50, carve a defensible niche for itself, says managing director Loryan Strant.

“It’s based around Office 365 deployment scenarios that allows us to work on more deployments simultaneously,” Strant says.

Sticking to Microsoft also works for Ensyst general manager, Nick Sone. “Our business strategy has been to align ourselves tightly with Microsoft,” he says. “We don’t have competitive offerings so we stay close to the incubation team and roadmap.”

Office 365 and hosted Exchange resonate with customers because they are a “commodity solutions” Sone says. “Azure resonates very well with customers for the same reasons. Storage is now seen as a commodity so it’s price per value.”

And even though the price per mailbox has tumbled to between $1-$2, Sone says the revenue is comparable to on-premise once other services are factored in: “It’s certainly not loss-leading.”

“Then we say to our customers, ‘If you believe we can add value once you’re in the cloud, we have our offerings of managed services around that’, which is charged on a per-environment basis.

“We understand the customer’s environment and charge a fixed-price managed service. So we can generate a very good value.

“And having the infrastructure in the cloud with a high service-level agreement gives us the confidence to know we won’t get too many support calls.”

Next: Reseller programs

SaaS vendors are coy about the incentives they offer the channel, but they typically relate to familiar bulk discounts, licences, training and attendance at VIP events often in exotic locations. Many vendors make the point that SaaS deals driven by the partner stay with the partner – to avoid dust-ups over poaching – and that they drive deals back through the channel with content marketing and other activities.

For resellers who were used to making double-digit monthly revenues from each mailbox, bolting on services and scale is critical, especially because the basic service sells for pennies in the dollar. OzHosting CEO Anthony Banek says this has led systems integrators to lose customers or forced them to cannibalise their own services before the competition did.

“A massive driver for systems integrators is end of life for Microsoft Small Business Server,” Banek says.

“I saw a financial organisation was paying a systems integrator $7,000-10,000 a month and they had three mail boxes. They moved to us and they’re paying $21 a month.”

Platforms such as Parallels Automation’s application packaging standard, which are like Google Marketplace for hosting providers, help to orchestrate services such as email, communications and collaboration, Banek says.

Banek is launching a hosted voice service that combines Microsoft Lync, Exchange and SharePoint with cloud storage.“As a service provider, we’re focused on the back office,” he says. “Parallels Automation allows us to cherry-pick different services and products that complement our core offering.”

The price is right

Evading fierce mainstream competition with localised services has helped Epic IT maintain profit margins, says the cloud provider’s founder and managing director, Greg Markowski. The WA CRN Fast50 lister appeals to Perth companies that want to keep their data in the state, prominently displaying this fact on the landing page of its corporate website.

“There is no need to slash your prices drastically if your price reflects a very good product that is locally supported in the same city as your target market,” Markowski says. “Having said that, our prices are still competitive but they are not rock bottom.”

Markowski emphasises Epic IT’s value over a competitor’s price when talking to customers, such as the local support and service that has customisation, integration and migration.

“I don’t really believe in cannibalisation. If a business does this, then they are not marketing to the correct audience and should change their focus rather than their price.”

Annuities have also provided Markowski with confidence for budgets and planning: “The key is client satisfaction, which is great [because] it eliminates companies that sell and burn.”

Epic IT will soon release cloud “building blocks” so customers can assemble their own solutions like Lego bricks.

“Every ICT company will eventually have to submit and come to the party by either directly supplying or reselling SaaS or cloud otherwise they won’t survive. The growth will also be proportional to Australia’s infrastructure with factors such as the NBN or lack of NBN.”

• The origins of software-as-a-service

• Can incumbents challenge disrupters in SaaS?

• The SaaS accounting war