There are two truths in the world of online business software. One, that there is more software out there than anyone could hope to sell, with new applications appearing weekly. And two, the number of resellers that can hope to sell software-as-a-service profitably is a tiny fraction of the existing reseller market.
The transition of software from on-premise to the cloud is nothing short of a revolution. There is a conundrum facing vendors and the channel: how easy is it for resellers to ride the wave rather than get flattened by it? Are they storming the barricades or merely lining up for the guillotine?
Resellers face difficulties in the essential task of moving their businesses to a recurring revenue model. This takes time, money and fortitude. But once a company obtains a strong line of customers tied to one cloud application, other software vendors come knocking. In a market packed with wannabees, cloud vendors are backing those they believe will be winners.
Following the pioneers
In February 2011, Artis Group managing director Chris Greatrex found a proposition too good to refuse. The Sydney-based IT solutions provider had built a business on managed services, telco, on-premise and hosted installations, when another Sydney reseller, the Missing Link Network Integration, offered to buy the infrastructure arm.
“There was really a lot of good luck finding a buyer for an infrastructure business. You couldn’t do it today,” says Greatrex.
The deal made sense. The Missing Link had a reasonable mid-market customer base while Artis had a string of enterprise clients. Since the sale, Artis went on to structure itself as a cloud business.
While bidding farewell to the hardware business meant giving up the chunky revenues, Artis Group has continued to expand. The company made its first appearance in the CRN Fast50 last year, when it reached 34th place by growing 27 percent to hit an impressive $10 million turnover.
Greatrex recalls it was difficult to kiss goodbye to the big sales in infrastructure. But how fast times have changed. “I’m glad we’re not in that position now. That’s a tough place to be. We were very lucky being able to sell that business in one fell swoop.”
As many vendors, channel players and analysts have said before, the hardest part with this shift from huge capex sales towards recurring revenues is weaning the sales team from high commissions to the long view of annuities.
Greatrex took a band-aid approach. “We just ripped it off.
We weren’t heavily reliant on product sales – there was already a large services component.”
Artis Group has a sales incentive for the first 12 months of a subscription although this is secondary. “We have a fairly high performance-based component across all salaries and commissions. As the guys build up their client bases, they are unlikely to leave in a hurry because of the recurring revenue in the business to recoup the effort,” Greatrex says.
This has a positive impact of making it easier to hang onto sales staff. If they stick around, they will still be collecting for sales they made five or six years ago.
Artis Group’s second stroke of luck was backing SAP’s nascent cloud application Business ByDesign. Artis is now the biggest partner for SAP’s cloud baby in Australia and New Zealand. Australia has done exceedingly well, with the platform’s biggest client: 8,500 seats under the NSW government.
Greatrex pauses when asked for advice for resellers hoping to follow in Artis’ footsteps. “What advice would I give them? God, good question. It’s very difficult because everyone has to find their own path to some extent. I’d like to say we were strategic but the fact the opportunity came up was incredibly fortunate. You just have to take the money you are earning and start investing it into [services that provide a] cloud-based recurring revenue.”
Sometimes this will come at a cost of existing revenue streams. While some companies reselling on-prem versions of SAP or Microsoft Dynamics AX “don’t get out of bed for less than $1 million”, the cloud versions will cannibalise those sales, Greatrex says.
For Artis, the average SAP Business ByDesign deal is worth about $200,000 to $400,000. Although the numbers are smaller, the deals are easier to come by. There’s no need to talk about system requirements, or how security is going to work, or backup processes. “It’s all packaged and ready to go. We don’t have massive overheads,” Greatrex says.
Next: What vendors want
Ask a cloud software vendor what they look for in an ideal partner and the answer is often unsatisfying. The easy answer: find a reseller who is already good at selling someone else’s software. Once a company has made the transition to an annuity model they can find complementary products to accelerate growth in monthly revenue.
New Zealand enterprise resource planning vendor Greentree is one of many on-premise software companies selling hosted versions under the ‘cloud’ moniker. It boasts a litany of mid-market Australian customers across utilities, healthcare, not-for-profit, wholesaling and engineering.
Last year, the company went to the US to research this very topic – who is doing well at selling the cloud?
Chief executive Peter Dickinson says the channel has split into two camps; value-added resellers (VARs) and what he dubs “commoditised service players”, or CSPs.
A CSP has no control over market development but instead lives as an extension of a vendor’s delivery network. The best example is Salesforce.com. It generates many leads through big marketing campaigns and its high profile. A customer can sign up for Salesforce.com but they can’t do the implementation, so the vendor puts that business out to its partners for bids, Dickinson says. It could be training, customisation or as part of a broader consulting project.
“It’s a totally different business dynamic. We’ve seen over the decades lots of businesses that have attached themselves to the big hairy mammoth. While the tap is turned on, it can be a fantastic business, but if for some reason the tap is turned off then you no longer have a business,” Dickinson says.
Some VARs may see the CSP model as a better way to do business. Sales and marketing may not have been a classic strength; they just want a steady pipeline of consulting engagements.
“CSP is really about convenience because I can just deliver well to business as it turns up,” Dickinson says.
The CSP model isn’t for control freaks who want to hold the destiny of their business firmly in their own hands. Market development is a hard skill to master, but this also makes a VAR more valuable to a vendor as they expand the sales channel as well as the delivery channel.
Greentree’s channel comprises solely of VARs, whether they’re deploying a custom system on premise or in the cloud.
Besides market development, what other skills make for a good seller of software? When it comes to selling ERPs or business management systems for mid-market, a reseller needs to understand the intersection of business and technology. This applies twice over in Greentree’s sweet spot of reasonably chunky, mid-market companies.
“The critical issue is really deeply understanding the customer’s business and what makes it tick. What can technology solutions do to empower that company?” Dickinson says.
Margins still play an important role in covering that crucial pre-sales period. Greentree partners spend a lot of time in the early stages scoping requirements and putting forward solutions. In the current model, resellers don’t really get paid for this – it has become part of the cost of sale.
A CSP has to start the clock as soon as they walk through the door because they tend to not receive a margin on the software. The reasoning is simple: the vendor needs the margin to pay for the cost of market development, which a VAR would otherwise cover.
Delivery is not enough
Cloud-based billing software company Zuora is looking to add partners in commercial and mid-market but only if they can bring in new customers. Delivery is not enough.
“I want to see a much more oriented sales channel and then build out the services. We obviously want to pass deals down to partners and they can build on our methodology,” says Greg Cullen, vice president for Asia-Pacific.
Zuora has a deep services team to tackle big implementations in media and other key industries, projects that might take a year to roll out. The channel can expect smaller deals to still take 90 days.
The key skills to selling an enterprise integration platform like Zuora are expertise in billing, APIs, CRMs and solid, finance-based experience.
This combination can be found in Oracle partners moving to the cloud (“legacy software partners”, in Zuora-speak), but often it’s experienced Salesforce.com and NetSuite resellers expanding their pie.
Zuora has an 80 percent attach rate to Salesforce.com and 50 percent to NetSuite. ERP resellers often understand the transformational objective and know how to manage expectations and work with stakeholders. Hardware resellers will struggle, however, Cullen says.
“If you’re a traditional break-fix kind of guy, unless you have expertise around billing then it’s a struggle. If [the reseller is prepared to make] a huge commitment and they want to move to a consumption-based model then we would certainly look at it. But I don’t think there would be as many people who would take that risk,” Cullen says.
The SaaS market is also ripe pickings for system integrators and managed service providers looking to launch products based on their own IP. John Munnelly is one such IT provider. The chief executive of professional services integrator, North Sydney-based Hands On Systems, took a similar approach to selling Financials for Office 365, a hosted, customised version of Microsoft NAV. Rather than spending time finding its own partners, Financials for Office 365 is sold only through partners in Microsoft’s Office 365 channel.
“Our game is to attach to customers who already have Office 365 and use those partners who sell it to make their customers sticky,” Munnelly says.
He is aware that many Office 365 partners don’t know how to sell accounting software. In a reversal of the Salesforce model, Financials for Office 365 operates more like a referral scheme. It picks up the lead from the partner and implements the software itself.
The upside for the partner, beside a small commission, is the opportunity for more services.
“Our reporting is in Excel and Power BI because we are attached to Office 365. So partners can use their Power BI and SharePoint skills to build financial systems attached to those products,” Munnelly says.
The partners who perform best with Financials for Office 365 are growing companies looking for another line of services revenue. Those that focus on industries also do very well. Vertical partners tend to have intellectual property for that industry that helps them understand how to get the most out of the solution for the customer.
Financials also gives partners level-one support, which then effectively turns the reseller’s own accounts person into a revenue-generating role.
Munnelly can see that the annuity model will win out for software vendors such as Financials for Office 365 as well as professional services resellers such as Hands On Systems.
“End users don’t want to pay big dollars upfront for accounting software. It’s irrelevant what we do as vendors; it’s all driven by customer demand.”
Tips to make the change
Moheb Moses from Channel Dynamics has had plenty of experience advising vendors and resellers on the transition to the cloud. His tips for break-fix resellers are to start early and take it slow.
The first step is moving to a managed services model. A break-fix business selling capex-based deals has a lumpy revenue; big wins show up as ‘sugar hits’ to the company’s cash flow.
Managed services move the hardware refresh cycle to a three- or five-year contract. The price can still have a large sign-on component, depending on the size of the initial install, but the key is locking in recurring high-margin services.
Now the business is operating on annuity revenue with good services margins, it can start to layer SaaS on top and build up that long-term subscription margin.
“Changing the billing systems is one of the hardest challenges. The other one is just the impact on cash flow. You do need to find a way to fund this because your revenue changes – it goes from a $100,000 deal to a $5,000-per-month deal. In that first month, you’re now $95,000 short and you’ve got to find a way to get around that,” Moses says.
The next step is weaning the sales team off those sugar hits to the slow-drip payback of SaaS. This happens in two steps: one is creating the compensation structure; and the other is recalibrating the sales culture.
“If an organisation has hired sales guys who are very good at winning business, they are typically good hunters, not nurturers. In a SaaS model, it’s driving usage and nurturing accounts,” Moses says.
The message from vendors, cloud resellers and consultants alike is that the sooner you start the transition to an annuity model, the better chance you have of surviving – or even prospering from – the business software revolution.
The software diaspora
The race is on to move desktop software to the cloud before challengers can establish themselves as the new incumbents. Software heading to SaaS can be broken into several families.
Small business accounting: Incumbents MYOB and Reckon got a dreadful shock when Xero blazed into the marketplace and are trying to catch up with a mix of hosted, hybrid and browser apps. Others such as Saasu.
ERP: JCurve and NetSuite had this space to themselves for a while until SAP released SAP Business ByDesign and now MYOB has rebadged Accumatica instead of upgrading MYOB EXO. Greentree and other on-premise vendors have moved to hosted versions with mobile extensions.
CRM: Salesforce.com rapidly became the world’s most popular CRM but now Microsoft is making in-roads with Dynamics Online. Expect to see a lot of attrition among small desktop players as the market is flooded with cloud competitors.
Retail: Desktop vendors allowed Vend, MYOB Kounta and other iPad-based solutions to snatch a growing share. Now the desktop apps are moving to hosted or online versions to match faster deployments, easier centralisation and real-time updates.
Billing and accounts: Automated data processing for SMBs was never really a category until cloud apps came onto the scene. Concur, a long-time cloud vendor with a big enterprise base, is looking to stamp out the small guys.
Productivity: Microsoft took a long time to come up with an answer to Google Apps. Since Office 365 launched in mid-2011, it has grown strongly and with Skype this desktop vendor is putting up a terrific fight.
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