What's a VAR To Do With SaaS?

There’s a new VAR channel for Customer Relationship Management (CRM) systems, Enterprise Resource Planning (ERP) applications and other similar types of business software. It’s smaller (for now), it’s lets publicized and its clearly in its formative years. However, the visionaries and early adopters of this channel are making their investments, executing their business plans and preparing to capitalize handsomely on the transition from on premise business software systems to software as a service (SaaS) applications.

SaaS has not only changed the business software procurement and delivery world for customers, but is clearly changing the business models and livelihoods for Value Added Resellers (VARs), software manufacturing business partners, system integrators and the host of indirect channel members which compliment software publishers for the sale, implementation and support of CRM and ERP business applications.

VARs and channel partners have become integral for the sale, delivery and support of on-premise or licensed business software solutions. They successfully deliver the client facing experience in order to bring leadership, project management, structure, specialized skills and assurance to the software procurement and implementation processes. Many have become symbiotic with the software manufacturer to the point where a client sees little or no difference between the two companies. However, behind the scenes the differences are clearly evident. Tasks and responsibilities are divided, there is very little overlap and each partner makes its livelihood from very a different business model.

SaaS business applications dramatically change the VAR business model which has matured and settled over the last 20 years. VARs selling the traditional buy-it-up-front software licensing procurement method have grown their business models with fairly low volume and high margin software products backed by annual maintenance plans and high margin professional services. It’s no secret that licensed product margins have eroded somewhat in the last several years, however, still remain high relatively speaking. The SaaS model turns the on-premise business model on its head. This model mandates high volume, low margin software sales backed with an annuity revenue stream. How low are the margins? Highlights of the top three SaaS CRM software publisher programs are illustrated below.

The downside is that the SaaS model offers a longer road to profitability. The upside is that the quality of earnings is higher as they are recurring and therefore more predictable.

Professional services revenue potential remains fairly constant among the two delivery models, however, the types of services have changed. No longer are tasks such as software installation, database tuning, operating system optimization, information security and similar technical services provided by the VAR as these are now delivered by the hosting service. However, key consulting services such as data conversion, conference room pilot configuration, project management, change management, training, system integration and software customization remain in very high demand and are integral to implementation success – whether on premise or SaaS. Successful SaaS VARs will have a lesser technical focus and a much greater business management focus.

According to IDC research analyst Darren Bibby , "For traditional partners who made their money on finding IT complexity and solving it, a lot of that goes away with Software as a Service." In a recent 2007 IDC research report titled "The Emerging SaaS Channel", IDC offers advice and suggests partners adopt the below strategies.

• Make yourself essential to customers by lending business process expertise to improve their SaaS experience.
• Make yourself indispensable to SaaS manufacturers top line revenue production with your sales, marketing and referral capabilities.
• Provide system integration to legacy applications and across customers SaaS systems.

The change in a VAR's business model from licensed product sales to SaaS subscriptions is significant and many VARs have reacted by ignoring, dismissing or chastising the SaaS evolution. These are often the VARs that like to repeat FUD (fear, uncertainty and doubt) statements regarding purchase versus rent Total Cost of Ownership (TCO), continuous uptime reliability and information security concerns – all items initially valid with the SaaS era introduction, however resolved years ago to the favor of SaaS. Taking a denial approach or failing to capitalize on the SaaS evolution is little more than a berry your head in the sand approach and those VARs who choose to fight the momentum will ultimately be replaced by more forward thinking VARs who choose to adapt their businesses to SaaS.

Frankly speaking, the SaaS software manufacturers have not really figured out or flushed out their VAR and channel partner programs. NetSuite has turned over four channel managers in as many years. Salesforce.com is making strides but partner pains and turnover are evident. Aplicor’s program is the most mature and partner friendly, however, remains small and seemingly more focused internationally than in North America. We expect that these SaaS providers will mature their programs with time as well as be challenged by new market entrants who have grander plans for VAR participation. Clearly those VAR’s who establish their place early will inherit the greatest upside and most profitable business models.