Adding a SaaS business means a new economic model for the channel

While lots of channel partners are looking to jump onboard the software as a service (SaaS) bandwagon, if they’re going to be successful one analyst says a restructuring of their relationships with clients and vendors, the skill sets of their consultants, and their revenue expectations will all have to change.

With SaaS a whole new business model is needed says Michael Speyer, a senior analyst with Forrester Research in Cambridge, Mass. In a recent report, Speyer wrote that as SaaS drastically changes the way businesses pay for applications, it’s also affecting the business models and revenues of the SIs and VARs that bring the products to market.

“Continued SaaS adoption will require a healthy channel that can provide the sales and implementation coverage need to reach a broader ‘early majority’ audience,” said Speyer. “A new breed of systems integrator that specializes in SaaS delivery is emerging; bringing business models that are tailored to the economic realities of SaaS and that don’t carry the baggage of traditional on-premise project delivery.”

One of the challenges in adapting to SaaS centres around revenues. There will be less opportunity around license and per-seat revenue, implementation, customization, post-delivery add-ons and extensions, and project size will be smaller. On the plus side, there will be more partner opportunity around business process change management consulting, and the data integration opportunity will be unchanged.

New skill sets will also be required of your consultants. Since SaaS favours helping clients adapt their processes to the SaaS apps’ embedded best practice, Speyer says getting customers to buy into this will require skilled business process and change management consultants to help build stakeholder consensus and guide the business through the change.

“As a result, the technical integration and customization services revenues shift to process transformation projects – and into the coffers of SIs and VARs that have these consulting skills,” said Speyer.

To be profitable selling SaaS to the mid market, Speyer also says SIs and VARs need to rev up their sales activity in order to maintain revenues due to the smaller revenues and shorter durations of SaaS projects, so increased focus on lead generation and sales will be key.

Toronto-based solution provider and Microsoft Gold Certified partner Legend Corp has built a thriving SaaS practice. Legend Corp. president Andy Papadopoulos says it’s been a great market for his company.

The SaaS model has forced Legend to better understand its clients’ needs. By working on a project basis you deal with one component at a time, says Papadopoulos, but with SaaS you need to really understand how the client runts its business, and where the pain points are.

“We find it gets us a little more intimate with our clients, and positions us more strategically with them,” said Papadopoulos.

Some adjustments are necessary though, he says. Most SIs aren’t provisioned for 24 by 7 service, so getting into SaaS requires SIs to create the processes and the infrastructure to support that.

There is a staffing benefit to be realized as well. With SaaS, rather than having a person dedicated to one client, that same person can service multiple clients, says Papadopoulos.

“Generally your profit on a SaaS engagement is more than on a consulting engagement, because you’re able to leverage (your staff),” said Papadopoulos. “You get a little better resource utilization out of someone through SaaS.”

While as Speyer notes the upfront revenue may be lower with a SaaS engagement, in addition to the employee utilization gains the fact that SaaS brings predictable, recurring revenue is a big plus for Legend Corp.

“The utopia for an SI is what we refer to as recurring revenue, where I’m getting a cheque every month,” said Papadopoulos. “That’s something any business owner would love to have, because it’s predictable.”

Legend Corp. still does traditional on-premise implementations in addition to SaaS, and what Papadopoulos says he likes the most about SaaS is that, when he’s talking to a client, he can now offer then a second set of choices. They can build and implement the solution and train their staff on it, or they can offer it as a service for six to 12 months to keep their costs down.

“What I really enjoy about the model is that it’s now a choice,” said Papadopoulos. “Our clients really like that they can make a decision, and now we’re not stuck with losing an opportunity to another provider, because can provide both choices.”

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Jeff Jedras
Jeff Jedras
A veteran technology and business journalist, Jeff Jedras began his career in technology journalism in the late 1990s, covering the booming (and later busting) Ottawa technology sector for Silicon Valley North and the Ottawa Business Journal, as well as everything from municipal politics to real estate. He later covered the technology scene in Vancouver before joining IT World Canada in Toronto in 2005, covering enterprise IT for ComputerWorld Canada. He would go on to cover the channel as an assistant editor with CDN. His writing has appeared in the Vancouver Sun, the Ottawa Citizen and a wide range of industry trade publications.

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