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Six considerations for SaaS in the channel

The SaaS model has a long-term impact on channel compensation and relationships

Rent or buy. For those entering into adulthood, this often marks the first of what will be a lifetime of major financial decisions. In the b-to-b world, many of those who once chose to buy have now become renters, enticed by the flexibility provided with a software-as-a-service (SaaS) model.

As the model grows in popularity, the number of pure-play SaaS providers has exploded, pulling with them on-premise suppliers that have quickly moved to add SaaS offerings to their mix. Either scenario provides unique challenges for organizations selling through third-party channels, challenges that must be proactively addressed in order to avoid significant upheaval. In this brief, we will discuss the repercussions of a SaaS-based approach on channel relationships, and the factors that must be considered (or reconsidered) by those affected.

SIX FOR CONSIDERATION

The impact of a SaaS model on long-held beliefs about how channel partners should be compensated and the relationship between supplier and partner forged cannot be understated. We have identified the following seven core SaaS-based factors that must be taken into account by the channel leaders:

1. License revenue. Although programs will differ, SaaS vendors typically offer resellers margins ranging from 15 per cent to 40 per cent for one- or two-year commitments.

These vendors must determine if the channel’s role will be one of a “beachhead” or if they will be called upon to generate additional license demand throughout the customer lifecycle. If the latter is the case, vendors must factor in margin on the sale of additional licenses or risk losing an essential demand creation component. In cases where on-premise solutions are converted to SaaS offerings, those that pull back on reseller margin for add-on licenses must look to offer a mechanism for generating revenue from other sources (e.g. configuration, partner add-ons) to compensate for diminishing license revenue.

2. Maintenance and support revenue. Two of the most important features of any SaaS offering – that there is no maintenance and less support required – either cut off or diminish two historical channel revenue sources. As a result, vendors must actively consider how they can make up the difference.Situations where partners will be asked to drive demand for support must be accompanied by incentive or alternate methods of support delivery (e.g. partner delivered first-line support). A growing reseller tendency is to offer a separate support contract to prospects and customers; while this is fine when the supplier has no support infrastructure, it undermines the supplier if that infrastructure is in place.

3. Upsell/cross-sell revenue. Partners who generate demand for solutions also often offer configuration or training services for additional modules they sell.

Independently, suppliers maintain inside sales teams who call into existing customers to generate demand for these same modules.

Suppliers who wish to optimize their customer interactions and generate product interest must first establish who maintains account ownership. If the customer was originally designated a channel account, suppliers must recognize that the partner “owns” that account; otherwise, you risk alienating the partner who will undoubtedly see this as “poaching” by an inside sales team.

4. Service revenue. A significant part of the channel’s revenue comes from its ability to deliver services for applications they sell. Because SaaS solutions greatly diminish the need for installation services, value-add resellers have shifted their attention to customer training, configuration and consulting services.

When delivering their applications through a SaaS model, suppliers should look to make their products “channel ready” to allow partners to generate complementary services (e.g. integration with on-premise data) which are now required. As an example, this can be completed by offering partners an API interface which they can utilize for integration into existing systems. Any service that is partner-delivered should be quality controlled, certified and governed by the supplier; if anything goes wrong, it’s the supplier that will likely be on the receiving end of customer complaints.

5. Payment and billing. Suppliers that allow partners to bill customers for additional licenses also allow them to keep their margins on those licenses, even when incremental licenses are sold. At the end of the transaction, the partner sends an order to the supplier (minus their discount) for new or incremental licenses. We’ve seen suppliers that manage the billing process for their partners, sending them monthly payments for what at times seems to be small, incremental add-on licenses. The latter is difficult to scale in the SaaS model as suppliers must establish processes and people to manage these payments, the reason why many suppliers are considering letting partners directly bill customers for SaaS licenses. In these cases, suppliers must look for ways to facilitate the billing process and not place the administrative burden on the channel, unless they want partners to add more accountants at the expense of salespeople.

6. Third-party add-on revenue. Prior to claiming that the big win for partners lies in building third party add-on solutions, you must establish processes to recommend or sell a partner’s third party add-on, as well as provisions to promote these tools to customers and other partners. Often, demand for these add-ons is generated by the supplier through a partner portal shared both by partners and a company’s direct sales force. A strong community of ISVs developing solutions that can be purchased by customers either through partners or directly from the manufacturer is a sure sign of marketplace acceptance. Suppliers may find the application of social media and developer communities a worthwhile investment to foster increased developer interaction; they also should consider whether they have the proper infrastructure to support an ISV program before enlisting ISVs into their partner ranks. While it may in fact be feasible to host an application delivered through a SaaS model, suppliers and partners must ask themselves whether the platform is “ISV ready.” Does it provide third parties with true development tools they can utilize to drive value and add onto the main product?

THE SIRIUS DECISION

When on-premise solutions were the only way to buy technology, many channel partners proceeded to build training facilities, hired service personnel and developed into highly effective selling and service machines that could fill all of the gaps in a supplier’s offerings.

While their ability to meet customer requirements rose, so too did their costs. Now, these partners are being asked to turn on a dime and retool their operations in support of a SaaS model that eliminates many of these sources of revenue. It is the responsibility of suppliers to work with their partners to derive new revenue opportunities and clarify changing relationships; when they fail to do so, they are undoubtedly damaging the channel they worked so hard to build.