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The Road Ahead

With competition from start-ups and major vendors, ISVs have to decide if they're going to continue on the path they're on, or drive towards a new business model. Some are choosing to offer software as a service

Many independent software vendors find themselves at a crossroads today.

With upheaval in the industry – ranging from the emerging software as a service model (Saas) to tier-one vendors stepping on their turf – ISVs have to decide whether to stick it out, change their focus or alter their business model.

For Interchange Solutions Inc., an ISV that focuses on customer relationship management for Lotus Notes with its Salesplace product, software as a service (SaaS) hadn’t affected the company much until recently. Now, though, it’s having a considerable effect.

“For the first 10 years of us being in business our competition in the marketplace was really just other ISVs in our neck of the woods, and when we’d go in to do competitive bidding we’d come up against the same companies all the time,” said Mark Wilson, the Toronto company’s vice-president of business development.

But in the past six months Interchange discovered it is increasingly going up against SaaS vendors, including the biggest: Salesforce.com.

As a result, Interchange has shifted the way it goes after new prospects. “We’re having to prove to our prospects why software as a service is not right for them and they should go for an ISV niche market solution,” said Wilson, “whereas we never had to do that before.” As a result, it’s formed a loose alliance with some of its traditional competitors. It’s also had to define its niche markets even further. At press time, it was about to launch a revamped Web site to focus more on industry-specific solutions.

And it also has a SaaS product. “I hate to say it this way, but in a sense, if you can’t beat them, join them,” said Wilson. Interchange can say to clients “we have those skills, instead of just saying goodbye.”

This changing landscape hasn’t affected its profitability yet. “We know that if we don’t adjust and we don’t change, it will.”

For Pandell Technology Corp., a Calgary-based ISV that focuses on the oil and gas industry, turning to a SaaS model has helped it boost business.

Initially, it targeted high-end markets, including government and large oil and gas companies.

“While they pay well, there aren’t very many of them,” said David Beresford, the company’s vice-president of research and development.

The oil and gas industry has plenty of junior start-ups, he said. Those with two or three people aren’t looking to buy an enterprise server and or to hire someone to manage that server – they want to spend their money on drilling oil wells.

To target these companies, Pandell now “rents” its software on a monthly basis. “This is a path for them if they grow,” said Beresford.

New customers

By changing its business model, the ISV now has more than 200 oil and gas customers and its revenues have almost doubled over the past year. About 75 per cent of its revenues is now recurring income.

“Our long-term plans are around taking this business model into other vertical markets,” said Beresford.

There are more than 6,000 ISVs in Canada and it’s a fairly healthy market, said Curtis Gittens, senior research analyst with Info-Tech Research in London, Ont.

Tier-one vendors such as Microsoft and IBM are focusing on expanding their offerings through ISVs, particularly to small and mid-sized businesses. For vendors like IBM, the large enterprise market is saturated and they’re moving downstream through the ISV chain. For vendors like Microsoft that focus on the SMB space, their strength is through ISVs and VARs.

This, Gittins said, is where ISVs are seeing value.

But SaaS is a double-edged sword. Instead of buying an on-premise solution that requires a lot of servers and maintenance from a big vendor, customers can turn to a smaller player for a service solution. “That cuts the ISV out of the middle because the ISV is no longer able to provide a tailored solution,” said Gittens. “That’s where the ISV can see some trouble.”

Market changing

However, the SaaS market is evolving. “You notice that Salesforce.com has the AppExchange component to their offering now,” he said. This is how ISVs can enter the SaaS market, he said, because as more large companies start adopting SaaS, they’ll still require customization and integration services.

Large companies have core competencies that cannot necessarily be handled by an all-encompassing solution. “You don’t become a Fortune 500 or Global 1000 company because your business processes are just like everybody else,” said Gittens. “You have your own special sauce.” Large companies will eventually outgrow their SaaS solution and have to move it back in-house, he said, or they’ll have to add on. In either case, the ISV can play a role.

Sunnyvale, Calif.-based Jamcracker Inc. sees a place for ISVs in the SaaS market. The company’s goal is to aggregate on-demand services for the SMB market; it created a product called PivotPath to streamline and automate the processes for delivering SaaS. Last year it launched the Jamcracker Service Delivery Network where on-demand providers, SaaS companies and ISVs can place their services.

“Our technology can talk to these services and solution providers, telcos, SIs, VARs and MSPs can shop from these 200 services and instantly add these services to their customer-facing catalogues to resell them,” said Don Best, director of marketing with Jamcracker.

“We believe the final piece of the puzzle will be the fact that the channel will be able to resell these with technologies like ours,” he said.

If ISVs don’t have a strong channel, they’re not going to succeed. If they want to expand into new markets, he said, they’re either going to have to build an awfully expensive direct sales force or use the channel.

And they have to make sure they don’t cannibalize current sales when they move to a SaaS model. The pricing model is completely different, he said, and creating packaged software is different from creating a SaaS-enabled model. Multi-tenancy, for example, means that many people can access one instance of the service, yet it’s still secure.

There’s also been an increase in demand from purchasers of technology for companies that can come in and handle the complexity they’re facing, both from a technology as well as a business perspective, said Stephen Graham, group vice-president of global software business strategies with IDC.

What’s emerging is a “software broker,” he said, that blends pre-integration work with a focus on the one-to-many business model that software companies are used to.

It’s a fundamentally different business model. “These companies tend to have partnering and high-level alliances as a core part of their DNA,” said Graham.

“Just to survive they have to be good at selecting partners because those partnerships become part of the legacy of their installed base.”

Shake-up coming

The software industry as a whole is in for a huge shake-up, he added.

“The underlying nature of intellectual property as a core component of this is in my opinion part of a bigger issue around intellectual property management,” he said.

Software companies are going to realize they’re not necessarily in the product market, but their core asset is their intellectual property – and software companies haven’t traditionally been very good at managing their IP.

“It’s fundamental for companies to rethink their business model,” he said. “IP is literally something that could be so potentially massive as to wipe out a lot of companies that have not been diligently doing their work over time.”

Software companies