I am now in the fourth law in Bessemer’s Top 10 Computing Laws and this has to do with software channels. I have so far addressed in my blog entry that a SaaS vendor needs to really live the life of a SaaS company, be part of the SaaS DNA, I have looked into the financials of a SaaS company and sales operations/sales curve for a SaaS vendor.
In this blog entry, I will be focusing on software channels which in the traditional world have enabled software companies to get scalability to address new markets, new verticals and new geographies. As with everything that I write about, I want to put context into it and the reference framework from which I am looking at this. First of all, I have run software companies with both direct and indirect (channel) sales. I have built software channels in Europe, US and Latin Americas. I have sold personally large enterprise solutions to end users around the world.
Let’s get to the statements from Bessemer and their view on Software Channels and their applicability in the SaaS world.
Law #4: Forget everything you learned about software channels.
Bessemer views the software channels very black-and-white and I do understand why they are taking that perspective. All of the years that you have built your relationships to major integrators such as IBM, Oracle, HP, Accenture and similar organizations, will not be of use for your SaaS business as the bottom-line is that there is a chunk of revenue that is missing from the SaaS business model when compared with the traditional software business model where the solution is installed either onsite at the client location or in an environment where a third-party organization such as Unisys takes over the IT infrastructure and management of the solution itself.
If we look at the SaaS business from System Integrators perspective (SI) and Independent Software Vendor (ISV) perspective, you have two different worlds. The system integrator lives and dies with the work that they get by customizing solutions for end user clients, tweaking and working with the infrastructure to optimize the performance and all of this is going to be more limited in the SaaS environment. Why is this the case? First of all, the SaaS solution will in most of the cases live in a public PaaS (or IaaS) platform and the SaaS vendor is not letting a system integrator to customize things as they wish, customization will have to be implemented via published application-programming interfaces (APIs) that gives them some flexibility, but not to the extent that traditional enterprise software vendor applications have given them in the past.
The other issue that these system integrators will have is about the customer relationship with the questions about ownership of the customer. Is the ownership of the client run by the ISV, the PaaS platform vendor (such as Windows Azure etc.) or is it the system integrator. What kind of view will the customer have on this? Will they see the ISV as the savior of their issues, or will it be the SI? How about a situation when the ISV files bankruptcy? In the early days, some of the large end-user organizations I sold to wanted to have the source code in escrow. How would you do that in a SaaS vendor scenario? What would the enterprise really be able to do if the software vendor would fold up?
Let’s look at this situation from an ISV (SaaS vendor) perspective. First of all, the ISV needs to become a credible player for people to trust their data into their SaaS solution. Secondly, the SaaS vendor is expected to be able to have direct sales to show success and understanding of the solution. Ten years ago, I got a lesson of this in the US. One successful channel partner told me when I became CEO for the software company to demonstrate our success in selling directly and when I had enough cases, he would then consider representing our solution. The message was very clear from him: show me that your value proposition works and I will be happy to see if I can make some money as well.
If you think about this type of scenario from a channel perspective that I mentioned above, how would I get this person/company to be interested in selling the SaaS solution? First of all, this person/company expects to get a 30% cut of the revenue as he is a traditional VAR reseller that makes money in selling value-added solutions to his channel. Secondly, he is the one that owns the client relationships that he has been building for years, nurturing them and feeding them with the latest of the greatest. How would that work in the SaaS scenario? Do you think that these types of resellers will be interested in growing a monthly recurring revenue channel for themselves? From a financial perspective, it could be painful as these resellers have a fixed OPEX to manage, telesales people to pay for and office rent to pay for. How would they be able to turn a $30k software licenses commission to a 30% cut on the Committed Monthly Recurring Revenue (CMRR)? That remains to be seen. I am pretty sure there needs to be some extensive financial modeling that has to happen for these VARs.
In the traditional software channel model, you can have many different types of relationships, everything from being a distributor to reseller or even having a practice around the product/solution. The common denominator for all of these relationships is that the customer relationship ownership is by the partner, not the manufacturer of the equipment or the software vendor. In a SaaS setting, this will not be the case anymore as these regular/typical resellers do not have any control of the relationship as the customer will typically get the same level of service directly from the SaaS vendor. I am sure that some of the readers of this blog entry disagree with me on this, but think about it. How much value does an average reseller provide for the delivery of a solution, delivery that will not have any physical elements to it? I am not including the resellers that have built a business practice around the solution and charging for the customization/training of the solution use.
So, what type of resellers/partnerships should a SaaS provider look for? Based on my research, and my discussions with lots of different vendors, SaaS companies should look for what Bessemer calls for “Business Service Channels” that could be accounting companies providing an add-on service for their clients and what is interesting to note here is that these service providers are not that interested in making money in the possible monthly recurring revenue, but more on the services that they can build around it. The Bessemer gives an example of ADP payroll provider, some marketing agencies and accounting firms. This is an example of emerging, new generation of smaller cloud-based system integrator (SI) companies such as Appirio that provide a solution for integrating systems in a cloud environment.
Phil Wainewright provides his view on where the channel is going in his blog entry. He sees opportunities for what he calls for “intermediaries”, organizations that take a platform (PaaS, like Window Azure) and add features or extensions to it. These types of applications are then sold on each of the PaaS vendors commercial site where the PaaS vendor gets the benefit of having more people subscribing to the software platform (PaaS) itself. Wainewright gives examples of NetSuite and Force.com combination (SuiteCloud Connect) that enables organizations to build vertical solutions, business processes on the platform itself. Lincoln Murphy gives similar examples in his blog entry Change the (SaaS) Channel Please, it’s a Rerun.
Summary of SaaS world and Business Model Canvas
Based on the experience from many SaaS organizations, a traditional software channel does not necessarily work. That is something that might be hard for many to accept, but that is the reality that software entrepreneurs, venture capitalists etc. are seeing on the marketplace.
Your channel development efforts have to be directed to new types of interest groups that can benefit of your service when providing their own service for clients. Do not expect this type of Channel (C) care about the monies that your solution could bring to them, the SaaS vendor should just care how the Value Proposition (VA) benefits the end user organization. The Business Model Canvas will be impacted in multiple ways in respect to Channels (C).
First of all, the SaaS vendor has to have a good Customer Relationship (CR) to the end user client or have an effective sales engine that provides leads to be fed to the possible Channel (C). Secondly, the Channel (C) discussion will typically be based on the Customer Segmentation (CS) strategy as I put in my previous blog entries, one of the biggest mistakes a software vendor can do is to try to address the whole world. It will not happen unless you have endless pockets of money to spend and not even Microsoft’s of this world can always do that. As entrepreneurs, we want to believe that we are going to change the world; some do like we have seen in many cases with Skype, etc.