How to implement a successful SaaS business model
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Channel conflict -- from solution provider competitors as well as from vendor partners -- has long been a threat for many channel partners reselling traditional on-premises hardware and software. Software as a Service (SaaS) and the cloud introduced another perceived vector for channel conflict. Early on in the cloud era, solution providers feared blatant disintermediation by their vendor partners, as the cloud makes it easy for customers to buy software directly from vendors. Today, the experts we spoke with suggest channel partners still have reason to be afraid, but it's not all bad, and there are many factors that determine the potential risk of conflict.
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Distinguishing between channel conflict of the past and present, however, Weaver marked a shift from a concern for the control of the customer to a concern for who can best distribute SaaS to the customer.
Weaver said, "SaaS is all about efficiency of distribution to the customer. And the vendors -- some of them, not all -- are realizing, 'Wow. Maybe we really don't need a channel.'"
Terry Hedden, founder and CEO of Cloud Guru, a cloud consultancy based in St. Petersburg, Florida, related cloud-based channel conflict to the maturity of the vendor and the vendor's offerings. "Channel conflict is occurring most in the less mature cloud offerings, and the Microsofts and the Amazons of the world [are relatively mature in how they handle it], but small firms are pretty immature in the way they handle it. They have no concept of managing channel conflict or avoiding it -- or at least they pretend not to," he said.
Terry Heddenfounder and CEO, Cloud Guru
"By definition, a lot of these cloud companies out here are not very well-funded," he added. "They don't have a very strong channel manager with strong channel experience. They tend to come from more of a direct strategy. They need to learn from the big boys. They need to learn from the established players how to effectively tap dance around channel conflict."
Adjustments to cloud
Carolyn April, director of industry analysis at nonprofit trade associate CompTIA, said vendors are currently fluid in how they are adjusting to the new cloud age. "We're seeing everybody in the industry having to make adjustments for how they take products to market and solutions to market, how they sell, how they market their solutions."
Putting things in blunt or "vulgar" terms, Weaver said: "The 'dumb' software vendors … want to compete [with the channel] because they think, 'Well, if we could just do this ourselves, then we can bypass the channel.' The ones that are 'smarter,' shall we say, they're the ones that have been around the block a time or two, and they know that they can't do this without the channel. They are trying to create technology and business models that embrace the channel, embrace MSPs [managed service providers], because they know they play a vital role in their distribution, sales, the ongoing support of that technology -- especially an application."
Vendors may overlook the role the channel can play in SaaS, as do many IT customers. For example, "in some cases, larger customers are simply demanding to work directly with the vendor for a cloud solution and not seeing a need for the channel to be in the middle," April said.
But she noted the drawbacks for customers dealing solely with a vendor for a SaaS application: "There are limitations … to using SaaS applications that you're able to access online as an end customer. … Usually, those [applications] are fairly fundamental and rudimentary, and, if you need to do anything more or mission-critical and tie those applications into existing software that you have on-site -- unless you have an IT department that's capable of doing that -- you really often will need the channel to help with that integration and customization work."
Hedden said, "The magic of the channel really relates to making solutions that aren't naturally integrated … become integrated, operate as one, and become very easy to use for the end user." Weaver noted that customers today still want to outsource, and outsourcing doesn't favor the typical vendor. "The question is whether [the customers are] going to outsource to a big, behemoth software vendor, or [are] they going to demand more customer service, higher-level customer service. They're probably going to opt for a more local boutique MSP."
Reducing channel conflict
Hedden said SaaS-product companies and SaaS providers "need to understand that the majority of mature managed service providers that represent the lion's share of the market potential aren't naïve. They've been burned before. They need to be forthright and have a defined channel policy; communicate it to them."
But he stressed that for vendors, channel conflict has desirable aspects. "At a certain level, vendors want channel conflict. They don't want exclusivity," he said. "They want to, understandably, latch their horse to a lot of different buggies and make sure they win the customer."
Hedden said vendors in many cases evade responsibility for their part in channel conflict. "In general, a lot of the providers out there take what I call 'The Ostrich Approach,' where they bury their head in the sand and just kind of pretend it doesn't exist," he said, "whereas they really need to have a stated policy to have a consistent strategy to manage and address channel conflict."
The rules of engagement for SaaS are "all over the map, especially in the smaller cloud players," Hedden said, comparing the current state of things to the Wild, Wild West. Every vendor must have a strategy and stated policy and abide by it, according to Hedden. "What I like to see is firms that have a very defined channel conflict strategy; a very proactive approach to managing it. But, at the same time, don't stifle it … don't eliminate channel conflict, because at a certain level, [it's] healthy," he said.
Weaver offered an idea that he believes would resolve the issues of distribution that he pointed out: two delivery models every software vendor would give customers as options. In the first model, the software vendor offers a complete SaaS-based version of the product. The MSP offers it to customers, resells it, makes a margin on the resale, and then offers support services of some kind. In the second model, the software vendor would allow the MSP to host the product. For example, the MSP can deliver hosted Exchange to its customers, which is still SaaS, but with the MSP doing the hosting.
"I think that [vendors offering these two delivery model options] would be the most winning option for the greatest number of people, including the MSPs," Weaver said.
"The purely SaaS version, when the vendor hosts, [is] going to be more likely the lower-cost, the more commodity-type, accessible offering, " Weaver continued. But for the customers that are willing to pay for additional costs and receive more value, they will work with an MSP and have the MSP host their software, such as Exchange, QuickBooks or an ERP application, he said.
"If the software vendor doesn't give the MSP and the customer that option, they're really missing out," he said.
Ideas like Weaver's may help shape and order the cloud era for channel partners and vendors. Until then, as both mature and immature vendors grapple with the complexity of the new landscape, channel firms must adjust to the major changes.
MSPs make the transition to managed cloud services