Many VARs are at least cautiously optimistic they'll be able to make those adjustments successfully -- or survive without having to make those adjustments -- even though most vendors opt to sell their SaaS offerings direct to customers.
But regardless of what the future holds, VARs need to start thinking about new ways to make money, whether or not they enter the SaaS market, according to a new report from IDC.
Worldwide revenues in the SaaS market were $3.7 billion last year, a number IDC expects to reach $14.8 billion by 2011. That's an annual compound growth rate of 32%.
"It's here to stay," said Erin TenWolde, a senior SaaS analyst at IDC. "It's not a fad anymore."
TenWolde and senior channel analyst Darren Bibby, who co-wrote the report, "The Emerging SaaS Channel," didn't look at the flip side of that growth -- how much money traditional VAR businesses will lose.
"I would think that right now there is very little impact," Bibby said. "But we'll surely start to see more over the next few years."
SaaS allows vendors to sell hosted versions of their applications to customers, who then access the software over a network. It makes deployment easier and reduces management and maintenance requirements for customers. Although some vendors say they want channel partners to help bring SaaS to market, that kind of work is much different than what VARs are used to, TenWolde said.
VARs must decide whether they can survive without getting into SaaS and, if they can't, how they can keep performing high-level work -- and reaping its high-level profits -- in the SaaS market, Bibby said.
"There's really nothing to install, so partners have to find new ways to add value," he said. "Some are going to be OK with it. Some are going to hate it."
Vendors tend to get into the SaaS market as specific technology sectors mature and they need to find a new way to grow their business in those areas, according to financial analyst Walter Pritchard, managing director for Cowan and Co., a Boston-based financial research firm.
The theory behind SaaS is to capitalize on economies of scale; if you can sell and manage a standard set of services for every customer, your profit margins will increase, Pritchard said. Vendors, however, are reporting lower profit margins with SaaS because they are spending so much trying to stake their claim to the SaaS market.
That's not unusual for the early development stages of even a rich market, but so far there is little evidence of when -- or to whom -- the profits from the SaaS market will flow.
"In theory it makes sense, but you haven't seen it borne out at all," he said. "It's not clear to what level the profitability is going to be."
Some vendors are taking a channel-friendly approach to their SaaS business, but for the most part, vendors are going direct to customers, Pritchard said. Although "there's no reason the services can't be resold through channel partners . . . if everything goes SaaS, then I think it is a threat," he said.
There are two emerging business models the IDC survey identified in the SaaS market, Bibby and TenWolde wrote. Vendors that provide business applications tend to work directly with customers, then rely on partners to add value through business process management (BPM) consulting.
Meanwhile, infrastructure vendors -- those that work in security, storage, networking and similar fields -- can give SaaS partners the chance to host the applications themselves and provide managed services to the customers. Many also pay partners for customer referrals.
Symantec Corp., for example, plans to make most of its security and storage software available as services through its SaaS platform, called the Symantec Protection Network. The first offering, Online Backup Service, is due later this year, and Symantec has pledged to make the channel an integral part of its rollout.
Partners can either sell the service and let Symantec host and manage it, or they can sell and manage the service themselves. Symantec is also offering training for partners that are traditional resellers but want to start providing services as well.
As another example, Microsoft announced SaaS versions of BizTalk Server, Exchange and Office Communications Server earlier this week. Partners can earn referral fees, and they will be able to sell custom services on top of Microsoft's and integrate the services with other products.
Despite those reassurances and others like them from vendors in the SaaS market, there are still questions about the role of the channel, particularly VARs.
Adam Gray, chief technical officer for Novacoast, said there will always be ways for traditional resellers to make money. In the case of emerging vendors, "new products are only implemented and sold if the VAR and SI [systems integrator] recommend the technology," he said in an email. "Without a VAR channel, it is an uphill battle for any vendor."
Even though his Santa Barbara, Calif., networking and security company has always focused on services, more and more of its business has come from product sales in recent years because "we were leaving money on the table," he said.
Still, most VARs realize the benefits of SaaS for their customers -- easier deployment, less hardware to maintain and lower costs. They're just trying to figure out where they fit in, Bibby said.
"It's not going to be for everyone, and I think people will still make a great living doing other things," he said. "Just because the trend's out there doesn't mean everyone should get involved in it."
Gray said he sees "a great opportunity" for VARs and SIs to work with SaaS applications.
"SaaS depends on partners to provide some aspect of the onsite maintenance requirements," he said. "Those needs are and will be there for some time to come."
Complicating the decision-making process for VARs is the fact that there's no tried-and-true SaaS market strategy for the channel to adopt.
"There's a lot of trial and error going on," Bibby said. "There's a lot of folks putting bets out there on what will work."
One way that VARs can get around the direct nature of SaaS sales is by focusing on customers in very specific industries, or "micro-verticals," for which vendors' offerings alone are not sufficient, Bibby said.
Gray agreed, saying VARs must provide specialists who "go very deep in particular skill sets and are the very best at one or two things."
Vigilar Inc., an Atlanta-based VAR, has taken a different approach by developing its own SaaS platform, ATLAS. Announced in June, it offers five security services -- asset management, technical support, log management, authentication management and system maintenance -- that customers can access through a Web interface. Vigilar had previously offered the services as a way of adding value to the security and regulatory compliance products it sold, and company executives saw them as a good entry point into the SaaS market, said Joel Hart, director of security architecture.
"There were definitely some trials and errors," he said. "The good thing was, we had a lot of background in doing these [services] in a disparate model. We just basically pulled them together."
Although some VARs fear that vendors won't need them in the SaaS market, getting a head start on SaaS can actually strengthen the VAR/vendor relationship, Hart said. One of Vigilar's partners, RSA Security Inc., approached Vigilar and asked for help implementing some of its own service initiatives.
"There will always be a role for the channel," Hart said.