Tag Archives: SaaS

Power Relationships and Cloud Computing

Last week at the London leg of Lotusphere Comes to You, a potted version of the January Floridian Lotus Love Fest, I re-visited LotusLive, IBM’s SaaS offering.  While the astute Nick Shelness neatly summarizes the set of services and though there are teething problems,  and aside from my belief it is too pricey, I believe IBM is paying heed to how a third party ecosystem can help promote and support cloud computing.  There have been doubts, but unlike Microsoft’s Business Productivity Online Suite (BPOS),  Microsoft’s set of cloud services, at least with IBM’s, partners are able to white label and bill.  

It is a matter of power.  IBM cannot reach SMB without indirect channel support, unless it does much more to promote a direct route to the SMB market.  Post the Lotus acquisition, the company did not have strong brand equity in SMB.  Microsoft, though it had used indirect channels exclusively to transact, always had a strong brand relationship with SMB, enabling it to transition easily to a direct route to market via the cloud.  That isn’t to say that partners can’t play in BPOS, in fact Microsoft is encouraging it, but a partner’s added value is diminished.

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Partner value chains vapourizing in the cloud

The arguments for SaaS or “cloud computing” are compelling.  By sharing the infrastructure of a service provider, the customer is able to make significant savings as compared to the buried labour costs of on premises software incurred when testing, integrating, securing, installing, backing up, customizing and upgrading.  Occassionally, and this usually depends upon the size of the company and the available resources inhouse, they call on external companies to assist with those tasks.  Only when they do that, do some of the costs become explicit.  As I have mentioned before, both Microsoft and IBM claim that for every $1 of software sold, there is between $7 and $8 of services opportunity for partners.  Put another way, the customer has to spend up to 9 times as much as the license price to extract value out of the on premises software they buy. 

Cloud computing throws a spanner in software economics.  While at the Salesforce.com event in London this week, I asked partners who specialize in Salesforce.com implementations where they derive their revenue from.  It is mostly around the same areas that Microsoft and IBM partners operate in – implementation, integration, training, customization, development and helping clients redesign their business processes.   And it seems to be in the same SMB sweetspot – between 20 employees and 1000, with occassional engagements in enterprise accounts, though enterprises are more likely to hire Salesforce.com’s own professional services arm.  The big difference is in the size of the engagement.  A large one for a partner might be 80  man days.  Most are a lot less than that.  Take for example one slide that Marc Benioff, Salesforce.com’s CEO, put up.  Titled “Fastest Way to Build Apps”, it portrays force.com, the branding for the company’s platform delivering an 80% reduction in development effort.  For partners, what might have been a 20 man day engagement becomes a 4 man day one.

Squeezed by SaaS and Indian outsourcers, traditional on premises software partners who do not differentiate themselves by aligning with a vertical niche or application have felt the pinch.  Cloud computing is changing the value dynamics as more value is concentrated in a cloud’s shared infrastructure, a change that has been accelerated by the downturn in the economy.   The traditional partner value chain is much more tenuous.

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Microsoft’s Business Productivity Online Suite and Partners

Yesterday I attended a partner briefing at Microsoft UK for their new Business Productivity Online Suite (BPOS) which goes live in a few weeks in Europe and Japan.  The service has already been up and running since November in the US.  I was particularly impressed by the level of investment Microsoft is putting into their data centres – with a primary one in Dublin, a secondary centre in Amsterdam as well as installations in Virginia, Washington State and Singapore with plans for more in APAC.   BPOS is Microsoft’s online offering of Live Meeting, SharePoint, Office Communications Server and Exchange Server with a minimum of 5 seats and around 13,000 seats max for standard (their multi-tenanted version) and a dedicated version intended for larger installs that is also finding favour amongst small customers.  At $15/user/month it is more than three times the price of Google Apps. The types of clients interested in BPOS cluster at the low 5 to 50 seat end, and surprisingly for Microsoft, the very high end blue chip clients. 

It is plainly evident that the company has put a lot of thought and effort into this. It has clear competition from Salesforce.com and Google and is determined to get SaaS right.  It is important to note that the service is not Microsoft Office online (yet) nor does it offer full telephony (yet) or CRM (yet)  but it doesn’t take a crystal ball to predict that they will soon flesh out their offerings.  Their sales projections are, on the other hand, relatively modest.  That is the issue I have with many new Microsoft ventures.  The company is huge and experienced sales hands know how to game the system.  They know to sandbag and slightly over-achieve.  An ambitious sales target presents higher risks – and lower individual rewards.  But that can also mean a new venture fails to find support in the company, and it flounders through lack of investment. That does not seem to be the case here as Microsoft feels the hot breath of competition and still retains much of the DNA that drove them to strive for share and seek choke points. 

By extending BPOS down to 5 users, and offering 5G of mail storage per user, they are competing squarely against their own SharePoint and Exchange hosting partners.  It must be said that if you add up all the company’s hosting partner’s mailboxes it doesn’t amount to more than 20% of the total number of Exchange seats, so though significant, partners have been at that game for a number of years and haven’t grown as quickly as Microsoft or they had hoped.   And that is because hosting Exchange technically isn’t easy – as Microsoft is finding out, because these partners started small and have been  growing organically, and because, importantly – most customers mid tier and up are loathe to give up their data.  For small companies, who don’t have an IT person, there isn’t a choice, so the data issue is not significant – but those small companies can be as difficult to service as ones 10 and 100 times their size – and can have the same cost of sale.    

It looks like there are significant teething problems for Microsoft at the low end. Microsoft needs partners in that segment. Their infrastructure software out of the box needs integration and support.  And it needs a sales force, so it can’t afford to alienate its partners.  By offering partners an 18% finder’s fee the first year and 6% thereafter and pledging not to offer end user help desk support, it is hoping to sweeten the medicine.  But by transacting directly with the end customer, the company is asking the partner to become an agency, and that is a point to which many partners are openly hostile.  Partners hate to lose control of their customer and a vendor transacting is a threat.  Microsoft tried to spin it, saying it was taking the credit risk, but it wasn’t sufficient to disperse the unease in the room. Yet many partners haven’t been transacting for on-premises Microsoft licenses anyway for years. There is no margin in it and they leave that to license specialist resellers.  Microsoft point to a 7:1 partner services vs license revenue ratio of opportunity for partners.    But that is also a problem. If you have to spend another $7 to get value out of $1 of software, that is an opportunity for a competing SaaS vendor to embed value in the service directly,  lower cost of ownership and time to value.  However, if there is one thing I have learnt from 25 years of competing against and working with Microsoft, it is this – they are extremely tenacious.  Eventually, they get things right. It may take five years, it may take ten, but they are determined.  And partners, as they have always done, will first bob and weave, then adapt or close shop.

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SaaS and routes to market

It is important to heed the growth of software as a service or SaaS since it is having an effect on how customers buy software.  It is not directly a route to market.  The customer doesn’t necessarily purchase the service through the web without the involvement of a direct sales person.  Indeed in enterprise SaaS sales, especially in the credit crunch, special deals cut through major account people are the rule not the exception.  But in SMB where web purchases are routine, it is both a delivery and purchase route. 

It is not a new phenomenon.  Throughout the 1970’s service bureaus were the norm for many organizations that needed specialist applications, leaving the internal computing function to concentrate on accounting and payroll.  It suffered when time to productivity, accessibility and cost swung in the favour of the PC. In the mid 90’s the model reared its head, as application service providers (ASP’s) started grabbing the spotlight – if not any significant software  share.  Most went out of business. They lacked a sufficiently compelling proposition.  Now that businesses look for new ways to drive out IT costs, coupled with the drive of salesforce.com  to create a something out of market that had been tainted, SaaS is once again a force to pay attention to for its influence on how people buy technology.

There are dissenters. In  August 2008, ERP vendor Lawson’s CEO, Harry Debes said “SaaS is not God’s gift to the software industry or customer community. The hype is based on one company in the software industry having modest success. Salesforce.com just has average to below-average profitability.”

In the coming weeks I will write in more detail on SaaS, but first let me define it and try to back up the assertion that it is a growing phenomenon.  Gartner characterizes it as:

  • Delivery of multi-tenant service (i.e. though a customer only sees their data, that data lives on the same machines as other customers’ data)
  • From a remote location
  • Over an internet protocol (IP) network
  • Via a subscription-based outsourcing contract

The delivery of a multi-tenant service is how it is done, arguably not part of a customer proposition only to the extent that it keeps costs low. Perhaps a simpler definition might be a remotely provided application sold via a subscription. 

I have never been a big fan of large analyst firms and when employed in Big Blue (and Little Yellow), I had a mean habit of keeping old analysts’ predictions then comparing them with actual results.  Often that was made impossible since market definitions would change en route and I suspect there was a degree of covering one’s tracks at play.  Take this statement from two years ago, “The worldwide SaaS market reached $6.3 billion in 2006 and is forecast to grow to $19.3 billion by year-end 2011, according to Gartner, Inc.”   Then this from October 2008, “Gartner predicts it (the worldwide SaaS market) will surpass US$ 6.4 billion in 2008, a 27% increase from 2007 revenue.  Moreover, the market is expected to more than double with SaaS revenue reaching US$ 14.8 billion in 2012.”

Notwithstanding the difficult tasks of quantifying revenues and selling headline grabbing reports, there are indications that SaaS is taking hold. IDC predicts that SaaS revenues will grow by 40% this year over 2008.    They claim that next year, 45% of US firms will spend at least a quarter of their IT budget on SaaS.  Takeup is considerably behind outside N America.   Within the IT Management software segment, Forrester estimates the SaaS delivery was 1% in 2008 and will reach 10% in 2013 with HP, CA, BMC, IBM and Symantec as the main players.  A recent Gartner survey of enterprises found that the major purchase drivers are cost effectiveness, ease of deployment, followed by underperforming on-premises solutions and changes in sourcing strategy.  They also found that in the US, a fifth of enterprises had been using SaaS for over 5 years and 60% had adopted it in the last 3 years.

SaaS is a significant delivery route in the US and is growing rapidly though from a much smaller base outside the US.   And that delivery does change the way consumers and businesses make brand decisions,  purchase and upgrade, something I will expand upon soon.

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Zoho’s routes to market

One normally associates software as a service (SaaS) vendor with direct sales channels – either enterprise sales people or direct over the web.  Some pure play SaaS vendors are developing more traditional indirect routes as they realize that a Web 2.0 offering doesn’t mean that there exists a quick and effective Web 2.0 way to reach potential customers – especially business customers.

Zoho is one such company, a SaaS vendor with a wide portfolio of business productivity applications.  Their partner programme, Zoho Alliance Partner Progam (ZAPP) has been going for 18 months now. The company now claims 200 resellers and at least one ISaaS (independent SaaS partner) in Huddle.net.   They also team with service providers such as Swisscom.

Ian Wenig, Zoho’s senior director of strategic alliances writes

“We try to be as transparent and fluid as possible, making it easy to do business with us while maintaining professionalism and focus on revenues. As a product-focused, passionately driven software engineering company you might also expect ZAPP to share some of these attributes. And it does. We are making some innovations on the product front which enable our partners to take our applications to their customers, blurring the line between vendor and partner. You’ll hear some interesting news about this moving forward. We have also developed a few tools for our partners to easily manage their interactions with Zoho as well as provide a level of automation that helps them be more self-sufficient and profitable. These include a secure Reseller Store, a Partner portal and the capability of allowing resellers to offer Zoho services from their websites.

As the world adjusts to an economic downturn and SaaS matures further, we will continue to see a steady rise in new businesses wanting to jump into the cloud computing space as well as take part in the newly emerging “Cloud Channel” that Zoho and its partners are in the process of creating. While Microsoft, IBM and other large ISV’s have mature, multi-level channel programs in place, my guess is they are still working on models for their SaaS business. I am not so sure they will get it right the first time or anytime soon. Our competitors like Salesforce have done a poor job in creating a vibrant channel mostly because their heart is in closing direct sales in large accounts. While our program is far from perfect, we are committed to our partners and will be focused on executing on our strategy of addressing a globally diverse customer and partner base employing the latest technologies and business models.”

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