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.