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Is SaaS Toxic for Partners?

I was recently having coffee with an old friend who is in business development.  His specialty is working with ISV’s to help them manage their partners and partner ecosystem.  I was particularly curious to hear what he thought about partners of this variety—SI’s, VARs, and the like—and their reaction to SaaS.  His comments were fascinating.

First, he mentioned that they will all speak enthusiastically about SaaS.  Theirs is a message of total embrace with no “ifs”, “ands”, or “buts”.  According to my friend, this isn’t the whole truth, however.  In fact, it may not even be nothing but the truth.

The real story about SaaS and partners is much more interesting.  Basically, they are terrified of SaaS for the most part.  A few of them are trying to mobilize as SaaS early adopters, because they see the writing on the wall, but most of them have no idea how they will prosper in the age of SaaS.

What an amazing story! 

The thing that struck me was how similar the fears of these partners are to the fears of most traditional ISV’s.  Like the ISV’s, these organizations know SaaS is hear to stay, but it is going to force them to reinvent their businesses, it is going to radically reduce their margins until they differentiate, and they know some of them aren’t going to be able to make the transition at all.  In short, they just wish it would all go away, but they know it won’t.

Why is SaaS so scary to these folks?

The details are out there if you do just a little digging to fully corroborate what my friend had to say.

I’ll summarize my view of the challanges for partners in a series of points.

Point 1:  SaaS is still largely an early adopter game

By this I mean that it doesn’t yet have sufficient mass and momentum to be an interesting opportunity for established players given the amount of mayhem and disruption it wreaks around their existing way of doing business.

Consider a firm like Accenture.  They’re giving SaaS some air time, because it has buzz and they’ll look irrelevant if they don’t.  But the reality is that Accenture doesn’t even assign a partner to an account until the account does $5 million in business with the firm.  Working at other ISV’s, I’ve been told they have little interest in serious partnering with ISV’s until the ISV can produce $100 million in business for them.  The other big firms are no different, and sometimes they’re worse—Accenture does invest a little more heavily in futures.

As Gartner put it in a recent press release on SaaS Service Providers:

For large, established IT solution providers, the SaaS market so far hasnt appeared to have enough incremental growth potential to meaningfully contribute to revenue growth. As a result, they have tended to ignore it. This has left the door open for smaller, newer players, who are now pouring into this gap. Incumbent IT solution providers are slowly waking up to this and are entering the market to leverage SaaS market interest.

That leaves SaaS to the boutique firms, which are largely vertically focused.  This means they’re off sitting in their vertical market, watching SaaS take over in other markets such as CRM, and wondering when the tidal wave will get to them and what they’re going to do about it.  It’s an uncomfortable place to be, and the only ones they have to commiserate with are equally uncomfortable ISV’s who wonder when they’ll have to deal with the problem.

Meanwhile, SaaS vendors aren’t necessarily making it easy for these guys to take part in a new SaaS-oriented ecosystem within their vertical market.  First, the SaaS vendor is just getting established themselves.  Second, they often see themselves as competing with their partners.


Point 2:  SaaS steals wallet share from partners and IT and gives it to the SaaS vendor

Virginia, SaaS steals wallet share from partners and IT.  It’s one of the big reasons why SaaS is such a growth driver, which makes ISV’s interested.  Unfortunately, it also means most SaaS vendors compete with their partners directly. 

What sort of wallet share, you say?  All kinds.  SaaS vendors start by radically simplifying the SI challenges associated with adopting their systems.  This is done in part by simply eliminating most customization options from the menu, a practice the industry is gradually looking at changing.  Managed Services opportunities, where the SI comes into the customer’s data center (or possibly a hosted center of their own) to run an application they’ve installed for the customer are gone.  That’s the whole SaaS proposition, after all.  The trouble is that these were some of the most lucrative contracts an SI could have.

Point 3:  It’s hard to add IP to SaaS

How do boutique (and larger) services firms differentiate themselves?  By creating unique IP around the software and vertical markets they specialize in.  This may simply involve expertise, or it may involve software components.  Both are under pressure in the SaaS world. 

Expertise is less relevant with the massive simplification SaaS brings to the table.  Creating software components is all but impossible with most SaaS being closed.  There are some exceptions, such as Salesforce’s AppExchange, but there is considerable effort required to use the AppExchange.  It’s a new language, and a difficult one at that.  It’s totally proprietary, and any work done there is not applicable elsewhere, forcing lock-in with a single SaaS vendor.  There are SOA interfaces, but this is again pretty difficult.  The Services firms I am speaking of have to live off limited margins.  The amount of time and energy they can put to use developing IP is sharply limited by the need to be billable on projects in order to pay the overhead and turn a profit.

This problem extends to ISV’s who’ve traditionally played in the application extension ecosystem.  Business Intelligence, Integration, Systems Management, and a whole variety of other tools grew up with unfettered access to the centerpiece
Enterprise application and now they’ve lost that access. 

Point 4:  SaaS, as it’s practiced today, leads to commoditization of the ecosystem

Given how much more difficult it is for partners to differentiate themselves through IP, the trend is towards commoditization.  Once every offering is about the same, the customer turns to wondering who can do it the most cheaply.  Margins come under pressure, and it becomes a buyer’s market with the seller’s gone begging.  The same Gartner press release had this conclusion:

This change will have many profound consequences on the types of IT services that are sourced by enterprises and the types that can be profitably delivered by suppliers, said Mr. Pring. The most profound is that, as some IT services come to resemble manufacturing, they will have a similar development curve as most manufacturing businesses had during the last quarter of a century that is, wide movement overseas to lower-cost production centers and overall price deflation. This potential combination of SaaS and global sourcing delivery models two notions that have seemed diametrically opposite up until now will produce powerful changes in the entire IT industry, and particularly IT service providers.

Definitely not a pretty picture for the world of partner ecosystems!

What’s needed?

SaaS vendors need to think about how to breathe life into their partner ecosystems, or they need to decide they don’t need or want partners like this and take all the business for themselves.  The natural tendency of ISV’s is to deliver on suite dreams and do everything, but the alternative may be a better answer for customers and the ISV too.

Breathing life means thinking ahead about creating opportunities for partners, and supporting those partners.  Starving the partners out may not be the best answer.  Often they are gatekeepers in the sales process too.  The customer may have engaged them to make recommendations on what solution to go with.  They may be bringing you, the ISV, a deal lead.  Often these partners know more about the domain than the ISV’s or customers themselves.  I’ve spent time recently talking to folks like David Thompson of Genius who feel that SaaS companies need to innovate in more ways than just sticking their software into a browser and selling a service.  That innovation extends to the partner ecosystem as well. 

Here are some thoughts about what SaaS vendors should be doing to create a vigorous partner ecosystem:

–  Make the rules of engagement clear.  Service providers need to understand where they do and don’t compete with the SaaS vendor.  This isn’t to say they expect not to compete, but they’d prefer not to compete everywhere.  Leave some clear areas for them and cultivate partners to step up into those areas.  Make sure these niches are lucrative and large enough to be interesting opportunities.

–  Don’t take too many advantages for yourself.  Partners hate having to operate at a disadvantage to the ISV, SaaS or otherwise.  In their view, they’re helping the ISV out, so why should they have to do that with one hand tied behind their backs.  Make sure they have access to news updates, training, and special support for their needs.  Establish a partner care and feeding organization that isn’t the usual “tea and crumpets” gatherings.  Make sure the partner has some ability to impact your product direction and listen to their needs.

–  Provide avenues for partners to connect their own components to your solution.  The SaaS world is gradually coming to terms with what this means.  SOA and REST are important facilities to have.  So are simpler mechanisms such as good old FTP of files.  Is there a way for the partner to participate in your data feeds with your customers?  It isn’t hard to provide one.

–  Consider a place in your community for partners.  Most SaaS vendors try to create an online community for customers.  Make sure partners have a role in your community.  Often this is their number one avenue for marketing.  And don’t charge too much for it (or at all unless its necessary).  Many partners have complained at how seems to be trying to make money from them through exhorbitant feeds. 

For their part of the equation, the partners need to step up aggressively for SaaS vendors who make a place for them:

–  Sell the virtues of SaaS and of your SaaS vendor.

–  Add real value for customers.  Most ISV’s care most about their customer’s satisfaction.

–  Never blame your problems on the SaaS vendor!  It’s harder to do so credibly with SaaS anyway.

Finding new ways to empower your partners will be a tremendous advantage and growth accelerator for innovative SaaS firms.

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