Software As A Service Looks To Be Struggle For VARs, Vendors

Technology providers “will have to make the transition or die,” said Mick Gallagher, CEO of LS Technologies, a Fallbrook, Calif.-based Oracle and NetSuite implementation specialist.

To date, enterprise software players have tied themselves tightly to customers via the direct sales model. The customers don’t only buy the software license up front, but pay a hefty percentage—typically upward of 20 percent—of that fee each year for support and maintenance.

Publicly, legacy software providers profess love for the model and work on transitions. IBM, Oracle, Siebel, SAP and, more recently, Microsoft have all talked about on-demand delivery for some time. Privately, they worry.

“Theoretically, there’s a problem. But in reality, [SaaS] is the least of their problems. They’ve got to worry about keeping customers in their version of SaaS, open source, and other things more,” says Bob Suh, chief technology strategist for Accenture’s Global Technology and Systems Integration practice.

Suh believes the only way for vendors and partners to prosper is to foster good joint customer engagements. He and others say there is more than enough work around to build specializations atop vendors’ software stacks to make those millions of lines of code usable and valuable to the end user. The bottom line: SaaS is here to stay.

“As SaaS becomes more accepted, the tech stack is built into the application suite and is priced per user. Thus, there is no tech license revenue—no tech implementation equates to less tech market share for [the] partner,” Gallagher said. “The big question is whether a tech partner makes the transition to app mentality. Scoping correctly on an apps implementation can make you financially sound. That is where your reputation is built.”

The issue of account control arose at last week’s Software 2006 show in Santa Clara, Calif., where top venture capitalist and vendor execs convened. It is clear to many onlookers that tech companies dipping their toes into SaaS have to weigh their options.

“On a practical basis, it’ll be very hard for SAP and Oracle to do on-demand things that cannibalize their existing businesses. Account control—they don’t want to give it up,” said Peter Sobiloff, managing director at Insight Venture Partners. On the plus side, the intransigence of enterprise software powers opens up opportunities for “young innovative companies,” he said.

Many would say Salesforce.com, NetSuite, RightNow, Webex and Salesnet are examples of innovators that were early to exploit customer demand for affordable technology provisioned and managed beyond their firewalls and paid for on a subscription basis.

RightNow CEO Greg Gianforte said the newbies have an advantage over older rivals with legacy revenue streams to protect. “The transition from on-premise to on-demand is much like the transition from green-screen mainframe apps to client/server. None of the green-screen mainframe apps companies are in any leading positions today. The same is true of this disruptive transition. None will make the transition successfully,” he said.

“They must rewrite all their apps from scratch for true multitenancy and multiversion capabilities to get to the economies of the new model," Gianforte continued. "They must alienate their existing partner channels and develop new ones. They must switch their financial model from an up-front pay to one where they get paid over time. And they must completely change their culture from cut-and-run to delivering customer success. When on a pay-as-you-go model, if you don’t deliver customer success, you don’t get the renewal.”