SaaS: It's Here To Stay

It its Worldwide Partner Conference in Denver last week, Microsoft played up its "software plus services" vision, the company's take on the Software-as-a-Service market it has been edging toward for years and will cannonball into later this year with its on-demand, hosted CRM Live service. The vendor's message to partners was sharp and to the point: SaaS is here to stay, so adapt accordingly.

"This is a hard transition. It was a hard transition for us to accept a couple of years ago, and it's one that's full steam ahead at Microsoft. This is a different business model," Microsoft COO Kevin Turner said in the show's opening keynote. "My call to action for you today is: 'Look, this is going to happen. Software plus services is imminent. The customer is going to want the choice. We'll help you, we'll work with you, but this change is going to happen.' "

Several show attendees said they appreciated the clarity Redmond, Wash.-based Microsoft brought to its software-plus-services messaging, which had previously been somewhat nebulous.

"I still need to see more of the steps, but at least they've solidified it—and I give them credit because I think it's the most realistic approach I've seen in a long time," said Dave Sobel, CEO of Evolve Technologies, a Fairfax, Va.-based Microsoft Gold partner. "To actually come out and say this is a hybrid approach: it's not all one thing, or another, but it'll be somewhere in the middle. I found this to be surprisingly realistic in a very good way."

While other SaaS vendors take a wholly Web-based approach to delivering their applications, Microsoft's "S+S" vision has always focused on a melding of traditional client software and online services. That approach resonated with Sobel, who likes the idea of melding data services "in the cloud" with traditional, on-premise deployments.

"That's where I see software plus services making the most sense: being able to pick and choose, and then customize it," he said.

But as Turner warned, the transition to on-demand services delivered directly by Microsoft to customers won't be an easy one for all partners.

One solution provider noted that partners depending on revenue from installation and configuration services stand to lose out when Microsoft handles deployment directly, as it will for its CRM Live customers.

In a survey of 250 solution providers conducted in May by CMP Channel, only 22 percent of respondents said they worry that vendors' SaaS offerings will take away from their own business. The survey also found that 32 percent of respondents viewed SaaS as an opportunity, while 46 percent don't expect it to affect their business. But when asked which specific vendor, if any, they viewed as a SaaS threat, more than a third cited Microsoft, which drew more votes than all of its rivals in the top software ranks (Oracle, SAP, Sage and several SaaS vendors) combined.

One thorny issue with SaaS is that it puts vendors in the driver's seat: they bill customers directly, deploy the software, push updates out automatically and manage the installation. That methodology gives the vendors a powerful customer-facing position that some haven't been shy about exploiting.

Salesforce.com, the industry's poster wunderkind, has been trying to invert the usual channel models by pushing partners to pay it referral fees, starting at 10 percent of first-year sales, on all deals the vendor influences. Launched earlier this year as a voluntary part of Salesforce.com's AppExchange network of third-party add-on applications, the fee drew widespread grumbling among partners.

"I appreciate that it's inventive, but as an ISV, I'm simply not used to that approach," said one AppExchange participant.

"There is a lot of selling that goes on to partners. It's pretty intense. I think Salesforce.com needs to strike a bit more of a balance, where a partner doesn't feel so much like a customer," said another.

There are signs that partners' pushback is wearing on the usually impervious company.

Two top AppExchange executives recently left Salesforce.com, and the San Francisco-based company has scheduled a Web seminar next month to discuss its partner tiering structure. Several Salesforce.com partners said that they expect the fee structure to be scaled back or entirely eliminated.

But amid the SaaS challenges are some bright rays of light. For one thing, solution providers say they're seeing broader recognition—among both prospects and SaaS vendors themselves—that they still have a role to play in customer deployments.

"As a whole, the marketplace has been under a false perception that hosted is easy," said Joe Giegerich, a partner in Marlton, N.J.-based services firm Horizon Associates Group, which specializes in NetSuite's hosted ERP software. "What we're finding is that people who have been through an implementation or a cutover in the last five years understand what it takes and are seeking out a qualified partner. People who have never been through an implementation fall into that 'false sense of ease' paradigm."

The CEO of one ISV that partners with Salesforce.com called that the biggest surprise of his relationship with the vendor: When integration problems popped up, his company would sometimes end up caught in a "blame game" loop with Salesforce.com, arguing over who owned responsibility for fixing the situation. "One of the things I got away from it is that there is still a lot of room for systems integrators," the CEO said. "The [SaaS vendors'] stance is 'You don't need systems integrators; everything is plug-and-play.' But there's still a lot of integration, and integration is painful and is a lot of work. That still applies. We're not going to get to that plug-and-play utopia, not right now, at least."

New York consultancy Bluewolf has built a nationwide practice around on-demand software engagements. While many of its customers are large enterprises managing complex deployments, it's also signing up smaller companies for two- to five-day "quick start" engagements. The idea is to help companies map their business processes and optimize their SaaS systems to avoid the pitfalls that can ensnare companies that try to go it alone without expert guides.

"The pitch is largely about accelerating the success of their deployments," said Glen Stoffel, director of Bluewolf's on-demand practice.

Microsoft executives insist that's the model they want to emulate as they push into the SaaS market.

"We want to have customers engaged with partners," said Microsoft CRM General Manager Brad Wilson, who will oversee CRM Live's rollout. "Partners might offer an eight-hour quick start. I'd rather have a customer get an eight-hour quick start than do it themselves." Microsoft executives also hope partners will be deeply involved in customization, developing add-on functionality, and building versions of its CRM software tailored for industry verticals.

Several Microsoft CRM partners said they see more opportunity than threat in services like CRM Live.

"We're trying to figure out how to provide hosted SaaS to our customers because they're asking for it. Some don't want to pay up-front costs, and others like the idea of not being tied to certain infrastructure, and being able to 'pay by the drink,' " said Michael Sullivan, president of Quest Business Solutions, based in Dallas.

Even if Microsoft collects the lion's share of customer spending by directly providing and billing for its CRM Live service, Sullivan expects it to open the door to ancillary opportunities.

"CRM is usually our entry point for customers. Once they decide to buy that [they] tend to pull everything else in around it," Sullivan said. "They'll usually decide to go with hosted Exchange and SharePoint, too."

Frank Lee, president of Microsoft CRM specialist Workopia in San Francisco, is delighted he'll finally have a weapon with which to battle Salesforce.com, to which his firm has occasionally lost prospects set on SaaS CRM. Workopia has clients queued up and ready to go the moment Microsoft opens CRM Live, Lee said. And he's optimistic that even small customers looking for the administrative ease of on-demand services will appreciate the value of involving a partner to help them customize the software.

"Live software requires live services," Lee said. "Services is our core. This is still software, and businesses still need value-added professional services."

SaaS veterans note that while adapting to the new model can be a complex process, on-demand software also offers big advantages.

"The speed at which new features and functionality are added gives us new ways to engage with customers," said Bluewolf's Stoffel. "The cost of services relative to what it used to be is down dramatically. It's also really changed the accountability equation. The customer is the big winner in this."