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Software as a Service:

  1. 1. A Channel Market Intelligence Paper from the Institute for Partner Education and Development February 2009 Software as a Service: Partnering with CA on Backup & Recovery Software as a Service (SaaS) is fast-changing the software industry landscape. The SaaS business model unleashes a recurring revenue engine for solution providers and an increasingly attractive option for end users wary of making large capital expenditures in today’s economy, especially those in the small- to medium-sized demographic. The SaaS model offers low-cost to entry, fast implementation and scalability across a range of applications needs.
  2. 2. Software as a Service: Partnering with CA on Backup & Recovery Many of the industry’s leading software vendors, including a raft of backup and recovery storage players, have unveiled SaaS strategies. Islandia, N.Y.-based CA specifically is embracing the SaaS model aggressively across several of its solutions offerings. From a solution provider perspective, one of CA’s central offerings in its SaaS strategy is a new channel-only business continuity (BC) and disaster recovery (DR) managed services offering that targets a ripe and as-yet underserved SMB market. This report by Everything Channel’s Institute for Partner Education In the last two years & Development (IPED) will detail the offering, called CA Instant Recovery On alone, 46 percent of the Demand, but first will provide solution providers insight into the general SaaS partner community added market today, the opportunity it represents, and how best to sell it and profit. a SaaS business model IPED research clearly demonstrates the SaaS model’s momentum. In the last two years alone, 46 percent of the partner community added a SaaS business model to their organizations. Revenue is up as well. IPED found that among both the Best in Class solution providers (the 20 percent most profitable today) and their channel counterparts, the year-on-year growth rate from 2007 to 2008 for SaaS sales is expected to exceed 20 percent. Percentage of Total Revenue SaaS Solutions BIC SaaS Providers, adopting faster, overall adoption rate growing however Saas: 31% % of Total 2007 Revenues 19% + 20% Saas: 37% Yr over Yr + 25% Expected % of Total 2008 Revenues 24% Yr over Yr Best in Class SaaS SP *Including SW agreements plus directly related services Average SaaS SP But those numbers don’t even scratch the surface of the opportunity. IPED has found that while the total spend on traditional software licenses still eclipses that spent on software delivered as a service, the latter model is in fact accelerating faster in the marketplace today. That trend will only continue in the current economic conditions, which is why partners should pursue the model as part of their organizations going forward. 1
  3. 3. Software as a Service: Partnering with CA on Backup & Recovery Demand is coming from end user customers, who want flexibility in how their software is delivered. This is a sea change from the previous wave of SaaS — the Application Service Provider (ASP) model — when the industry pushed a model that customers themselves were not seeking. Solution providers are tailoring their sales pitches Solution providers are tailoring their sales pitches to what the customer wants and to what the customer needs: faster time to deployment and low cost taking precedence. What’s interesting, wants andneeds: faster however, is how few solution providers today are leading their pitch around SaaS’ time to deployment much lower capital expenditure requirements as compared with traditional software and low cost taking purchases. In today’s economic crisis, needing less cash upfront is a compelling precedence argument to place in front of a line of business or C-level executive at an end user organization and a competitive differentiator for a solution provider sales force. Why do Customers Adopt SaaS + 29% 57% Faster Time to Deployment 44% 55% Lower Initial Deployment Cost 49% 45% Flexibility: Remote Offices/Branches 34% 36% Flexibility with Departmental Group Projects 23% 34% Costs: Expenses vs. Capital 28% Best in Class SaaS SP Average SaaS SP 25% Avoid Affecting Existing IT Infrastructure 32% As a solution provider today it is worth evaluating the SaaS model as it gains strength in key technology markets such as back-up and disaster recovery applications and business software. In the following profitability guide, IPED will illuminate the channel opportunity, share the latest market dynamics driving the SaaS industry and highlight best practices of the most successful solution providers implementing the SaaS model today. Key topics to be addressed include: • IPED data on the state of SaaS in the market today, including important trends and analysis • The impact of SaaS on traditional partner business models and a simple system for evaluating the specific implications for individual companies • Building a SaaS practice and the critical questions every provider should answer when considering selling SaaS offerings to existing or new customers • Best practices for selling SaaS and managing the customer 2
  4. 4. Software as a Service: Partnering with CA on Backup & Recovery But first off, what constitutes the SaaS business model? Definitions vary, but the following is commonly accepted: Software as a service (SaaS) is a software application delivery model where a software vendor develops a web-native software application and hosts and operates (either independently or through a third-party) the application for use by its customers over the Internet. Customers do not — in the majority of cases — pay for owning the Many solution providers software itself but rather for using it on a contractual basis, typically monthly. who believe the managed For its part, CA defines SaaS in the context of “on-demand” software that is services model is delivered over the Web as a service. Some CA solutions, however, go beyond more attractive and likely to strict definitions of SaaS — applications delivered as a service as typified by a yield better profits and company like — to include capabilities and features that are more long-term customer robust and involve storage, failover and in some cases hardware. relationships may simply lack the expertise to SaaS: Market Dynamics & Partner Opportunity make the move, and find themselves left behind. When many people think about SaaS, they think applications such as Salesforce. com. But the market ranges much farther today, encompassing software solutions that run the gamut from storage, data backup and disaster recovery applications to security solution. Gartner and IDC forecast a 32 percent increase in combined annual growth worldwide in Web-based SaaS services by 2011. A quarter of new business software is expected to be delivered as a service by 2011, when there will be a $21 billion market for cloud-based software services. Some natural conditions exist in the marketplace that account for the growing interest in software delivered as a service: • Small- to mid-sized end-user customers do not have the IT capabilities in-house to manage and maintain the multitude of on-premise software applications and requisite infrastructure. • Economic conditions have tightened-up budgets and caused end customers — especially in the SMB space — to look to more affordable solutions such as subscribing for their software with minimal initial capital investment. • End-customers are looking for predictable costs to keep in line with those tightened budgets • End-customers want features of the latest platform but don’t want to upgrade or we don’t have the skills • End customers are seeking predictable costs — even if it does not save a lot of money long-term • End customers can’t keep good IT people to run the platform and we need to free up our best people to work on strategic projects 3
  5. 5. Software as a Service: Partnering with CA on Backup & Recovery Building and Growing a SaaS Business Practice Beyond the theory of SaaS lies the practical process for building an organization with the right resources and structure to sell and deliver SaaS solutions in a predictable, profitable model. In some cases, this necessitates making changes to existing operations, taking stock of resources requirements and devising a new formula for managing an annuity-based business model. One thing should be noted: Successful solution providers run diversified businesses. In other words, while they focus on The solution providers one primary business model — SaaS, for example — they maintain a mix of other making the most money revenue streams. Of the Best in Class solution providers that derive half of their are NOT waiting for revenues from managed services, including SaaS, all still generate upwards of 20 customers to pick up the percent of their annual revenue from either consulting, product sales or project-based phone seeking SaaS, but business models as well, according to IPED research. rather proactively selling the model early on in the Why do solution providers want to get into the SaaS business today? Overwhelmingly, adoption cycle. they tell IPED that the desire to increase recurring revenue streams drives their decision. Why SPs Choose SaaS Solutions BIC SaaS Providers, adopting faster, overall adoption rate growing however 38% Increase Recurring Revenue Streams 35% 35% Improve Profit Margins 28% 32% Provide Higher Value-Add Services 24% 28% Improve Customer Satisfaction 23% 25% More Up-Sell Opportunities 19% 23% New Customer Acquisition 24% 17% Improve Competitive Advantage 21% 15% Service Differentiation 17% 13% Respond to Customer Demand 26% 11% Reduce Customer Churn 6% 8% Technology Purchase Economies of Scale 9% 6% Best in Class SaaS SP Improve Service Utilization Rates 7% Average SaaS SP In rank order, boosting recurring revenue and profit margins are the obvious drivers for getting into the SaaS business today. Beyond that, however, it is interesting to note the behaviors of the most profitable solution providers selling SaaS today. For one, just 13 percent of Best in Class are selling SaaS in response to customer demand versus more than a quarter of the industry average in the channel. This 4
  6. 6. Software as a Service: Partnering with CA on Backup & Recovery means the solution providers making the most money are NOT waiting for customers to pick up the phone seeking SaaS, but rather proactively selling the model early on in the adoption cycle. Secondly, Best in Class solution providers are more likely choosing to sell SaaS to improve their competitive advantage and gain service differentiation over their industry average counterparts. When building a SaaS practice, the types of software a solution provider offers is Sixty percent of Best critical, but it’s not the only part of the equation. A number of key attributes are crucial in Class deemed financial to running a successful SaaS practice, including: acumen a required skill set • Marketing for running a successful • Sales SaaS practice (versus 49 percent for the industry • Customer Management average). • Integration / Technical Services • Workflow Design / Professional Services • Financial Management • Organization Design / Management There is a tendency in today’s market for solution providers that identify themselves as having a SaaS business to focus primarily around their skills in integration and technical services. But while these skills are essential, they alone do not constitute being in the SaaS business. It simply means that you provide some SaaS offerings. To establish a company as a genuine SaaS business, solution providers need to excel at all seven of the business attributes above — and the Best in Class typically do. Solution providers should think about four moving parts to establishing a SaaS practice: Know their audience (customer size and vertical focus, technology needs); know what kind of software to sell on a subscription-basis; know what kinds of additional services to wrap around that sale to boost margin; and know how to drive demand. One skills area where Best in Class place a higher premium than the industry average solution provider is with respect to financial analysis. Sixty percent of Best in Class deemed financial acumen a required skill set for running a successful SaaS practice (versus 49 percent for the industry average). In today’s difficult decision- making environment the need to make a financial argument for buying anything is paramount and Best in Class know that their sales staff must know how to read a P&L statement and make a business case to end customers. Instilling financial acumen in sales reps is just one of the challenges that come with establishing a profitable SaaS business, though not all challenges are equal. According to IPED research, some hurdles to the SaaS model are more urgent than 5
  7. 7. Software as a Service: Partnering with CA on Backup & Recovery others, but easier to solve; while some are less immediate but more important and more difficult to achieve long-term. The first chart below illustrates in rank order the urgent or prominent challenges to setting up a SaaS practice, while the chart that follows lists the obstacles to achieving SaaS profitability. Challenges to Building an Saas Practice 70% Developing/Delivering Relevant Services 65% 66% Selection of SW/Vendors 63% 64% Trained Tech Staff 59% More Frequent 62% Achieving Operational Profit 61% 59% SaaS Margin Structure 57% 59% Consultative Sales Staff 57% 53% Service Attach Opportunity 58% 49% Time/Cost: Cultural Change Management 54% Best in Class SaaS SP 47% Average SaaS SP Current Sales Staff Migration 53% Challenges to Profitably Building an Saas Practice 49% Achieving Operational Profit 40% 47% Service Attach Opportunity 43% 47% Time/Cost: Cultural Change Management 40% 45% More Difficult Current Sales Staff Migration 39% 45% Trained Tech Staff 38% 42% SaaS Margin Structure 43% 38% Selection of SW/Vendors 39% 36% Consultative Sales Staff 39% Best in Class SaaS SP 36% Developing/Delivering Relevant Services 33% Average SaaS SP Solution providers launching into a new business model or market focus such as SaaS can be overwhelmed by a huge laundry list of to-dos that impede the smart implementation of a business strategy and delay operational profit. So there is a need to prioritize. If too much time is spent focusing on the urgent challenges, for example, the items most critical to long-term profit and success can be neglected. 6
  8. 8. Software as a Service: Partnering with CA on Backup & Recovery One of the first questions solution providers ask when they consider diving into SaaS is what kind of investment they need to make and how long before they see a return on it. The answer reveals what is likely one of the most attractive elements of the model: Low risk. Consider the following: SaaS practices, like • Upfront capital costs are minimal if a solution provider is not going to build and all managed services maintain their own network operating center, but rather host their customers’ businesses, need applications at a third-party data center or with the manufacturing vendor. a higher ratio of • Offerings delivered in this manner are typically turnkey at the outset, so solution sales/ tech reps providers can quickly get customers up and running. The opportunity for customiza- tion and integration services remains, but is not necessary for initial startup. • ROI is quick, as customers are paying for their SaaS services on a recurring, con- tractual basis. Solution providers should focus on signing customers to a one-year contract at bare minimum, three years ideally. IPED recommends the following steps to address priorities and establish balance when starting a SaaS business: Step 1: Focus on developing and delivering relevant services and selecting the appropriate software vendors with whom to partner. These are urgent needs for the business to launch, but also less difficult to achieve quickly. Step 2: Begin retraining a sales staff to be consultative in nature and able to sell services on a contractual basis backed with a service-level agreement. This is critical in order to begin filling the pipeline with the high volume of customers necessary to generate enough monthly revenue and cash flow. Step 3: Identify services attach opportunities; retrain technical staff to effectively manage a services-based operation IF the solution provider is going to host the software themselves; determine a SaaS margin structure Step 4: Focus on achieving operational profit and managing cultural change throughout the business Best Practices for Selling SaaS Selling software is an exercise in tangible transactions: customers acquire a real product that provides measurable functionality. But SaaS solutions are fundamentally intangible: customers acquire a new capability but not necessarily a new piece of software. Learning to sell in this new relationship model is mission critical to a successful SaaS practice. 7
  9. 9. Software as a Service: Partnering with CA on Backup & Recovery Selling SaaS requires a skill quite different from selling products and it is therefore is critical to invest in sales training for both sales and technical staffs. Some other notables to remember include: • SaaS practices, like all managed services businesses, need a higher ratio of sales/ tech reps • Make a higher percentage of tech resources “customer facing” and trained in sales • Divide resources into hunting and farming teams, with sales personnel hunting for new business while technical staff farm existing accounts for additional services opportunities • Emphasize net-new customer acquisition in compensating your sales reps. SaaS Sales Process Dynamics 17.3 Best in Class SaaS SP Average Sales Cycle: Weeks 12.3 Average SaaS SP 32.4 Average Transaction Size: Thousands 36.1 45% 53% 2007 Average SaaS Gross Margin 23% Note: BIC, larger percentage of transaction size falling in the $1025 k range than average (23% v 15% of average SaaS selling in that range) NET: BIC longer sales cycle, typically higher transaction size 2x GM The sales cycle for Best in Class solution providers in a SaaS engagement runs five weeks longer on average than that for the industry average players selling SaaS. However, consider the payoff: a slightly larger transaction size, but a whopping Compensation gross margin of 53 percent in 2007, according to IPED research. The 23 percent gross plans for SaaS sales reps margin garnered by the rest of the industry selling SaaS is good coin in and of itself, are markedly different but clearly there is a lot more money to be made by following best practices around than those for transac- sales, marketing, operations and finance. tion-based businesses. The other big payoff for building a successful SaaS practice comes in the form of services attach revenue. SaaS implementations require upfront assessments of a customer’s existing infrastructure, a design consultation process that Best in Class providers routinely charge a premium for. SaaS deployments also set the stage for other managed services to be sold, particularly for those solution providers that maintain their own data center to host software for their customers. 8
  10. 10. Software as a Service: Partnering with CA on Backup & Recovery Finally, SaaS can’t be discussed without addressing the topic of compensation plans. Comp plans for SaaS sales reps are markedly different than those for transaction- based businesses where commissions are paid when revenue is received from the customer. By contrast, SaaS solution providers need to pay commission (typically in one-year increments) to reps when the contract is signed. Paying commission monthly based on the customer subscription model would result in amounts so small that it becomes difficult to motivate sales reps. CA Instant Recovery On The main obstacle to this best practice is cash flow. Solution providers need an Demand is sold adequate enough amount of cash on hand to pay their sales reps a year’s commission upfront. If they do not have the means, they can pay their reps smaller portions of only through authorized their commission at a time, with the danger being reduced motivation on the part solution partners of the reps. Managing SaaS Customer Relationships Finally and perhaps most important to creating a successful, sustaining SaaS business is the ability to effectively manage customer relationships. Because it is a recurring revenue model, SaaS, by nature, binds solution providers to their customers more tightly than in more traditional transaction-based deals. Best in Class solution providers understand the importance of relationships in making the SaaS sale, with a vast majority looking to convert their existing base to a SaaS model. They excel at farming their installed base and growing customer share within those end-user organizations, according to IPED research. In 2007, Best in Class sold 40 percent of their SaaS solutions into their existing customer base compared with 20 percent by the industry average. In 2008, Best in Class anticipate increasing the percentage of SaaS sold to existing customers by more than 20 percent year on year, according to IPED. Another key element to managing customers is ensuring service levels and mak- ing sure that the applications provided perform as well or better than on-premise versions of the software. Well-crafted SLAs are essential and solution providers entering the SaaS business must spend upfront time developing SLAs that, if done right, represent a crucial selling tool. They are, in effect, the contractual guarantee that consumers in today’s fraught marketplace will be looking for before they agree to let a solution provider manage the delivery of its critical software applications. 9
  11. 11. Software as a Service: Partnering with CA on Backup & Recovery CA: Instant Recovery on Demand CA’s entrance into the SaaS market with their business continuity and disaster recovery managed services offering will help drive demand even further. But CA Instant Recovery On Demand is more than just SaaS, it is a comprehensive turnkey business continuity and disaster recovery managed services offering. The Though targeted more robust offering combines real-time replication and high availability software with full disaster recovery data center facilities and staff, and Web-based assessment, at the SMB space, provisioning, management and reporting tool that provides 24/7/365 protection. the service also For solution providers, this means little to no capital startup costs — and as a result provides enterprise- almost no risk. class capabilities. CA Instant Recovery On Demand is sold only through authorized solution partners and targets small and midsize businesses with 100 to 1,000 employees and at least one business-critical application such as email, database and/or Internet. While most large organizations have a wide variety of business continuity solutions already in place, these solutions are less common among SMBs, given their cost and complexity. SMBs face high risk from unplanned outages, and in some cases, could even experience business failure from a significant disruption like a natural disaster. This reality presents a compelling sales story for solution providers to articulate; essentially the ‘need to have’ vs. the ‘like to have’ nature of this kind of solution for SMB customers. And because customers are not buying a lot of equipment and software upfront, they likewise enjoy the low-risk cost of entry that solution providers do. CA’s service, based on CA XOsoft™ High Availability software, replicates a company’s business applications and data to the disaster recovery datacenter of CA partner Geminare, a Toronto-based company that hosts and delivers the service on its SaaS Business Continuity Platform. Geminare’s datacenter provides automatic failover and near-instantaneous recovery in the event of system failure at the end customer site, and maintains its own disaster recovery plan and facilities across Canada, the U.S. and Europe. The turnkey managed services offering includes all replication software, server hardware, Microsoft operating systems software and application software for the replica servers at the disaster recovery data center, in addition to five day’s per month use of the disaster recovery facilities. Customers only need to provide VPN connection and a small amount of storage on each protected server. Solution provider partners can quickly add this high-margin offering to their business model with no capital investment. Once authorized, partners are able to perform online customer environment assessments and quotes (and possibly even charge a fee for this), then provision, manage, support and start billing customers, typically in less than 24 hours. The CA replication software is automatically installed 10
  12. 12. Software as a Service: Partnering with CA on Backup & Recovery remotely on the customers’ production servers while the disaster recovery data center automatically provisions the replica servers, applications and storage. There is little to no customer IT support necessary. Though targeted at the SMB space, the service also provides enterprise-class capabilities. It has sophisticated functionality around real-time application and data recovery, including automated disaster recovery testing without interrupting the The turnkey nature customer’s production or disaster recovery environments. The testing capability of CA Instant Recovery validates the recoverability of mission-critical data and is unique among recovery On Demand enables management solutions on the market today. From a SaaS perspective, partners can channel partners to get tout this capability, giving customers an unprecedented level of confidence that the customers up and fundamental infrastructure running the service is reliable and effective. running quickly with little initial expenditure The service enables the following: • High application availability via fully automated failover and push-button failback for Microsoft® file services, Exchange, SQL, and IIS, as well as Oracle and Blackberry Enterprise Server • Disaster recovery site compliance through fully automated, scheduled tests of an organization’s disaster recovery system without disrupting the production environment or existing data protection • Provisioning and deployment typically less than 24 hours after the customer environment assessment is completed The turnkey nature of CA Instant Recovery On Demand enables channel partners to get customers up and running quickly with little initial expenditure — plus customers use operational budgets instead of capital budgets to pay for it. The profits for solution providers are substantial as well. The CA offering delivers channel partners high margins, especially when considering the wide range of services for which they can charge, including the initial business continuity/disaster recovery assessment, recurring disaster recovery testing, non-disruptive sandbox testing for O/S and application patches and upgrades, and even complete outsourcing of the management of the solution. Channel partners also own the relationship with the customer including monthly billing. And because they are the front lines in protecting their customers’ business-critical applications and data, solution providers are positioned strategically to provide additional services and consulting as needs arise. The service is available now in North America and Germany with availability elsewhere in Europe, the Middle East, Africa and Asia-Pacific slated for the first half of 2009. One CA partner selling its CA Instant Recovery On Demand service said that in today’s dismal economic climate his organization is finding it more important than 11
  13. 13. Software as a Service: Partnering with CA on Backup & Recovery to be able to lower the total cost of technology and eliminate operational headaches for end-user customers so they can focus on their specific business objectives. “With CA Instant Recovery On Demand, we can provide the business continuity and disaster recovery capabilities [our customers] need, as well as save them and ourselves any large startup costs,” said J. Michael Drake, founder and CEO of masterIT, a Bartlett, Tenn.-based managed services provider and CA partner. Conclusion In difficult economic times there is often opportunity. SaaS is one of those opportunities. The nature of the business model — low-risk/low-cost of entry, fast deployment, scalable — provide the ingredients for the right sales pitch for the right time. Solution providers evaluating SaaS should get a clear understanding of how much they will need to reorient their business around a recurring revenue model that changes the nature of how they sell, consult and relate to customers. Most importantly, solution providers should determine the right set of services for their customer target and align themselves with the appropriate software vendors, ones that fully support the SaaS model from a resource and programmatic capacity. CA is committed to the SaaS model and is depending on its channel partners to drive success. In turn, solution providers selling CA Instant Recovery On Demand will generate recurring revenue streams considered critical to the evolution of the channel, particularly in a down economy. ABOUT IPED The Institute for Partner Education & Development (IPED) is the professional services division of Everything Channel. IPED applies proven best practices to deliver customized recommendations that accelerate channel revenue through access to exclusive data and expert analysis. With over 20 years of institutional knowledge, IPED is the only professional services organization that can leverage the resources of Everything Channel, the unrivaled leading provider of information and access to the channel. IPED empowers Solution Provider firms to understand and react to the motivators and business value propositions that matter most to their business. IPED’s proven methodologies help technology vendors support their Solution Provider partners and present their portfolio of technology and business solutions for a mutually beneficial business relationship. For more information on IPED, visit 12
  14. 14. Software as a Service: Partnering with CA on Backup & Recovery ABOUT CA CA (NASDAQ: CA) is the world’s leading independent IT management software company. With CA’s Enterprise Management (EITM) vision and expertise, organizations can more effectively govern, manage and secure IT to optimize business performance and sustain competitive advantage. For more information, visit Copyright © 2009 CA. All Rights Reserved. One CA Plaza, Islandia, N.Y. 11749. All trademarks, trade names service marks and logos referenced herein belong to their respective companies.