SaaS & Cloud Computing and the Channel - Part III

This is the third installment in a series of posts on SaaS / Cloud Computing and the channel – and this is going to be a very long one.

The topic of the day is barriers to adopting SaaS and cloud applications from the channel partner’s perspective. By the end of this post I think you’ll see that we are at the point where the main issues are down to education and inertia – between 2000 and 2005 there were real issues around technology and economics, but these are solved today – I’ll make the case below, and I think the facts clearly show, that in 2010, for both the channel and for the client, both technology and economics are better with SaaS and cloud computing than for old on-premises software.

I’ve had the pleasure to meet with a great variety of channel partners over my last 10 years or so in the SaaS / cloud computing business – we had 1,800 channel partners at Postini and we are now well above 100 here at Intacct, plus I’m lucky enough to participate in great channel oriented groups like the Information Technology Alliance (the ITA) where hundreds of execs from the reseller community regularly meet to share best practices. Plus I spend a lot of time with other "channel champions" from both the vendor and the reseller communities.

In literally hundreds of meetings with resellers of on-premises software, I’ve seen clear patterns of concerns, questions and issues. We are clearly over the awareness hump – just about every channel partner I’ve spoken with is extremely aware of SaaS and cloud computing – the question in their mind is whether cloud and SaaS represent an opportunity or a threat – and the repeated concerns I hear are mostly about economics and technology.

The rationale for this post is that many of the concerns I consistently hear and the conventional wisdom being repeated aren’t well grounded in fact. This is only natural for channel partners coming from the on-premises world. So I thought it would be helpful to get all of this on the table and out in the open – the top 10 channel concerns about SaaS and Cloud Computing.

As you will soon see, my experience is that many of these common concerns have been developed without the benefit of cloud or SaaS experience, are based on incomplete information, or are relying on inaccurate information being perpetuated by the heritage on-premises publishers.

Concern 1 – Cloud computing is insecure and presents privacy risks vs. on-premises software.

Security and privacy are almost always the top concern from anyone new to cloud computing, both for channel partners and for clients. And security concerns are valid. The way I like to think about this, though, is to ask the question - Security risk as compared to what? In the real world, the most likely security problems are far less exotic than hackers breaking into a cloud computing system – laptops are frequently stolen, unsecured files are easily copied off the network, confidential data is forwarded via un-encrypted email, etc.

Just this week, Computer Reseller News published a recap of the top 10 security breaches of 2010 - most of which were thefts of portable drives and laptops and none of which involved commercial cloud computing applications. My experience is that for the millions of businesses smaller than the Fortune 2000, which represent the majority of the cloud computing market, information security is not a exactly core competency and what you get with a commercial cloud computing application is going to be much better than you can afford to put in place internally.

Compare this to the mature cloud computing vendors, where customer data is secured in fortune 100 class data centers – which feature armed guards, biometric access controls and 24x7 operations by security experts. Data is encrypted both when stored on disk and in transmission, passwords are robust, networks are hardened. Plus the systems are SAS 70 Type II audited, typically have additional privacy and security certifications and often employee third parties for penetration testing and additional security and privacy audits. How many in-house IT departments can say the same? And if data is never stored on laptops, it can’t be stolen.

So my point is that I while I think security concerns are valid, I think any statement about the cloud being less secure than running software on-premises is a real red herring – the level of security you get with a commercial cloud applications is almost always far superior to that businesses smaller than the Fortune 2000 can ever achieve, or afford, by running their own software themselves.

Concern 2 – Cloud computing is not reliable

I think it is perfectly valid for VARs or clients to ask questions like “what happens if the Internet goes down” – this is a very common question and it is a unique concern to cloud applications. It is absolutely true that you will lose access to your cloud-based systems if you don’t have an internet connection – but in 2010, I find internet connections to be extremely reliable, and clients can relatively inexpensively mitigate this risk by deploying backup or redundant Internet connections in the rare event the primary connection goes down.

That said, from literally every aspect of availability and reliability I can think of, the reliability of cloud systems is far better than running on-premises software yourself. The major commercial cloud-based systems have guaranteed uptime that varies from 99.5% to 99.999% - at the high-end guaranteeing no more than literally seconds of down-time per year - very few internal IT departments can afford to offer anything remotely close to this. The mature cloud vendors are so good at reliability that they actually publish their real-time availability status for the world to see on their public websites.

My real-world experience is that using cloud computing is far more reliable than running software yourself. This is proven over and over again every year – whenever there is a hurricane, an ice storm or anything else that knocks out local power, businesses will lose any all of the systems that they are running on-site – vanishingly few have generators or other backup power than lasts for longer than a very short outage. But if they are using the cloud, their systems stay up and running – with clients and employees in locations with power enjoying uninterrupted access - and this happens literally hundreds of thousands of times every year.

So I feel even more strongly about reliability than security – if you look at the track records of the established commercial cloud vendors, you’ll quickly see that reliability is actually a major driver for moving to the cloud – quite the opposite of a concern.

Concern 3 - Cloud-based applications are simplistic, immature and not customizable

These are concerns I hear from channel partners who haven’t yet experienced commercial cloud applications. And this concern is tightly linked to the "I can't make money in the cloud" concern below. If you are pre-disposed to think this and you haven’t tried SaaS or Cloud applications out or seen a demo, I can pretty much guarantee you’ll be blown away by the capabilities the leading cloud applications have.

If you feel like cloud applications are simple, I’d say sign up for a trial of Salesforce or Intacct – it’s fast, easy and free and you’ll quickly see that in every way these applications compare favorably to their on-premises counterparts. These commercial cloud-based applications are every bit at sophisticated and mature, if not more so, than on-premises software. Cloud apps simply would not be selling if they didn’t solve real world business problem – people don’t buy them because the cloud is cool, they buy them to solve business problems more effectively than running software themselves with higher ROI.

Similarly, I’ve found that the ability to integrate, customize and extend applications like Salesforce and Intacct is far superior to on-premises alternatives.

For example, I get asked a lot by channel partners about SQL access – the implication being that their technical teams are used to directly accessing the database tables underlying the software they are working with using SQL to do integration, customization and extension. I don't get asked a lot about more modern technologies like web services, SOA, integrated development environments or platform capabilities - so my sense is that many channel partners are coming at the topic of integration and customization from the perspective of how they accomplish it with their current products, rather than taking the next step to learn about the much more modern and productive methods used by more modern offerings - whether on-premise or cloud-based.

So while it is absolutely true is that you don’t get SQL access to the underlying database with cloud applications, I would argue that SQL access is a 1980's approach to integration and customization and that in 2010, modern cloud applications feature modern platform as a service tools and rich web services that allow you to do far more, and more productively than you ever could with direct SQL access. Most importantly, what you build with web services or modern platforms doesn’t generally break when the system is upgraded like SQL does – the cloud platforms that are part of leading products like Intacct and Salesforce guarantee upward compatibility.

One of my favorite quotes on this if from one of our resellers that has a long track record with Great Plains and Lawson – the managing partner of the ERP practice told me “Dan, with Intacct, for the first time I feel like I can sell solutions rather than assemble products.” He was reflecting on Intacct's web services and platform capabilities to extend the applications, build entirely new applications, create extensive customizations and integrate to just about anything.

I’m confident that if you do your homework, you will find the same thing to be true – that today’s leading cloud-based applications are sophisticated, mature and highly customizable – so customizable that you’ll find yourself focused on solving the client’s business problems rather than hunting through catalogs of add-on products.

Concern 4 – Integration is difficult or impossible

Four in a row – as with the prior topics, my experience is that this concern reflects just about the exact opposite of reality. While consumer and low-end cloud and SaaS applications may not be designed for integration, all of the commercial cloud applications excel at it. Cloud systems generally offer excellent, comprehensive web services, permitting open, secure access using technology standards like https, XML, SOAP and REST.

At Intacct, more than 50% of the transactions processed by the system come in through our web services and the vast majority of our clients use Intacct integrated with some other system(s) – whether they are using the prepackaged integration we or one of our partners provide. You can use our native web services, our platform services or one of our integration partners like Boomi, Pervasive or CastIron to build new integrations. For another data point on cloud integration, look to the Appexchange, you can find nearly 1,000 applications that are pre-integrated with Salesforce.

So as with the prior three concerns – Security, reliability, maturity / customization and integration, I think if you spend the time to look at leading cloud solutions you’ll actually find they are better than on-premises alternatives in each of these four areas. I expect as more and more channel partners adopt the cloud, the old conventional wisdom will turn on its head, and that the channel will start to understand these things are all strengths, not weaknesses, of the cloud.

Concern 5 - Switching to Cloud is as simple as flicking a switch

There is a lot of hype about the cloud – and the idea of the cloud somehow being magical – you just turn it on and baam – you’re using it, is a great example and Channel partners are right to be skeptical. While there are some simple cloud applications that you or your client can simply provide your credit card and start using – Google Apps, Webex and Go to My PC come to mind – I think most channel partners have business applications in mind when they express their disbelief about this cloud claim.

And they are right – switching to the cloud is not magic – it’s generally just like switching to any other new system. While you don’t have to set up any hardware or install or configure any software, the process of configuring the system, setting up business logic, uploading master and historical data, configuring business processes, training users etc is just about exactly the same with a modern cloud system as it is with a modern on-premises system.

The central role of the channel partner as business consultant and product expert is almost exactly the same with cloud-based systems as it is with on-premises counterparts. Implementations do generally go faster and easier because there are fewer variables involved – with no hardware or software needing to be installed – so there is less to go wrong. And at the same time, implementations tend to be more collaborative since the client and the reseller can both log into the system at the same time and can see the results of configuration decisions together at the same time – and in my experience this greatly increases the success rate of cloud deployments vs. on-premises implementations.

Concern 6 – The Cloud is only suitable for small businesses

I hear this concern quite a bit from VARs and I think it comes from IT departments, particularly in larger enterprises. Some folks in IT see cloud computing and SaaS as a threat – and saying it is only useful for small businesses is a way of dismissing it.

Ray Wang, one of the top industry analysts recently did some very interesting analysis on this. He surveyed the CIOs at 100 Global 2000 organizations and asked them if their firms had deployed SaaS applications. Only 23% said Yes. Then he spoke with procurement – and it turned out that 100% of these same firms were actually using SaaS and cloud computing applications.

This matches with my experience. I know Walmart and nearly all of the Fortune 500 use SaaS applications. Companies like Postini, Omniture and Salesforce serve some of the largest global corporations. At Intacct we have more than 10 of the top 100 CPA firms in the US as partners and many public companies on our applications.

So while I think that any broad concern about SaaS and cloud computing for large enterprises is unfounded, something that is true is that small and mid-sized businesses see even more value than global giants. These technologies are great democratizers – because of their scale, SaaS and cloud computing providers offer small and mid-sized businesses access to technology and operating capabilities that were formerly out of reach to any but the largest organizations.

Concern 7 – Channel partners cannot make money with cloud-based applications

I hear two main concerns about the ability of channel partners to make money in the cloud. First is that there is no professional services revenue to be had, second is that because SaaS and cloud companies are subscription based, it takes a long time for channel partners to break even.

If you read closely my thoughts about concerns 3, 4 and 5 above, you’ll know that my experience is that the professional services opportunity for VARs as it relates to cloud and SaaS applications is just about exactly the same as it is with on-premises software. While there is no revenue to be earned for installing hardware or software, this is commodity work that most channel partners tell me they do not relish. The real intellectual, value added work – business process design, application implementation, customization and integration is either the same or offers more opportunity for the channel partner in the SaaS/cloud world, because so much more can often be done vs. on-premises counterparts.

My experience is that with SaaS and cloud applications, professional services margins also tend to be higher, because all work can be done remotely, and because many SaaS and cloud applications are designed to be templated, encouraging re-use and monetization of the channel partner’s intellectual property. Support is similarly more effective and higher margin – you never have to go on site to reinstall broken software, and with permission you can log into a client’s system so you can see exactly what is happening, right in their environment.

I’ve posted here several times about the subscription-based economic model and how it provides reliable, on-going, high-margin cash flows for the channel. The source of the concern that it takes channel partners a long time to break even is that in the on-premises model, channel partners get high percentage of an initial license sale – and with SaaS and cloud applications there isn’t such a large initial charge for the client. Some of this concern may also come from the revenue sharing models of the large publishers that offer both on-premises and hosted versions of their applications – and offer low revenue sharing – like 12% in year one and 6% ongoing – that I can only assume are in place to make their hosted offerings unattractive to the channel.

What I can tell you on this is that at Intacct we are working with enough channel partners that carry both traditional software and cloud-applications to know that from a revenue sharing perspective alone, the break-even point occurs after about 18 months. After 18 months, it’s all upside for the channel partner. In addition to understanding pricing and revenue sharing , the key questions a channel partner needs to ask SaaS and cloud vendors are about customer lifetime and churn – this will help the channel partner gauge not only how long it takes to “get ahead” on the initial purchase vs. the on-premises model, but also how long on average the channel partner can expect to keep an ongoing, high-margin revenue stream coming from each one of their clients.

The net is that in my experience SaaS and cloud computing are better for the channel from a financial perspective in just about every way – professional services revenue opportunities are similar or better, margins are higher on both professional services and support and building a consistent, ongoing income stream by sharing in subscription revenue for the life of the client is transformational.

Concern 8 – It’s best to stick with my current publisher and wait for them to develop cloud-based offerings

This is a concern that merits an entire post on its own. Established on-premises software publishers face a tremendous, daunting challenge in moving to the cloud. If you’ve not yet read “The Innovator’s Dilemma” by Clayton Christenson I highly suggest it – the book is a fabulous read about disruptive innovation in the technology industry. The conclusion is that that it is somewhere between extremely difficult and impossible for software publishers to make a switch when a truly disruptive new technology and business model like SaaS and cloud computing arises.

The challenges are just formidable - all new skill sets are required in engineering (so are you going to fire your current development team or can you afford to hire a new parallel one), for the first time operations becomes a critically important competency (and where are you going to find this type of talent), all of the financial metrics used to run a cloud business are different (and finance tends to starve new cloud initiatives) and organizational competencies – both within the publisher and within their clients and distribution channels – are all structured around the old on-premises model. It’s like the whole organization keeps being sucked back to the center of the legacy business, making it critically hard for a fledgling SaaS or cloud business to establish escape velocity.

My personal opinion is that it is highly unlikely that the majority of the current crop of on-premises software publishers will make the transition to SaaS and cloud – certainly it won’t happen organically. This isn’t dissimilar to the transition 30 years ago from the mainframe and minicomputer to the client-server world – outside of SAP, few of the dominant players from back then are still operating in a meaningful way today.

For the channel, this becomes a question of inertia and opportunity cost – you’ve got to assess whether your current publisher has the talent, focus, deep pockets and management expertise to make the transition. The longer you sit on the sidelines waiting for your current publisher to move the more risk you incur for your own business and the higher your opportunity cost will be – because plenty of other channel partners are moving forward with the cloud with a new set of SaaS and cloud publishers

Concern 9 - I can accomplish the same thing by hosting on-premises software

For the last couple of years, I’m hearing more and more amazing stories about hosting from channel partners – VARs responding to inbound demand from their clients for cloud-based solutions by building out racks of servers in closets in their offices to host traditional on-premises applications and providing client access through Citrix or terminal services.

I actually think this is a good first step – it provides the client with remote access and improved availability over running applications themselves – but I really struggle with why a channel partner would want to build a competency in hosting old-style on-premises software. If you are fielding demand for web-based applications, why not fulfill it with applications that were designed for multi-tenant, web-based deployment in the first place?

The economics of hosting by a channel partner just aren’t there – single tenancy hosting is a proven loser from a financial perspective. Remember the ASP (application service provider) business model that was popular back in the technology bubble – these companies failed because their business models couldn’t scale.

The root of the problem is that legacy software applications were not designed for multi-tenancy. While hardware today can be virtualized, most software infrastructure and nearly all operating costs – which are the bulk of ongoing costs - cannot be. You still have to license, operate and maintain SQL server, Sharepoint, Citrix and more for every client and someone has to do maintenance, performance tuning , customization, upgrades, backups, etc for every client. In the cloud computing and SaaS world, all of this is done by the vendor in a very scalable, cost effective way, because the applications were designed from the start to be multi-tenant – the vendor can spread costs of gold plated operations across thousands of clients.

Also remember that the major SaaS / cloud vendors are very good at this stuff. They invest millions to tens of millions of dollars annually in infrastructure and operations. From 24x7 global operations to guaranteed availability to undergoing SAS 70 audits, my experience is that these are tasks that just aren’t core to the business of most channel partners.

I could dive into many more technical, financial and even legal issues with hosting – but let’s save that for another post. The net is that while I think hosting is absolutely an improvement over running applications on-premises, I also think that in the long run it is a dead-end that doesn’t make economic sense for the channel to try to build competency in.

Concern 10 – It’s too early to build a cloud-based business – my clients aren’t ready

If you feel this way, I think it’s time to talk with your clients – and to start thinking about the businesses that aren’t becoming your clients. Millions of businesses are using SaaS and cloud applications today – most common are web-based payroll, web conferencing, productivity tools, file sharing, security, customer relationship management and financials. As a channel partner, you really don’t want to get in a situation like the CIO’s I described above who aren’t aware that their own firms are already broadly using SaaS and cloud applications, just because the only applications you touch are the old on-premises ones.

Software industry revenue numbers tell the same story. In 2009, nearly all of the large vendors of traditional on-premises business reported declining revenue year over year - with new license sales falling off a cliff. On the other hand, large SaaS vendors grew rapidly, led by Salesforce at 20% and SuccessFactors at nearly 40% YOY growth. Intacct is growing even faster.

So where do you start? Many VARS have found success by adding a cloud or SaaS offering that is a substitute for a current on-premises offering, so you can present two alternatives to new clients – cloud or on premise, and so you can have something new and exciting to go back and sell into your installed base. Another approach VARs are taking is to add cloud and SaaS offerings that are best suited for new industries – they stick with their current on-premises offering in the industries it is good for, and add SaaS / cloud products to help expand the market they can address to new industries their current product isn’t well suited for. A third strategy is to begin to offer cloud-based products as add-ons to the installed base.

So what is the downside - who is truly threatened?I don't want to seem entirely pollyanna-ish here. For channel partners who's business model is primarily based on low value, commodity IT services like moving boxes or helping clients with software upgrades cloud and SaaS are increasingly an existential threat. Similarly, businesses don't need as much help as they used to with software selection - the Internet has transformed the buying process. So some channel partners will have to transform - the channel truly has to be about intellectual property and business value added - it's been evolving this way for the last 20 years; I think the cloud will just accelerate this trend. For those channel partners who are truly business process and topical experts, the cloud and SaaS represent an expansion of market opportunity, because you can more easily serve clients regardless of geography.

Conclusion – what are you waiting for?

If you are still with me at the end of this very long post, then you long ago got the idea that evidence is really mounting that SaaS and Cloud applications are better in just about every way for both the channel and better for the client.

From the hundreds of channel partners I’ve spoken with, it’s clear to me that education and inertia are the two biggest barriers to broad adoption. Hopefully this post has helped on the education side – I’ve done my best to faithfully reproduce and address the major concerns I’ve heard from the channel.

Overcoming inertia, however, is entirely up to you…


James Foley said...

Hi Dan,

Great post as usual and lots of truths in what you write. I expect to see Drukers' Ten Laws enshrined in Cloud culture before too long.

I'd like to suggest one other for your inhibitor to great channel adopting, and that comes from my experience here in the UK. My experience suggests that one of the biggest issues related to channel adoption isn't technology or market opportunity but rather it's around business models.

Traditional channel partners have a business model based from the ground up around premises-based sales. They're used to the peaks and troughs of large capex sales, they build their comp and reward structures around these and in many cases debtor management, receivables and their own supplier management is based around these models. There's almost an addiction to large swing deals that can make or break a quarter.

To convert this to a cloud business model where you may still have to put in the same cost of sale but instead see the return on this investment amortised over perhaps 3 -5 years of subscription revenue requires both a confidence in the vision of cloud computing as well as the financial strength to fund the business during this transition.

In many cases companies may subscribe to the former without the financial wherewithal to achieve the latter. So, I think addressing the subject from a business-model rather than technology perspective could be useful in terms of furthering the debate.

This, IMHO. is a key constraint to consider when evangelising as you do so well.

Sanjeev Aggarwal said...

Hi Dan,

Overall good post.

An issue that still remains is ecomonics of SaaS, especially when one considers larger mid-market companies and enterprises (with large number of users). I think most SaaS applications will not provide a good TCO when compared to on-premise applications. We have done a lot of work with real companies that proves this to be the case.

Sanjeev Aggarwal
SMB Group

Daniel Druker said...

Jim - Nice to hear from you. My experience is that the channel focused cloud vendors understand this dynamic and work with their channel partners to solve the timing of revenue vs. expenses for the partner if this problem exists. One way of solving this is a tiered royalty structure - with higher revenue sharing in earlier periods to better match cash flow to expense for the partner. I can tell you in our business we've worked very closely with the partners to model their cash flows, and adjusted our programs to make the financials attractive to them both on a short and long term basis.

Daniel Druker said...

Sanjeev - no pushback, cloud and SaaS are not a panacea for everyone. I also agree that for large scale deployments the economics of SaaS can be less compelling for very large enterprises that it is for smaller deployments or for smaller firms. I also generally think ROI is a better measure than TCO for software selection.

My recommendation would be to look at both options in most evaluations, and select based on ROI and functionality for the particular business problem being solved. My experience is also that the dynamics and economics are different for each technology segment - so I am not sure a broad rule that says SaaS has a lower TCO for large enterprise would be entirely true.

Some problems (like email security we worked on at Postini) were just inherently better to be solved in the cloud. On the other hand, there are plenty of applications that just make way more sense to solve on-premises. Cloud-based data warehousing for large enterprises for example is still something that makes my head hurt.

EJ said...

The issue of security is a serious matter but then what system is foolproof? I think cloud based applications are great opportunities for channel partners to rethink their channel sales strategy.

Mike said...

This is no different in the cloud computing world. In the cloud computing world, there are “Cloud Platforms” and “Cloud Applications.” Cloud platforms include offerings such as Amazon’s EC2 and S3, or Joyent’s Accelerator. Cloud applications include offerings such as, NetSuite, SuccessFactor and many others.
So, is SaaS cloud computing?
Since using applications is considered to be computing, and that SaaS is basically providing application software in the cloud, then using SaaS should be considered cloud computing. read more

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