Sightings in SaaS

The SaaS channel continues to be a bit of a conundrum. Recently SightLines had the opportunity to speak to several NetSuite partners about how they are handling the business of being in a SaaS channel and there was one thing that came through perfectly clear: Everyone continues to search for the right mix of consultants, employees, 1099s, support staff and for the right mix of business.

In other words, no one has yet figured out how to make the SaaS channel partnership a business with a clear roadmap to growth and long term profitability. Most common is the channel partner with 1 or 2 principals and a stable of 1099s for both consulting and customer support. There are a few partners with a short list of high value employees, and a group of 1099s for implementation and customization. It is nigh impossible to support a large employee base on the SaaS business model. Where on-premise consulting can often charge 8 times licenses fees for implementation, it is nearly impossible for SaaS consultancies to justify more than 2 times subscription. There is no hardware setup and configuration, no database install and training, no application server install and training, no application install and patching, patching, patching. These activities, often opaque to the business’s managers, eat up an awful lot of time, budget and timeline. They are big money makers for on-premise consulting.

So the SaaS partner is left with business process requirements and system configuration and, in some cases, customization. These are time consuming and laborious tasks, often difficult to predict. In addition, the SaaS client has not spent $250,000 for licenses. Their firm with 25 users can probably negotiate something in the $30,000 to $40,000 range, depending on what they need. So you have not going to walk in and suggest a $100,000 implementation. It’s just not going to happen. The end result is that you have an implementation in the range of $40,000 to $50,000 on the high end. You pay a short list of bills, take a salary, pay the consultants and that’s it. You have supported the cost of sales and implementation, but there is little left to grow the firm.

So what’s the answer? Some partners are looking back at the on-premise model and trying to find deals where they can push the tab into the low to middle 6 figures. These are home runs and they come along rarely. It’s a dubious strategy I think. You have to add in the $20,000 – $40,000 implementations to keep cash flowing. But in the long run you are still looking at a low margin business that will have a very hard time breaking out.

NetSuite has suggested publicly and to the partner group that the way forward is twofold: Model the business on ‘Service as Software’  using a remote sales and implementation strategy and building vertical apps on the NetBIOS (NetSuite’s Business Operating System – customization and extension platform). This sounds like a great idea but how can a Solution Provider partner with already thin service margins make the jump to Vertical software development, maintenance and support? This is not a simple jump to make. A company doing custom software development, which is finally what a vertical built on NetBIOS is, needs some deep pockets, maybe even VC or Angel pockets.

Selling grilled sausages is also a dubious business model unless of course you have a concession at a stadium, in which case you can make some good coin. Likewise, the most successful vertical apps on SaaS, NetSuite or otherwise, have a captive audience. I had the chance to chat a few years ago with a company that sells information and they created a vertical app for NetSuite that included integration with their data warehouse, enabling their customers to formulate deals on the fly for thousands of different items.  Their customers became then not only their data customers but their NetSuite customers as well. Good work if you can get it.

One of our favorite SaaS writers Phil Wainewright had an interesting piece not long ago about the opportunities in the SaaS integration space and I agree with him. But again, in this kind of derivitive market you have to have a product with a huge potential audience, or a captive audience to succeed, methinks.

So there is still much to figure out in the SaaS channel. SightLine will have its own announcement in the near term as we make our way forward.