The traditional software (on-premise) sales model relies on the both direct and indirect distribution, leveraging the indirect Channel (the Channel) to build a loyal customer base and to generate a large portion of sales. Value Added Resellers (VARs), and System Integrators (SIs) play a major role in the evangelizing, demand generation, pre/post sale activities and shepherding customers through the product adoption lifecycle. VARs and SIs also double up as subject matter experts in industry verticals. With the advent of Software-as-a-Service (SaaS) and the software vendor owning the delivery, hosting, upgrades, support of the application and so on, the role of the Channel is being questioned in the new world order. We are initiating a series of posts to look at channel strategies across the different areas of Cloud Computing beginning with a look at SaaS in this post.

Here are some trends we have been witnessing in the cloud-based delivery model:

• ISVs have mostly sold directly to end customers
• ISVs are responsible for software updates (multiple updates per year), user acceptance, and support
• There is no hardware platform at the customer site for porting/certification challenges
• Web Services is the only way to perform integration
• Large license contract are out—Monthly Recurring Revenue is in
• Large drawn out implementation are out—Agile incremental implementation is in

These trends seem to portend that the traditional Channel will become obsolete. Is there enough work for the channel partners to engage with customers and be viable?

On the one hand companies like Salesforce.com have relied entirely on the direct sales model. Then there are cloud companies that have been building successful channel-centric organizations. One such company is Intacct. Founded in 1999, Intacct today delivers on-demand financial management and accounting applications entirely over the Internet via cloud computing to 30,000 users across 3,300 businesses and CPA firms. Intacct’s experience shows that companies don’t simply purchase “bet your business on” type of applications like finance and accounting software over the Web. In many cases, they turn to their local trusted advisers for recommendations and hands-on assistance. That’s where the channel approach shines.

I did a joint post on Sandhill.com based on the discussions we had with Taylor Macdonald and Daniel Druker of Intacct. This is a re-post of the same on PrudentCloud.

Taylor Macdonald is the Vice President of channel sales responsible for managing Intacct’s successful Value Added Reseller (VAR) and CPA channel initiatives and Daniel Druker is the Senior Vice President of Marketing and Business Development. Both of these executives have deep channel experience—Taylor having founded a successful VAR business and since running channels for Sage and Deltek, and Dan in marketing for channel centric companies including Arbor Software, Hyperion, Trigo and Postini.

Here are some of the highlights:

How is SaaS business model different from on-premise in terms of value chain and future growth opportunities?

TM: There is no growth in on-premise ERP software and that’s attracting the existing channel partners of on-premise software (SAP, Sage, Deltek, Intuit, Microsoft, etc.) to SaaS software. Today, there really isn’t any new license business coming to these firms; their on-premise customers are paying large maintenance fees and they are making good money, which they are investing in working with SaaS vendors such as Intacct, where there is a lot of new business.

The average on-premise partner’s new unit count was down between 10 and 50 percent over the last three years. On the other hand, there is huge new unit growth at SaaS companies like Intacct and NetSuite. So most of these partners feel that they need to be relevant in both the cloud and on-premises models. Adding to their concern is the fact that most of the incumbent on-premise vendors haven’t articulated or delivered a true cloud financial product at the price points and scale benefits of SaaS solutions.

I tell my partners that cloud-based financials is similar to what has happened in Payroll services. You will find CFOs firmly on both side of the outsourcing payroll camp. Some would insist on running payroll in-house citing security, control and so on. Others have long been using outsourced payroll services (ADP, etc.) and would not have it any other way because of any number of reasons (anytime access, convenience, etc.). We are still in that battle between on-premise and on-demand. The new generation who grew up using Internet and Mobile applications will drive the acceleration to on-demand solutions in the enterprise.

On the economics front, on-demand products provide a significantly lower TCO if you peel the layers and look at all the costs of the infrastructure and staff you would have to pay for in the on-premise product environment. SaaS also produces significantly more value by delivering new features several times a year whereas the on-premise vendors produce a new release once in every 2-3 years. The best part is all the upgrade costs associated with installation, regression test, configuration, and compatibility are near zero in an on-demand product.

DD: Our channel is comprised of VARS and CPA firms that bring accounting and finance domain knowledge to the table. For the CPA firms, the driver towards SaaS products is all about productivity. Today, they typically engage only once a quarter with their clients. They get in their car and drive to their client’s office, review the client data, and correct any errors. With a SaaS product, both the client and the CPA firm can both look at the same real-time financial data at the same time from any place. This allows the CPA firms to provide much better financial advice to their clients because they are looking at today’s data, not information from three months ago. This ubiquitous and real-time access increases productivity and high-value work leading to high-touch advisory services for the CPA firms.

Having access to client data in a centralized location results in increased collaboration. Additionally, the entire process is more secure than carrying around financial data in thousands of laptops, USB devices, or logging in through Citrix or Microsoft remote desktop without auditing and controls. With centralized security, CPA firms can easily demonstrate compliance with new privacy laws that are being enforced by some states (e.g. Massachusetts Data Privacy Law).

What we find is that you really need to educate your partners about the ROI and TCO of the cloud. It’s really about helping them understand the cloud business model including such things as:

• Recurring revenue
• Reduced capital costs towards installation, refresh and upgrade of hardware and software
• The need for less staff for maintenance and operations etc.

Much of this has been handled by the end customer until now in the on-premise world and so it is not very visible to channel partners—their natural tendency is to compare the subscription price of a cloud application with the initial license price of on-premises software—so you have to spend time educating them about what makes up an apples to apples TCO comparison. The perception by the broad channel of cloud applications so far has been that they are simple and cannot be customized or used for serious enterprise class applications. When they see mature cloud systems like Intacct, they are blown away by the customization and development capabilities—so it’s very important to address this perception early and head on. We are helping them realize the true capabilities of cloud applications, the value they can add, and providing them with opportunities to grow.

How do you leverage the Channel to drive adoption of SaaS into a market where customers already have applications in that area?

DD: We have to show how the cloud is better. No one will buy cloud applications just because they are cool—they have to be better—more productive, less expensive, faster, and more agile than what the business is currently using. In the case of accounting and financial solutions, the American Institute of CPAs (AICPA) has been lobbying to make the CPA profession more efficient, collaborative, and proactive. They understood early on that the Internet—and the cloud—are the key and have been advocating the cloud to the CPA profession along with the reasons why it should be adopted. The AICPA have been marketing and selling Intacct software to 45,000 accounting firms and their 450,000 members, who in turn offer it to their clients as part of their service. I think we will start to see similar initiatives in the legal and the health-care markets and other cloud providers clearly have similar opportunities in many other vertical markets.

What kind of role, if any, does the channel have in the distribution of cloud products?

TM: The channel can play multiple roles for an on-demand (SaaS) product. You can think of them in these roles in terms of the value they add:

• Agent: Qualifies and refers a new customer/opportunity to the cloud vendor
• Reseller: Provides Tier-1 support, training, delivers white-labeled software configured to a particular vertical or micro-vertical
• System Integrator (SI) or Independent Software Vendor (ISV): Defines business process flows, customizes and integrates with other legacy and SaaS applications, using the SaaS platform (SDK), extend the SaaS application to deliver value-added offerings

Some SaaS products don’t need much effort to sell. The customer visits a website, gets a URL, and they are up and running. Some consulting may be needed, but not much. Most channel folks tell me, “There not much work to be done.” For a company like Intacct, which produces mission-critical accounting software, there’s a fair amount of learning and configuration involved—and just like with on-premises software there is a tremendous opportunity for customization and business process reengineering. There is also a fair amount of new functionality that gets delivered four times a year. The total amount of channel work (the amount that is billed for) for a cloud-based system versus an on-premise one for complex ERP software is roughly the same. The difference is that in the on-premise case, there is a lot more of the low-value, low-margin work, such as hardware and software installs, upgrades, patching, tuning databases, etc. In the SaaS model, all of that work is eliminated, the margins on the remaining work is much higher and the channel can now focus their efforts on even higher-value and higher-dollar activities such as business process re-engineering, multi-system integration, reporting, dashboards etc. This way they can help customers to:

• Increase revenue opportunities by streamlining processes and improving productivity
• Close the information loop by integrating more easily with other systems
• Make better decisions by getting high quality information out of their systems

DD: At Intacct, providing expertise local to the customer via our channel is a critical enabler for sales. CFOs purchase these kinds of systems once every ten or more years. The consequences of failure for such systems are high so ERP is among the most considered purchases a CFO will ever make. Customers don’t and will never buy them through a website. At the price points we sell our service, we simply can’t afford to have an army of expensive direct salespeople out in the field. Plus, the market is highly vertical. Since our target market is the SMB market, the direct sales approach is just not a scalable model. Domain and vertical expertise are critical in our space. Therefore, your distribution strategy should be aligned with the type of product you are selling in terms of price point, availability of local expertise that can go on-site and help the customer out, and customer trust required for mission-critical systems. When partners bring in high-levels of accounting, finance, and vertical industry domain expertise at the business process level, the conversion and close rates get a lot higher (close to double).

What are the criteria for recruiting the right partners? What are some of the challenges you have seen in doing that?

TM: You have got to find the right partners in the right numbers in the right geographies. The right partners in our case are people who have accounting knowledge, not your typical technology based SIs. You have to pick the right numbers so the partners don’t step on each others toes.

DD: As a first priority, we select partners who have very strong vertical domain expertise and ERP implementation skills and secondly, we look for partners who can also bring technology, development and deep integration skills with Web services knowledge. Many of the emerging cloud computing partners have technical skills but not ERP or vertical experience, while many of the traditional ERP partners have terrific vertical and ERP experience but not yet very much in terms of web services.

What are the key strategies to develop and manage a successful channel for on-demand products? What’s in it for the partners?

TM: You need to figure out the right economic model so that those partners would want to be involved with you. From a cloud ERP VAR standpoint, the notion of recurring revenue is an attractive one that helps in planning their business with a predictable revenue model. It takes a lot of risk out of their long-term business investments. In a steady-state recurring model, the business partner has a huge incentive to keep the customer happy and leverage the system for as long as possible. That is aligned perfectly with our objective as a cloud vendor. In the on-premise world, 70-75 percent of revenues come in the first year. What is the incentive to delight the customer after that? You must think long-term. In the recurring model, the more you reduce customer churn, the higher the return over the long term and also the increased opportunity to up-sell into the existing customer base. All the new customers you add each year is additive. By the tenth year, an on-demand sales person may be way better off than an on-premise sales person if she managed to keep all her customers happy. So what we try to do is to align the customer’s interests, our interests and our partner’s interest.

In order to ensure successful partnerships, we help our partners with a number of things that they find challenging. For example, we provide our partners with a “website in a box” that contains everything from case studies, references, Search Engine Optimization (SEO), and marketing collateral so they don’t have to spend time and resources on that. We also assist in pre-sales, sales, marketing, and implementation activities. We believe that if our partner is successful, we will be successful as well.

DD: Our VARs can expand their business and add tremendous value for their customers by using Intacct’s development tools to customize and extend Intacct’s applications and to integrate it with other applications to solve specific business problems. Our ability to demonstrate to the VAR that we provide great tools they can use to solve real customer business problems with new applications is critical to close the deal. We have many instances where our channel partners have extended Intacct and used our development tools to build custom applications:

• Prototyped new cloud-based solutions within a few days for specific business problems for a particular prospect
• Replaced legacy on-premise front office and operations software with a new cloud-based application they built using our development tools
• Extended Intacct core functionality horizontally with new features that they can offer to our entire customer base

All this goes beyond simply participating in subscription revenues and opens up new sources of revenue for the channel. We have found that ability to show the channel how they can increase revenues with their intellectual property by giving them great customization and development tools is super attractive to them.

What can companies do to empower their Channels?

TM: At Intacct, we are trying to bring Channel 3.0 to fruition. By that, I mean moving to a fresh innovative channel model that is devoid of bureaucracy and rigid rules. If you have the right type and number of partners, then you won’t have partners stepping on each other and “stealing” each other’s deals. We have to really look at it from a partner perspective and provide the things they need to be successful. That will make us a company that makes the channel active business partners as opposed to being merely resellers. If you keep your channel policies light-weight and focus on a win-win situation in every deal, then your channel will figure out ways to add value. I have seen partners do ingenious things because they identified opportunities that we don’t normally see by virtue of them being closest to the customer.

DD: You have to ensure that your product is designed to be partner friendly and you have to think about how you can help your partners make money in your roadmap prioritization. You have to provide shared service like features for partners so they can easily provision new customers and new users on their own without having to go through the support channel.

One of the biggest challenges you need to think through is billing/metering. It is critical to identify who would bill the customer—you or the partner? Partners typically prefer that they bill and maintain the contract with the customer. If your partner bills, you have to provide capabilities for them to understand their customer’s usage and enable bill presentment, etc.

Pricing has to be consistent for partners and direct sales. You should ensure that you have just one set of discounting and pricing rules, regardless of channel. This avoids channel conflict and builds a good reputation with the channel.

At the end of the day, it is really about culture—and this is set by your CEO. Are you going to be a channel friendly company or not? This just isn’t a marketing thing or a sales thing or worse the problem of your VP of channel sales—it’s about your whole company strategy, execution, and culture. My experience is you either make a company level commitment to the channel or you don’t.

How do the Direct Sales and the Channel work with each other?

TM: Our channel and direct sales teams are completely aligned. The key innovation here is channel neutral sales compensation—paying your sales people the same whether they take a deal down direct, or whether a partner sells it. This drives all of the right behaviors—our direct sales teams regularly get on a call with our partners and their prospects to add their experience and knowledge. The idea is simple: when it comes to direct versus indirect sales, study after study has shown that the bottom-line for either effort is roughly the same. You pick a method of distribution based on what your customer wants. If you customers are in large Fortune 500 companies, they probably want to deal with you directly face-to-face rather than with a VAR. This is part of the reason why large vendors have some difficultly moving down market. In the SMB world that we operate in, customers expect to have someone they can call on, down the street, and support them personally through the process. Relationship selling (as opposed to transactional selling) is the key to success in our market. The channel plays a critical role in establishing that close customer link.

Key Takeaways

Cloud companies have gained successes on the back of the cost savings, rapid innovation, and easy to use value propositions compared to their on-premise predecessors. But for them to really create a massive exodus of companies towards the cloud, they have to engage with the Channel.

1. As the opportunities for large implementations/upgrades dwindle, the pure-play SI vendors need to re-focus on subject matter expertise, high touch value-added services that still need to be delivered.
2. Channel partners now have an opportunity to go up the value chain instead of low-end activities like hardware upgrades, help-desk, maintenance and so on. They should focus on areas like Business Process orchestration, integration, and building vertical applications for the micro-domains (For example: hospitality, not for profit, professional services in case of Intacct).
3. This gives them a wonderful opportunity to generate software revenue with the Intellectual Property they built that they can then sell at higher margins and create sticky customers for themselves.
4. Cloud companies that want to be channel friendly need to develop channel-centric cultures from the CEO on down. Invest in key executives that bring channel experience to the table and be prepared to focus their product roadmap investments on features like development tools and customization capabilities that are attractive to channel partners.