Saturday, March 29, 2008

Time to Sell SaaS and Managed Services

Technology Resellers need to change their thinking…


"This coming 'services wave' will be very disruptive…Services designed to scale to tens or hundreds of millions will dramatically change the nature and cost of solutions deliverable to enterprises or small businesses.”
--From an internal memo from Bill Gates, Microsoft Chairman, October 30, 2005


The Software as a Service (SaaS) and Managed Service Provider (MSP) movement is gaining customer attention and its adoption rate is increasing, forcing retailers, distributors and resellers (collectively referred to as “Resellers”) to determine how this new software delivery model will affect their business.


While SaaS and MSPs won't cut traditional “Resellers” out of the distribution chain, providers will need to adjust their sales, assortments and distribution platforms to take the greatest advantage of these emerging service platforms. This document explains the need for “Resellers” consider the introduction of said services in order to best serve the demands of their Small Business and SoHo customers.


It’s important to understand how far-reaching SaaS and managed services are. Many industry observers believe that SaaS will only appeal to small and medium-sized businesses (SMBs) that lack the money to afford traditional, on-premise enterprise applications or the staff to keep those applications up and running. They also believe that SaaS will only be adopted by larger enterprises to address non-mission-critical needs such as worker productivity and collaboration. Odigo Marketing believes these assumptions are wrong. Research indicates that business of all sizes are evaluating outsourced services as a fundamental component of their business infrastructure.

U.S. Reseller software sales on the decline / The need to adopt a SaaS and MSP Strategy to service the growing SMB / SoHo customer segment.

The continued growth of SaaS and MSP offerings will result in a significant decline in traditional software sales and the greatest impact will be felt by those “Resellers” that rely on traditional software sales as their primary source of revenue in the category. According to market research firm NPD, “U.S. retail software sales fell a year over year adjusted 12% in January 2008”.

In August, 2007, Gartner Group analysts conclude SaaS and MSP offerings are far more lucrative over traditional hard drive based software solutions: “Ease of use, rapid deployment, limited upfront investment in capital and staffing, plus a reduction in software management responsibility all make SaaS a desirable alternative to many on-premises solutions, and they will continue to act as drivers of growth.”


With a down trending economy, it’s reasonable to assume a spike in formation of small business and independent business contractors. Enterprise lay-offs continue to increase. Large enterprises will continue to seek outsourced labor to better manage operational overhead. Organizations of all sizes will continue the trend towards decentralization and smaller workgroups in order to leverage lower infrastructure costs and cut expenses.
Forrester estimates there are 28.6 million small businesses in the United States and expects double digit growth every year over the next five years.


Later on, we will share info supporting the overwhelming majority of Small & SoHo businesses procure their technology solutions through channels and “Resellers”. SaaS and MSP offerings will not replace all internal applications within these organizations but will represent an affordable, scalable option to more effectively run their business. Key Benefits are summarized below:

· Much easier to install & configure
· Easier to manage because of web/GUI based configuration interface
· Significant cost savings through reduced onsite management and maintenance
· Better customer service & productivity; virtual access with an online connection
· Scalable with continual stream of upgrades and service enhancements at low or NO cost
· Online and Offline access through the usage of a Smart Client


“SaaS adoption is highest in applications that support simplified, common business processes or large, distributed virtual workforce teams.” Sharon Metz, Gartner Research Director

A Shift in the Sales Support Model

Those Resellers offering Value Add Services such as Installation & Repair Support, will need to modify their view of future revenue opportunities. The focus should be on demonstrating how the customer can fully utilize SaaS and MSP offerings rather than how they can simply get it up and running. This means that traditional software salespeople who are accustomed to selling the technical features of software products to the IT or application development team within a customer organization must now focus their sales efforts on convincing the business decision maker that a solution can meet their needs.

Key SaaS and MSP Categories

SaaS and MSP offerings do not cover the entire spectrum of technology solutions however they are replacing core business applications previously found on hard drive based software. Key growth categories in which SaaS and MSP offerings are achieving significant market share include:

· CRM (customer relationship management)
· Digital Marketing (e-mail, text, SMS, Voice Mail, etc)
· Telecommunications (VoIP / Hosted IP)
· Web-Hosting / Web Site Management
· Payroll, Benefits and HR Applications
· Business Analytics and Surveys
· Intranet and Virtual Office Networking
· Web Marketing / Search Word Optimization
· Group Collaboration / Conferencing / Messaging
· eLearning
· Data Backup and Management


Revenue Stream beyond the initial transaction

Software as a Service and Managed Services are typically purchased on a subscription basis. Services can be purchased on monthly, quarterly, annually or greater basis. This flexibility affords the adoption of these services in those companies with the even smallest operating budgets. Scalable growth and expansion of the subscriber base offer even more sources of income to those Resellers adopting these solutions within their portfolio.

Technology solution resellers gain immediate benefit in offering their customers these services in a variety of ways. The most obvious is recurring revenue beyond the point of originating purchase. There are also complimentary hardware sales associated with the adoption of some services which offer immediate revenue recognition at the point of purchase.

For those Resellers that offer selection and convenience to their customers, the adoption of a robust SaaS and MSP assortment is critical to ongoing success in the technology realm. There is no inventory investment so the Gross Margin gained on these transactions represents the highest GMROI in the industry. Distribution can still be driven in-store (via Kiosk or Online Interface), through web-properties, call centers and outbound sales activities with Web-empowered sales associates.

In very simple terms, given the ever eroding margins in technology hardware and software categories, quite often in the single digits, a collective revenue share contribution equaling $10 million dollars from the reselling of SaaS / MSP offerings equates to the equivalent of a $100 million hardware / software vendor offering 10% gross margin on their products. If 20% of your technology revenues shift towards SaaS and MSP services, you will realize a 100% net gain in gross margin income.


With lower costs of access, expanding global presence in connectivity and the continued adoption of SaaS and MSP solutions by leading software developers such as Microsoft, Oracle, EMC, Cisco, Intuit and more, your Company will need to adopt a solid distribution and marketing strategy within this space or must wholly reconsider whether continued presence in offering technology solutions is justifiable.


Trends and Industry Statistics:


· A 2007 McKinsey & Co. survey found that 61% of North American CIOs intend to adopt one or more SaaS applications over the next year, compared with 38% in 2005.

· A Harris Study indicated that Small Business purchasing patterns include investments in the following business areas (percentage of respondents):
­ Marketing 75%
­ Sales 68%
­ Technology 61%
­ Web Site and Online Services 57%


· SoHo and Very Small Business owners source 58% of their technology purchases through the Retail channel and 27% via the Direct / Vendor Channel.

· “SMBs are a substantial market for channel partners as most technology products and brands that SMBs buy are based on recommendations from the channel,” says Avinash Arun, New York-based research analyst.

· According to Saugatuck Technology Inc., the percentage of SMB businesses with one or more SaaS applications in place rose from 9% in 2006 to 27% in 2007.

· According to Gartner Inc., the global SaaS market is expected to grow to $19.3 billion by 2011, tripling in size from the $6.3 billion it was in 2006. IDC predicts SaaS will be worth $10.7 billion by 2009.


ROI Assessment and Gross Margin Example in a “service over product” business model:


SaaS and Managed Services are not only designed to be scalable, easy to implement and low maintenance, they also offer lower aggregate end-user cost over traditional hardware-based solutions. For the reseller, the introduction of SaaS and Managed Services will likely lower your top line revenues however, their introduction will yield lower inventory costs as higher gross margins to your bottom line.

We conducted a side by side comparison to determine the cost savings associated with a purchase of a 5 user PBX bundle vs. the adoption of a 5 user Hosted PBX bundle over a five year period of time. We broke down costs into Capital Expenditures, Other Non-Recurring Expenditures, Recurring Expenditures and Total Expenditures. The results further validated the case for Hosted Services as a more profitable venture. The summary concluded:

Customer Costs: $29,478.40 for Hosted PBX vs $35,255.00 for Traditional PBX or 20% over the 5 year period

Gross Margins: 55% higher yield on Hosted Service

To calculate Gross Margins, we assume 25% reseller margins on Capital Expenditures, 40% reseller margins on Non-recurring Expenditures and 20% recurring revenue on subscription services (bandwidth and monthly fees). In our model, the reseller margin on the Hosted PBX
vs a Traditional PBX bundle is 55% greater in offering the Hosted PBX. The Gross Margin contribution on the Hosted PBX bundle is $6030 vs $3900 for the Traditional PBX.


How Odigo Marketing supports the Channel’s migration towards SaaS and MSP services

Odigo Marketing is an Atlanta-based Consulting, Marketing and Development firm focused on servicing the channels with technology solutions aimed at the SoHo / SMB market segment.

We have studied emerging trends of significant value to the channel as well as the migration and consumption patterns of the small business customer. We realize resellers’ core competencies and distribution platforms are largely based upon selling tangible goods and limited support services.

We’ve aligned ourselves with 15 best in class SaaS and MSP companies and have assembled an immediate “category killer” assortment exceeding over 20 such services. We’re under contract with these Companies and viewed as critical Partners in their Channel distribution strategy.

Our collective assortment offers recurring revenues to our Channel Partner up to 40% of the service bill; quite often lasting for the life of the customer or life of the business relationship.

MyBusinessMVP

Odigo Marketing wholly recognizesthe challenges Resellers face in adopting new distribution platforms and have created a unique, industry-first aggregation portal called MyBusinessMVP. MVP serves as a simple and turn-key manner in which to extend hosted services to your SoHo / SMB customers without radically altering your operational infrastructure or IT resources.

MyBusinessMVP is a Partner-branded aggregation portal or Managed Vendor Portal (MVP) designed to educate the customer about the varies services examined, articulate the value proposition and ROI in adopting such services and facilitate an ease of purchase environment common to the Reseller Channel. MyBusinessMVP adopts an “Orbitz-like” strategy where these best in breed service offerings are assembled in a central location offering value, convenience and functionality. We offer a consultative selling experience to those Channel environments offering little or no consultative support today.

MVP features include:

· Interactive demos and tutorials
· Centralized Billing and POS integration (with customization)
· Click to Talk / Click to Chat
· Real time service experience
· Bundles and Complimentary solution sets
· Channel Exclusive discounts and promotional offers

We welcome an opportunity to further explore the explosive growth of the SaaS and MSP market and evaluate how Odigo Marketing can assist your efforts to capitalize on this evolving and dynamic business environment in the most comprehensive and cost effective manner possible.

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