From the May 16, 2005 CRN by Rochelle Garner, CRN

Jeremy DeSpain and Steve Jones have watched their systems integration business quadruple over the past six months. In fact, business for Explore Consulting, which the pair co-founded in 2001, has been so good that the Bellevue, Wash., firm created a specialized practice in implementation, customization and integration just to keep up.

But in an unexpected twist, Explore’s growth hasn’t occurred in its practice dedicated to Oracle’s E-Business Suite, despite the fact that corporations buying such high-end applications typically require fully customized, high-effort implementations. No, Explore’s chief opportunities these days come by way of NetSuite—subscription-based software delivered as a service over the Internet. Explore’s NetSuite business grew 42 percent, which translated into a 170 percent jump in NetSuite-related revenue for the 21-employee firm.

That’s right, software as service (SaS). Often compared to the Ford Model T—that is, available in any color as long as it’s black—such software is famous for being difficult to integrate, add on to and customize. So how can a systems integrator build a practice around something that’s one-size-fits-all?

“For a company like ours, customization is everything,” said Jones, Explore’s president. “We really think NetSuite’s [NetFlex] Web services platform will take NetSuite to the next level, both in terms of customization and integration.”

“NetSuite’s Web services integration capability really enables small businesses to access their realtime information more easily than large companies can today,” added DeSpain, Explore’s COO. “There’s more integration here than Fortune 500 companies get.”

In other words, the Model T era is ending, and not just for NetSuite. That’s because the SaS market is growing up. While differences continue to exist among the scores of hosted applications that keep popping up like mushrooms after a storm, it’s no longer safe to characterize such software as generic. A number of the more-mature vendors, including NetSuite, San Mateo, Calif., San Francisco-based Salesforce.com and Boston-based Salesnet, have adopted the same attributes as more-established ISVs, such as formalized channel programs and the ability to customize and integrate their software.

“As SaS vendors have matured, they’ve added functionality, enhanced customization and integration capabilities, and locked down security to quell past concerns,” wrote Laurie McCabe, vice president of SMB Insights and Business Solutions at AMI-Partners, in her report, “Software-as-Services: Moving On Demand To In Demand With SMBs,” published by the market-research firm AMI-Partners. “Vendors that effectively pull disparate services together for SMBs will have a more sustainable solution than those that don’t.”

In essence, we’re seeing the emergence of channel, distribution and development strategies geared to the needs of the SMB market. And that means more pieces of the puzzle for systems integrators, resellers and consultants to fit together for the unique needs of their SMB customers. Today, it’s possible to weave SaS applications into a broad IT fabric: building new on-demand applications, customizing them, and combining them with each other as well as with software installed on-site. Already we’re seeing a new breed of partner. Exemplified by Explore, such partners are able to meld Internet technologies and reshape their business models for a recurring revenue stream.

“I see customization and integration for software as a service as a big market, and growing,” said Jones. “We’ve been booming. We have about 40 NetSuite customers, the high majority of which want a continuing relationship with us— either for new projects or new ideas. Today NetSuite accounts for the bulk of our business.”

Interlocking Pieces
In her report, analyst McCabe predicts worldwide spending by SMB companies—those with 200 or fewer employees—for SaS applications will increase more than 40 percent between 2004 and 2009, to reach $2.4 billion. That’s because this is not your father’s hosted software anymore. Consider:

Using NetSuite’s NetFlex or Salesforce.com’s sforce software, for instance, developers can integrate with a wide variety of applications as well as create entirely new applications based on the vendor’s hosted platforms. CRM vendor Salesnet, which tends to target larger customers, offers integration-as-a-service capabilities as well as a growing private-label program. And Intacct, Los Gatos, Calif., has been quietly building a coalition of SaS companies that can work together, allowing each other’s partners to sell best-of-breed suites on the fly.

It’s important to note that all of these applications were written specifically for the Web and, as such, make use of modern, open standards. Also referred to as on-demand software and application service provider (ASP) software—partially because competing market analysts have yet to agree on a standard term—such Net-native applications support multiple customers with a single database. It’s this so-called multitenancy environment that gives SaS software dramatic economies of scale over traditional applications, even over those that have been enabled for hosting.

Thanks to the consummate marketing skills of Salesforce.com, the ASP market has heated up. Now ISVs are adding such services to their arsenal and, increasingly, customers are considering them as viable alternatives. Evidence for this can be found in the report “Key Trends in Software Pricing and Licensing,” published by the Software & Information Industry Association in conjunction with asset management vendor Macrovision. According to this study of 396 software executives and 100 enterprise customers, one-third of the polled ISVs already offer subscription-based pricing. Within the next two years, 52 percent of those ISV respondents expect to offer subscription pricing as their primary sales model. Clearly, the service model will become more prevalent.

“Customers are starting to ask us for this,” said Mitch Cannady, CEO of Spinnaker Solutions, an Irvine, Calif., solution provider that specializes in CRM. “At least 25 percent of the opportunities we are in today are at least reviewing the hosted option. Recently we had an account that said that was the only option. Plus, as companies are reviewing whether they should upgrade, they’re also asking themselves if this kind of hosted software is something they should consider. When that starts to happen we have to come up with a good answer for that.”

As part of that answer, Spinnaker recently signed on to become a NetSuite reseller and systems integrator. “Integration is where Spinnaker built its name. That’s been a big challenge in the hosted market, and it’s how we competed against [SaS] when we didn’t have a hosted offering,” said Cannady. “But that technology is catching up quickly. We now say you can customize and integrate.”

Mix Masters
NetSuite is unusual in the SaS world in that it’s a complete ERP suite, with CRM, e-commerce and financial apps built in. In contrast, almost every other SaS contender offers a point product. Salesforce.com, of course, focuses on CRM. Intacct offers accounting software. Employease and Peopleclick address human resources and staffing needs.

The challenge for partners has been in combining the disparate SaS applications into a cohesive whole. Recently, the industry has seen grass-roots efforts by vendors to make that possible. One example comes by way of Intacct. For the past six months, the company’s CEO, Robert Jurkowski, has been working to forge relationships among vendors of complementary software. With about a dozen SaS companies so far, that coalition includes Intacct, Peopleclick, Employease, Siebel CRM On-Demand, Ultimate Software Group (for payroll and HR) and nSite, which automates manual processes. Recently, Jurkowski scored a coup when he got the backing of IBM and its Software-as-a-Service Partner Council.

“IBM spends $800 million in on-demand positioning, and I wanted to make sure we, as a collection of SaS companies, could work with IBM,” said Jurkowski. “Our view is to give people freedom of choice—to mix and match complementary software however they choose. We’re working with IBM to establish standards on how to integrate through a Web services infrastructure. Once we have that standard, it will be easier for our partners to offer that choice to our customers.”

In effect, we’re seeing the birth of a new SaS distribution model: one that lets its reseller and integrator partners create suites of on-demand applications for their customers. The prospect certainly intrigues Nat Bartholomew, a partner in charge of management and technology consulting services at Langan Associates, an accounting firm in Arlington, Va.

“We’re looking for ways to build an industry-specific soup-to-nuts solution using the [SaS] applications of our choice,” said Bartholomew. “If we can extend Intacct’s ERP platform with other nonprofit functions—such as fund-raising packages, membership databases and impact measurement tools—we’ve hit a home run for our nonprofit client base. New functionality and stronger systems are great, but if I must become a technologist to deploy the advancements, we are back to square one. The idea that these features are easy to use and deploy makes this a viable solution for an accounting firm like Langan.”

Steffan Welch, manager of sales at Welch Business Systems, a network integrator and reseller in Newark, Calif., is also savoring the prospect of additional business via a new SaS distribution model. But in Welch’s case, that distributor is the newly launched JustWorks Provider Network. Initially aimed at integrators and VARs in the IT services market, San Jose, Calif.-based JPN offers help-desk, IT configuration management tools and other applications its members can resell over the Internet. Welch is particularly keen on JPN’s online help-desk software, provided by JPN’s hosting infrastructure company, Jamcracker, Santa Clara, Calif.

“Network integrators are looking for something that’s sexy and valuable to our customers, and this is it,” said Welch. “The system is configured to call my engineers when my clients push the button for help, and I can charge my hourly rate or whatever deal I’ve made with the client. Once you get people used to logging into a portal every day, you can say, ‘Oh, by the way, would you like to get your CRM application through here, or keep your configuration information online with us?’ And now I can add other JPN services on top of the help desk, so it increases reseller ‘stickiness.’ ”

In essence, Welch views the JPN distributor model as a key business differentiator. “We are a horizontal integrator, with no intellectual property,” said Welch. “More and more we’re competing with CDW, Dell and others that sell products for low margins. This is not something Dell and CDW are doing. Now I can say, ‘Don’t buy switches from me; just pay a small monthly fee and let that headache be ours.’ ”

Challenges, Challenges
Without exception, software industry observers believe the SaS delivery model is here to stay. But that doesn’t mean SaS sales are a no-brainer. According to AMI-Partners’ McCabe, for example, small businesses remain slow to adopt SaS applications, primarily because they haven’t been educated about the true costs of ownership. “People forget to look at the soft costs of owning software, including updates, services and support and depreciation,” said McCabe.

Still, the SaS industry is inexorably growing—catalyzed by the increasing involvement of the software industry’s major players. IBM Global Services, for example, is sponsoring that SaaS Council as part of its efforts to penetrate the small-business space. And, says McCabe, it’s companies like IBM that can build an industry—creating full-fledged marketing awareness, branding and program campaigns around these Net-centric applications. “As major players form and shape active ecosystems, they can radically boost market awareness and demand for SaS,” she said.

In the meantime, advancements in integration and customization now make it possible for SMB partners to explore this new source of recurring revenue. The question they need to ask themselves: Why are they not at least exploring what’s out there?

“Either embrace this kind of software now, or it will be thrust upon you,” advised Bartholomew. “I believe there will be no server-based systems in a few years. None.”