Building a Channel for SaaS Companies – Challenges and Opportunities

Reinventing the channel for the cloud computing era

Building a profitable network of channel partners used to be the “holy grail” for B2B ISVs because it amplified the growth while improving profitability by dramatically reducing customer acquisition costs. Most of the largest software companies in the world still have massive partners programs that they carefully nurture and support. However, in recent years, the new breed of SaaS software companies has become successful with a largely direct sales force, selling directly to businesses without the help of a channel. It was not as if these companies did not try to build a channel, but rather they have not been able to really figure out the right type of channel partners that will help them resell their on-demand software.

There are fundamental issues between the traditional channel partners and SaaS vendors that make the typical channel relationship impossible:

– The economic model does not work out: Given that SaaS companies have to invest a lot upfront to gain customers and only recover the cost over a period of time, due to the subscription-based pricing model the traditional channel partners are stuck in the “rock and the hard place”, being squeezed both ways economically, as Joel York at Chaotic Flow has pointed out in a recent post.

– The lack of opportunities for value-add: SaaS companies all try to make their software as easy to implement and consume as possible and thus make the partner’s system integration and configuration work more redundant.

– Increased customer cancellation risk: On-demand software can be a lot less sticky than on premise software, and there is fierce competition between SaaS vendors to win customers from each other, and this risk affects partners’ enthusiasm for pushing and selling the software.

Cloud computing, as a business model and technology paradigm, is the next step from SaaS in that cloud computing vendors naturally form a full, all encompassing on-demand, web-accessible subscription-based platform of software and services to cater to any computing needs. Does it mean that the cloud computing revolution will marginalize the channel partners even more? Is it possible to grow a channel-focused cloud computing company anymore? This question is a major strategic consideration for the management teams at expansion stage cloud computing companies.

I did a bit of research and found that this is still very much hotly debated. The answer, as far as we know, is still out there. Many believe that the channel is simply redundant in the cloud computing business model, save for companies that sell to really large customers. But others believe that cloud computing, in changing the way IT is done, is actually giving many new value add opportunities for the channel partners. Some of these are:

– True business process improvement: Channel partners should be expected to help clients implement and realize the full benefits of their software purchase, rather than simply offer technical IT support. This is particularly important with business applications such as marketing automation software. I have already noted some successful demand generation consultants who follow this model.

– Managed services: The growing MSP industry is a clear indication that even as IT services are being delivered over the cloud, clients still need manpower to run, monitor and optimize their whole organization’s infrastructure, and with the cloud computing platforms, smaller VARs are now able to actually serve that need, which used to be resource and capital intensive.

– Even in the transitory period when clients are migrating into the cloud, there is a huge opportunity for IT consultants to become “cloud” consultants who help companies adopt the most appropriate cloud computing model for themselves while building some proprietary software to help them manage the cloud environment (since most current cloud services providers offer really barebones cloud management and governance capabilities, a fact I have also noted earlier).

– Ultimately, value added partners will become application and transactional brokers who help organizations navigate the ever growing market of cloud-based software providers, negotiate pricing bundles of applications from different vendors (an enterprise version of Appsumo.com), manage billing and usage management and maintain overall service level agreements. They will in fact be instrumental in any client’s transition to the cloud and successful utilization of the resources, and therefore are still a crucial link in the software value chain. Some startups are already doing this- notably Channel Cloud and SaaSPlaza, while our newest portfolio company Mashery is helping to tackle this from the technology perspective by helping software platforms link seamlessly together through well-managed APIs.

I will be watching development in this space with much interest.