Why VARs don't want to accept SaaS

From a buyer's perspective, there is a good case to be made for SaaS. Up-front costs, as well as total cost of ownership, are lower, and there is less spending required for integration, deployment and ongoing maintenance. These however, are precisely the things from which the VAR derives profit. It would seem on the surface that the SaaS model is taking the "value-add" out of "value-added reseller". Simply selling a plain vanilla, preconfigured service turns the VAR into an over-the-counter retailer, and profit margins start to thin out.

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In many cases, SaaS offerings will compete with higher margin software products and some cannibalization is inevitable.  There's no question: Deal size will decrease, and revenues will be smaller than what would otherwise be received from selling on-premises solutions. Another big potential loss is the upsell. In Microsoft's "Software Plus Service" plan, which offers a 12 percent cut for the first year and six percent for renewals to solution providers that sell its hosted services, the direct sales folks take over for upselling the customer. It's a common complaint in every company's sales channel; there is a fear that if SaaS takes over as the predominant model, it will lead to vendors taking over partner business.

In the end, it means a major change in the VAR's business model from a relatively low volume of high-margin, high-dollar deals, to a high volume of low-margin, low-dollar deals. It can be done, but nobody likes to change. It's evident though, that in the business of reselling software and hardware for on-premises use, those high margins are starting to dwindle, and those who try to compete solely on price are in for a shock. Success will involve moving out of that "line item" selling model. "You really have to think more of yourself as an arms dealer to an end user, and less of a point-in-time, line-item reseller. That's ultimately where margins are going to get crunched the most, because you are competing with other like-minded people on nothing other than price," says Dave Kubick, Vice President Worldwide of Channels and Alliances at Iron Mountain Digital, a vendor of SaaS and storage-as-a-service data backup and archival solutions.

Todd Fitzwater, principal at Demand Solutions Group, an on-demand business solutions provider, agrees that there has been a major change, but says there is still plenty of opportunity for value-added services. "The orders of magnitude are different. An Oracle implementation is a 5x to 7x license services opportunity, and an on-demand implementation is 1x to 3x, and that's 1x to 3x against a smaller annual license fee—so the numbers are smaller." Currently serving 65 customers with on-demand solutions, Fitzwater notes that his company's success hinges on serving a larger number of customers. "In all the years I did consulting prior to this company, I never had 65 active customers," he said. "There obviously is a change of business, because you're dealing with smaller numbers, and larger numbers of customers."

Naturally, there is customer resistance to any major change in the industry, and SaaS is no exception. VARs must know how to overcome these objections. According to Fitzwater, the two greatest objections are data control and data security. With data outside of the customer's data center, there is a fear over loss of control. Fitzwater says, "Those are unwarranted fears at this point. The Salesforces and NetSuites of the world have demonstrated that that's an unfound concern." In reality, he says, "your data is actually getting taken care of in their data center better than in yours. The backup and recovery, disaster recovery, and security around the servers is much tighter and higher grade than you would put in your own data center."

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