As SaaS grows, partner portfolios pay off

Software-as-a-service (SaaS) has become one of the fastest growing segments of the broader utility computing movement. This pay-as-you-go approach to acquiring business applications is gaining market acceptance because it alleviates many of the hassles associated with traditional shrink-wrapped software.

Escalating demand for SaaS is also generating greater competition among a rapidly expanding array of application providers and technology suppliers. For instance, in January THINKstrategies launched an online directory, called the Software-as-a-Service Showplace (www.saas-showplace.com), which now includes over 150 company listings across 33 application and industry categories.

As the number of SaaS applications and enabling technologies grows, the ability of SaaS suppliers to differentiate themselves purely on the technical capabilities of their solutions is declining.

While the most compelling measure of a supplier's competitive advantage is the number of customers it boasts, another important metric is the breadth of its partnerships. As a result, many SaaS players are aggressively expanding their partner portfolios in order to strengthen their competitive position and win a greater share of the market.

In the IT industry, solution providers like to refer to their partner portfolios as an 'ecosystem.' Partners serve a vital role for most companies either by supplying important ingredients that go into a final product or service, or by providing a channel to market to a broader audience.

Partners also play an important symbolic role by endorsing the value of a supplier's products or services. The more partners a solution provider can enlist, the more attractive their products or services become.

The increasing importance of ecosystems in the SaaS market can be clearly seen by looking at the number of industry events that have focused their agendas on this topic. Last week it was the OpSource SaaS Summit (www.opsource.net); in April it will be Software 2000 (http://sandhill.com/conferences/sw2006.php); and in May the Software & Information Industry Association (SIIA) Software Strategies conference (http://www.siia.net/s3/2006/default.asp).

OpSource offers application development, business consulting and service delivery skills to independent software vendors (ISVs) seeking to offer SaaS solutions. The company's SaaS Summit was aimed at demonstrating its market leadership in part by showcasing its ecosystem of partnerships. The event included leading system vendors like IBM and Hewlett-Packard, software vendors like Microsoft and Business Objects, as well as many of the top venture capitalists and investment bankers focusing on the SaaS market.

Every speaker at the event endorsed the virtues of partnering, starting with Salesforce.com's keynote address that described the rapid growth of its AppExchange platform, which enables third-party companies to link to the software provider's on-demand applications.

From a customer standpoint, ecosystems can represent a double-edged sword. On one hand, the quality of a provider's SaaS solutions can clearly be enhanced by leveraging partners' value-added products and services. Partnerships can also enable organizations to reduce the number of providers they use by selecting those that offer the broadest set of SaaS solutions.

On the other hand, today's SaaS partnering arrangements often create a multi-layered application solutions and service delivery process that can complicate getting technical support if problems arise. For instance, multiple companies may be responsible for architecting, integrating, monitoring and managing a SaaS solution behind a single provider's brand-name offering.

In order to counteract these risks, most SaaS agreements give customers 'one throat to choke' -- the SaaS provider's -- if problems do arise. And, despite the recent service outages suffered by Salesforce.com, overall SaaS provider availability and performance levels still generally surpass those of most in-house IT departments.

In fact, THINKstrategies survey research has found the vast majority of SaaS subscribers are happy enough with their application services that they not only intend to renew their subscriptions, but they also plan to broaden their use of SaaS and will gladly encourage others to adopt SaaS.

As more SaaS ecosystems take root, THINKstrategies expects the quality of SaaS solutions to rise. Those SaaS suppliers that play a vital role in building ecosystems will reap the rewards of increased demand for their solutions, while those that choose to focus on their standalone offerings will lag behind.