Software as a Service:

A Channel Market Intelligence Paper from the Institute for Partner Education and Development

Software as a Service: Partnering with CA on Backup & Recovery

www.iped.com

Software as a Service (SaaS) is fast-changing the software industry landscape. The SaaS business model unleashes a recurring revenue engine for solution providers and an increasingly attractive option for end users wary of making large capital expenditures in today’s economy, especially those in the small- to medium-sized demographic. The SaaS model offers low-cost to entry, fast implementation and scalability across a range of applications needs.

February 2009

In the last two years alone, 46 percent of the partner community added a SaaS business model

Many of the industry’s leading software vendors, including a raft of backup and

recovery storage players, have unveiled SaaS strategies. Islandia, N.Y.-based CA

specifically is embracing the SaaS model aggressively across several of its solutions

offerings. From a solution provider perspective, one of CA’s central offerings in

its SaaS strategy is a new channel-only business continuity (BC) and disaster

recovery (DR) managed services offering that targets a ripe and as-yet underserved

SMB market. This report by Everything Channel’s Institute for Partner Education

& Development (IPED) will detail the offering, called CA Instant Recovery On

Demand, but first will provide solution providers insight into the general SaaS

market today, the opportunity it represents, and how best to sell it and profit.

IPED research clearly demonstrates the SaaS model’s momentum. In the last two

years alone, 46 percent of the partner community added a SaaS business model to

their organizations. Revenue is up as well. IPED found that among both the Best

in Class solution providers (the 20 percent most profitable today) and their channel

counterparts, the year-on-year growth rate from 2007 to 2008 for SaaS sales is

expected to exceed 20 percent.

Percentage of Total Revenue SaaS Solutions

But those numbers don’t even scratch the surface of the opportunity. IPED has found

that while the total spend on traditional software licenses still eclipses that spent

on software delivered as a service, the latter model is in fact accelerating faster

in the marketplace today. That trend will only continue in the current economic

conditions, which is why partners should pursue the model as part of their organizations

going forward.

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31%

19%

37%

24%

Best in Class SaaS SP

+ 20% Yr over Yr

+ 25% Yr over Yr

Average SaaS SP

!

BIC SaaS Providers, adopting faster, overall adoption rate growing however

*Including SW agreements plus directly related services

Saas:

% of Total 2007 Revenues

Saas:

Expected % of Total 2008 Revenues

!

Solution providers are tailoring their sales pitches to what the customer wants andneeds: faster time to deployment and low cost taking precedence

Demand is coming from end user customers, who want flexibility in how their

software is delivered. This is a sea change from the previous wave of SaaS — the

Application Service Provider (ASP) model — when the industry pushed a model that

customers themselves were not seeking.

Solution providers are tailoring their sales pitches to what the customer wants and

needs: faster time to deployment and low cost taking precedence. What’s interesting,

however, is how few solution providers today are leading their pitch around SaaS’

much lower capital expenditure requirements as compared with traditional software

purchases. In today’s economic crisis, needing less cash upfront is a compelling

argument to place in front of a line of business or C-level executive at an end user

organization and a competitive differentiator for a solution provider sales force.

Why do Customers Adopt SaaS

As a solution provider today it is worth evaluating the SaaS model as it gains strength

in key technology markets such as back-up and disaster recovery applications and

business software. In the following profitability guide, IPED will illuminate the

channel opportunity, share the latest market dynamics driving the SaaS industry

and highlight best practices of the most successful solution providers implementing

the SaaS model today.

Key topics to be addressed include:

• IPED data on the state of SaaS in the market today, including important trends and analysis

• The impact of SaaS on traditional partner business models and a simple system for evaluating the specific implications for individual companies

• Building a SaaS practice and the critical questions every provider should answer when considering selling SaaS offerings to existing or new customers

• Best practices for selling SaaS and managing the customer

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57%

55%

49%

45%

36%

23%

28%

Faster Time to Deployment

Lower Initial Deployment Cost

Flexibility: Remote Offices/Branches

Flexibility with Departmental Group Projects

Costs: Expenses vs. Capital

Avoid Affecting Existing IT Infrastructure

28%

25%

32%

34%

34%

44%


Average SaaS SP

+ 29%


But first off, what constitutes the SaaS business model? Definitions vary, but the

following is commonly accepted:

Software as a service (SaaS) is a software application delivery model where a software vendor develops a web-native software application and hosts and operates (either independently or through a third-party) the application for use by its customers over the Internet. Customers do not — in the majority of cases — pay for owning the software itself but rather for using it on a contractual basis, typically monthly.

For its part, CA defines SaaS in the context of “on-demand” software that is

delivered over the Web as a service. Some CA solutions, however, go beyond more

strict definitions of SaaS — applications delivered as a service as typified by a

company like Salesforce.com — to include capabilities and features that are more

robust and involve storage, failover and in some cases hardware.

SaaS: Market Dynamics & Partner Opportunity

When many people think about SaaS, they think applications such as Salesforce.

com. But the market ranges much farther today, encompassing software solutions

that run the gamut from storage, data backup and disaster recovery applications to

security solution. Gartner and IDC forecast a 32 percent increase in combined annual

growth worldwide in Web-based SaaS services by 2011. A quarter of new business

software is expected to be delivered as a service by 2011, when there will be a $21

billion market for cloud-based software services.

Some natural conditions exist in the marketplace that account for the growing interest in software delivered as a service:

• Small- to mid-sized end-user customers do not have the IT capabilities in-house to manage and maintain the multitude of on-premise software applications and requisite infrastructure.

• Economic conditions have tightened-up budgets and caused end customers — especially in the SMB space — to look to more affordable solutions such as subscribing for their software with minimal initial capital investment.

• End-customers are looking for predictable costs to keep in line with those tightened budgets

• End-customers want features of the latest platform but don’t want to upgrade or we don’t have the skills

• End customers are seeking predictable costs — even if it does not save a lot of money long-term

• End customers can’t keep good IT people to run the platform and we need to free up our best people to work on strategic projects

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Many solution providers who believe the managed services model is attractive and likely to yield better profits and long-term customer relationships may simply lack the expertise to make the move, and find themselves left behind.


The solution providers making the most money are NOT waiting for customers to pick up the phone seeking SaaS, but rather proactively selling the model early on in the adoption cycle.

Building and Growing a SaaS Business Practice

Beyond the theory of SaaS lies the practical process for building an organization with

the right resources and structure to sell and deliver SaaS solutions in a predictable,

profitable model. In some cases, this necessitates making changes to existing

operations, taking stock of resources requirements and devising a new formula for

managing an annuity-based business model. One thing should be noted: Successful

solution providers run diversified businesses. In other words, while they focus on

one primary business model — SaaS, for example — they maintain a mix of other

revenue streams. Of the Best in Class solution providers that derive half of their

revenues from managed services, including SaaS, all still generate upwards of 20

percent of their annual revenue from either consulting, product sales or project-based

business models as well, according to IPED research.

Why do solution providers want to get into the SaaS business today? Overwhelmingly,

they tell IPED that the desire to increase recurring revenue streams drives their

decision.

Why SPs Choose SaaS Solutions

In rank order, boosting recurring revenue and profit margins are the obvious drivers

for getting into the SaaS business today. Beyond that, however, it is interesting to

note the behaviors of the most profitable solution providers selling SaaS today.

For one, just 13 percent of Best in Class are selling SaaS in response to customer

demand versus more than a quarter of the industry average in the channel. This

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Increase Recurring Revenue Streams

Improve Profit Margins

Provide Higher Value-Add Services

Improve Customer Satisfaction

More Up-Sell Opportunities

New Customer Acquisition

Improve Competitive Advantage

Service Differentiation

Respond to Customer Demand

Reduce Customer Churn

Technology Purchase Economies of Scale

Improve Service Utilization Rates

38%35%

24%

23%

28%

13%

8%

6%

19%

15%

11%

24%

17%

35%

32%

28%

25%

23%

21%

17%

26%

6%

9%

7%

BIC SaaS Providers, adopting faster, overall adoption rate growing however


Average SaaS SP

!


means the solution providers making the most money are NOT waiting for

customers to pick up the phone seeking SaaS, but rather proactively selling the

model early on in the adoption cycle. Secondly, Best in Class solution providers are

more likely choosing to sell SaaS to improve their competitive advantage and gain

service differentiation over their industry average counterparts.

When building a SaaS practice, the types of software a solution provider offers is

critical, but it’s not the only part of the equation. A number of key attributes are crucial

to running a successful SaaS practice, including:

• Marketing

• Sales

• Customer Management

• Integration / Technical Services

• Workflow Design / Professional Services

• Financial Management

• Organization Design / Management

There is a tendency in today’s market for solution providers that identify themselves

as having a SaaS business to focus primarily around their skills in integration and

technical services. But while these skills are essential, they alone do not constitute

being in the SaaS business. It simply means that you provide some SaaS offerings. To

establish a company as a genuine SaaS business, solution providers need to excel at

all seven of the business attributes above — and the Best in Class typically do.

Solution providers should think about four moving parts to establishing a SaaS practice:

Know their audience (customer size and vertical focus, technology needs); know

what kind of software to sell on a subscription-basis; know what kinds of additional

services to wrap around that sale to boost margin; and know how to drive demand.

One skills area where Best in Class place a higher premium than the industry

average solution provider is with respect to financial analysis. Sixty percent of Best

in Class deemed financial acumen a required skill set for running a successful SaaS

practice (versus 49 percent for the industry average). In today’s difficult decision-

making environment the need to make a financial argument for buying anything

is paramount and Best in Class know that their sales staff must know how to read a

P&L statement and make a business case to end customers.

Instilling financial acumen in sales reps is just one of the challenges that come

with establishing a profitable SaaS business, though not all challenges are equal.

According to IPED research, some hurdles to the SaaS model are more urgent than

5www.iped.com

Sixty percent of Best in Class deemed financial acumen a required skill set for running a successful SaaS practice (versus 49 percent for the industry average).


others, but easier to solve; while some are less immediate but more important and

more difficult to achieve long-term. The first chart below illustrates in rank order the

urgent or prominent challenges to setting up a SaaS practice, while the chart that

follows lists the obstacles to achieving SaaS profitability.

Challenges to Building an Saas Practice

Challenges to Profitably Building an Saas Practice

Solution providers launching into a new business model or market focus such as

SaaS can be overwhelmed by a huge laundry list of to-dos that impede the smart

implementation of a business strategy and delay operational profit. So there is a

need to prioritize. If too much time is spent focusing on the urgent challenges, for

example, the items most critical to long-term profit and success can be neglected.

6www.iped.com

Developing/Delivering Relevant Services

Selection of SW/Vendors

Trained Tech Staff

Achieving Operational Profit

SaaS Margin Structure

Consultative Sales Staff

Service Attach Opportunity

Time/Cost: Cultural Change Management

Current Sales Staff Migration

63%

59%

65%

49%

61%

53%

47%

57%

59%

70%

66%

64%

62%

59%

57%

58%

54%

53%


Average SaaS SP

Mo

re F

req

uen

t

!

Achieving Operational Profit

Service Attach Opportunity

Time/Cost: Cultural Change Management

Current Sales Staff Migration

Trained Tech Staff

SaaS Margin Structure

Selection of SW/Vendors

Consultative Sales Staff

Developing/Delivering Relevant Services

43%

40%

40%

36%

39%

38%

36%

38%

42%

49%

47%

47%

45%

45%

43%

39%

39%

33%


Average SaaS SP

Mo

re D

ifficu

lt

!


One of the first questions solution providers ask when they consider diving into SaaS

is what kind of investment they need to make and how long before they see a return

on it. The answer reveals what is likely one of the most attractive elements of the

model: Low risk.

Consider the following:

• Upfront capital costs are minimal if a solution provider is not going to build and

maintain their own network operating center, but rather host their customers’

applications at a third-party data center or with the manufacturing vendor.

• Offerings delivered in this manner are typically turnkey at the outset, so solution

providers can quickly get customers up and running. The opportunity for customiza-

tion and integration services remains, but is not necessary for initial startup.

• ROI is quick, as customers are paying for their SaaS services on a recurring, con-

tractual basis. Solution providers should focus on signing customers to a one-year

contract at bare minimum, three years ideally.

IPED recommends the following steps to address priorities and establish balance

when starting a SaaS business:

Step 1: Focus on developing and delivering relevant services and selecting the

appropriate software vendors with whom to partner. These are urgent needs for the

business to launch, but also less difficult to achieve quickly.

Step 2: Begin retraining a sales staff to be consultative in nature and able to sell

services on a contractual basis backed with a service-level agreement. This is critical

in order to begin filling the pipeline with the high volume of customers necessary to

generate enough monthly revenue and cash flow.

Step 3: Identify services attach opportunities; retrain technical staff to effectively

manage a services-based operation IF the solution provider is going to host the

software themselves; determine a SaaS margin structure

Step 4: Focus on achieving operational profit and managing cultural change

throughout the business

Best Practices for Selling SaaS

Selling software is an exercise in tangible transactions: customers acquire a

real product that provides measurable functionality. But SaaS solutions are

fundamentally intangible: customers acquire a new capability but not necessarily

a new piece of software. Learning to sell in this new relationship model is mission

critical to a successful SaaS practice.

7www.iped.com

SaaS practices, like all managed services businesses, need a higher ratio of sales/ tech reps


Selling SaaS requires a skill quite different from selling products and it is therefore

is critical to invest in sales training for both sales and technical staffs. Some other

notables to remember include:

• SaaS practices, like all managed services businesses, need a higher ratio of sales/

tech reps

• Make a higher percentage of tech resources “customer facing” and trained in sales

• Divide resources into hunting and farming teams, with sales personnel hunting for

new business while technical staff farm existing accounts for additional services

opportunities

• Emphasize net-new customer acquisition in compensating your sales reps.

SaaS Sales Process Dynamics

The sales cycle for Best in Class solution providers in a SaaS engagement runs five

weeks longer on average than that for the industry average players selling SaaS.

However, consider the payoff: a slightly larger transaction size, but a whopping

gross margin of 53 percent in 2007, according to IPED research. The 23 percent gross

margin garnered by the rest of the industry selling SaaS is good coin in and of itself,

but clearly there is a lot more money to be made by following best practices around

sales, marketing, operations and finance.

The other big payoff for building a successful SaaS practice comes in the form of

services attach revenue. SaaS implementations require upfront assessments of a

customer’s existing infrastructure, a design consultation process that Best in Class

providers routinely charge a premium for. SaaS deployments also set the stage for

other managed services to be sold, particularly for those solution providers that

maintain their own data center to host software for their customers.

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17.3

32.4

36.1

45% 53%

Average Sales Cycle: Weeks

Average Transaction Size: Thousands

2007 Average SaaS Gross Margin

28%

23%

12.3


Average SaaS SP

Note: BIC, larger percentage of transaction size falling in the $1025 k range than average

(23% v 15% of average SaaS selling in that range)

NET: BIC longer sales cycle, typically higher transaction size 2x GM

Compensation plans for SaaS sales reps are markedly different than those for transac-tion-based businesses.


Finally, SaaS can’t be discussed without addressing the topic of compensation plans.

Comp plans for SaaS sales reps are markedly different than those for transaction-

based businesses where commissions are paid when revenue is received from the

customer. By contrast, SaaS solution providers need to pay commission (typically

in one-year increments) to reps when the contract is signed. Paying commission

monthly based on the customer subscription model would result in amounts so small

that it becomes difficult to motivate sales reps.

The main obstacle to this best practice is cash flow. Solution providers need an

adequate enough amount of cash on hand to pay their sales reps a year’s commission

upfront. If they do not have the means, they can pay their reps smaller portions of

their commission at a time, with the danger being reduced motivation on the part

of the reps.

Managing SaaS Customer Relationships

Finally and perhaps most important to creating a successful, sustaining SaaS

business is the ability to effectively manage customer relationships. Because it

is a recurring revenue model, SaaS, by nature, binds solution providers to their

customers more tightly than in more traditional transaction-based deals.

Best in Class solution providers understand the importance of relationships in

making the SaaS sale, with a vast majority looking to convert their existing base to a

SaaS model. They excel at farming their installed base and growing customer share

within those end-user organizations, according to IPED research.

In 2007, Best in Class sold 40 percent of their SaaS solutions into their existing

customer base compared with 20 percent by the industry average. In 2008, Best in

Class anticipate increasing the percentage of SaaS sold to existing customers by more

than 20 percent year on year, according to IPED.

Another key element to managing customers is ensuring service levels and mak-

ing sure that the applications provided perform as well or better than on-premise

versions of the software. Well-crafted SLAs are essential and solution providers

entering the SaaS business must spend upfront time developing SLAs that, if done

right, represent a crucial selling tool. They are, in effect, the contractual guarantee

that consumers in today’s fraught marketplace will be looking for before they agree

to let a solution provider manage the delivery of its critical software applications.

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CA Instant Recovery On Demand is sold only through authorized solution partners


CA: Instant Recovery on Demand

CA’s entrance into the SaaS market with their business continuity and disaster

recovery managed services offering will help drive demand even further.

But CA Instant Recovery On Demand is more than just SaaS, it is a comprehensive

turnkey business continuity and disaster recovery managed services offering. The

more robust offering combines real-time replication and high availability software

with full disaster recovery data center facilities and staff, and Web-based assessment,

provisioning, management and reporting tool that provides 24/7/365 protection.

For solution providers, this means little to no capital startup costs — and as a result

almost no risk.

CA Instant Recovery On Demand is sold only through authorized solution partners

and targets small and midsize businesses with 100 to 1,000 employees and at least

one business-critical application such as email, database and/or Internet. While most

large organizations have a wide variety of business continuity solutions already in

place, these solutions are less common among SMBs, given their cost and complexity.

SMBs face high risk from unplanned outages, and in some cases, could even

experience business failure from a significant disruption like a natural disaster.

This reality presents a compelling sales story for solution providers to articulate;

essentially the ‘need to have’ vs. the ‘like to have’ nature of this kind of solution

for SMB customers. And because customers are not buying a lot of equipment

and software upfront, they likewise enjoy the low-risk cost of entry that solution

providers do.

CA’s service, based on CA XOsoft™ High Availability software, replicates a company’s

business applications and data to the disaster recovery datacenter of CA partner

Geminare, a Toronto-based company that hosts and delivers the service on its SaaS

Business Continuity Platform. Geminare’s datacenter provides automatic failover and

near-instantaneous recovery in the event of system failure at the end customer site,

and maintains its own disaster recovery plan and facilities across Canada, the U.S.

and Europe. The turnkey managed services offering includes all replication software,

server hardware, Microsoft operating systems software and application software for

the replica servers at the disaster recovery data center, in addition to five day’s per

month use of the disaster recovery facilities. Customers only need to provide VPN

connection and a small amount of storage on each protected server.

Solution provider partners can quickly add this high-margin offering to their

business model with no capital investment. Once authorized, partners are able to

perform online customer environment assessments and quotes (and possibly even

charge a fee for this), then provision, manage, support and start billing customers,

typically in less than 24 hours. The CA replication software is automatically installed

10www.iped.com

Though targeted at the SMB space, the service also provides enterprise- class capabilities.


remotely on the customers’ production servers while the disaster recovery data

center automatically provisions the replica servers, applications and storage. There is

little to no customer IT support necessary.

Though targeted at the SMB space, the service also provides enterprise-class

capabilities. It has sophisticated functionality around real-time application and data

recovery, including automated disaster recovery testing without interrupting the

customer’s production or disaster recovery environments. The testing capability

validates the recoverability of mission-critical data and is unique among recovery

management solutions on the market today. From a SaaS perspective, partners can

tout this capability, giving customers an unprecedented level of confidence that the

fundamental infrastructure running the service is reliable and effective.

The service enables the following:

• High application availability via fully automated failover and push-button failback

for Microsoft® file services, Exchange, SQL, and IIS, as well as Oracle and

Blackberry Enterprise Server

• Disaster recovery site compliance through fully automated, scheduled tests of

an organization’s disaster recovery system without disrupting the production

environment or existing data protection

• Provisioning and deployment typically less than 24 hours after the customer

environment assessment is completed

The turnkey nature of CA Instant Recovery On Demand enables channel partners

to get customers up and running quickly with little initial expenditure — plus

customers use operational budgets instead of capital budgets to pay for it. The profits

for solution providers are substantial as well. The CA offering delivers channel

partners high margins, especially when considering the wide range of services for

which they can charge, including the initial business continuity/disaster recovery

assessment, recurring disaster recovery testing, non-disruptive sandbox testing

for O/S and application patches and upgrades, and even complete outsourcing of

the management of the solution. Channel partners also own the relationship with

the customer including monthly billing. And because they are the front lines in

protecting their customers’ business-critical applications and data, solution providers

are positioned strategically to provide additional services and consulting as needs arise.

The service is available now in North America and Germany with availability elsewhere

in Europe, the Middle East, Africa and Asia-Pacific slated for the first half of 2009.

One CA partner selling its CA Instant Recovery On Demand service said that in

today’s dismal economic climate his organization is finding it more important than

11www.iped.com

The turnkey nature of CA Instant Recovery On Demand enables channel partners to get customers up and running quickly with little initial expenditure


to be able to lower the total cost of technology and eliminate operational headaches

for end-user customers so they can focus on their specific business objectives.

“With CA Instant Recovery On Demand, we can provide the business continuity

and disaster recovery capabilities [our customers] need, as well as save them and

ourselves any large startup costs,” said J. Michael Drake, founder and CEO of

masterIT, a Bartlett, Tenn.-based managed services provider and CA partner.

Conclusion

In difficult economic times there is often opportunity. SaaS is one of those

opportunities. The nature of the business model — low-risk/low-cost of entry, fast

deployment, scalable — provide the ingredients for the right sales pitch for the right

time. Solution providers evaluating SaaS should get a clear understanding of how

much they will need to reorient their business around a recurring revenue model that

changes the nature of how they sell, consult and relate to customers.

Most importantly, solution providers should determine the right set of services for

their customer target and align themselves with the appropriate software vendors,

ones that fully support the SaaS model from a resource and programmatic capacity.

CA is committed to the SaaS model and is depending on its channel partners to

drive success. In turn, solution providers selling CA Instant Recovery On Demand

will generate recurring revenue streams considered critical to the evolution of the

channel, particularly in a down economy.

ABOUT IPED

The Institute for Partner Education & Development (IPED) is the professional services

division of Everything Channel. IPED applies proven best practices to deliver customized

recommendations that accelerate channel revenue through access to exclusive data and

expert analysis.

With over 20 years of institutional knowledge, IPED is the only professional services

organization that can leverage the resources of Everything Channel, the unrivaled leading

provider of information and access to the channel. IPED empowers Solution Provider firms

to understand and react to the motivators and business value propositions that matter most

to their business.

IPED’s proven methodologies help technology vendors support their Solution Provider

partners and present their portfolio of technology and business solutions for a mutually

beneficial business relationship.

For more information on IPED, visit www.IPED.com.

12www.iped.com


ABOUT CA

CA (NASDAQ: CA) is the world’s leading independent IT management software company.

With CA’s Enterprise Management (EITM) vision and expertise, organizations can more

effectively govern, manage and secure IT to optimize business performance and sustain

competitive advantage. For more information, visit www.ca.com

Copyright © 2009 CA. All Rights Reserved. One CA Plaza, Islandia, N.Y. 11749. All

trademarks, trade names service marks and logos referenced herein belong to their

respective companies.


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