We stand at the edge of a new wave of computing, from the perspective of the principals at cloud service broker Strategic SaaS. More and more businesses will migrate from an on-premises model of computing to a cloud-based model of computing, and many will adopt an approach that integrates both models. But businesses need help in this migration, and that is where Strategic SaaS comes in. The company was formed to help organizations transition into the world of cloud-based computing. To succeed and to create a business that would be profitable in the long term, Strategic SaaS needed online products and services that would enable it to both meet customer needs and add value to the customer’s experience. For that, it turned to Microsoft® Online Services and the Business Productivity Online Suite.
Business Focus
Strategic SaaS, as its name suggests, exists to help businesses make the most of software delivered as a service. The Houston-based firm’s principals—Becky Thomas, Don MacNeil, and Frank Johnson-Suglia—had all worked in IT-related roles for many years before forming Strategic SaaS in 2009. They could see the trends moving toward the delivery of IT services through the cloud. They knew where the technology was heading. They heard companies asking questions about moving away from on-premises infrastructures and refocusing the IT resources to create and support applications and services that were truly strategic.
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In that confluence of technical direction and service demand, they saw an opportunity to form a business dedicated to helping other organizations realize the benefits of software delivered as a service. The key question was which provider of online services could best deliver the enterprise-class services that Strategic SaaS customers desired and offer Strategic SaaS the greatest opportunity to extend the online offering with value-added services?
After surveying the technical marketplace and exploring more fully the needs of the businesses they wanted to support, the principals at Strategic SaaS decided that Microsoft would best meet the needs of their clients and the business model they envisioned. With the Business Productivity Online Suite from Microsoft Online Services and the Windows Azure™ Platform, Strategic SaaS would be in an ideal position to meet the evolving needs of businesses as they moved into the cloud. Moreover, in running the numbers and projecting the profit and loss opportunities over the course of three years, they saw that those opportunities could prove to be very profitable.
Selling Online Services
The Business Productivity Online Suite from Microsoft Online Services enables Strategic SaaS to offer its clients access to a range of enterprise-class messaging and collaboration services—including shared workspaces, workflow, desktop and mobile email, calendaring and contacts, instant messaging, presence, audio/video conferencing, and Web conferencing. Yet because the applications supporting these services—including Microsoft SharePoint® Online, Microsoft Exchange Online, Office Live Meeting, and Microsoft Office Communications Online—run on servers residing in state-of-the-art Microsoft data centers, neither Strategic SaaS nor its clients need to invest in on-premises infrastructure to take advantage of these services. Indeed, Microsoft hosts and maintains the servers with its own staff of hardware and software experts, supplies patches and security updates in real time, and guarantees 99.9 percent uptime with a financially-backed service level agreement (SLA).
This cloud-based messaging and collaboration service offers still other advantages. Neither Strategic SaaS nor its clients need to purchase separate server or client licenses for infrastructure components such as Microsoft Office SharePoint Server or Microsoft Exchange Server. Instead, Strategic SaaS connects its clients to the applications they want to use on a per-user, per-month subscription basis. Small and mid-sized organizations can provide their users with access to the entire Business Productivity Online Suite for one low monthly fee. If a user needs access to only one service—Microsoft Exchange Online, for example—it is possible to subscribe to a single service only for an even lower monthly fee.
Extending the Offering with Value-Added Services
While the breadth of services and the reliability of the Business Productivity Online Suite offered clear benefits to customers, the principals at Strategic SaaS also understood that the software as a service approach inherent in the Business Productivity Online Suite created opportunities to offer additional services that would add even more value to customers. Strategic SaaS could see opportunities to help businesses migrate their existing messaging and collaboration infrastructures to the Business Productivity Online Suite. Similarly, there were opportunities to provide training and support services, as well as integration and customization services.
Preparing to Go To Market
To prepare for entry into the online services reseller market, Strategic SaaS followed a five-step process recommended by Microsoft.
- Perform market segment analysis
- Define differentiating offerings
- Prepare to generate demand
- Review and refine sales practices
- Review and refine customer services offerings
This process helped Strategic SaaS organize its efforts and its offerings. “We’re creating an online services brokerage for customers,” says Don MacNeil, one of the managing partners at Strategic SaaS. “We’re looking at small and medium-sized businesses, as well as those that are slightly larger, in the range of 500 to 2,000 seats.” Strategic SaaS is also looking at specific vertical industries in region, particularly those that have a strong need for solutions for deskless workers. “Those companies see the value of this approach immediately,” says MacNeil.
Strategic SaaS is also targeting the independent software vendor (ISV) market space. MacNeil and his partners know that ISVs are building SaaS solutions on top of the Windows Azure platform. “But many of these companies do not have strong marketing and sales organizations to help push their products out into the marketplace,” says MacNeil. “Strategic SaaS can do that for them. We can act as their representatives and push their products out to the marketplace.”
Strategic SaaS is using telemarketing and direct sales campaigns to generate sales. The company uses a weekly webinar to educate prospective customers and follows up on that with either telemarketing outreach or a direct sales call, depending on the nature of the prospect. Strategic SaaS also has a strong web presence and uses social media such as LinkedIn and Twitter to drive interest to its weekly webinars. Through the use of post-webinar surveys, Strategic SaaS has been able both to further qualify individual prospects and refine the webinar presentation to meet prospective customer needs more effectively.
“Based on specific feedback we got a few weeks ago, we modified the education portion of our webinar,” says MacNeil, “and that was very worthwhile. People have responded well to our changes in content to meet their needs.”
Revenue and Margin Growth
For Strategic SaaS and its clients, the online offerings from Microsoft offer numerous benefits. The Business Productivity Online Suite from Microsoft Online Services enables Strategic SaaS to offer its customers a low-cost, enterprise-class messaging and collaboration solution that they can choose to run entirely in the cloud or that they can integrate with existing in-house or hosted solutions. At the same time, both the Business Productivity Online Suite and the broader array of online technologies from Microsoft create ongoing opportunities for Strategic SaaS to add value through professional services, and this is projected to have a significant impact on the profitability of the company.
Increasing Growth and Revenue
The revenue streams associated with online services have two components. The Partner of Record (POR) fees paid by Microsoft for bringing a client on to the Business Productivity Online Suite, for example, represents one component; the revenues arising from a partner’s value-added services are the other. Let’s look at the POR fees first.
The Microsoft Online Services partner program compensates partners for bringing clients onto the Business Productivity Online Suite. Every year, for the life of a client contract, Microsoft Online Services compensates its partners with a POR fee equal to six percent of the value of the contracts under management. In addition, Microsoft Online Services compensates its partners with fee equal to 12 percent of the value of new contracts it brings in during a given year. The net effect for partners is an 18 percent return on the value of new business during the first year of a customer contract and six percent per year each year after that.
Consider: If a partner such as Strategic SaaS signs up ten clients in January of 2010, each with an average of 25 users and at an average subscription rate of U.S. $10 per seat, per month, the value of those seats to Strategic SaaS, in terms of total first-year POR fees, would be U.S. $5,400. That includes the six percent recurring POR fee (U.S. $1,800) as well as the 12 percent first-year fee (U.S. $3,600). And these fees are compensation for doing nothing more than signing up those 250 users during that first month.
If Strategic SaaS were to continue to sign up customers at a rate of 250 users per month, it would have signed up 3,000 users by the end of the year, earning a total of $64,800 in POR fees—just for signing up those users.
If only 95 percent of those first year users were to continue to use the Business Productivity Online Suite beyond the first year, Strategic SaaS would receive U.S. $43,200 in POR fees in 2011 and 2012 for the customers it signed up in 2010.
If Strategic SaaS were to repeat its first year sales each year for three years, adding 250 users per month, by the end of the third year it would have signed up 9,000 users. It would receive a total of U.S. $129,600 in recurring (six percent) POR revenue as well as a total of U.S. $129,600 in first year (12 percent) POR revenues.
In this scenario, the total value of POR fees to a partner such as Strategic SaaS accrues to U.S. $259,200 over three years.
A partner such as Strategic SaaS can also provide value-added services to its customers. Some of these services will be one-time services—set up and migration services, for instance—whereas other services will be recurring services. They might involve SharePoint Online customization, help desk services, or other managed services that are offered for an annual fee. The value of these fees can add up to considerably more than the POR fees.
Crunching the Numbers at Strategic SaaS
How realistic is the scenario just outlined? Let’s look at a more detailed profit and loss scenario based on the projections from Strategic SaaS.
In 2009, Strategic SaaS signed an average of 15 Business Productivity Online Suite deals each month. An average deal included 100 seats. The average distribution of subscriptions breaks out as follows:
- Business Productivity Online Suite (full): 48 percent
- Exchange Online: 40 percent
- Office SharePoint Online: 10 percent
- Office Communication Online: 1 percent
- Office Live Meeting: 1 percent
For the purpose of a three-year profit and loss projection, Strategic SaaS assumes that the average company size will increase to approximately 150 seats in years two and three. Moreover, Strategic SaaS officials expect to see the number of monthly sales doubling during this same period. They also anticipate that increasing numbers of users will adopt the full Business Productivity Online Suite, not just individual services such as Microsoft Exchange Online. Indeed, in the Strategic SaaS three year profit and loss projection the percentage of users subscribing to the full Business Productivity Online Suite increases from 48 percent in year one to 68 percent in year three.
Given the low cost and high value of the Business Productivity Online Suite, Strategic SaaS anticipates that only five percent of clients will, for one reason or another, decide not to renew their contracts at the end of their first year.
Using these figures, the Strategic SaaS three year profit and loss projection shows 105,300 seats under contract at the end of three years. It shows first year (12 percent) POR fees growing at a compounded annual growth rate (CAGR) 85 percent, and recurring (six percent) POR fees growing at a CAGR of 153 percent.
Increasing Profitability through Value-Added Services
As noted, these numbers reflect the value of only one of the two Business Productivity Online Suite-related revenue streams. Strategic SaaS anticipates that all customers signing up for the Business Productivity Online Suite will require set-up and migration support, for which Strategic SaaS charges an average of $35 per seat. Another 40 percent of subscribers will also require consultation and customization support, and for that they will pay an average of $66 per seat per year. Another 30 percent will subscribe to other Strategic SaaS services at an average of $50 per seat per year.
These fees add significantly to the POR revenues that Strategic SaaS gains from bringing a customer onboard the Business Productivity Online Suite. In its three year projection, the total accrued value of revenues associated with its professional service offerings grows at a CAGR of 129 percent. Interestingly, Strategic SaaS anticipates that revenues from set-up and migration services will actually decrease on a per-seat basis as the company brings more and more automated services online to facilitate migration. Over the course of a three year projection, set up and migration fees grow at a CAGR of only 38 percent. At the same time, as increasing numbers of clients adopt SharePoint Online Strategic SaaS anticipates in increase in revenues derived from SharePoint Online customization and integration services. Over the same three year period, Strategic SaaS projects that revenue from customization and consulting services will grow at a CAGR of 253 percent.
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The bottom line? For Strategic SaaS the accrued value of the revenues derived from these services is more than four times the value of the accrued POR revenues.
Factor in cost of service delivery, depreciation, amortization, taxes, and similar real world elements, and the three year profit and loss projection for the online services business at Strategic SaaS is extremely attractive.
- Total revenue grows at a CAGR of 125 percent
- Gross profit grows at a CAGR of 123 percent
- Net income grows at a CAGR of 152 percent
“With the Business Productivity Online Suite and the portfolio of services we offer from Microsoft, we have a great opportunity to build our customer base,” says MacNeil. “It’s something of a land grab right now. In the long run, though, our business model is not dependent on profitability from partner of revenue fees associated with the Business Productivity Online Suite. We’re aiming to build deeper long-term relationships with our customers and supporting the breadth of their online needs.
“We’re a cloud services broker, and our intellectual property includes a unique set of services that we can wrap around products like the Business Productivity Online Suite,” MacNeil continues. “As new solutions appear from Microsoft and other software companies, we can deliver those to our customers. As more services are built for the Windows Azure platform, we will bring those to our clients. As Microsoft delivers more software in the Software plus Services paradigm, we want Strategic SaaS to be the partner of choice for companies interested in taking advantage of those products.”
Microsoft Online Services
Microsoft Online Services are business-class communication and collaboration solutions delivered as a subscription service and hosted by Microsoft. These offerings help make it easier for customers to rapidly and cost-effectively access the most up-to-date technologies, and are designed for rapid deployment to provide customers with streamlined communications, simplified management, and business-class reliability and security features.
For IT staffers, Microsoft Online Services help reduce the burden of performing routine IT management tasks such as installation, provisioning, ongoing maintenance, updates, and upgrades, making it possible for them to spend more time on initiatives that move the business forward. The Online offerings are backed by strong service level agreements and are designed to meet the regulatory compliance and reliability needs of enterprise customers. On a technical level, the offerings boast the sophistication and reliability that customers expect from Microsoft, which continues to invest heavily in building data centers to support the Online family of services.
For more information, visit: www.microsoft.com/online
For More Information
For more information about Microsoft products and services, call the Microsoft Sales Information Center at (800) 426-9400. In Canada, call the Microsoft Canada Information Centre at (877) 568-2495. Customers in the United States and Canada who are deaf or hard-of-hearing can reach Microsoft text telephone (TTY/TDD) services at (800) 892-5234. Outside the 50 United States and Canada, please contact your local Microsoft subsidiary. To access information using the World Wide Web, go to: www.microsoft.com
For more information about Strategic SaaS products and services, call (713) 582-3009 or visit the Web site at: www.strategicsaas.com
This case study is for informational purposes only. MICROSOFT MAKES NO WARRANTIES, EXPRESS OR IMPLIED, IN THIS SUMMARY.
