In-Depth

Landing New Business: S+S Incubation Centers Gives ISVs a First Step

Microsoft's Software plus Services Incubation Centers can help ISVs hook into SaaS opportunities by pairing them with experienced hosters.

• By Rich Freeman
• December 01, 2008

Ask the management teams of a half-dozen ISVs about Microsoft's Software plus Services (S+S) Incubation Centers, and odds are pretty good that they'll all have the same reaction: "Huh?" In fact, awareness of Microsoft's incubation program -- which is designed to help ISVs enter the burgeoning Software as a Service (SaaS) market -- is so low that even software vendors that have used an S+S center sometimes don't realize it.

Take iACT LLC, for example. The Provo, Utah-based company, which is a Registered Member of the Microsoft Partner Program, operates StageGold, a SaaS solution that organizations can use to store and display videos on their Web sites. When CTO Rob Adamson realized iACT needed help building and maintaining StageGold's underlying infrastructure, he turned to Gold Certified Partner OpSource Inc., a hosting provider headquartered in Santa Clara, Calif. That OpSource is also part of the S+S Incubation Center program, however, made no impact on Adamson's decision. "I didn't know anything about that," he acknowledges. He was just impressed by OpSource's scalable data centers and strong knowledge of the Microsoft platform.

A year later, he's still impressed. OpSource's assistance is one reason why StageGold is poised for rapid growth, Adamson says. Traffic on the site jumped 400 percent in September alone and is continuing to climb. "I think we're on the right track," he says.

Established by Microsoft late in 2006 under the name "SaaS Incubation Centers," the program was renamed last summer to align more closely with the company's S+S vision. Today, the incubation centers are as notable for what they aren't as for what they are. Despite what the name implies, they aren't laboratory facilities like the Microsoft Technology Centers, which help ISVs and businesses refine solutions. Nor are they terribly exclusive. In fact, almost any software maker looking to build a hosted solution on the Microsoft platform is eligible to work with an S+S center. Above all, they're not widely known. "It's been a well-kept secret, unfortunately," says Elliot Curtis, director of the hosting partner channel in Microsoft's Communications Sector Business Group.

What the S+S Incubation Centers are is an elite corps of Microsoft hosting partners with rock-solid infrastructures and unusually deep experience in helping ISVs successfully bring SaaS applications to market. To date, Microsoft has identified just eight such companies in North America, plus about 10 in Europe and two in Asia. Rounding out the incubation ecosystem is a second, even smaller, group of business-consulting firms that help fledgling SaaS providers think through issues such as financing, pricing and marketing.

Collectively, Microsoft's incubation partners are working with more than 500 ISVs worldwide. And while they're doing so largely in the shadows, many of their clients say the centers' help is invaluable just the same.

Need an Incubator?

Following is a partial list of Microsoft Software plus Services (S+S) Incubation Centers: 7group Global Ltd., Liverpool, U.K. Affinity (subsidiary of Hostway Corp.), Chicago, Ill. Attenda Ltd., Staines, U.K. Canada Web Hosting, Toronto, Ontario, Canada Computer Sciences Corp., Falls Church, Va. Mondo A/S, Copenhagen, Denmark NaviSite Inc., Andover, Mass. NetSourcing, Waardenburg, Netherlands Netstore plc, Reading, U.K. NTT Europe Online (subsidiary of NTT Communications), London, U.K. OpSource Inc., Santa Clara, Calif. PEER 1 Network Enterprises Inc., Vancouver, B.C., Canada Pironet NDH AG, Cologne, Germany Siennax, Amstelveen, Netherlands Verizon Business (unit of Verizon Communication Inc.), Basking Ridge, N.J. Visionapp AG, Frankfurt, Germany Wizmo Inc., Eden Prairie, Minn. For additional details on and links to these companies, visit the Microsoft S+S incubator directory. Source: Microsoft

Opportunities and Challenges
That ISVs are eager to make the jump to SaaS is hardly surprising given how large an opportunity the approach represents. Gartner Inc., the Stamford, Conn.-based IT research company, expects worldwide SaaS revenues to more than double by 2012, reaching $14.8 billion. Moreover, because hosted solutions don't require server hardware and are typically paid for through modest monthly fees, they can help software vendors reach into cash-strapped small and midsize businesses or establish beachheads for pricier on-premise products.

"ISVs are seeing 120 percent to 200-plus percent more cash from the same customers than they were when they were doing traditional [on-premise only] sales," says Brad Balogh, president and CEO of Gold Certified Partner Wizmo Inc., a S+S Incubation Center in Eden Prairie, Minn.

Yet tapping into the SaaS opportunity isn't easy. For starters, aspiring SaaS providers must retool their applications to support a "multitenant" architecture in which multiple customers securely pool their data in a single database. Then they must completely change the way they develop software, adding new functionality continually rather than rolling it out in periodic major releases. After all, as OpSource CEO Treb Ryan notes, there's no such thing as Yahoo! version 8.4: "New features show up in Yahoo! all the time," he says. Meanwhile, any functionality that you add had better work right the first time -- SaaS customers have little tolerance for bugs. "There's no waiting for version 0.1," Ryan adds.

Furthermore, you can't offer hosted software unless you have a speedy, reliable and secure infrastructure on which to host it. Yet few ISVs have experience creating or maintaining data centers. And because customers can dump a SaaS solution far more easily than an on-premise system, there's little time for on-the-job training. "If they're not satisfied, they can walk," notes Jeff Kaplan, managing director of THINKstrategies Inc., a strategic consulting firm based in Wellesley, Mass.

To top it all off, SaaS vendors must have deep pockets and plenty of patience. "This isn't like a traditional software play where you can write an application and have revenue in the first quarter," Ryan notes. On average, SaaS providers are in the market three to five years before they begin collecting significant income. In the meantime, they must master new marketing tactics, such as offering free online trials, and even revamp the way they compensate their sales teams. "Salespeople are coin-operated. They work off a commission," notes Balogh. But SaaS salespeople typically receive their compensation in small, recurring increments rather than a fat lump sum up front. Over time, most sales reps recognize the appeal of collecting modest commissions in perpetuity, Balogh says, but keeping them motivated in the early years can be tricky.

Bringing Ideas to Fruition
It all adds up to more challenges than most ISVs can handle alone. "Relying on a solid hosting company to provide at least a service-delivery structure is going to be really essential to success," Kaplan says.

Other Incubation Options

Microsoft isn't the only technology giant helping would-be Software as a Service (SaaS) providers get up and running. Google Inc., Amazon.com Inc. and Oracle Corp., among others, all offer SaaS platforms and at least some degree of technical counseling. According to strategic consultant Jeff Kaplan, however, the 800-pound gorilla in the SaaS space is Salesforce.com Inc., the San Francisco, Calif.-based online CRM vendor whose Force.com hosting platform competes directly with Microsoft's Software plus Services Incubation Centers. So should ISVs hitch their wagon to Salesforce.com or to Microsoft? "Salesforce certainly has greater experience as a Software as a Service company," Kaplan notes. It's also got sky-high market visibility and credibility. But don't dismiss Microsoft just because it's a relative newcomer to SaaS, Kaplan says. "While it doesn't have the same track record of success, it does have a very solid base of software applications and customers," he notes. The bottom line, in Kaplan's view: Choosing a SaaS platform is a serious commitment, so it's important for partners to look beyond the technical qualifications to determine the best overall fit with their long-term strategies. -- R.F.

Yet as Microsoft executives watched ISVs struggle with the transition to SaaS, they gradually realized that those companies' needs went beyond the standard rack space, power and bandwidth that most hosting partners provide. Enter the S+S Incubation Centers. Though all have solid hosting credentials, they also offer deeper forms of SaaS expertise, such as advice on architecting a SaaS solution for peak performance and help in scrutinizing usage statistics for signs of impending trouble.

"If you have a good enough handle on how an application is being used, you can generally tell when something is going to fail," notes David Flawn, senior vice president of sales and marketing at Canada Web Hosting, an S+S Incubation Center and Gold Certified Partner with facilities in Toronto, Ontario and Vancouver, B.C.

In addition, most incubation centers can assist ISVs with unfamiliar chores such as online billing and user provisioning. That's the "boring stuff" few ISVs think about, says Chris Patterson, an infrastructure services product manager at NaviSite Inc., an S+S Incubation Center and Gold Certified Partner in Andover, Mass. "I've met people with some absolutely brilliant ideas, but they just don't have that experience with the back-end pieces that need to be there to really bring an idea to fruition," he says. "That's what we help with."

Expandable Software Inc., a maker of business solutions for manufacturers, is among many ISVs that have taken advantage of such services. The Santa Clara, Calif.-based company, which is a Registered Member of the Microsoft Partner Program, worked with Balogh's Wizmo to create an on-demand version of its flagship ERP app. Wizmo helped Expandable complete the complex process in less than three months. "They've just been so good at getting it all set up for us with very little pain," says Jeannie Fitzgerald, Expandable's vice president of customer support.

Genticity Inc. tells a similar tale. A Gold Certified Partner based in Cumming, Ga., Genticity offers a suite of CRM and call-center applications. Working with PEER 1 Dedicated Hosting Inc., an S+S Incubation Center and Gold Certified Partner in Vancouver, B.C., Canada, the company created SaaS versions of its products in just two months -- significantly less than the 18 months it expected the process to take.

"We were planning to do it regardless," says Genticity CEO Harold Hutchinson. "The incubation capability allowed us to do it that much faster."

Bottom-Line Benefits
There can even be financial benefits to working with an incubation center. Many help ISVs weather the fiscal trials of building SaaS applications by offering discounted rates. "When you're just building, nobody has money," Patterson notes. Giving software makers short-term subsidies during their start-up phase is a great way to build long-term loyalty.

Don't Spare the TLC

Though Microsoft's Software plus Services Incubation Centers provide many services, customer support usually isn't among them. After all, a hosted solution's creators are best qualified to answer questions about its functionality. Just the same, many incubation partners warn ISVs that top-notch end user assistance is even more important with easily swapped Software as a Service (SaaS) applications than with on-premise systems. "In my mind, the most important factor in being a successful SaaS ISV is being able to provide white-glove support," says Lee Hadsock, channel sales manager at incubation center PEER 1 Dedicated Hosting Inc. Fail at that type of hand-holding, he notes, and customers will ditch you in a heartbeat. -- R.F.

Of course, offering those leads benefits Microsoft as well. "Clearly we want ISVs to be successful on our platform," says Curtis. Funneling software makers toward skilled hosting partners helps them join the SaaS fray more quickly and successfully, while widening the range of SaaS options available to Microsoft's customers. Not surprisingly, Microsoft hopes to connect another 600 ISVs with incubation centers by the time its 2009 fiscal year ends next June 30.

Curtis has plenty of other plans for the coming months, too. "The incubation center is still in incubation," he says. "I expect the model to mature and improve over this fiscal year."

Among other things, Curtis looks forward to launching a comprehensive online catalog of incubation partners and services, along with a centralized set of ordering, provisioning and billing services that ISVs can leverage in lieu of creating their own. In addition, Microsoft will work to raise the program's profile through marketing campaigns, appearances at SaaS conferences and targeted telesales outreach efforts to Microsoft's ISV partners.

Meanwhile, iACT's Adamson isn't much interested in program names and fancy titles. He's just pleased to have access to companies like OpSource with scalable hosting infrastructures and people who know how to manage them. "The way their system is organized, we can add more servers [and] do load balancing as we expand," Adamson says. And in the end, that ability to nurture and sustain growth is what matters most.