In-Depth

Sailing into Software Plus Services

Mitchell Cannady, president and CEO of Spinnaker Network Solutions, knew that selling Microsoft Dynamics CRM Online would change his company's course. He just had no idea how fast that would happen.

A lot of partners view Microsoft's Software plus Services (S+S) framework for Software as a Service (SaaS) the way children look at eating spinach. They know they'll probably be in trouble if they don't swallow what's being served -- but they're going to put it off as long as they can. Many early adopters are companies that already have a foot halfway in the door of the S+S business model: hosters, for example, or ISVs whose products make sense to deliver through the cloud and to license by subscription, Mitchell Cannady's Spinnaker Network Solutions Inc., a Gold Certified Partner based in Irvine, Calif., doesn't fit that mold. The 17-person business is kind of a quintessential small to midsize business and implementation partner company on the Dynamics side (for more on the company's relationship with Redmond, see "Spinnaker: A Surprising Partner"). For many Dynamics partners that make a big chunk of their money from implementation services, a solid SaaS product -- as Microsoft Dynamics CRM Online seems to be, by most accounts -- could pose a serious threat.

But Cannady, Spinnaker's founder, president and CEO, saw a major opportunity instead. By pushing the new product aggressively and spinning up a separate staff with a compensation structure more in line with the leaner economics of Dynamics CRM Online, Cannady believes he's found a way to boost his customer base and stop losing certain types of business to the SaaS-oriented competition of Salesforce.com Inc.

Over the last few months, Cannady has steered his firm squarely into S+S. As with any journey into uncharted waters, there have been surprises along the way. In early June, Cannady spoke by phone with RCP Editor in Chief Scott Bekker about why he decided to sell CRM Online, the adjustments he made to build the product into his business and how that effort is paying off.

SPINNAKER: A SURPRISING PARTNER

Spinnaker Network Solutions Inc.’s early and eager embrace of Microsoft Dynamics CRM Online is especially significant given the company’s "show-me" attitude toward Microsoft software in the past.

The Irvine, Calif.-based company is a Gold Certified Partner now, but it didn’t start out in such a tight orbit around Redmond.

President and CEO Mitchell Cannady, a former Citrix reseller and early believer in the application service provider business model, founded Spinnaker in February 1997 as an infrastructure VAR. A sailor, Cannady named the company after the often colorful, billowing front sail that’s used primarily by racers to maximize every last bit of wind.

Spinnaker got into the sales force automation business in June 1997 after an introduction to Pat Sullivan, who built the ACT! contact manager and SalesLogix midmarket CRM software. After a good run on SalesLogix, Cannady was on the lookout for new opportunities in late 2005.

"At that time, our SalesLogix business had slowed down to a point that we were concerned about what was happening in the market space, so we decided that we would expand the product offering that we had," Cannady says.

The Spinnaker team hadn’t been impressed by Microsoft CRM before the version 3.0 release. "Prior to that, when we looked at the application, it wasn’t something that we really effectively could sell nor implement for what our customers’ requirements would have been. When 3.0 came out, it was a whole different story," Cannady says. "Microsoft CRM ended up taking over our entire business, so it’s 99 percent of my business today."

—S.B.

Q. Many Dynamics partners still aren't sure that reselling Microsoft's hosted CRM product is a good ideA. What made you sure, even early on before it was released, that that was something you wanted to do?
A. I actually come from a background that is really kind of designed around the whole hosted model. I've always been a very big firm believer of the ASP [application service provider] model, and was surprised that some of the pioneers that made a shot at hosting applications failed miserably. But I knew eventually somebody would get it right. I think Salesforce.com is a good example of [the right approach now. Other] companies originally were trying to do an entire hosted model, and would host everything for any application -- it was too early and a little bit ahead of its time. Whereas Salesforce has shown that, at least right now, people are willing to buy into specific applications. I do believe that over time, the whole hosted offering -- the Software as a Service or Microsoft Software plus Services -- is, really, long-term where a good share of the world will go, especially on the small business side.

So, already from a foundation level, I've always thought that the ASP model and the hosted model are all very valid and [will be accepted in] time. But when I looked at doing CRM Live, there were a couple of key reasons why we went down that path and why we've invested in the path, one obviously being: I'm comfortable with the concept. Second, it's a part of the market that we haven't been able to profitably service prior to this. It's the small five-to-10-seat implementations. For what we do, our organization is not really built in order to be able to service that type of customer and their needs at a price point where we can afford to do it and the customer can afford to pay for it.

"I do believe that over time, the whole hosted offering— the Software as a Service or Microsoft Software plus Services—— is, really, long-term where a good share of the world will go, especially on the small business side."
Mitchell Cannady, President and CEO, Spinnaker Network Solutions Inc.

Q. What did you do to prepare your company to sell Microsoft Dynamics CRM Online?
A. Originally, one of the goals was for the potential new customer base that we could go after, but that's also why I realized I had to set up a completely separate division at the organization to be able to do it, almost a separate company. [That new division] needed to be able to tie into the resources and the knowledge we have of CRM. But if I were to put my existing project managers or salespeople on those types of deals, they would just try to overcomplicate it and go through the whole assessment. In our company, we have what we call the envisioning phase, which is design and planning. Our implementation methodology is very detail-oriented. In order to do that, you can't do it cheaply. So we ended up hiring additional people that were specifically for the online group but were not from Spinnaker originally.

[Another reason] that it made sense to set up a separate division is that it created an incubator of prospects that we couldn't touch before, but it also created an incubator for employees that I knew I would need as the company grows. I can hire more junior-level staff members, and as they grow and mature in CRM, I can then move them from what we used to call the online group to the enterprise group. It was a good training ground for both our sales people and our engineers. That was the original intention, and the reason that we went forward when we first heard that Microsoft was coming out with, at that time, the [Dynamics CRM] Live product, which they've renamed to [Dynamics CRM] Online. That's the main reason that we went down that path. The intention was that we would have inside sales reps that would basically be dialing for dollars and then we would have "configurators," rather than engineers and developers, be the services end that would actually customize or really configure the application.

Q. So that was the original intention.
How did you go about setting that up?
How large an organization did you build for the launch?

A. Initially, very, very small -- a total of three people. We figured it was going to take time for the momentum of online to go. And the good thing is that those people are easier to hire than the more developed people that we currently employ, so we haven't actually hired any more than that.

Q. What type of business impact did you expect from offering online CRM?
A. Initially, I thought it would be very minor, obviously, with the number of employees that we hired, and that the type of customers would be small, five-to-10-seat opportunities. We created a quick-start program, where for $4,999, we'll get a company up and running with specifically the number of databases we'll import and how much configuration we'll do. When a customer is ready to get started, we can get them up and running in a matter of days. The intent there was going to be for the smaller organizations that were five-to-10 seats and really new to the CRM market space.

Q. And you were thinking about maybe a certain percentage of your pipeline coming through that?
A. Yes. Initially, I figured maybe 10 percent of our opportunities. We figured that there would be a lot more individual opportunities, but as far as the dollar volume of the pipeline, we figured it may start somewhere around 5 percent or 10 percent. But I envision that, in five years, it would be closer to 80 percent or 90 percent.

Q. What was the time frame that you were thinking that way? Was it right up to the launch this past spring? And when was it really available to you to start selling?
A. We were involved in the beta program, so we had two customers that were on the beta release of the online application. So we already had some momentum with that, but until the product really came out in April, there wasn't really much we could do. So we spent a lot of time training and getting people up to speed.

Q. And since you started, what's happened? How have things changed?
A. I would say that the momentum has increased dramatically. We've gotten a total of, I would say, nine to 10 new opportunities just in the last week. And that's increasing. That had not been the case. We actually had a little bit of a slower start than what we thought it would be. But I think as more and more people have become aware of the fact that Online is a product out there, the lead flow is increasing.

With that being said, it's not just the five-to-10 seat deals that are potentially now interested in CRM Online. That's the part where, for us, it's a good thing it's still early on and we're able to adjust. But 60 percent of my entire pipeline has an interest in online. Now, I don't know if that's going to come to fruition, or people are interested in it, and it may not be right for them. But I did not expect the larger opportunities in the pipeline to be as interested in looking at CRM Online also as an option.

Q. How big does that go? What are some of the largest opportunities that are looking at it pretty hard?
A. We've got opportunities that range from the five-seat deals all the way up to 200 seats. Now, whether or not those 200 seats work out to be an online deal, I don't know yet. I think a lot of it will have to do with the complexity of the implementation. My point here is, they're still looking at online, still willing to go through the more detailed implementation methodology, because they know they need to do the services behind it. But it's interesting to me that they see CRM Online as a true option for what they're trying to do.

We had figured that there was going to be some level of overlap between our enterprise group and our online group. For example, if a deal was 10 or 15 or 20 seats on the online side, and the sales rep realized that this customer is going to have a much more complex need and is going to need to have a much more detailed process on the implementation side, they would have to pass it up to the enterprise group. We knew that we were going to have to figure out a way to incentivize [the online group sales reps] and to make them comfortable about making that transition -- basically taking the lead away.

But I didn't realize how much and how fast that was going to actually manifest itself. So that is the one thing that I'm definitely behind the timeline on-figuring out how to incentivize those two groups. That's probably my biggest issue right now.

Q. You were talking about how maybe the structure that you set up isn't going to work. How are you going to change it?
A. It kind of goes off that [question]: How do I incentivize people to go back and forth? Because originally I had it as online versus on-premise, and we had the mindset that all the small business was going to be on the online side and all the mid-level, midsize to enterprise-level was going to

be on the on-premise side. But that line doesn't work based on what we're talking about. Having to deal with how I pass business back and forth has made it a little more difficult because a lot of my enterprise sales reps are trying to sell online deals now. So I think the division that I created needs to change so it's truly not online versus on-premise, but small business versus midmarket and enterprise. I don't have the answer to that yet. That's something that I'm still thinking out loud about. I have an idea that we have to change the mindset that we have about small business to midsize and enterprise [as opposed to] online versus on-premise.

Q . How are all these online CRM customers finding Spinnaker?
A. Most of my leads that I get today as an organization come from our relationships and our partnerships with other organizations. We have relationships with about four infrastructure VARs, four Great Plains VARs, two Navision VARs and one Axapta VAR. That's where the majority of our lead flow comes from, along with our own marketing and advertising. But on the online side, we're getting a lot of leads right now from Microsoft. As more companies get into CRM Online, I doubt that we're going to be getting the flow that we are right now. We're not going to be resting on that being our long-term flow of leads. I think what happens is, you have a lot of companies that are first going to go to the [official Microsoft] CRM Online Web site and that's where they're going to start.

Q. Let's talk about the longer term, when there are more Microsoft partners in this space and fewer leads coming directly from Redmond. How will you reach customers, especially if you're trying to get these five-to-10-seat organizations, which are always a challenge to reach?
A.We won't be able obviously to do the level of marketing that Microsoft itself can do, so we're hoping Microsoft will continue to increase its level of informing the population that CRM Online is an option. That being said, we'll be doing a lot of our own internal marketing and redesigning of our Web sites. We're going to be hiring a lot more inside sales reps that will be pounding the phones, hitting on specific verticals, so that when they call somebody up, they have knowledge of that [prospect's] specific industry. In the next two years, I'll probably have 10 to 15 inside sales reps. [Now] I have two inside sales reps, and one configurator.

Q. What does a configurator do?
A. A configurator does non-code-level customization, things that you can do with the application today without writing code. Things like adding fields, adding databases, doing minor database imports, being able to do screen configuration -- the basic level of what we do today for customers.

Q. Is this a job role that existed already at Spinnaker for your on-premise business?
A. No. The way in which my organization is built on the enterprise side is that we have project managers, developers, senior engineers, engineers and support staff. Those are the job functions that we have in the midmarket-to-enterprise group.

Q. In the midmarket-to-enterprise group, is it mostly inside sales or field sales?
A. We have one inside sales rep and the rest are field sales. On the midsize and enterprise group, I'm still a big, firm believer that you can't sell over the phone. You need to be face-to-face with these people. The opportunities are much more complex. What they're trying to accomplish has many deeper levels. The reality is that I'm still fighting my own mindset that I still think of online as these small five- or 10-seat deals and that's not the case.

This is an exciting time for us. It's a bit of an unknown. We made some plans ahead of time. They've worked out, but not in the way in which we expected. If companies in the future are thinking about being in the CRM market space and selling Microsoft, it's really not going to be an option not to sell it.

Q. Why do you say that?
A. Not that my last predictions were correct, but I still believe that over time, a good share of our business is going to be online, and more so than our onsite deployments. So if you want to be in this market space, it's going to be very difficult not to do this.

It's a different business, though, so I think the organizations are going to have to be structured departmentally or differently than the way in which they're structured today. For example, there's no way we would be able to make money or would be able to provide a price to a customer that they would be willing to pay for that small five-to-10-seat deal with the infrastructure I have today [in terms] of staff. I think that's why most people are struggling. They're trying to fit the online product into their businesses. That's the wrong methodology. They need to figure out how to build a business around the online product.

Q. On this idea of the configurator: How did you come up with that job description? Did you look at some of Salesforce.com's partners? Was it just sort of obvious to you that that was the way to go?
A. There was a level of it being obvious. When we put together our quick-start program, we looked at what would need to be done for a five-to-10-seat customer that doesn't have anything right now and is trying to get something up and running quickly. They probably need to customize X number of fields, X number of entities. They probably would have two to three Excel databases that they would need to import or some other contact database that they would need to import. Once we put all that together, that's where it really started. So now we have the quick-start program [and the people] we would have to have inside our organization that would be able to physically do that service, and that's how the job description came about.

Q. Is that working out, with the two salespeople and the configurator?
A. Yes. I think that percentage or that number is going to change based on what the workload becomes. Right now, it's fine. We actually need more sales than what we have at this moment, but we weren't expecting to come flying out of the gate. But the lead flow has definitely increased enough to where I think it's not going to be an issue. We'll continue to hire sales reps and once that configurator is swamped with [work], that's when we'll hire the next one. I don't have any predesigned [formula, saying, for instance, that] we're going to have four sales reps to every configurator. That will come with experience and time.

Q.What's the sales cycle been like on the small business side?
A. That's the issue, because we thought [the online group] would be working all the [online] deals, but they're not. Ask me this question six months from now and I'll have a much more detailed answer for you, but right now, we're experiencing a lot faster sales cycle. It's somewhere between 15 and 30 days. Our normal sales cycle is anywhere from six weeks to six months on the larger deals. As far as how long it takes a company to get up and running: It's anywhere from a number of hours to -- if they have a number of database imports that we're going to need to do -- a matter of days.

Q. Does the configurator need to go onsite for that stuff?
A. Not at all. The online group was never intended to leave my office.

Q. In the past, were you losing any business to Salesforce.com? Is this changing that at all?
A. By all means. You originally asked the question about why we did this. The five-to-10-seat deals we couldn't do profitably, so we would have to pass on them. Which means, where would they go? They would either go to an ACT! database or, most likely, they were going to Salesforce. If that company grew and went from being a five- or 10-seat deal to being a 20- or 30-seat deal, making it something we could work profitably with, we would have had to go and convert them off of a Salesforce.com database. Now with CRM Online, there's that continuous incubation. If that organization goes on CRM Online now, grows as an organization, and -- in this case, my mind is a little bit foggy -- if they choose down the road to go on-premise, it's a much easier transition, and they're already in our customer base without [us] having to relearn the customer. The reason my mind is a little cloudy is that I'm not so sure a lot of them are going to need to go on-premise. It will be interesting to see how that works out.

Q. How about the economics? How is it profitable for you to do Dynamics CRM Online stuff?
A. My cost of doing business has dropped considerably because I've got a lot more junior-level employees. On the customer side, the way that we can make the quick-start program work is by making it specific. A certain number of databases, a certain number of added fields, the time spent on it -- that has to really be narrowed down to specifics. Then everything else after that is a la carte. So if they have two additional databases that they need to have imported, that's above and beyond the quick-start program. That's actually starting to be a very profitable portion of the business, and it's amazing how that conversation is so much more fluid with a customer. I would have expected that there would be a lot more kickback when something was outside of the quick-start program that we put together. But if anything, it's easier to sell those other add-on a la carte things because they know specifically why they're spending the money. It's an easier sale.

On that note, it's still too early to say that [CRM Online is] grossly profitable, but it's working out that way. But, again, it's a reason why companies that are going to do it have to hire different people. I couldn't make money on it if I had my midmarket-to-enterprise group doing it.

Q. How do you see it going as far as revenues over the next few years, to the extent that you can? And on the profit side, how do you think that mix is going to work out?
A. I would expect a 20 percent to 25 percent profit on that side of the equation, most of it actually coming from services, from doing the implementations [additions on the quick-start and on the quick-start program itself]. Again, it's going to be a volume play. I think there's a lot wider prospect and customer base to choose from, and so I think we'll have a lot more opportunities, and that's why I think we're going to need a lot more sales reps to do it. As far as physical dollar amounts, I don't even know where to guess at that yet.

Q. What's the profit margin on the traditional side of the business?
A. Right now, we do about a 30 percent margin, software and services. That's if you combine the two together. On the Microsoft side, we're only making 25 percent on the software side.

Q. What's Microsoft paying on the online side?
A. For their first year, on the online side, they're paying 15 percent. Then it goes to 10 percent. Then there's an annuity stream so that if the customer renews their contract the following year, it stays at 10 percent. So long term, one of the parts of the business that we're discussing right now is how to make sure that we maintain the business partner of record for those accounts, so almost having an additional employee when we have a customer base to support it in almost a customer-support role. This is just making sure the customer is happy -- when it gets to be a couple of months before their renewal comes due, getting in touch with them and making sure they're happy and that when they renew that they put Spinnaker down as their business partner of record. We haven't done anything on that, but that is one of the things that we're contemplating right now.

Q. Is there any kind of training component in terms of additional services for you?
A. We do training on CRM as it is right now. A lot of the training we do today is classroom and face-to-face training, whereas on the online side, it's going to be a lot of online training. I know Microsoft is going to be providing a lot of that training for the basics, so I haven't built anything for the online group yet for training. But it's definitely something that we've got on the list of to-dos to figure out.

Q. Are there major concerns you have to overcome to make these sales, or it early enough that customers are excited and coming to you?
A. It's still relatively new. The customers that we have on the beta program and the most recent customers that we've created on the online product have been really good. One of the reference-able customers that Microsoft uses today started with us on the beta program. I would expect that, based on the complexity of the small business side, it shouldn't be too hard to drive high levels of customer satisfaction.

Q. Have you been able to do any upselling or cross-selling other than the possibility of taking customers on-premise down the road if it works out that way?
A. There's not a lot of [upselling or cross-selling opportunities] out there today because of what you can do online. We sell a lot of add-on products to our on-premise implementations and deployments. There are already some of those that are out there on the online side. For example, Scribe [Software Corp.], who we do a lot of work with today, has an offering for online. As companies start building additional products out there, I will say that there will be more of those opportunities that will show up. Right now, there's not.

Q. Do you see anything that Microsoft needs to fix in the next version of the online product?
A. Nothing, at this point, sticks out. Right now, we can't write code on the servers, which is something down the road that I would hope that they would be able to figure out how to help us do. I understand [not doing that in the first version]. But down the road, that's going to really separate the ability of doing truly complex deals versus what we can do today.

Q. As far as Microsoft's partnering and business model, is that working out?
A. Very much so. I'm very happy with them. They've been really good to us. We've worked with a lot of other vendors in the CRM market space and by far, Microsoft has the best partner support.

Q. Are you competing with anybody locally who offers CRM Online?
A. Not yet, either on-premise or on the online side. Right now, our No. 1 competitor is indecision. That's tied to the economy. Outside of that, our No. 1 competitor is Salesforce.com, without a doubt. But very rarely is it another CRM partner that we're competing against. Every now and then, but I'd say maybe only in 5 percent of our deals.

Q. How often do you come up against Salesforce.com?
A. I would say 90 percent of the time. Salesforce is almost in every deal. Kudos to them. They do a great job on marketing and that side of it. Now we win a much higher percentage of those deals because I think that the whole Microsoft [package], their power of the stack, with the application being as strong as it is now and their ability to integrate into Office and to SharePoint -- it really becomes almost a no-brainer for customers where they're making longer-term investments.

Q. Any advice to other partners considering partnering with Microsoft to resell their on-demand products?
A. They have to look at it through different eyes. They need to set up a different business in order to do it. Don't try and fit the online application into your business. Fit a business around the application because the way in which it's sold and the way in which it's implemented has to be different. And those are lessons that can be learned from Salesforce.com.

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