Leading SaaS vendor Salesforce has partnered with its on-premise rival, Sage, to boost customer acquisitions and allow the UK-based firm to develop a brand new product on the salesforce platform. ComputerworldUK looks at what brought strange bedfellows, CEOs Marc Benioff and Stephen Kelly together.  

Stephen Kelly, former UK government COO, today announced a new cloud product, Sage Life, which is “socially-powered, with a mobile control centre” for social business and real-time accounting for small and medium businesses. The product is built entirely on the Salesforce1 platform, which could explain why a team of financial advisers were called into Salesforce towers last week.

He also announced a "complimentary" portal called Sage Impact that integrates with the existing Sage tools that accountants and bookkeepers currently use to run their businesses. Accountants can receive personalised news alerts and updates from social networks as well as the information they need on-the-go in one hub online.

The partnership announced this morning may dissapoint those excited by the rumours Salesforce was up for sale. But it does signal an interesting trend. Pureplay SaaS vendors are looking at how on-premise rivals can help them boost profitability, while traditional software vendors are looking at ways to offer customer a worthy cloud product.

Who's buying whom?

It would appear that no-one is being bought outright, yet. Microsoft and SAP were named (and subsequently denied their involvement) as potential suitors for the hugely successful CRM tool-turned platform. NetSuite, which offers similar cloud-based enterprise tools, refused to confirm or deny any dealings with the Salesforce.

Gossip surrounding the sale of the SaaS vendor have always been in the zeitgeist thanks to its increasing pressure to return profits to investors.

This is because customer acquisition costs Salesforce more than traditional on-premise vendors like SAP who have a perpetual license fee providing cash. Salesforce relies on investor’s cash, and investors can demand a higher growth rate year-on-year.

“SaaS companies make losses and have problems with profitability, almost without exception”, says Anthony Miller, analyst at TechMarketView.

“The underlying problem is that delivering SaaS is inherently less profitable than delivering software-as-a-product.”

Vendors like Salesforce are responsible for developing, hosting and providing a high service level for its software, unlike traditional software vendors who simply send off the download link or CD.

Miller adds: “That may be all well and good if they charged a premium, but it is quite the contrary. The whole way SaaS markets itself is at a lesser cost to their client.”

Comparing SaaS’ business model to airline sales, Miller points out that rather than paying a premium for flexibility as airline passengeres do, the opposite is the case with SaaS customers. "SaaS vendors have turned it on its head and said 'have as little or as much as you want and it is going to be cheaper than you have had before'."

When you consider that attracting investment costs SaaS vendors like Salesforce “roughly half of their revenue,” according to Miller, it is easy to see why their growth may appear unsustainable. 

So how will this partnership benefit both vendors?

The partnership with Sage could bring existing customer lock-in from its small and medium customer base, boosting Salesforce's cash. 

Further, this meeting of minds could be the “dramatic action” needed to boost Sage’s growth, said Peter Roe, another TechMarketView analyst, citing its “so far disappointing and tardy performance in cloud/SaaS where able and more customer-friendly competitors are making inroads,” for its hum drum financial results.  

This partnership saves time and investment into a technology that Sage is unlikely to have a market lead in.

How will it affect customers?

The pressure to return profits to shareholders will see customers forced into spending more with the Salesforce with higher prices and less innovative products, Forrester analysts warned recently. This may filter through to Sage customers who use Sage Life due to its backend. However, for those concerned, Miller believes the market is competitive enough at least to keep costs relatively low for enterprise users.

It is important to remember that turning SaaS on and off may not be not as simple as it was billed. Price commitments, contracts and minimum user numbers will affect how deeply embedded a product will be within a company; plus integration and migration will be difficult as the product is hosted by another party.

“They [SaaS vendors] are already trying to put the financial terms around it to make it more difficult for customers to bail out but they would have trouble with doubling prices, for example,” Miller noted

The voracious machine that is SaaS

While this partnership could signal a good deal for all involved, SaaS vendors are still left with as the hamster wheel, chasing growth to secure investment. More partnerships are likely to be announced, Miller forecasts.

“This machine has got a voracious appetite to grow the business abnormally fast” he says.

The announcement itself may not come as a shock. In February, Sage revealed that its global employees would use its salesforce’s Customer Success Platform to improve its internal system architecture and data management in February this year.

Former government COO, and recent CEO of Sage said of the announcement: “Together with Salesforce, Sage is shaping the future of small business...Now running a small business can be as easy as updating your Facebook status."