Business Case for Microsoft Partners in Canada to offer SaaS to SMBs

Make over 40% margins on the growing SaaS opportunity when combined with service Grow your customer base with new SaaS solutions for SMBs Secure annuity revenue with the benefits SaaS offers to your customers SaaS market growth has started, you need to start now to capture market share

The SaaS opportunity is about converting each user you support into a seat that generates recurring revenue each month. The first set of SaaS solutions to be adopted by the SMB is messaging and collaboration, mobility, CRM and SharePoint. Each seat represents a base Average Revenue Per User (ARPU) of $20/month that can be bundled with your value-added services to increase ARPU and your profit margin.

What is the market opportunity in Canada? Estimated 100,000 new seats per year for the next 3-5 years
Market Statistics SaaS (Software-as-a-Service) market is growing at 40% YoY. The businesses benefiting the most from SaaS are SMBs (Small to Medium-sized Businesses with 5-500 workers) due to their limited resources in supporting the complexity of todays IT systems. The SMB market in Canada represents a unique opportunity to introduce a SaaS offering due to its under-serviced state with SaaS growth at over 200% in 2006. The products meeting the messaging and collaboration needs of SMBs are Microsoft Exchange and SharePoint combined with some form of a CRM tool. Small businesses with 20+ workers have purchased these products through their local IT service provider as the Microsoft Small Business Server (SBS). The cost to install and manage a MS SBS to support 5-19 workers over a 3-year period can range from $40,000 to $80,000. This cost is prohibitive to the Micro SMB (5-19 workers) and as a result they use less than optimal solutions. Market Statistics for Hosted Solutions SMB (5-500) market in Canada represents 450,000 SMBs employing 5.6 million people Micro SMB (5-19 segment) represents 300,000 (66%) of the businesses and 1.8 million (32%) of the people 1 (this market segment is highly under serviced) The US market is estimated at 60 million SMB workers Current worldwide market penetration for Hosted Messaging and Collaboration is 1%
3 2

This 1% is expected to go from 1.2 million to 7 million seats within 3 to 5 years with 42% of this growth to occur in North America this represents 1.7 million new seats in North America with an estimated 400,000 in Canada.

1 2 3

Statistics Canada, Business Register, December 2004 Forecasted market size for Hosted Exchange, February 2007, Osterman Research An Analysis of the Hosted Services Market, February 2007, Osterman Research

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What is the distribution of this market opportunity in Canada?

Forecasted New Seat Distribution in Canada
Province / Territory Newfoundland and Labrador Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia Yukon Territory Northwest Territories Nunavut Canada Total % 1.14% 0.44% 2.28% 1.93% 21.98% 36.71% 3.28% 4.12% 13.25% 14.57% 0.12% 0.12% 0.04% 100% User-Base 400,000 4,549 1,772 9,139 7,735 87,940 146,855 13,131 16,486 53,005 58,275 492 470 152 400,000

Who is the best to distribute and support SaaS to the SMB market? Telcos They will have some success with SMBs that require little support - They do not have a trusted relationship with the SMB Microsoft They have a vanilla offering that will capture SMBs not requiring customization - They cannot offer the level of service the SMB demands Large IT Service Providers They will succeed at the mid-level market with 500+ seats - They cannot afford to sell to the SMB market ISPs They have a unique opportunity to convert POP email to higher value Exchange seats - They have the relationship with the SMB Google They have a product offering that competes with Microsoft Hosted Solutions - They are now entering this space with entry level products Beware! Small to mid-sized Microsoft Partners They have the trusted relationship with the SMB - They understand the SMB and have the mind-set to sell to the SMB market

Why should the small to mid-sized Microsoft Partner sell SaaS? The SaaS trend has started - start now to benefit from an early to market advantage Once you lose a customer to another SaaS provider they are gone SaaS is based on an annuity revenue model, it takes time to adjust to this new revenue stream and if you are late, you may not have time to adapt SaaS has no borders, your competition can come from anywhere
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Why do SMBs want SaaS? Removes the pain, burden and complexity of having servers on-premise SaaS is more reliable, secure, robust and scalable than on-premise servers SaaS is 65% less expensive - leaving room for more value-added services to be sold Standard Microsoft Small Business Server cost of ownership for 3 years based on a 25-user SMB scenario is $110,000 compared to a SaaS offering of $38,000.

What market research do you have for SaaS offerings and other value-added services that the SMB will want? 63% of <100 employee organizations have identified Email/messaging (collaboration) as #1. There are over 1.2 million Hosted Microsoft Exchange seats worldwide and growing. The success of Google Gmail and Enterprise Apps is another example of the SaaS trend. Mobility support, Microsoft SharePoint and CRM are starting to be adopted as the next set of SaaS offerings. The wide adoption of Blackberry and Salesforce.com over the past few years supports this trend.

SMB Go-To-Market Approaches

What additional services do you currently purchase or would you consider purchasing from your current hosting provider?
36% Email/messaging 51% 63% 39% 38% 39% 23% 22% 26% 36% Backup/recovery 25% 26% 20% 40% 60% 80%

SMB Research

Additional hosted applications that Hosted Exchange users expect to add

Over half of Hosted Exchange users intend to add at least one additional application. 30% indicate a desire to add 2 or more hosted applications in the next 18 months.

Standalone sales model not an option for hosted applications

Bundles: position standard

hosting add-ons as value-added packaged options Integration: position existing or partner-provided value-added capabilities with core services to serve horizontal business requirements Converged solutions: smallscale business process outsourcing
Hosted applications: more
1,000+ employees

Mobility Support SFA CRM Accounting/ERP SharePoint 18 45 33 38

53

Network security

IP telephony

0%
<100 employees

100-999 employees

than software-as-a-service if the functionality solves a key business problem

20
Hosting

40

60

Market Segment Size and Customer Analysis US, Edge Strategies, July 2004

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What triggers an SMB to buy SaaS? An upgrade or refresh cycle, Microsoft Exchange 2007 will represent an opportunity to adopt SaaS compared to buying a new server or the need to refresh existing servers. New requirement, Microsoft SharePoint 2007 and Microsoft Dynamics CRM represents a new platform for collaboration, document sharing and customer relationship management. The need to buy more servers, which will make these solutions cost prohibitive to some SMBs. Pain and frustration, SaaS is more reliable, secure, robust and scalable than on-premise servers. Cost, SaaS is 65% less expensive than an on-premise solution.

Microsoft Small Business Server and setting up servers on-site is my business and I make good money doing it. Why would I change? The SaaS model is an evolution and will be adopted over time based on a trigger by your customer. Customers are becoming educated on SaaS and will consider it as an option. If you do not offer SaaS and they demand it, you will lose that customer forever. The majority of Micro SMB (5-19 users, 32% of the SMB market) cannot afford a Microsoft Small Business Server solution and adopt less than optimal solutions SaaS represents an affordable option for this market segment and the opportunity to sell into this underserviced market. Profit margins for SaaS are healthy today. Increased competition in the SaaS market space will drive down margins and SaaS providers will need to continue to add value to remain competitive. Selling SaaS today with value-added services will secure a SaaS customer-base needed to grow your business in the future.

What are my options to sell SaaS? 1. Do it yourself - Base start-up cost is $250,000 $500,000 to sell direct - Best-case timeline to setup platform is 6 12 months - Monthly operating cost is $10,000 to $20,000 - Breakeven occurs between 4,000 and 10,000 seats 2. Partner with a SaaS Platform Provider like ITUtility - Low start-up costs and shortest time to market - Test before you make an investment in building a SaaS business - Start small and grow your SaaS business based on customer demand
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Why should I select ITUtility as my Canadian SaaS Platform Provider? We are based in Canada important for Privacy of Information and US Patriot Act We do not sell direct to SMBs we do not compete with our channel We have extensive technical and business experience with SaaS dating back to 1999 We offer a Business Portal that is fully integrated with Microsoft Exchange and SharePoint to help kick-start your SaaS Business We provide you with the tools you need to be successful with SaaS Sales and marketing material and support Tools to setup and service your SMB customers Value-added services to help grow your SaaS business

How does ITUtility offer SaaS to Microsoft Partners?

ITUtility offers Microsoft Partners the ability to resell a SaaS offering through its SaaS Partner Programs: 1) Sales Agent Program: Sells our services as a flow through to Micro SMBs. The Sales Agent earns monthly recurring revenue in the form of commissions and can generate additional revenue from support services. 2) Value-Added Reseller Program: Sells ITUtility hosted offerings bundled with their value-added services to provide SMBs with business solutions. The Value-Added Reseller earns monthly recurring revenue combined with the revenue from their value-added services. Our low cost solution enables VARs to target the underserviced Micro SMB market at a competitive price and still earn a healthy profit. The ITUtility Sales Programs differentiated by branding, pricing and billing: Key Components Sales Agents Value-Added Resellers Branding Our brand Your brand Pricing ITUtility sets list price VAR sets price Billing We or you bill your customers You bill your customers

Who is involved in the SaaS model and how is the revenue shared? The SaaS revenue model is about Average Revenue Per User (ARPU) each month. Each user represents an ARPU value. This ARPU value represents the base fee for Hosted Solutions. Partners add value to these base offerings to increase ARPU, which is shared between the 4 parties needed to deliver SaaS. SaaS Partners include the following 4 parties: 1. SaaS Service Provider: Provides SaaS sales and support services and bundled offerings that include their services and other services from 3rd party SaaS providers. SaaS Service Providers can be Microsoft Partners and other IT providers that own and support SMBs. These providers earn revenue from the SaaS offering and their value-added services.

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2. SaaS ISV Provider: Develops SaaS solutions that are distributed by SaaS Service Providers. The SaaS ISV helps increase ARPU by developing software solutions that are sold as a monthly subscription service. ISVs are starting to offer versions of their products as a SaaS offering. These providers earn revenue based on the demand for their SaaS software solution. 3. SaaS Technology Provider: Provider of the base SaaS software (multi-tenant hosting) and supporting infrastructure to create the SaaS Platform. Vendors capable of providing this technology are Microsoft and other larger technology companies such as Google. 4. SaaS Platform Provider: Builds a platform using the technology from the SaaS Technology Providers and adds services to the platform that are needed to deliver SaaS as a direct offering and/or indirect offering (white label). The platform is an environment that integrates base software offerings (like Microsoft Exchange and SharePoint) with vertical solutions developed by ISVs to create the ecosystem to accelerate SaaS sales growth and retain SaaS customers. The adoption of SaaS and retaining SaaS SMB customers is based on three key strategies being executed: 1. The delivery of quality services and support at a price point affordable to the SMB by trusted parties that offer value-added services (SaaS Service provider: Example - Microsoft Partner) 2. The integration of vertical applications with a diverse base of general purpose software (Vertical Software Developer: ISVs / SaaS Technology Provider: Example - Microsoft) 3. A robust and scalable SaaS Platform and delivery channel that includes the backend services to deliver SaaS as a reliable and integrated offering by connecting Microsoft Partners to a SaaS Platform (SaaS Platform Provider: Example - ITUtility.NET)

How to make over 40% margins on the growing SaaS opportunity when combined with services? One support personnel can generate $240,000 of annual revenue by supporting 500 SaaS users
The complexity of the backend services to support the Hosted Solution environment is managed by ITUtility. This removes the high cost of skilled technical personnel. The tools offered by ITUtility to manage the Hosted Solutions enable an entry-level to intermediate-level support personnel to manage the solution remotely. One support personnel can now manage 500 users and generate $240,000 of revenue per year by bundling the ITUtility Hosted Solutions with end-user support, which includes: SaaS setup and configuration SaaS administration and support Business Portal customization and support End-user training
*These services can be delivered by the SaaS Service Provider or by another provider on the platform.

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Revenue and Margin Calculation Total Revenue per User: $480 per year
Revenue from SaaS Product Sales per User: $240 Revenue from SaaS Service Sales per User: $240 ($20/month for each user with a support contract) - $20/month per year for each user (annualized, service peaks during setup and configuration stage) - Estimated support required for each user per year is 3 hours - This fee represents a fully managed service (Customer pays one fixed price for service per user) - Ad-hoc services such as consultation, customization and development services are extra

Total Cost for a Support Personnel: $55,000 per year

Intermediate Technical Analyst II: $55,000 per year - $40,000 Salary (salary.monster.ca) - $15,000 for fully loaded costs and related expenses Available work days per year: 235 per personnel Working hours per day: 8-9 Estimated working hours per year: 2,000 per personnel Account Management: 500 hours Technical Support and Administration: 1,500 hours (500 users @ 3 hours per user)

Revenue = $240,000 per year (SaaS Product to SaaS Service ratio 1:1)
SaaS Product ($240/user): $120,000 per year (Equivalent to $20/user/month) Support Service ($240/user): $120,000 per year (Equivalent to $20/user/month)

Costs = $139,000 per years (Cost of Sales Personnel are not included)
SaaS Product Subscription Fees for 500 Users ($168/user = $14.00 /user x 12 months): $84,000 per year Support Personnel and Administrative Costs for 500 Users ($110/user = $9.17/ user x 12 months): $55,000 per year
4

Profit Margin = 42% Profit = $101,000 (breakeven at 229 users to cover costs of support personnel)

Reseller price for the PortalDesk Business Online bundle (SKU26) has been used in this example, refer to www.PortalDesk.NET for details.

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