What’s Missing – the Value Added Reseller

As an open-source company, Compiere was predisposed to work with the community including value added resellers that could profit from configuring ERP to customer needs. Consona, on the other hand, has a “services” menu on it’s web-page menu instead of a “partner” menu.

Compiere - VAR Friendly

Consona - Services not Partners

It will be interesting to see how the transition from a community of partners to a single partner unfolds. The press release did not mention how existing partners would fit into the Consona plan.

VARs do not work for Free

Today’s vendors are scrambling to enroll value added resellers. The fact that Compiere was not able to obtain a large number of paying customers may have had to do with its partner channel. While many customers were willing to download the solution (company boasts millions of downloads), few (130 customers) actually pay for it.

For VARs who receive income by receiving discounts on vendor software, Compiere offered little incentive. If VARs are operating on thin margins, they will certainly not expend the time and effort to adopt and sell a product which can be downloaded for free.

With complex software such as ERP, VARs provide business process expertise as well as accounting and industry specific expertise. Without VARs, many small and medium sized business customers probably struggled to implement the software to match their business processes. Mid-sized and larger customers that could afford consultants were probably aligned with VARs that offered other solutions.

Other Links

Certainly VARs were not the only factor in the lack of Compiere customers. Other authors have already written on the topic – including providing a good history, perspective, and other theories.

• ERP Graveyard Blog by Ned Lilly – good description of the history and theory on where things went wrong.
• The Enterprise System Speculator by Frank Scavo discusses the history, points out some counting issues, and provides opinions on what went wrong.

In Bob Scott’s Insights, we found the following blurb about Epicor:

CEO George Klaus has finally owned up to the fact that has company has a channel program, following Epicor’s Five-Star award by Epicor’s Partners for Growth Program. Now, this is very strange since Klaus has spent much of his time during Webcasts telling investors and Wall Street that the company is totally direct sales. Now, Klaus said he’s proud of the channel program.

Several publications, such as this one from ChannelWeb, have discussed the NetSuite 100% channel offer:

NetSuite’s retort comes on the heels of the company’s effort to expand its channel partner ranks by offering resellers 100 percent margins on first-year subscription revenue.

Microsoft gave it’s channel incentives to sell against NetSuite as reported in the Channel Register:

Microsoft said it was tapping its 10,000 US reseller partners to punt its Dynamics range of software through the channel.

And several other companies such as Lawson, Acumatica, Sage, and others have announced the addition of several new VARs around the world.

So all vendors seem to agree that VARs will continue to play an important role in driving ERP sales and deployments. What all vendors do not agree on is whether or not they should be 100% VAR focused or the role of VARs in supporting customers.

The results are interesting, but not surprising:

• Businesses are still clinging to top vendors (SAP, Oracle, Microsoft Dynamics)
• 30% of top vendor implementations last longer than expected (13.2 months on average)
• 53% of top vendor implementations are over budget
• most customers, 75%, are “fairly satisfied” or better with their vendor while only 23% are “fairly unsatisfied” or worse
• 69.8% of customers do not realize 50% of the benefits they are expecting from their implementation

Cloud ERP News Analysis

Top tier vendors should give their sales, service, and public relations people a very large bonus. We say this because most businesses (70%) do not get the results that they want to realize, yet say they are fairly satisfied (75%) with thier vendor. This includes both the timeframe for delivery as well as the features that are delivered.

The VAR Steps In

Maybe ERP customers are satified because the value added resellers (VARs) that deliver these solutions are able to develop a good personal relationship and fix problems as they arise. If the solution is not delivered on time, the VAR is there to pick up the pieces and explain that this is typical of all systems. Thus the customer becomes “fairly satisfied” (54%) instead of satisfied or very satisfied (21%).

A Real Alternative?

Until recently VARs have not had an alternative for distributing a solution other than the ones offered by the top vendors. VARs that want to distribute a web-based or SaaS solution have had to deal with direct competition from vendors, unfamiliar business models, and less-flexible platforms which minize the amount of customization they can provide.

Recent launches of web-based and SaaS software solutions which are tailored to VARs will improve delivery times and have the potential to improve customer satisfaction. These products give VARs the ability to offer clients an alternative to the client-server solutions which are responsible for not delivering on all customer expectations.

The 2011 Report

Once VARs have a viable alternative based on modern architectures, they will be able to speed delivery times and provide flexible solutions which will meet customer expectations. This in turn will raise customer expectations while driving higher satisfaction. The impact will not be immediate (implementations take 13 months), but improvements are on the way.

Channel Move or Publicity Stunt?

The program attempts to reward VARs (strapped for cash) in the short term, while helping NetSuite (channel problems) in the future. The question to consider is how much is the reward compared with giving up future revenue.

Customer example

Let’s assume that a customer has budgeted $100,000 to spend over 7 years for an ERP system. This money can be spent on license fees, maintenance, hardware, and ongoing customizations. The table below shows a typical schedule of payments.

SaaS versus traditional payment schedule

The net present value (NPV at 2% discount rate) of these payments favors SaaS by $3,500, but we will ignore that for now.

Focused Spending

With the traditional model, the spending is upfront and is focused on hardware, software, migration, training, customization, and integration. This is critical to mid-size businesses which require these services to match existing infrastructure and business process requirements. Many times this cost can be 3-4 times the cost of the license.

With SaaS, the majority of the $100k is spent in later years with a focus on eliminating the cost of maintaining software and paying IT personnel. Customization, implementation, and training may only be 1 time the cost of an annual payment. This model is best suited for companies which can utilize off the shelf solutions that require little integration with existing systems.

VAR Payment Schedule

Assuming that VARs earn a 30% margin on training, implementation, and integration tasks, the payment schedule for VARs under the various plans is listed below.

VAR payment for SaaS and traditional licenses

So VARs earn about the same amount of money across the different plans over a 7-year period when the customer pays $100,000.

Our Take

NetSuite is beginning to focus on the VAR channel to help get higher end customers. This is good for the VAR industry. However, the 100% year one commission program awards smaller VARs that sign up customers without adding a significant amount of value. NetSuite will end up with many low end VARs that have little incentive to maintain a relationship with their clients. More importantly, VAR programs suffer when the vendor’s main strategy is direct sales.

We doubt that this program will tempt VARs that are currently aligned with a channel focused vendor and drive value from customization and integration work.

Don’t get stuck in the past

We agree with Nelson that cloud computing is the future of ERP (disclosure: ERP Cloud News is the URL of this blog). There are many mid-sized business customers without IT expertise that need to access an ERP solution from different offices and geographies. These customers will be well served by a cloud solution.

Don’t bet too heavily on the future

The Sage reseller also makes many valid points. First, a company with only 20% channel sales does not have a great channel program. This is because NetSuite aims to replace the training and support services that VARs provide with it’s own. In addition he makes the point that many SaaS solutions do not offer the customization capabilities which are critical to the VAR business model.

Just like there are customers that will benefit from SaaS, there are customers who will benefit from a highly-customized on-premise solution.

Focus on the “Value Add” in VAR

As the Sage reseller pointed out, “VARs must add their own special sauce to the mix”. If this special sauce is a add-on module, then find a cloud solution that allows you to use your existing development skills to port your application to the cloud. If the special sauce is customizing the application, then find a cloud solution which supports robust customizations. If your special sauce is customer support and training, then find a cloud solution with a business model that provides customer ownership.

Most importantly, realize that your customers may want to switch to SaaS and back to on-premise depending on their changing business needs. A VAR which understands how to help customers through this transition will be the most valuable of all.

Most [SaaS companies] are going it alone rather than investing in traditional channel activities. However, it seems to me that if they are to safeguard their future, then capturing the hearts and minds of the many thousands of channel VARs is going to be critical.

Many value added resellers (VARs) read our blog, so we wanted to publically thank Dennis for the insight.

Varying VAR roles in different market sizes

• Enterprise customers: Nearly 100% of all enterprise sales are accomplished through VARs or with the help of a VAR. Software complexities, legal requirements, unique process flows, tax requirements, and much more require expertise.
• Upper-mid market and mid-market customers: VARs are particularly important for clients who need customized workflows, customized reports, and integration with other systems. VARs with a detailed knowledge of accounting and business processes can provide ERP setup and configuration advice which saves clients a lot of money down the road.
• Lower-mid market customers: Generic workflows and non-integrated SaaS solutions might work for companies which do not require extensive automation. But, we would caution that even smaller companies need the accounting and reporting advice that VARs provide and that we chronicled in an earlier post describing an implementation.
• Low end markets: Clients with sub-$1,000 budgets for software and implementation will not be able to afford a VAR, even though they may benefit from a VAR’s services.

Direct sales versus channel focused

Vendors select different channel strategies depending on the customers they target. Customers who use QuickBooks can purchase directly from Intuit, while high end customers rely on consulting services and reseller advice when buying an Oracle or SAP solution.

Few vendors are able to create a VAR program which can co-exist with direct sales. Most attempts to do so result in channel conflict and non-strategic channel programs. It will be interesting to see if NetSuite can overcome a statement that is highlighted in their financial reports: “we generate sales directly through our sales team and, to a lesser extent, indirectly through channel partners”.

In our opinion, the partner models proposed by Microsoft, Acumatica, and Sage seems to be more in line with upper tier markets.

An ERP Installation Example

Earlier this week, I participated as an observer during an ERP installation. The conversation between the value added reseller (VAR) and the customer was very typical. The discussion included topics such as why a 13th accounting period is important, the benefits of implementing accounts receivable versus manually using the general ledger, how and when to setup sub-account codes, how taxes need to be implemented, how to customize reports … and on-and-on for a few hours. The VAR also showed the client how to perform these processes using the software.

This installation was very typical, so why am I writing about it? Answer: This was a SaaS ERP implementation on a cloud platform. Note that the conversation didn’t change because the implementation was SaaS, and although the software installation was very different (it was done on Microsoft Azure), the business conversation was identical to an on-premise deployment.

In the case of ERP, the business discussion is much more meaningful and important than the deployment conversation.

More Evidence

Articles from Bob Scott’s Insights cover various aspects of the mid-sized ERP and accounting market. By just reviewing the titles of recent posts, it’s apparent that partner programs are not going away.

• AccountMate signs VARs: “AccountMate doesn’t sign a lot of new resellers and CEO David Dierke says that’s one of the hazards of being a source-code software company. But it enlisted 10 new dealers this year and that’s double the amount for 2008.”
• Intacct Growing Channel Program: “Intacct, which markets Web-based financial software, is beefing up its channel program.”
• SaaS is the Future, But: “Acumatica continues to recruit VARs with the idea that SaaS remains the way of future.”

Why VARs will Continue to be Important

1. VAR Sources of Revenue.
Nelson predicts that most VARs are going to lose a lot of revenue because they will no longer be required to install and maintain systems. The problem with this argument is that VARs get an extremely small percentage of their revenue from managing systems. Most accounting and ERP VARs help businesses build customized workflows, migrate data from legacy systems, build interfaces to existing systems, customize reports, and customize business processes. The cost and need of these services dwarfs the cost of maintaining an operating environment.

2. Subscription Based Billing.
Nelson says that most VARs will have to switch to subscription based billing because that is how cloud-based software is sold. First, most “subscriptions” require a 1 year pre-payment that is equal to over 50% of a traditional license. Second, most businesses will not want to pay a subscription for migration, customization, configuration, and business process services.

New Partnerships

VARs will continue to be relevant in the SaaS world, just as they are in today’s hosted world. Several VARs are working with hosting providers (as well as cloud providers) to outsource server operations. They realize that datacenter operators are experts at buying, powering, and backing-up servers. Partnerships between software vendors and cloud providers have the potential to create a turn-key offering that VARs can offer clients without changing their existing business model.

SaaS provides have declared war on value added resellers (VARs) that specialize in accounting, ERP, and CRM solutions. There is no official declaration, but here are some manifestations of the war:

• Direct selling versus partnerships. Application providers that sell SaaS do not see their VAR programs as strategic. Direct sales usually compete with the VAR channel so hot leads that come in to the vendor/manufacturer are rarely forwarded to the channel for fear of losing margin.  Evidence of this is provided by the legal dispute between Skyytek and NetSuite. In addition, leads that may be uncovered by the VAR may go to the vendor’s website and enter the sales process without the VAR.
• Customizing SaaS Platforms. A key source of revenue for VARs comes from customizing software. But, many SaaS platforms are proprietary and require specialized development skills. Developing these specialized skills can be time consuming and development projects are always at the risk of being replaced by the efforts of the vendor in a new software release which can be instantly rolled out to everybody with a subscription.
• Installing SaaS Platforms. This additional source of revenue for VARs has been eliminated through SaaS. There are opportunities to configure charts of accounts, workflows, reports, and business policies, but the purchase and installation of hardware has been absorbed by the SaaS vendor.
• Business Model. SaaS business models provide less up-front revenue and more revenue over time.  Many times this is not consistent with cash flow patterns of established VARs.

So when clients demand web-based ERP solutions, VARs need options.  Several vendors have responded by developing ‘channel-friendly’ solutions which can be deployed on-premise or hosted, customized according to client needs using familiar technologies, and delivered according to popular VAR distribution models.  Here is one example of a VAR partner program.