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.

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.

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.