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.

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.