The enterprise applications market continues to quake, thereby significantly reducing the number of independent software vendors (ISVs). Those who survive (and often thrive) have been devising strategies to penetrate new and uncharted markets, whether they are geographically remote, or within an esoteric industry, or both. For many reasons, these vendors tend to look for the help of a value-added reseller (VAR) or distributing channel partner for geographical penetration. They may also seek help from other (often smaller) ISV partners to fill functional and technological product gaps. However, some recent announcements accentuate the fact that distinguishing between a VAR and an ISV might not be as straightforward as it used to be.
Part One of the series The Cha(lle)nging World of Value-added Resellers.
A decade or so ago, when the enterprise resource planning (ERP) market was doubling in size year over year, most vendors had to turn to implementation channel partners in one form or another, whether they were called resellers, distributors, system integrators (SI), or consulting partners. If one also considers the rush to beat the Y2K deadline, it becomes clear why the major concern of these partner firms was their technical competence. Indeed, few of them were business- or industry-oriented, neither by nature nor training. At the time, such resellers would obtain an abundance of leads through referrals (from the vendor or otherwise), and would then service these installations for a long time, which meant a comfortable, recurring revenue stream.
The market dynamics and requirements of today have changed dramatically. Now, it is all about understanding business, and not merely technology, all within an atmosphere of cutthroat competition. Previously, firms did not have the pressure to uncover new leads that the VARs of Microsoft, Sage Software, SAP, Oracle, IBM, Infor, Exact Software, Epicor Software, SYSPRO, Salesforce.com, Intuit, NetSuite, and so on increasingly face now. The need for faster deployment speed, improved systems quality, better cost control and resource utilization, and more flexibility to change requirements on short notice have also become critical in today's business environment.
Certainly, partners are needed to provide the link between the master vendor and an expanding (or not yet penetrated) market, such as the small and medium business (SMB) market in some still growing regions. However, the real task is to develop and expand relationships with the right type and number of partners, so that the master vendor can also grow its presence in the target market. Indeed, many vendors have recently come to the realization that their customary obsession with mere VAR quantity might actually weaken the effectiveness of a good partner program. Increasingly, the quality of such a program is about covering the market potential effectively, by focusing on targeted, carefully picked partners who can deliver ever-higher value in the markets the vendor needs to address, while keeping all parties focused on customer needs and satisfaction.
But the magic formula for a mutually beneficial arrangement for the vendor and its partners has traditionally been complicated, if not completely elusive. After all, the goals of both parties are basically the same: to prosper, to obtain prospects of continual gain of new business, to satisfy and more than satisfy customers (future references) and so on. The difficulty is in the execution, especially for the partner: typically a smaller firm, it has to balance its viability (after all, it has to invest in starting up the business, in training and maintaining a number of consultants and sales employees for a particular product, etc.) with exclusive loyalty to a particular vendor, which in turn cannot possibly guarantee enough business to every partner.
While master vendors prefer an exclusive relationship (some even impose this exclusivity), at the end of the day the vendor cannot take care of the cash flow and liquidity of each partner. Having said this, losing a VAR due to bankruptcy or defection means disruption to business, as well as customer dissatisfaction: every change is painful. If a VAR's business slips away, it must and likely will be replaced, either by the vendor's own professional services, or by another VAR hungry for new business. On the other hand, to stand a chance of higher business volume, many VARs have to partner with multiple master vendors, which often results in becoming "a jack of all trades and master of none."
When choosing a VAR partner, some vendors thus impose stringent requirements, mainly regarding the prospective partner's competence, size, and business model concept. Partners, on the other hand, typically place importance on values such as the vendor's track record of partner satisfaction, brand preference, and the vendor's backing and loyalty. After a partnership is signed, training and support is supplied by the vendor in the start-up phase. But after a certain number of customer systems installations have been performed, the partner is traditionally deemed to be self-sufficient, and from this phase on, the vendor helps mostly with marketing support. In other words, the VARs still have to be able to close deals themselves and maintain a viable business model, which increasingly means expressing the message that they are specialists in one or more defendable niches.
Moreover, not only is there a likelihood of internal competition for business (because of crowding in some region or vertical segment), but also many VARs have realized lately that living from just the markup on the vendor's software license fees will not suffice in the long run. There is rapidly constricting opportunity for "pure installers," who can perhaps make the technology pieces fit together (installation, data import, occasional table customization, user training, and so on), but who are not necessarily able to think strategically on the customer's behalf through all the implications, or to pinpoint tactical complications that might arise when these pieces get joined together.
Certainly, some partners can provide valuable industry-specific expertise (if their seasoned staff members happen to come from a certain industry), or provide strategic counseling about how systems might enhance operational performance and business objectives (so as to be able to charge for business consulting, which is more lucrative than pure software peddling and installation). However, there is increasingly the notion of the VAR need for intellectual property (IP) packaged as software, which can be applied repeatedly elsewhere ("develop once, deploy many times"). The big market push of late is to serve vertical markets which want software to fit the special needs of their business. Even with a high degree of technical knowledge, most VARs nowadays need a degree of business skill that differentiates them from generalists.
The added value inncreasingly required from partners is not only that they be able to sell in the markets in which they currently have presence, but also that they spark the creation of vertical solutions and add-ons to the master vendor's horizontal solution to the rigorous needs of a refined group of customers anywhere in the world. For example, on a global basis, SAP's PartnerEdge channel partners have reportedly created more than 550 qualified mySAP All-in-One partner solutions for microverticals (in other words, sub-segments of a defined vertical industry) based on the flagship mySAP ERP application targeting the lower mid-market, and over 250 add-ons for the SAP Business One product for SMBs. In December 2005, SAP announced that 12 new solutions were among the first certified integrations under SAP's PartnerEdge program, while an estimated 200 more are in the pipeline from SAP ISV partners worldwide.
SAP has been addressing the upper mid-market with SAP packaged solutions that have the same code base, such as the core mySAP ERP/mySAP Business Suite. These solutions come combined with appropriate SAP Best Practices templates and accompanying services designed to significantly reduce deployment time by eliminating development and leaving configuration only to be conducted for each customer. On the other hand, SAP has earmarked SAP Business One for the smallest businesses, and for subsidiaries of larger enterprises (see SAP Tries Another, Bifurcated Tack at a Small Guy).
Thus, of late, there seems to be ever more blurring of the line between VARs (the partnering firms that would rather focus on implementation and integration than on software development per se) and ISVs (the partnering firms that would rather focus on developing software applications than on implementation and integration). There are still many remaining "white space" opportunities in most major vendors' functional product roadmaps, which are too small for the mighty vendor to justify developing in-house. This is particularly the case with the recent advent of composite applications based on service-oriented architecture (SOA). For this reason, some expect to see growth amongst business services providers (BSPs) that combine software with market- or vertical-specific business process intellectual property and services, further increasing user choices and enabling improved business efficiencies. In general, the growth of standards-based and component- or SOA-based applications will bolster joint venture application development between vendors and their resellers (see SOA as a Foundation for Applications and Infrastructure).
By adding assembly as an alternative, Web services and SOA will probably change the traditional "build versus buy" debate and application decision. In this scenario, the partnering software and services providers would sometimes join forces with innovative early-adopter customers to develop business process-focused templates, more and more often with an industry-specific flavor (see Buy, Build, or Somewhere Between and Build versus Buy - A Long Term Decision). The best example of this kind of alliance might be Salesforce.com's AppExchange or NetSuite's NetFlex on-demand application development platforms (see Software as a Service Is Gaining Ground). Certainly, with limited research and development (R&D) resources and even fewer time resources for bringing new products and services to market, almost every vendor is leveraging offshore development resources. However, this does not necessarily address the concurrent time-to-market and innovation issue, whereas owning a solution built atop the vendor's own software by an early-adopting savvy customer or partner does both.
The catch lies in making sure that the partner can justifiably develop and sell those kinds of applications, without reinventing what some other partner in another corner of the world has already invented. Also needing to be considered is the potential shock of realizing that the master vendor has also—possibly clandestinely—been developing the same functionality, which means the cannibalization of the partner's business. Having said this, no partner will complain if the vendor wants to acquire the intellectual property and roll it back into the standard product's foundation (see Has SAP Nailed Plant Level Leadership with Lighthammer?).
The Tale of Two Extremely Different VAR Experiences:Indeed, only a handful of vendors thus far have developed a nurturing model for their partners. Possibly the best example is the business model of Swedish ERP vendor, Jeeves Information Systems. This model has been exclusively indirect, since most of the company's employees work on product development. Its revenues are thus sourced only from licensing and maintenance fees, while sales, installation, modification and servicing is effected through nearly 400 dedicated partner professionals worldwide. This gives Jeeves a presence in about fifty locations in eighteen countries, primarily in Europe. Consequently, there is basically nothing to prevent its reselling partners from creating their own packaged ready-to-run solutions for industry verticals as a platform for further adaptation to each client's business. A considerable number of such industry solutions built on Jeeves Enterprise are in fact available today.
Jeeves might thus be offering the best of all worlds: a measured balance of packaged versus adaptable solutions, which has long been in sharp contrast to the routine entire-applications-value-chain approach (or "as much as possible") illustrating the business model preferred by most other master vendors. Conversely, Jeeves prefers to focus only on product development (R&D) and sales support, while completely leaving lucrative sales, customization, implementation, training, and support to trusted and competent partners. In some ways, this resembles the model of former Lilly Software Associates (now part of Infor), Microsoft Business Solutions' (MBS) recent Industry Builder, Sage Software's Sage Select, and SAP's PartnerEdge initiatives, although Jeeves gives partners much more leeway to develop and own the intellectual property of tailored industry solutions.
In other words, until recently many other vendors preferred centralized development (that is to say, by the vendor itself) of new extensions. This kind of development is easier to administer, quality test, and deliver across the globe. It also provides a unified front to customers, but it still limits the partners to being mere installers, perhaps with some software localization IP opportunities. For instance, the above-mentioned SAP Best Practices program was introduced in the mid-nineties, and includes internal SAP data structures for fostering re-use across industries, as well as external programs for helping partners plan the development and management of their value-added solution components. SAP's most significant recent Best Practice initiative includes the creation of regional small-to-medium enterprise (SME) Solution Centers to accelerate the delivery of offerings for midsize enterprises, support closer collaboration with partners, and reduce the cost of creating new offerings. Partners can then leverage the output from the SME Solution Center (which includes SAP Best Practices, ASAP Focus methodology, and an implementation services package) as a starting point, and can configure the output for their specific sub-industry and specialty to create a qualified mySAP All-in-One partner solution, which in some instances, has reduced deployment time to less than sixty business days.
In any case, the market created by Jeeves is nearly ten times the size of its own turnover, since partners with experience and skills operate critical links of the software value chain, such as sales, modification, and installation. These kinds oof revenue scales and ratios could only be wishful thinking for other vendors' ecosystems, not to mention for the internal competition amongst the hundreds of resellers covering the same market segments. Furthermore, specialization is thereby maximized at every level, since partners often have specific industry skills and deep domain knowledge in various business processes, which in turn provides qualified feedback for Jeeves' product development. These partners are selected industry specialists who can tailor Jeeves Enterprise to fit virtually every customer's need; over 80 percent of the partners have more than 5 years of experience with the product, which means that end-customers should in theory gain expert advice and support.
But achieving such nirvana is a far from easy, as demonstrated by the examples of some vendors which have recently completely reverted to a direct sales model, due to the lack of competence and zeal in their former VARs. The recently acquisitive SMB market incumbent vendor, Made2Manage Systems (see Made2Manage Systems �One Year After': Reenergized and Growing), cites many examples of a total disconnect on the customer-VAR-vendor line, including cases where some VARs did not inform the customers of the latest product and service developments (although that would have been a no-brain sale). Even if customers had needed these developments, they would not have known what exactly to ask for. Some extreme cases involve VARs that did not tell their customers of the M2M University educational offering, in order to keep training revenues to themselves. Implementation quality issues also presented a major problem, and the vendor cites much improved customer satisfaction surveys since going back to the direct model.
Indeed, while ill-fated ERP implementations have long been reported and their causes analyzed (see The "Joy" of Enterprise Systems Implementations), according to a recent press release by DiamondCluster International, a Chicago, Illinois (US)-based consulting firm, data about ERP implementations are still disturbing. By some accounts, 20 percent of projects are shut down before they are completed, and more than half do not finish within budget, schedule, or scope. And yet in 2005 alone, about $20 billion (USD) was reportedly spent to buy, implement, and maintain ERP systems. Such investments will undoubtedly continue, since organizations need the efficiencies that ERP promises. One of the major causes of project failure has been the business-oriented inadequacy of implementation partners.
Part One of the series The Cha(lle)nging World of Value-added Resellers.
A decade or so ago, when the enterprise resource planning (ERP) market was doubling in size year over year, most vendors had to turn to implementation channel partners in one form or another, whether they were called resellers, distributors, system integrators (SI), or consulting partners. If one also considers the rush to beat the Y2K deadline, it becomes clear why the major concern of these partner firms was their technical competence. Indeed, few of them were business- or industry-oriented, neither by nature nor training. At the time, such resellers would obtain an abundance of leads through referrals (from the vendor or otherwise), and would then service these installations for a long time, which meant a comfortable, recurring revenue stream.
The market dynamics and requirements of today have changed dramatically. Now, it is all about understanding business, and not merely technology, all within an atmosphere of cutthroat competition. Previously, firms did not have the pressure to uncover new leads that the VARs of Microsoft, Sage Software, SAP, Oracle, IBM, Infor, Exact Software, Epicor Software, SYSPRO, Salesforce.com, Intuit, NetSuite, and so on increasingly face now. The need for faster deployment speed, improved systems quality, better cost control and resource utilization, and more flexibility to change requirements on short notice have also become critical in today's business environment.
Certainly, partners are needed to provide the link between the master vendor and an expanding (or not yet penetrated) market, such as the small and medium business (SMB) market in some still growing regions. However, the real task is to develop and expand relationships with the right type and number of partners, so that the master vendor can also grow its presence in the target market. Indeed, many vendors have recently come to the realization that their customary obsession with mere VAR quantity might actually weaken the effectiveness of a good partner program. Increasingly, the quality of such a program is about covering the market potential effectively, by focusing on targeted, carefully picked partners who can deliver ever-higher value in the markets the vendor needs to address, while keeping all parties focused on customer needs and satisfaction.
But the magic formula for a mutually beneficial arrangement for the vendor and its partners has traditionally been complicated, if not completely elusive. After all, the goals of both parties are basically the same: to prosper, to obtain prospects of continual gain of new business, to satisfy and more than satisfy customers (future references) and so on. The difficulty is in the execution, especially for the partner: typically a smaller firm, it has to balance its viability (after all, it has to invest in starting up the business, in training and maintaining a number of consultants and sales employees for a particular product, etc.) with exclusive loyalty to a particular vendor, which in turn cannot possibly guarantee enough business to every partner.
While master vendors prefer an exclusive relationship (some even impose this exclusivity), at the end of the day the vendor cannot take care of the cash flow and liquidity of each partner. Having said this, losing a VAR due to bankruptcy or defection means disruption to business, as well as customer dissatisfaction: every change is painful. If a VAR's business slips away, it must and likely will be replaced, either by the vendor's own professional services, or by another VAR hungry for new business. On the other hand, to stand a chance of higher business volume, many VARs have to partner with multiple master vendors, which often results in becoming "a jack of all trades and master of none."
When choosing a VAR partner, some vendors thus impose stringent requirements, mainly regarding the prospective partner's competence, size, and business model concept. Partners, on the other hand, typically place importance on values such as the vendor's track record of partner satisfaction, brand preference, and the vendor's backing and loyalty. After a partnership is signed, training and support is supplied by the vendor in the start-up phase. But after a certain number of customer systems installations have been performed, the partner is traditionally deemed to be self-sufficient, and from this phase on, the vendor helps mostly with marketing support. In other words, the VARs still have to be able to close deals themselves and maintain a viable business model, which increasingly means expressing the message that they are specialists in one or more defendable niches.
Moreover, not only is there a likelihood of internal competition for business (because of crowding in some region or vertical segment), but also many VARs have realized lately that living from just the markup on the vendor's software license fees will not suffice in the long run. There is rapidly constricting opportunity for "pure installers," who can perhaps make the technology pieces fit together (installation, data import, occasional table customization, user training, and so on), but who are not necessarily able to think strategically on the customer's behalf through all the implications, or to pinpoint tactical complications that might arise when these pieces get joined together.
Certainly, some partners can provide valuable industry-specific expertise (if their seasoned staff members happen to come from a certain industry), or provide strategic counseling about how systems might enhance operational performance and business objectives (so as to be able to charge for business consulting, which is more lucrative than pure software peddling and installation). However, there is increasingly the notion of the VAR need for intellectual property (IP) packaged as software, which can be applied repeatedly elsewhere ("develop once, deploy many times"). The big market push of late is to serve vertical markets which want software to fit the special needs of their business. Even with a high degree of technical knowledge, most VARs nowadays need a degree of business skill that differentiates them from generalists.
The added value inncreasingly required from partners is not only that they be able to sell in the markets in which they currently have presence, but also that they spark the creation of vertical solutions and add-ons to the master vendor's horizontal solution to the rigorous needs of a refined group of customers anywhere in the world. For example, on a global basis, SAP's PartnerEdge channel partners have reportedly created more than 550 qualified mySAP All-in-One partner solutions for microverticals (in other words, sub-segments of a defined vertical industry) based on the flagship mySAP ERP application targeting the lower mid-market, and over 250 add-ons for the SAP Business One product for SMBs. In December 2005, SAP announced that 12 new solutions were among the first certified integrations under SAP's PartnerEdge program, while an estimated 200 more are in the pipeline from SAP ISV partners worldwide.
SAP has been addressing the upper mid-market with SAP packaged solutions that have the same code base, such as the core mySAP ERP/mySAP Business Suite. These solutions come combined with appropriate SAP Best Practices templates and accompanying services designed to significantly reduce deployment time by eliminating development and leaving configuration only to be conducted for each customer. On the other hand, SAP has earmarked SAP Business One for the smallest businesses, and for subsidiaries of larger enterprises (see SAP Tries Another, Bifurcated Tack at a Small Guy).
Thus, of late, there seems to be ever more blurring of the line between VARs (the partnering firms that would rather focus on implementation and integration than on software development per se) and ISVs (the partnering firms that would rather focus on developing software applications than on implementation and integration). There are still many remaining "white space" opportunities in most major vendors' functional product roadmaps, which are too small for the mighty vendor to justify developing in-house. This is particularly the case with the recent advent of composite applications based on service-oriented architecture (SOA). For this reason, some expect to see growth amongst business services providers (BSPs) that combine software with market- or vertical-specific business process intellectual property and services, further increasing user choices and enabling improved business efficiencies. In general, the growth of standards-based and component- or SOA-based applications will bolster joint venture application development between vendors and their resellers (see SOA as a Foundation for Applications and Infrastructure).
By adding assembly as an alternative, Web services and SOA will probably change the traditional "build versus buy" debate and application decision. In this scenario, the partnering software and services providers would sometimes join forces with innovative early-adopter customers to develop business process-focused templates, more and more often with an industry-specific flavor (see Buy, Build, or Somewhere Between and Build versus Buy - A Long Term Decision). The best example of this kind of alliance might be Salesforce.com's AppExchange or NetSuite's NetFlex on-demand application development platforms (see Software as a Service Is Gaining Ground). Certainly, with limited research and development (R&D) resources and even fewer time resources for bringing new products and services to market, almost every vendor is leveraging offshore development resources. However, this does not necessarily address the concurrent time-to-market and innovation issue, whereas owning a solution built atop the vendor's own software by an early-adopting savvy customer or partner does both.
The catch lies in making sure that the partner can justifiably develop and sell those kinds of applications, without reinventing what some other partner in another corner of the world has already invented. Also needing to be considered is the potential shock of realizing that the master vendor has also—possibly clandestinely—been developing the same functionality, which means the cannibalization of the partner's business. Having said this, no partner will complain if the vendor wants to acquire the intellectual property and roll it back into the standard product's foundation (see Has SAP Nailed Plant Level Leadership with Lighthammer?).
The Tale of Two Extremely Different VAR Experiences:Indeed, only a handful of vendors thus far have developed a nurturing model for their partners. Possibly the best example is the business model of Swedish ERP vendor, Jeeves Information Systems. This model has been exclusively indirect, since most of the company's employees work on product development. Its revenues are thus sourced only from licensing and maintenance fees, while sales, installation, modification and servicing is effected through nearly 400 dedicated partner professionals worldwide. This gives Jeeves a presence in about fifty locations in eighteen countries, primarily in Europe. Consequently, there is basically nothing to prevent its reselling partners from creating their own packaged ready-to-run solutions for industry verticals as a platform for further adaptation to each client's business. A considerable number of such industry solutions built on Jeeves Enterprise are in fact available today.
Jeeves might thus be offering the best of all worlds: a measured balance of packaged versus adaptable solutions, which has long been in sharp contrast to the routine entire-applications-value-chain approach (or "as much as possible") illustrating the business model preferred by most other master vendors. Conversely, Jeeves prefers to focus only on product development (R&D) and sales support, while completely leaving lucrative sales, customization, implementation, training, and support to trusted and competent partners. In some ways, this resembles the model of former Lilly Software Associates (now part of Infor), Microsoft Business Solutions' (MBS) recent Industry Builder, Sage Software's Sage Select, and SAP's PartnerEdge initiatives, although Jeeves gives partners much more leeway to develop and own the intellectual property of tailored industry solutions.
In other words, until recently many other vendors preferred centralized development (that is to say, by the vendor itself) of new extensions. This kind of development is easier to administer, quality test, and deliver across the globe. It also provides a unified front to customers, but it still limits the partners to being mere installers, perhaps with some software localization IP opportunities. For instance, the above-mentioned SAP Best Practices program was introduced in the mid-nineties, and includes internal SAP data structures for fostering re-use across industries, as well as external programs for helping partners plan the development and management of their value-added solution components. SAP's most significant recent Best Practice initiative includes the creation of regional small-to-medium enterprise (SME) Solution Centers to accelerate the delivery of offerings for midsize enterprises, support closer collaboration with partners, and reduce the cost of creating new offerings. Partners can then leverage the output from the SME Solution Center (which includes SAP Best Practices, ASAP Focus methodology, and an implementation services package) as a starting point, and can configure the output for their specific sub-industry and specialty to create a qualified mySAP All-in-One partner solution, which in some instances, has reduced deployment time to less than sixty business days.
In any case, the market created by Jeeves is nearly ten times the size of its own turnover, since partners with experience and skills operate critical links of the software value chain, such as sales, modification, and installation. These kinds oof revenue scales and ratios could only be wishful thinking for other vendors' ecosystems, not to mention for the internal competition amongst the hundreds of resellers covering the same market segments. Furthermore, specialization is thereby maximized at every level, since partners often have specific industry skills and deep domain knowledge in various business processes, which in turn provides qualified feedback for Jeeves' product development. These partners are selected industry specialists who can tailor Jeeves Enterprise to fit virtually every customer's need; over 80 percent of the partners have more than 5 years of experience with the product, which means that end-customers should in theory gain expert advice and support.
But achieving such nirvana is a far from easy, as demonstrated by the examples of some vendors which have recently completely reverted to a direct sales model, due to the lack of competence and zeal in their former VARs. The recently acquisitive SMB market incumbent vendor, Made2Manage Systems (see Made2Manage Systems �One Year After': Reenergized and Growing), cites many examples of a total disconnect on the customer-VAR-vendor line, including cases where some VARs did not inform the customers of the latest product and service developments (although that would have been a no-brain sale). Even if customers had needed these developments, they would not have known what exactly to ask for. Some extreme cases involve VARs that did not tell their customers of the M2M University educational offering, in order to keep training revenues to themselves. Implementation quality issues also presented a major problem, and the vendor cites much improved customer satisfaction surveys since going back to the direct model.
Indeed, while ill-fated ERP implementations have long been reported and their causes analyzed (see The "Joy" of Enterprise Systems Implementations), according to a recent press release by DiamondCluster International, a Chicago, Illinois (US)-based consulting firm, data about ERP implementations are still disturbing. By some accounts, 20 percent of projects are shut down before they are completed, and more than half do not finish within budget, schedule, or scope. And yet in 2005 alone, about $20 billion (USD) was reportedly spent to buy, implement, and maintain ERP systems. Such investments will undoubtedly continue, since organizations need the efficiencies that ERP promises. One of the major causes of project failure has been the business-oriented inadequacy of implementation partners.
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