The Renewal Game

software

"I'd be surprised if a partner didn't want a renewal, because it's recurring revenue," said Sean Stenovitch, a partner with M&S Technologies Inc., a Dallas-based provider of network security services that sells software subscriptions. "You'd be a fool not to. You're essentially selling the product again."

Subscriptions for software and maintenance agreements and the role of the channel in selling subscription renewals have been in the spotlight since July when it was revealed that Symantec Corp., Cupertino, Calif., was taking steps to automate its subscription renewal process for SMBs. That raised the hackles of the vendor's channel partners who said such steps steered SMB renewals away from them and directly to Symantec.

At Primary Support Solutions Inc., a New York-based solution provider, Symantec has been sending renewal quotes directly to its customers. And without the reseller's premium services, "Symantec is actually undercutting us," said Ronnie Parisella, chief technology officer at Primary Support. "They can cut us out and I don't get the sale. I hate it."

Just how do vendors that sell their software and maintenance agreements on a subscription basis work with their channel partners? What do solution providers expect from vendors and how much of a disconnect is there?

Interviews with vendors and solution providers reveal a wide range of approaches. Some companies take a very hands-off stance, leaving the job of renewals to channel partners and paying generous margins. Others offer little in the way of incentives or opportunities for channel partners to handle renewals.

While perpetual licenses have been the traditional way of selling software, revenue from software sold on a subscription basis is expected to grow 23.8 percent annually to that $52 billion figure by 2012, according to market researcher International Data Corp. Much of that comes from products such as security applications that require frequent updates. Also fueling that growth is the rise of on-demand, or Software-as-a-Service, applications that are sold almost exclusively on a subscription basis and, according to IDC, account for about one-third of all subscription revenue.

Sales of maintenance agreement subscriptions are also expected to grow in the short term as the economic downturn worsens and businesses defer new IT purchases in favor of maintaining the software they already own.

Some vendors, aware of the Symantec controversy, are quick to reaffirm the role of channel partners in renewing software subscriptions.

"There's no talk here of taking renewals direct," said George Kafkarkou, senior vice president and general manager of Islandia, N.Y.-based CA Inc.'s Internet security business unit. Kafkarkou made the statement in October while announcing a channel-only security product that's sold on a subscription basis.

Few vendors are totally hands-off when it comes to renewals. Most take at least the basic step of maintaining a database of customer subscriptions and renewal dates and sending out reminder notices or making calls as subscriptions get closer to their expiration dates. But most swear they are careful to work with their channel partners when taking even those steps.

Just how Microsoft Corp. compensates its channel partners for selling on-demand applications such as Dynamics CRM Online was the hot topic of discussion at the vendor's Worldwide Partner Conference in July. Microsoft, Redmond, Wash., said it would pay channel partners a margin of 12 percent on sales when a solution provider first signed up a customer and 6 percent on subscription renewals.

Primary Support's Parisella said Microsoft, in contrast to Symantec's approach, tells customers to contact solution providers about subscription renewals. "They're all about their partners," he said of Microsoft.

"The rules for us are very simple. Whoever did the original sale is the named partner in our system," said Chris Doggett, director of global channel programs at Sophos Plc, an Abingdon, U.K.-based security software developer. The company sells its on-premise and SaaS products exclusively through the channel on a subscription basis. Sophos pays its partners the same margins for new subscription sales—often multiyear deals—as it does for renewals, Doggett said.

At the other end of that spectrum is Salesforce.com, which sells its on-demand CRM applications only on a subscription basis. Channel partners earn 10 percent margins for initial subscription sales, but the company doesn't pay solution providers for subscription renewals. Salesforce's argument is that solution providers make their money by building value-added products and services around its on-demand software platform.

For some solution providers, revenue generated by selling software subscription renewals is a significant part of their business. "Most definitely we try to get renewals," said M&S' Stenovitch. M&S sells software subscriptions from Sophos and WebSense Inc., San Diego.

Next: Margins The margins offered by Sophos for both initial subscription contracts and renewals are attractive, Stenovitch said. Also important, the vendor is flexible on those margins when M&S has to offer discounts to customers when renewal deals hang in the balance: Sophos generally doesn't make M&S absorb the cost of the discount. "They've got a willingness to work with the partner on the margins," he said.

A big advantage of selling subscriptions right now is that customers can spread out their payments rather than make a big, up-front payment for a perpetual license—a plus in the current economy. "I can position my financing much easier," Stenovitch said. "Cash right now is huge."

Another solution provider that proactively pursues subscription renewals is Spinnaker Network Solutions Inc., Irvine, Calif. Spinnaker resells CRM applications from Sage Software (part of the U.K.-based Sage Group plc) and Microsoft, including the latter's subscription-only Dynamics CRM Online application. Ongoing maintenance and support contracts already account for 15 percent to 20 percent of Spinnaker's sales and President Mitchell Cannady expects revenue from software subscriptions and renewals to become a significant part of the company's revenue stream.

Although the Microsoft CRM service just became available in April and subscription renewals won't be due for a while, Cannady said he intends to be ready when they are. "What I don't want to happen is to have the customer go online and renew [their subscription] without making sure Spinnaker is the partner-of-record," he said. "That is going to be a huge part of our business."

Spinnaker will track and process subscription renewals using the same system it uses to renew the maintenance and support contracts it sells to clients, Cannady said. "It's important to know when those renewals are and be prepared to contact the customer prior to the renewal date." While some vendors such as Sage send channel partners lists of customers with expiring contracts, others do not and Cannady predicted that not all solution providers would be as vigorous as Spinnaker in pursuing subscription renewals.

Stenovitch agrees. "If you don't stay on top of your renewals, you open the door for your competitors," he said.

Some solution providers, however, say that while the revenue earned from subscriptions and renewals is welcome, their focus is on building technical and business services around the software.

"Generally, the commission component is not why you get into this business," said Steve Smith, president of Pittsburgh-based Plus Consulting Inc., which resells CRM, business intelligence and portal software from Sage Software, Microsoft and other vendors—some of it on a subscription basis. Plus Consulting provides implementation and business consulting services around the software products. Fees earned for those services can be worth up to three times the software acquisition revenue, Smith said. "The software commission is gravy, not the primary driver," he said, but added: "It's nice when it comes."

Many vendors provide the channel-partner-of-record with a commission for software and maintenance renewals even if the vendor processes the renewal itself. Sage is one such company, and that's fine with Smith. "Absolutely, it's the software vendor driving the renewal," he said. But Smith added that smart vendors will reach out to the solution provider to check on the health of the customer-partner relationship before making a subscription renewal pitch.

Others are content to let vendors handle subscription renewals.

"Our responsibility is keeping the customer happy and their responsibility is collecting the money," said Steve Chipman, founder and president of Lexnet Consulting Group, San Francisco. The solution provider resells Sage CRM application subscriptions and perpetual licenses, offering integration, data migration, customization and training services around the software.

Chipman admits that he isn't even certain how Sage processes subscription renewals. But he knows he gets a monthly check for renewals where Lexnet is the channel-partner-of-record. "It's like clockwork," he said. "It definitely helps pay some of the bills."