What's Ahead For Software

So, you want to be in the software business? You're not alone, and for very good reason. The software space--everything from installing basic operating infrastructures to finessing high-end applications like RFID and identity management--is teeming with opportunity. And variety. According to VARBusiness' exclusive 2005 State of Software survey, working with software can run the gamut from strictly product

reselling to implementation, custom development, integration and, notably, consulting services. No matter their entry point, VARs are benefitting.

Just ask Brian Okun, director of strategic partners at Chips Computer Consulting in Lake Success, N.Y. Okun says the push deeper into software, particularly of the Microsoft ilk, has paid off handsomely for his company, whose Microsoft sales alone are up more than 200 percent year-over-year. Company president Evan Leonard says more consulting companies like his are driving growth through software efforts.

"It's the central core of what we now do," he says.

Software spending numbers expose a market ripe for the picking. Consider this: Worldwide spending on packaged software alone (no custom-built apps) is projected at $206 billion worldwide this year, half of which will take place in North America, according to IDC. Add to that the amount expected to be spent on attendant software consulting, support and maintenance services, and the size of the opportunity check swells. IDC forecasts total worldwide services spending for 2005 (including both hardware- and software-oriented services) to ring in at $609 billion, of which an estimated 62 percent will be software-related.

That brings us to the results of our State of Software research survey. The data reveals in great detail renewed momentum around software in the channel, following the dark days that characterized the past few years in the IT industry. The survey, conducted online in late May into June, both confirms and unearths a number of interesting trends among VARs doing business in the space. From a macroperspective, more VARs are getting into or growing their existing software businesses, adding more vendors to their portfolios and accelerating up the solutions stack beyond core infrastructure, such as Microsoft Office rollouts, to deliver higher-margin, technically complex software installations. They also are increasingly willing to explore different routes to market, such as the emerging software as a service model (see "Services Transformation," page 30), and ponder open-source software as a strategic part of their businesses (see "Making Money In Open Source: What It Takes," page 35). The hot-ticket technologies span security software to Linux (see "Hot Technologies, Strategic Choices," page 28).

First, a few key data points: The average gross software revenue in 2004 among VARs surveyed was $51.9 million. As a percentage of overall business, software represents 42 percent of total annual sales for smaller VARs (those with less than $1 million in revenue per year), half of all sales for midsize VARs (between $1 million and $9.9 million) and more than one-third of business for large VARs ($10 million and above). Perhaps best illustrating the aspirations of the little guy, more than half of the software revenues generated by our survey respondents was derived from customers with between just one employee and 99 employees. The remainder is nearly evenly split between midsize customers (100 to 999 employees) and the big guys (1,000 employees or more).

What's especially noteworthy is that many VARs are evolving their software businesses beyond the traditional, high-volume resales of shrink-wrapped boxes of CDs to something more complex and lucrative from a project standpoint. Whether they are building securely integrated Web portals, custom-vertical business applications or multipronged collaboration solutions, VARs today are diving into deeper waters with software projects. The move up the value chain requires more tech-savvy and business-consulting acumen, but the end result is longer engagements and higher returns.