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Playing Both Sides Of The Software Fence

Faced with margin erosion, channel conflict, vendor consolidation and new delivery models, what's a software partner to do these days? The choices boil down to joining the SaaS fray, sticking with the traditional model or hedging bets by doing both.

Software partners face a world of hurt.

Margin erosion and channel conflict—the age-old bugaboos—remain unabated. Indeed, those pressures are heightened as large vendor partners consolidate and seek a bigger footprint in existing accounts.

Just last week, Business Objects acquired performance management software maker Cartesis for approximately $300 million. The deal came only one week after Oracle completed its $3.3 billion acquisition of Hyperion Solutions and its line of performance management software. Besides that, SAP, Cognos, Microsoft, Cisco Systems, Hewlett-Packard and EMC's RSA unit have all made software acquisitions this year.

Even without consolidation, today's software resellers and implementers also face a wholesale re-evaluation of the software delivery model, led by Software-as-a-Service (SaaS) pioneers like, NetSuite, Webex and others.

And even as legacy vendors (Microsoft, Oracle, SAP) put more investment into SaaS options, their partners have to think about following suit, or at least try to figure out a way those vendor moves won't disintermediate them entirely.

Naysayers characterize the SaaS push as the second coming of application service providers—and we all know what happened to that particular boondoggle. But smart solution providers know that service-delivered software is now a real option and will remain one. There are several reasons. First, reliable broadband is now nearly ubiquitous. Second, there's now a selection of robust remote management tools like LogMeIn and Citrix's GoToMyPC to enable VARs to support customers that may have been beyond their reach geographically in the past.

The software partners that actually sell licenses must decide whether to enter that SaaS fray, stick with traditional sales models, or hedge their bets and do both.

This week's CRN cover guy Mick Gallagher, CEO of LST, Fallbrook, Calif., has looked carefully at the equation and is betting on both sides of the SaaS/on-premise divide. His company, once known as Life Sci Technologies, is both a longtime Oracle partner and an inaugural NetSuite partner.

A few months ago LST acquired another NetSuite power in Lohmueller Associates. Gallagher's company does managed services for clients—mostly in the life-sciences field. The addition of Lohmueller makes LST arguably NetSuite's largest partner. And NetSuite is one of the SaaS pioneers, specializing in a hosted ERP suite.

Andy Vabulas, CEO of IBIS, an Atlanta-based Microsoft Business Solutions partner, is likewise balancing both models. The percentage of his business that has gone via the managed services or hosting route has grown at 100 percent year over year for the past few years and he expects that trend to continue.

The key is partner adaptability. As more value starts going into what some might call "plumbing," solution providers have to keep building in the white space. They have to stay above that rising tide of value. Whether the application is hosted on the customer premises, in "the cloud" by the vendor, or by the partner itself could be beside the point.

Microsoft is famous for putting more features and functions into its operating systems and applications over time. Oracle and SAP are doing likewise. Solution providers must watch that like a hawk.

For example, many Oracle partners now increasingly see the database as a commodity, along with the operating system and other plumbing. That very notion would have been deemed blasphemous for this crew until a few years ago when it became clear that Oracle CEO Larry Ellison might be feeling the same way. At that point, he set out on his $20-plus-billion application buying binge. The result: Oracle, Redwood Shores, Calif., is focused on enterprise apps with its portfolio now including not only its own branded E-business Suite but PeopleSoft and Siebel. And even above those applications it has bought retail expertise with Retek and banking know-how with i-Flex.

One Midwestern Oracle partner, who requested anonymity, suspects Oracle will put all of its database business through the channel so it can focus its prodigious direct-sales forces on the more remunerative applications. An Oracle spokeswoman denied that contention.

Many software partners agree that for continued survival, let alone success, they have to get outside their comfort zone. Terry Petrzelka, CEO of Redwood City, Calif.-based Tectura, a large Microsoft Business Solutions partner, says the days of the software-only partner are numbered—he gives them three or four years. By then, these partners will have to establish themselves in some specialty, beyond license sale and implementation.

Next: New Vendors On The Block

New Vendors On The Block, NetSuite and Webex are just a handful of the SaaS-oriented vendors that software partners must keep an eye on. Beyond them, there's a whole universe of ad-supported SaaS players—folks like the ever-growing Google that parlay their "freeware" talents into services that increasingly compete with bought-and-paid-for goods.

Take a look at the goodies Google is starting to offer that cost end users zero dollars. Google's DocsSpreadsheets will add presentation software this summer, making it even more Microsoft-Office-like. As one channel pundit has been known to say in varying contexts over the years: "It's hard to beat free."

Google, Mountain View, Calif., also fields the freebie gMail and other perks. Many business users have glommed onto gMail as a secondary mail account. Face it, even the most dyed-in-the-wool Exchange Server or Domino partner—and his or her customer—is well aware of gMail. There's no branding or name recognition issue here.

A bevy of ecosystem companies are adding capabilities to bring local storage and archiving to such offerings, further narrowing the gap with on-premise commercial software.

Google has targeted key partners with domain expertise to move its search appliance into data centers and extend its search reach into corporate data. Several SharePoint partners are aboard and a few have told CRN that they have gotten more and higher-quality "pre-sold" leads from Google in the past year than they have from Microsoft over a much-longer period. In other words, they see a money-making opportunity in extending and adding to Google expertise.

Finding (And Paying) The Influencer
As more software capability gets pumped to users direct from a vendor, software partners have to consider their role as opinion leaders or trusted advisers.

Many vendors have sought to identify partners that nudge a customer into their product camp but may not actually resell the software. Indeed, Sam Jadallah, who headed up Microsoft's partner program close to a decade ago, used to talk of the need to identify and compensate such "influencers." The only problem: How?

Microsoft is now attempting to reward such partners with a nascent influencer program, announced last month by Robert Deshaies, vice president of the U.S. partner group. The Redmond, Wash., company will rely on the large account resellers (LARs) or distributors to identify influencers to the vendor. Then some portion of the channel margin will flow to those partners.

Some solution providers foresaw potential issues immediately. If the influencer margin is to come from the LAR or distributors' share, they assume that there will be problems with actually seeing the money. "Who gives up margin voluntarily?" asked one.

Meanwhile Oracle, which had fielded an influencer fee—called the Commission Co-Sell Initiative—under the Oracle Open Market Model, deactivated it in February. The company retains its "referral fee," which can reach 10 percent of the list license cost with a cap of $50,000, but for most products it amounted to 5 percent of the license sale with the same cap. The discontinued fee, on the other hand, could be up to 10 percent of list license cost with a cap of $100,000. Oracle execs said few partners actually applied for the influencer fee.

One executive with an Oracle VAD discounted the impact of the change: "Who cares? The way Oracle goes to market in nonstandard deals, they're all done differently anyway. What it boils down to is each deal is negotiated at [the] end- user level: It's hard to say we'll give you a flat fee. I've had one partner complaint about it," he said.

At least one Oracle VAR was not pleased, saying he probably earned $100,000 last year in such fees, but was nonetheless prepared to move on. "I'll make it up somewhere else," he shrugged.

Others in the system integration community maintain that influencer fees are not appropriate to their model.

"There was a point where we were interested [in such fees] but we stepped away from that years ago. We didn't think it was ethically right. At the end of the day we influence based on people's needs, not on our relationships with vendors," said Derek Small, founder and president of Nulli Secundus, a Calgary-based integrator specializing in identity management.

Next: Fighting The Direct-Sales Compulsion

Fighting The Direct-Sales Compulsion
One big factor in this services push is the desire by enterprise software vendors with strong direct-sales DNA to grab share in the SMB market. Even Oracle and SAP realize that for them to penetrate this potentially lucrative but hugely diverse market, they need partners to help not only with license sales but with SaaS implementation and customization.

Toward the midmarket end, Oracle is pushing All Partner Territories for its applications and now even its technology (database and middleware) business. It claims nine "technology" APTs currently and plans for more. The intent is to focus partners on "net new" business. Current named and enterprise accounts would not go through these accounts, however.

Rauline Ochs, Oracle's group vice president of North America alliances and channels, said the company is pleased with the uptake and cites relatively new non-geography based APTs in higher-education and small- and medium-government accounts. She also counsels patience.

The company fields technology APTs in New Jersey, San Francisco, Iowa/Wisconsin/Minneapolis and northern Illinois as official tech APTs. But she said some regional managers have experimented with "bootleg" APTs, which do not yet have full corporate sanction.

"The good news is [the effort] is going well and people understand the return is better than what [Oracle] put in. The bad news is when we're not part of preparing the structure, the training lessons learned, etc., they don't execute as well," she said.

Identity Crisis
Scott Jenkins, president of The EBS Group, Lenexa, Kan., said overall, margin erosion remains the No. 1 partner issue closely followed by—you guessed it—channel conflict. He gets particularly irked when vendors seem to consider distribution partners—he cites Dell, CDW and Tech Data—as skilled solution providers. Other partners add Best Buy to that list of volume providers that some vendors (Microsoft in this case) seem to consider VARs.

When vendors lump CDW, Dell and mass retailers into the same category as hands-on, highly knowledgeable solution providers, VARs suffer, he said. And that issue will only get worse as the debate over on-premise vs. SaaS continues.

But the smartest partners see beyond the either/or rhetoric. If they have the resources and wherewithal, they're going to be on both sides of the fence.

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