Is the cloud a VAR killer?

When I wrote about SAP Business ByDesign fixed price implementation as a good thing, I could not have anticipated the variety of opinions that emerged. It seems the VAR world falls into two camps that are diametrically opposed. They either love the idea of fixed price or they hate it. If the responses I've seen are indicative of the market then there are no grey areas. But then there are deeper issues for the VAR community to consider.

Historically, VARs had the luxury of two easily defined and lucrative revenue streams: a decent slice of the retail selling price, up to 40%, of the solution on offer plus consulting and implementation fees based on time and materials. Regardless of economic conditions, the fundamentals of the model have not changed. Cloud computing solutions upend that model.

One conversation I had with Ezequiel Steiner, CEO of Acumatica was particularly instructive. Acumatica is a cloud ERP player that uses a 100% indirect selling model: "VARs understand that sales margins for cloud solutions are lower than the traditional on-premise offering albeit there is the opportunity for recurring revenue. We concluded that in those circumstances, it doesn't make a lot of sense to compete with VARs by going direct to the market. Competing with the VAR is not going to help build a channel, rather it is an impediment. We have to provide much more upfront support than was the case in the past as part of smoothing the adoption process at the customer end but we gain from being VAR friendly. However, I disagree with the idea of fixed fee implementation because that removes the competitive element in the market place. It also means that some customers end up subsidizing others. It will be interesting to see how SAP VARs perform now that we have seen what SAP is prepared to offer."

Mr. Steiner claims that the non-compete element of Acumatica's proposition makes it relatively easy for the company to recruit: "Like any other vendor we want the best we can find." Acumatica claims to have north of 50 resellers. "Having a non-compete model makes it much easier for us to select those VARs that have the skills to quickly implement solutions in an economical manner. We're working towards a cost that is around 80% of the first year's subscription price." Isn't that a fixed fee by another name? Apparently not although I must admit to struggling with the logic of that argument.

Acumatica's number is in the ballpark of figures I have heard before. Skyytek for instance suggests that BYD implementations will likely run at roughly 100% of first year full fees. In contrast to Acumatica, Skyytek prefers to offer a fixed price. It bases that upon a fixed fee up front requirements analysis plus the ability to replicate past solutions.

Regardless of which model works best for everyone, the broader question must be how cloud solutions will impact the VAR market over the long term. Gary Turner, UK managing director of Xero says that past waves of VAR consolidation have left a market that is struggling for profit but with significant challenges: "We don't find difficulty in bringing our community of accountants on board. We have a 100% success rate when we get in front of them. The problem is in their understanding how to on board their clients. We think it should be easy given the low monthly subscription model but it isn't that simple."

Everyone I have spoken with agrees that VAR models for cloud solutions have yet to mature. The one thing that everyone knows is that the balance of power between customer, vendor and VAR is changing in the customer's favor. For some it is a scary proposition. For others it is an opportunity.