Zach Nelson: Optical problems for saas VARs

Zach Nelson, CEO of Netsuite used SIIA Europe as a platform for setting out his vision of the VAR market. Using a Microsoft example, he said that while the traditional one to three times license revenue might look fine in the on premise world, it doesn't work the same way in the on-demand world:

“VARs are going to have to change their business model or go out of business. They have a math problem they need to solve. Great Plains has licence up front of $529k. Then the VAR gets one to three times as much to implement, so that's up to $1.59 million. NetSuite you pay $176k subscription per year. If I charge you that, can I charge you $1.59 million for services? No way. So the challenge for VARs becomes how I reduce the cost by 10x."

Nelson's solution is to turn the on demand model on its head. Instead of 'software as a service' he proposes that VARs adopt the idea of 'services as software.' By this he means that VARs should concentrate on building methodologies that allow them to resell implementations and vertical market offerings,  maling money on incremental sales.

That's fine and is in line with calls to reduce large scale project implementations but is it viable? Nelson operates Netsuite's services organization at zero profit. That makes it difficult for VARs to compete. Also, the notion that VARs should price based on a figure the vendor is able to achieve says nothing about value delivered. "We're at the very early stages of working this out. RIght now we're seeing price pressure but the models themselves have not emerged. But...the idea you can build a solution that you can resell over and over should mean VARs make money. They've got to get used to the idea of deferred gratitude."

Nelson agreed that his company will need to work more closely with VARs so that the VARs have a better opportunity to tap into Netsuite's marketing. "We all need to get a lot closer to each other but it's got to be so our customers benefit."