State of the VAR Market

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Does having fewer players change the game?

by Robert W. Scott

The pain is easing for people like Ivan Cole, whose firm sells three of the Microsoft accounting software lines.

Partner Insights

"We have been on a roller coaster," says Cole, owner of New York City-based Cole Systems. The company rode the e-business bubble up and down. In 1999, the firm was honored by Great Plains for Overall Sales Achievement. The next year, Great Plains cited it for eBusiness excellence and Cole was ramping up its staff to build Web stores. The firm expanded to as much as $15 million in annual revenue. But it got back to basics in the accounting software market, shrinking to about $6 million last year. Not only did the Web hype subside, but as business tanked, deals got smaller and clients adopted a do-it-yourself attitude when they could. "They still use our services to help them implement systems. But on networking systems, they've chosen to do their own Exchange Server implementation," he says.

Cole's goals have also changed. "We are back to a more manageable size," says Cole. And instead of targeting growth, he continues that, "Our focus is to get back to profitability." Business has picked up in the last few months and Cole faces the question of how to meet the rising business demand, since getting new consultants up to speed requires investment, and it is difficult to judge if the economy will continue to improve.

The weak spots were not just in new license sales. For instance, training is down 60 percent, says Nicholas Hoad, one of the owners of Atlanta's Macdonald Consulting Group. Still, despite the decline, "We are a much more profitable group than we were in 1999. That's based on the fact that the head count is down and we are more focused on the bottom line." In 2003, MCG had a staff of 23 and $3.5 million in revenue. Back in 2000, it had $5 million in revenue and projected $6 million for 2001. The company shrank through attrition, not through layoffs.

Many other resellers--at least the ones that stayed in business--went through a similar process. John Woodburn's Woodburn Group had 30 people when Accounting Technology named him a Killer VAR in 1999. He's down to 19 employees. "The half-million-dollar Epicor deals dried up," says Woodburn, who is busy rebuilding his St. Louis Park, Minn.-based practice. The Crowe Systems Consulting Group shrank from $45 million in 2001 to $36 million last year.

But even though 2003 was not a fun year, for many VARs it was a good year, because they trimmed expenses, which had gotten out of hand when times were good. Although sales were down, they made more profit.

"We've been profitable, but we've been very flat," says Richard Paul Thomas, CEO of TBC International, an Open Systems reseller.

Despite the difficult economy and saturated mid-market, not everyone had a tough year. "We didn't have a bad year, period," says Linda Rose, owner of San Diego-based Rose Business Solutions. She says demand for Great Plains and Solomon systems was good. How did she do it? "I think we made inroads with the classic Microsoft VARs and got them to understand what we are about," says Rose. By courting those non-accounting software resellers, Rose was able to get significant referrals.

Similarly, Gary Artis, CEO of Interdyn Artis, says that 2003 was far from bad. The firm, a Great Plains reseller, had $4.5 million in revenue last year. "We had a 20 percent increase in top line revenue and a bigger increase in profits." Artis attributes results to a decision to target specific markets, particularly the lumber industry. The firm also has a highly focused practice "not just in health care, but behavioral health care."

Still, many resellers folded or were acquired or merged with others. And that trend is likely to continue as vendors seek firms that can devote more time to selling, without having to stop the sales process in order to implement systems.

"There is a size that makes sense," says Taylor Macdonald, senior vice president, partner development, for Best Software. He anticipates that firms will continue to band together whether formally or informally, because many cannot afford all the services needed to succeed. "I think that at any moment there are a half dozen partners that are talking about merging with each other," he notes.

More Is Less

While Best Software and Microsoft have grown their channels through the acquisition of other accounting software vendors, and Microsoft apparently is authorizing many new dealers, Exact Software North America has aggressively whittled down its dealer base, hoping to get bigger, stronger dealers, before eventually rebuilding the channel to about 125 resellers.

Exact has encouraged a variety of combinations, and has seen smaller dealers acquired by larger VARs. It has supported the formation of alliances as well.

In Texas, Russell Flowers, owner of SRH Consulting in Grapevine, Texas, acquired a number of small Macola dealers on his way to a staff of 15. He believes the company must continue to grow and wants to reach $5 million in sales by the end of next year. "You have to be a certain size to support a lot of skill sets," he says. "You have to have a staff of programmers, bodies on the help desk, accounting expertise, inventory management expertise, and CRM expertise."

Todd Replogle, COO of Business Computer Technologies of Normal, Ill., has also been bringing Exact dealers together, even as he grows his business through the establishment of virtual offices. Right now, other VARs benefit from better pricing, since Exact lets them make purchases through Replogle's organization.

"They can keep their own name and run their own organization," he says. "We will handle all of the customer interaction, deploying the resources, and providing sales support."

Clustering also lets the small VARs avoid paying the entire $10,000 annual Exact reseller fee. In fact, Exact deliberately implemented the fee to encourage VARs to join together. One result was August's formation of the Esta Group, five Midwestern resellers who operate under the leadership of Yeo & Yeo Consulting of Saginaw, Mich.

"They transferred their accounts to my license number," notes Jeff McCulloch, CEO of Yeo & Yeo Consulting. The members split the annual fee, while the larger organization qualifies them for better margins. Esta also represents Best's Abra HRMS line. No money changed hands, as owners kept control of their companies. However, the number of formal activities will probably increase. The members are working to develop a joint marketing project.

Informal Gathering

Another group that may move towards a more formal affiliation is the Zenith Alliance, four Open Systems VARs who serve on the vendor's VAR council. Right now, the three-year-old organization provides principally peer support.

"We have half a dozen conference calls over the course of the year," says TBC's Thomas, who organized the association. There is also the 21-member South Central VAR Group, which meets quarterly to offer training to its members' staffers.

When it comes to partnering, Thomas says he is open to all kinds of arrangement. He has joint venture agreements with other Open Systems resellers to provide common services.

"We are all fairly small companies. The only way to get larger clients is to partner," notes Thomas. He is taking concrete steps towards more formal affiliations, including meeting with his CPA to discuss profit sharing. Thomas, who employs nine, also has "various agreements" with 10 consultants, including some spread around the country. He is considering providing support services to such individuals who want to sell, but not handle the rest of the services. That would help Thomas grow, because although he wants to build a sales team, he has extra capacity on the service side. "I can't generate enough sales to keep everybody busy," he notes.

Bob Scott's VAR 100

Just how big are the biggest 100 accounting software resellers in the United States? And what products do they rely on?
Next month, Accounting Technology does the first-ever ranking of accounting software VARs by revenue in Bob Scott's VAR 100. This list contains some familiar names. But there are also many that readers will not be familiar with-consolidation has reshaped the playing field as fast growers like Tectura and Altara have moved up the list of top players.

It's not only accounting VARS that are organizing. Accpac officials are aware of at least two CRM VAR groups. One, CRM World Class, is a group of GoldMine VARs that banded together to carry Accpac's eCRM, says Mike Bongiovanni, Accpac's senior vice president of sales. Another group is the CRM Guild International. But while there have been groups of Accpac Advantage and Pro Series resellers who have formed, he was not aware of any that are currently active.

That was also the case with Atrac International, which was active from 1999 to 2002. The members were Epicor VARs and the problems that vendor endured did not help VARs such as the Woodburn Group.

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