The State of the VAR Market

Will Tectura reshape the face of the business?

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The numbers tell the Tectura story. By 2007, CEO Terry Petrzelka plans that the company will have annual revenue of $500 million and a staff of 2,500 worldwide. That's for a company whose business revolves around financial software. And he describes the organization that will emerge in terms that many smaller competitors believe will not be possible to achieve. "The focus is to build this global company that provides a local touch," says Petrzelka.

Is the company that Petrzelka wants to build one that will reshape the accounting software market? Is it playing on a different field, and thus will have little impact on the way other software VARs do business? Will it fall prey to the forces that have stymied past efforts to establish far-flung reselling operations?

The company of the future that Petrzelka describes appears to be as much a combination of systems integrator, independent software vendor, and distributor, as it is a reseller. Can it work?

Partner Insights

"Can multi-office VARs provide the same level of service as people that are domained in a particular geography?" asks Taylor Macdonald, executive vice president of channel and sales operations for Best's Mid-Market Division. "Are they a collection of offices or a holistic firm?"

It's the past efforts at creating large reselling organizations that have led many in the industry to question Tectura's goals. In the 1990s, when CPA firms were being acquired by companies like American Express, there was a parallel movement in the VAR market. ePartners, then called TexSys RD, emerged quickly, ramping up to a run rate of $100 million a year, but never actually hitting $100 million in annual revenue. Results fell, but with new management the company stabilized and began growing again last year when it acquired EYT, a Great Plains and Solomon reseller based in Reston, Va. But it still hasn't gotten to the initial public offering that was supposed to provide much of the rewards for the resellers it acquired.

Other efforts faltered. Centerprise Information Systems was supposed to be the VAR arm of Centerprise Advisors, now known as UHY Advisors. But that group did not grow substantially and was sold last year. MaxQ Technologies, based in Connecticut, was supposed to acquire of both ISVs and resellers. It has done little acquiring.

But along comes Tectura, which has jumped to pro forma results of $150 million in 2004 revenue on its way to a projected run rate of $300 million by the end of the year as it builds toward that half-billion dollar goal. In the fourth quarter, it had $19 million in sales of Microsoft accounting software at retail, a figure that is larger than the total annual revenue for all but the ten largest resellers.

Measuring Tectura's Fast Pace

Revenue for Tectura exploded last year with its purchase of several accounting software resellers, including Aston Business Solutions, which by itself had about $64 million in revenue.

Tectura, whose name is loosely derived from the Latin word for cover or protect, claims pro forma revenue of $150 million for 2004. It has been a quick road for an organization that was founded in 2001 through a management buyout of Scitor Enterprises. Scitor itself had gone from $25 million in 1993 to about $130 million in 2000, and in 1999 was named by Fortune magazine as one of the five best companies to work for in the United States. Maybe that's reflected in the fact that in 2000, the company picked up the tab for its 700 employees and their companions to attend a company outing in Maui.

By October 2003, when Tectura received $12 million in equity funding from Pequot Ventures, the company had nearly 150 employees and a run rate of $23 million.

Tectura has armed itself with $62 million in equity funding and is looking for another $15 million to $25 million to support growth over the next two years. It has attracted money from big names, such as GE Pension Trust.

The company remains committed to multiple Microsoft platforms, although sales are coming overwhelmingly from the two products that originated in Denmark: Navision, with about 50 percent of software license revenue; Axapta with 20 percent; Great Plains, another 20 percent; and Solomon 10 percent.

A big part of the strategy revolves around controlling vertical markets. Tectura is buying companies that have strong vertical packages, not relying on partners that own critical pieces of software. That factor drove last year's purchase of Cosmo Consult, a German company with strong entries in the Navision ISV market. It doesn't just want to have vertical software; it wants to control niche markets.

"We own the thermal plastics and process discrete manufacturing markets," says Petrzelka. "We went after people who own solutions for life science and consumer package goods."

Tectura will not hoard vertical offerings. It is constructing a program that will let other MBS resellers handle its niche software.

"We are in essence building our own channel," Petrzelka says. That channel will be developed in North America and the rest of the world. However, the primary American dealers who will be enlisted are the larger dealers such as some Interdyn members and Collins Computing.

From a purely reselling approach, growth, Petrzelka says, is necessary. Larger prospects do not want to deal with VARs that may utilize the services of other resellers and ISVs to provide the software and services the end user wants.

"There is only so much partnering doing, they don't want to deal with a VAR," he says. "They want to deal with a systems integrator."

Rivals?

Is there any organization out there that can rival Tectura? Is it necessary that there be any rivals?

ePartners, which had about $60 million in revenue before it acquired EYT, has not made any recent moves, nor has it been talkative about its plans. EPartners' management could not be reached for comment.

Another group that embarked on establishing a national presence has been Altara, an MBS VAR based in Cedar Ridge, N.J., through its affiliate program. That, however, seems to have hit a few rough spots. It has since evolved into what owner Helen Cole calls the "Strategic Network of Altara Partners based on our own focused vertical strategy." Altara's revenue for 2004 was at $16 million.

The Interdyn Group represents a consortium of VARs that act together, with a national reach. Interdyn is a corporation owned by its members, who continue to operate under their original names at the local level. Together, they have about $40 million in sales in the United States. But despite some talk, Interdyn has resisted becoming more formal or embarking on a rapid growth plan.

What most of the larger VARs have in common is that they sell Microsoft products. In fact, in the last year, ePartners dropped Best's MAS 500, while Tectura, which briefly picked up the Exact line through its purchase of a New Jersey operation, Peak Data Systems, sold that product business to Exact North America late in 2004.

Out of the top 20 resellers, the only ones selling any Best products are the accounting firms, a market State of the Art, the company that originated the MAS 90 line, was active in developing. The CPA organizations all carry multiple lines.

Not only are there no Best resellers rivaling ePartners or Tectura, Net@Work, with $8 million in revenue, was the largest VAR that sells only Best Software products to make the Accounting Technology Top 100 VAR list.

"We seem to have the normal large business partners, but not the disparity [between the largest and smallest] that other folks have," says Best's Macdonald. He adds, "I think there's no doubt you need larger partners, the larger the opportunity you go after."

While Macdonald says that an increasing number of Best VARs are combining to create organizations in the $5 million to $20 million range, he sees less evidence of Best resellers emerging on the ePartners or Tectura level. "Only a certain number of people aspire to be a nationwide firm. We will see some of that that, it just won't be to the level you've seen elsewhere," says Macdonald.

What is more important than size, Macdonald believes, is for those running reselling organizations to determine what kind of organization they wish to operate. "Any business partner needs to focus on what part of the market they are in and decide on a strategy," he says. Meanwhile, Blytheco, which has been Best's Business Partner of the Year seven times, just announced its plans to move into several states as it goes national.

Smaller resellers are still quite active in the MBS channel. In fact, Microsoft officials have said repeatedly that the company is still authorizing VARs of all sizes as it increases the size of its channel.

Also emphasizing profitability was Clifton Gunderson Technology Solutions, under Jeff Hapeman, who took over last year as the new chief technology officer.

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