The small get bigger. The bigger get even bigger. Everyone in the accounting software reselling business is getting bigger or probably not staying in the field. It's a lesson demonstrated by the fact that the threshold for making Accounting Technology's VAR 100 list was $2.9 million, up about $600,000 from last year.
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The list is also much less about accounting software, financial software, ERP systems-whatever these applications are called-than it has ever been. And this market is heading toward something much different.
"It's my belief that we've got a year and a half to three years before we see Microsoft come out as a software-as-a service," says Scotte Hudspeth, CEO of LBMC Technologies, a Microsoft reseller based in Nashville. He predicts the financial applications will be increasingly integrated with customer relationship management and Microsoft Office.
"Eventually it will be one complete package," says Hudspeth. "If we don't make that shift now, we won't get there."
LBMC hit $9.6 million, up from $6.3 million for 2004, and it could generate 50 percent more revenue this year. With luck, Hudspeth sees a chance to reach $25 million to $30 million in the next two years.
It grew last year with the acquisition of IT Associates in Tennessee and expansion into Alabama.
There just haven't been all that many $25 million accounting software resellers. Last year, only four organizations on the VAR 100 list were larger than $25 million. And so far that hasn't changed.
The top players-Tectura, ePartners, and RSM McGladrey-maintained their same positions within the United States. The other change came from our decision to include international revenue, not just results for the United States. That pushed Danish reseller Columbus IT Partner, whose operations are primarily international, to the No. 2 spot.
However, some of the big players did change their revenue significantly.
Tectura hit $190 million on a pro forma basis, up from $150 million pro forma in 2005, maintaining its No. 1 position with its June acquisition of the Enterprise Solution Group. That added about $16 million in annual revenue. RSM McGladrey grew its businesses, including technology consulting, with the purchase of American Express Tax & Business Services. However, McGladrey was not able to provide revenue for 2005 that included the AmEx business.
Counting the VAR 100|
Accounting Technology's selection of the VAR 100 list is based solely on the amount of revenue for each organization.
Because virtually all accounting software VARs are privately owned, the numbers reported are provided by the resellers. Revenue for companies that do not disclose figures is estimated based on staff size. Companies that report revenue that appears out of line for sales per employee compared to the typical ratio are asked to explain those figures.
Companies were listed if they were still in business on Dec. 31, 2005, regardless of what has happened to their ownership in 2006.
There have been some changes in the methodology, including a decision to include international revenue for the 2006 list, which was not included for 2005 and 2004.
Revenue from IT risk management and audit services is also included. This affects many of the CPA firms and their units that are included in this list. Because some VARs provide IT audits, the decision was made to include this revenue in the totals.
But no new players burst into the top tiers. Not one new reseller joined the group with more than $25 million in revenue, although Interation2 got close at $23.5 million, while LBMC's aspirations suggest that within the next two years that level will expand.
Growth was most notable in the middle of the pack. Last year, there were 42 organizations that had more than $5 million in revenue. For the 2006 list, that number has reached 50.
Much of this was driven by acquisition and mergers, especially those that occurred within regional markets, such as the purchase of Houston-based Burch Consultants by the Dallas-based Enterprise Resource Group. ERG's revenue for 2005 was $6.8 million, compared to $4.8 million for 2004. Similarly, Atlanta's Macdonald Consulting Group, which acquired three MAS 90 practices, jumped to $5.2 million from $4 million.
In Ohio, Xpert Business Solutions, a Sage and Microsoft reseller based in Akron, merged with Socius, a Microsoft reseller in Columbus that came out of a former office of the former American Express Tax & Business Services, producing a company with $9 million in 2005 and 51 employees.
New York City-based Sage reseller Net@Work acquired its Manhattan neighbor, American European Consulting Corp., and jumped to $11 million from $8 million.
But it's about more than just software resellers buying other software resellers.
Among the Interdyn Group, whose members are among the largest resellers of Dynamics GP (formerly Great Plains), New York-based Interdyn AKA leaped to $8 million from $5.8 million by expanding its operations, including its strong media niche. That came as AKA made no major acquisitions, but made investments in its Denver and Philadelphia offices, according to CEO Alan Kahn.
There were also significant changes in how resellers do business, where they do business, and what services and products they offer.
Software reselling is an increasingly international business. Tectura's acquisition of ESG gave it a wide array of offices in the Far East, and it entered in a joint venture to move into Latin America, while Altara, based in Bernardsville, N.J., moved into Europe.
New York-based Queue Associates opened an office in London that has been very successful, says CEO Jeff Goldstein, while Net@Work's purchase of AECC also drew it into England.
Part of the international move is being pushed by Microsoft's efforts to develop vertical markets as the larger VARs become more like systems integrators that develop and market their own specialized packages. In fact, one of Columbus IT's buys in 2005 was 2Increase, the development business that had been spun out by European reseller Watermark.
CRM sales were also an increasing factor for companies that base their businesses around financial software. Sage Software, for example, gave CRM a higher profile with the launch of a global CRM initiative, and Microsoft VARs were given Dynamics CRM 3.0 to market.
Meanwhile, business intelligence became a more important part of the reseller arsenal, and that development is likely to grow over the next few years.
Clients First Business Solutions of Morganville, N.J., added a business intelligence practice to its lineup. LBMC's Hudspeth also saw BI as a strong area of growth.
It's not just a growth in software sales. It's a growth in services revenue, says Altara CEO Helen Cole. "We are transitioning our businesses to a services business," says Cole, who says that will include a lot more business intelligence services, more long-term projects.
The Name's Not the Same|
One of the biggest changes that is reflected in this year's VAR 100 chart was the name changes that affected the products they sell.
The major changes occurred with Sage Software, which was known as Best Software until a year ago, and Microsoft Business Solutions, which had significant changes in the names of their product line-ups.
Microsoft placed its business software under the Dynamics name, a brand owned by the former Great Plains that has been brought back to the market. Products formerly known as Axapta, Great Plains, Navision, Solomon, and Microsoft CRM, are now known as Dynamics AX, GP, NAV, and CRM respectively.
Sage took its Accpac Advantage and Accpac Pro Series and made them Sage Accpac ERP and Sage Pro ERP.
In the last two years, Epicor has also taken its frequently renamed line, changing it from e by Epicor to Epicor Financials.
Incidentally, among the BI players, Dynamic Software Solutions had a softer than expected year as it took a double hit from hurricanes. Its New Orleans office was closed for two months because of Hurricane Katrina, while business has slowed since its Miami office was shut for two weeks. It was also hurt because it has a strong Caribbean business that was hit by the storms. It still grew to $3.6 million for 2005, up from $3 million.
Most resellers believe that the current wave of consolidation will continue, especially towards the lower end of the VAR 100 list.
"The new margin structure is putting more pressure on VARs and more of the small guys will opt out this year because it is too expensive," says one Sage Accpac reseller. "I really feel that Sage is isolating the small VARS at the low end of the Accpac and MAS 90 channels. Everything seems geared for the Blytheco/ERG/Net@Work guys."