The State of the VAR Market 2007

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Scotte Hudsmith has no doubt that the future requires his firm to grow. "We need to be big enough and stable enough to create the right talent and create a path for them," says Hudsmith, the president of Nashville, Tenn.-based LBMC Technologies.

That is not the only reason that Hudsmith's firm is halfway into a five-year plan to reach $25 million in revenue, with $14.2 million in revenue for 2006 and a staff of roughly 70. LBMC Technologies, an affiliate of the CPA firm Lattimore Black Morgan & Cain, became a separate entity 11 years ago.

At its current size, LBMC is among the larger resellers of Microsoft's Dynamics software line, handling Dynamics GP (formerly Great Plains), SL (formerly Solomon) and CRM. But like many other reselling executives, Hudsmith says the business has become about a lot more than accounting software. And the requirements to play have gone up.

Partner Insights

"It's just getting more expensive to do business with our partners, and the skill set that is required [is] more about business process and workflow than accounting and network engineering. You have to tie it all together now," he says.

Instead of selling financial applications, the firm handles the broad Microsoft line, which is known in the trade as the Microsoft "stack." That includes elements such as Active Directory, Exchange, Vista Office, and tying those products together.

LBMC is typical of the larger reselling firms in that it is establishing specialized work forces. It has 10 full-time outside sales people and four project managers, whose role has become particularly important with the need to coordinate projects involving the broader Microsoft line.

Size is also important for providing the staffing demanded by the broader product lines, and for attracting and keeping employees.

"We have gotten to the size that we can fully support a sales staff and fully support a marketing organization, and fully support a help desk and support team, and being able to afford to train our employees," he says.

Getting to $25 million will require both organic growth and acquisition. While LBMC isn't as aggressively on the lookout for acquisitions as it was in 2006, Hudsmith would entertain purchases.

One of the big limitations for growing organically has been finding staff. That in turn has driven acquisition to add skills, such as last year's purchase of Birmingham's West Glenn Software-primarily a Solomon and custom development shop.

The big demand is for employees that have both technical and consulting experience. Hudsmith's experience also reflects the new skills needed to play in the current market. His career included running three startups while he worked in the venture capital world.

"I have experience with this model to do the expansion acquisition and do the organic expansion," he notes.

The current round of expansion differs from five years ago, when firms were talking national rollouts and a company then called TexSys RD, now known as ePartners, spanned the country in a series of buyouts.

In fact, firms aren't racing to become the next national or worldwide firm. Instead, much of the growth comes from within firms that are trying to make their position in a region or regions more commanding.

Going National

There are exceptions, and one of them is Los Angeles-based Blytheco, which moved into the broader market in February through its merger with Atlanta's Macdonald Consulting Group.

CEO Steve Blythe says that he and the three MCG partners had been talking and working together for more than a year.

"One of my drives has been to create more of a national presence. Opening remote offices hasn't had as much impact as I would like," says Blythe, whose firm has been Sage's top accounting software VAR for six consecutive years.

The merger will bring Blytheco to about $16.5 million in revenue and about 85 employees, with the MCG partners joining Blythe as owners of the expanded operation.

The four partners don't plan to stop there.

"We are looking to roll up top Sage resellers in key population centers," he says.

Blytheco was already eyeing nationwide operations when it got together with its Atlanta component, which was examining expansion in the southeast, says Ruth Menter, one MCG partner.

The evolving product line is a driving force, as many Sage Software resellers shift to emphasizing sales of MAS 500, moving up-market from MAS 90 and 200. MAS 500 is much more expensive and serves larger customers.

"That type of customer is at minimum regional, and more likely to be national," says Menter. To land those deals, resellers must be capable of providing local support in a variety of locations.

That makes hiring a critical issue that limits growth, largely because of the shortage of consultants. Sage Software has one of the best-known programs, the 100/100 program, in which the company provides 100 resellers with $10,000 each to pay a salesperson until they get up to speed on a product. Money has also been available for seeding consultants.

The current demand for consultants is driven by the fact that consulting services represent the big growth area for revenue and consultants are largely limited by geography, according to Chris Burleson, owner of Oklahoma City-based InterDyn Pro Data.

Consulting is generally performed by people who drive to their engagements and "consulting has a natural [2.5-hour] window," says Burleson. His company's reach is determined by the fact that Dallas is about 2.5 hours away by car, while it takes about 1.5 hours to hit Tulsa. "If you go beyond that [distance], you have to have a better level of management talent."

Microsoft is working on short-term and long-term programs to deal with the issue, says Robert DeShaies, vice president of the U.S. Partner Group. Where the company once had programs to work with universities and seek Big Four talent, those programs have lagged, he admits.

"We are working together with partners and are going back to work with colleges and universities," he says. Microsoft also has a pilot program using a co-op approach to building school relationships.

But Microsoft does not see opportunities for small firms evaporating.

"There is still good opportunity for smaller players that provide a niche level of service and expertise," says DeShaies. However, these firms do need help, which includes Microsoft acting as a matchmaker to get them together with other firms.

The M&A Way

While Hudsmith's LBMC Technologies has eased up on the acquisition pedal, the MIS Group has not, although it has been taking a breather since a series of purchases brought the firm to pro forma revenue of about $23 million for 2006.

Starting out as a reseller of Sage's Timberline construction software, Muir's group propelled itself onto the larger stage last year with the acquisition of Dallas-based Enterprise Resource Group, which handles Sage's accounting software line.

After that, the company continued with purchases of other Timberline resellers as it worked to establish itself as a Southwestern powerhouse.

Getting bigger provides a lot of benefits, including the ability to have closer customer contact, and to provide resources for support and service.

"It's different for a substantially smaller enterprise to have a customer care group like we have," says Muir.

The larger staff enables the company to provide a broader range of services to clients, who are more demanding and sophisticated as new technologies become everyday tools.

Inability to find qualified staff-particularly consultants-also is a barrier to growth. Muir wants to hire 10 people in the next quarter, and 30 more this year. Firms try to hire experienced consultants, rather than training employees, but the market is changing the approach.

"We are thinking we may not find those people. We may have to develop some of them," he says.

Robert W. Scott is Editor of Accounting Technology and can be reached at robert.scott@sourcemedia.com.

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