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Solution sales are key to success, VARs say

In small and medium-sized businesses, solution sales are key for software-oriented VARs already pressured by falling margins on hardware and software license sales.

Solution sales rule.

That truth has never been starker for software-oriented value-added resellers (VARs) than it's become in this tough economy. Tech sales are hard to come by and the margins on those sales are dwindling. The specter of sometimes-free, cloud-delivered software and services seems a natural, if off-putting, culmination of this trend.

In the past few years, after big companies got snarled in long and pricey enterprise resource planning (ERP) and customer relationship management (CRM) implementations, they have started demanding fixed-time and fixed-cost solutions. Simply put, companies want to get what they pay for and pay for nothing more. If there is risk in an implementation, they expect that risk to be shared with the implementer. For better or worse, that trend is also starting to permeate smaller companies.

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Small and medium-sized businesses (SMBs) want their solutions implemented quickly and inexpensively and yet customized for their needs, said Andy Vabulas, CEO of IBIS Inc., a Norcross, Ga.-based Microsoft Gold partner.

Smart VARs are finding ways to develop effective, repeatable solutions that they can sell (and resell) into certain types of businesses.

Vabulas and other software VARs affiliated with Microsoft, Oracle, Sage Software and other vendors say the key to better margins is the addition of the partner's own know-how or "special sauce" to the overall solution. "There is more margin in our stuff than in Microsoft or someone else's stuff," Vabulas said.

Numbers tell the story. Solution providers are seeing the same sort of margin erosion afflicting software sales that has already decimated the hardware category. Indeed, many solution providers speaking to used to sell hardware -- until that no longer made sense. The fear now is that margins on software license sales are following hardware margins in a similar race to the bottom. "We've been down that road before," Vabulas lamented.

Software solutions are the solution

So smart VARs are going where the margin is. The solution, pun intended, is solutions -- or rather solution sales and services related to those solution sales. That may be even truer in SMBs than it is in bigger businesses with more in-house IT resources.

A Microsoft business partner might make 30% margin on CRM or 40% on ERP if the stars are aligned. "A partner can make two times to three times that on services," Vabulas said.

Partners say Oracle license margins are even thinner, but there are mitigating factors.

"On the licensing side alone, we're lucky if we get five to 10 points of margin," said Scott Jenkins, CEO of The EBS Group, a Lenexa, Kansas-based Oracle solution provider. "When we package [the software] up as a part of a total solutions service, we get 50% margin and the margin on the licensing part [of that deal] will be closer to the high end of the range."

On bare-bones, license-only deals, solution providers end up facing off against low-cost providers like Dell and CDW -- which are known to take a loss on software in order to sell servers, something that's hard for software-oriented VARs to compete with.

The more the resulting solution is customized to fit a vertical niche, the higher the margins, Jenkins said. EBS does work in life sciences, engineering and financial services, customizing Oracle portals, Collaboration Suite and applications to fit those needs.

But Oracle partners are quick to point out that the software itself tends to be pricier and average deal sizes are bigger. So it may be a thinner margin but on a bigger number.

"I'd say the average Microsoft deal is $75,000 to $150,000, while the average Oracle deal is $200,000," said Mick Gallagher, CEO of LS Technologies (LST), a Fallbrook, Calif.-based Oracle and NetSuite partner specializing in life sciences and related verticals.

To restate the obvious, services can make or break a business. Gallagher estimates that in the Oracle universe, a partner typically sells a dollar in services for every dollar in software.

As for IBIS, it targets debt collection, high-tech manufacturing and professional services in CRM. In ERP, its specialties lie in high-tech manufacturing, professional services and financials, where it has a special emphasis on upgrading QuickBooks users.

Growing expertise in a limited number of vertical markets rather than staying a generalist is the only way to go, these VARs say.

One key to happy VAR-customer coexistence is setting expectations -- that means being explicit about what the customer's $30,000 or $50,000 will buy.

Here Vabulas and company are setting a high mark. IBIS parses deals into four categories, similar to those Microsoft itself proposes.

At the low end of the fixed-fee spectrum, IBIS provides a one-day technical boot camp for users, two days of application training and sets up Microsoft CRM out of the box. The price is $2,600. For slightly more customized service, it will offer all of the above, plus set up some best practices, provide lead and contact management, implement marketing campaign and activity management and other services starting at $19,000. (These prices do not include the cost of the software licenses.)

At the very high end, customers will essentially use Microsoft CRM as a full development environment for a totally customized implementation with workflows set up from scratch, custom account management, custom configured sales processes -- you name it.

The goal here is to make sure both the customer and VAR agree ahead of time on exactly what is being bought and sold.

"My contention is that smart solution providers have to come up with packaged service offerings to take friction out of the sales process," Vabulas said.

Software vendors have long pushed their partners in this direction, especially as more of the software licensing business goes through upgrades that, in essence, take VARs out of the deal over time.

The vendors want partners to fill in the "white space" above their application stack, to build more functions on top of what they offer. They pitch that as a win-win-win for vendors, partners and customers.

Microsoft execs will doubtless speak about this at the annual Microsoft Worldwide Partner Conference next month. Oracle has also sounded the call for customization and verticalization. And as it continues to assimilate its acquisitions from PeopleSoft to BEA Systems, Oracle must continue to suss out the partner role in solution sales. Oracle will have to balance the needs of partner constituencies from the various acquired companies, some of which will be at odds with each other.

But, in reality, the trend of partners filling in the white space masks a potentially ugly reality. As vendors tighten links to customers via volume deals and upgrades, they increasingly compete with their own partners for account control. If partners can get customers hooked on their own special sauce, they can retain their hold on the customer as well.

Some VARs take that account control and push it to its natural conclusion, outsourcing the entire IT function for SMB customers.

SMBs want to know how much their technology will cost and many of them simply want the partner to take care of it from soup to nuts, said Alex Solomon, founder and co-president of Net@Work, a Sage Software partner based in New York City.

"They want us to budget for them on IT spending. We are their IT department," Solomon said. "Our concept is that we take care of the whole implementation -- we have competitors in all areas, but no competitors who are accountable for the entire solution. SMB customers want to know one company is accountable for everything so there's no finger-pointing,"

Whether or not they take on full IT services and support for SMBs, smart solution providers know they must prove their own value to customers day after day, year after year.

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