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Vendors, VARs vie for software upgrade and maintenance contract money

It's a never-changing story: VARs want a piece of software upgrade and maintenance contracts, but vendors won't cough it up.

It's an age-old channel story: Value-added resellers (VARs) want a piece of software upgrade and maintenance contracts, but vendors are loathe to cough it up.

Still, as margins are squeezed and more software business dissipates into the cloud, there is some feeling that the status quo will change -- at least if vendors want to keep a viable partner force in place.

"Resellers will get into renewals," said John Paget, global president of Avnet Technology Solutions in Phoenix. "There's just not enough new business for them to make it [otherwise]. Net new doesn't pay the freight."

It may come down to a simple choice for vendors: If they want partners to sell their stuff, they're going to have to let them share in the annual annuities that support, upgrades and maintenance have become.

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"You can't sell software at 6% margins and survive," said Scott Hill, president of RightSize IT in Dallas.

At that point, many VARs completely divorce implementation and deployment fees from software licenses. What Hill typically does is advise users to get a Microsoft Open License and source the software themselves.

"I tell them, 'Here are the specs. Go buy it, and we'll implement it,'" he said.

David Hiechel, president of Eagle Software in Salina, Kan., said this vendor behavior makes his choices a lot easier.

"If we're not able to make margin on software renewals, we won't even look at the solution," he said. "We won't even consider it."

Hiechel keeps working with vendors like CommVault who give partners extra points for net new accounts and opportunities, but also extra margin on follow-up sales. Many vendors try to pigeonhole partners into net new business and keep the lucrative software upgrade and maintenance contract revenue to themselves.

"Believe me, we would love it if they paid us on that," said Scott Jenkins, CEO of The EBS Group, in Lenexa, Kan.

But does he expect them to? Not unless they're forced into it.

Vendors fight to keep 100% of software upgrade and maintenance contracts

Oracle provides a glimpse of what's at stake. The database and enterprise apps giant typically charges 22% of the license price for support. Software upgrades, maintenance and support accounted for 55% of Oracle's total revenue for its most recently disclosed quarter. That was a cool $2.9 billion. On the earnings call, Oracle CEO Larry Ellison touted support and maintenance as the most profitable part of the company's business. One reason? No partner cut.

A Boston-area solution provider who asked not to be named said most of his vendors want their partners to bring in new business and pay them margins to do so. The reason? It's much harder to win new business than it is to retain current customers. Most do not pay margin on upgrades, however.

The solution provider agreed that, on some level, it makes sense for software vendors to keep support in house.

"Software's different than hardware," he said. "Hardware lends itself to third-party maintainers and software doesn't. With hardware, you can get all sorts of third-party parts if you need them, but you can't get the source code with software."

Still, some software vendors are better than others. SAP, Symantec and Sun Microsystems cut his company in on maintenance.

"They try harder, but then again they have to," compared to Microsoft and Oracle, he said.

Other partners applauded Cisco Systems, which also pays VARs some margin on support and upgrades. And NetApp, the storage appliance vendor, is apparently a superstar in sharing the upgrade and maintenance wealth.

"NetApp has the gold standard program," Jenkins said.

Meanwhile, Microsoft, Oracle and other broad-based "platform" software companies try to sell site or volume licenses covering all their key core technologies. In doing that, they have "bought out" all new demand, said the Boston-area VAR.

At that point, a partner may find a bona fide new opportunity within a department or subsidiary of a larger business -- only to be told that it really isn't new business, because some of the vendor's software is already running elsewhere in the organization. Bye bye, partner deal.

The Boston-area VAR also praised SAP's small and medium enterprise (SME) business, where SAP pushes Business One and All in One ERP through partners.

"Our partners own the customer when they sell our stuff," Pat Hume, senior vice president of SAP's indirect channel, told "They do the post-sales, and they do the cross-sell and up-sell, which is a big deal."

The user universe may be saturated for a company like Microsoft, which sells operating systems and productivity applications, but Hume said she still sees plenty of net new deals for SAP's enterprise resource planning (ERP) and analytics lineup.

"I think there are millions of customers out there who are uninitiated. They may have made the decision to buy piece parts of ERP -- maybe they have CRM or a purchasing system -- but they really don't have ERP," she said.

Microsoft's approach to software upgrades and maintenance contracts

Of course, when it comes to the discussion of software upgrade and maintenance contracts, Microsoft remains the 800-pound gorilla. That company, despite its channel-oriented DNA, has not been a star when it comes to sharing the upgrade wealth. The sole major exception that proves the rule is Microsoft Business Solutions, which pays authorized partners 20% margin on upgrade sales. But for the bulk of the "classic" business -- Office, SQL Server, Exchange, etc. -- there is no real partner play in maintenance.

Matt Rosoff, analyst at Directions On Microsoft, said large account resellers (LARs) in some cases get a 1% to 10% rebate on services associated with implementing Enterprise Agreement volume deals. But Microsoft and the customer negotiate the price of the deals up front.

Rosoff's colleague, analyst Paul DeGroot, said Microsoft must maintain a tight, closed loop between customers reporting bugs and support issues and its own product groups. Because Microsoft's product range is so broad, "it makes sense to have the vendor lurking in the background to answer more obscure questions," he said. "There's a lot to be said for the vendor knowing what the problems are."

There is a small number of "support resellers," but these partners perform the same services Microsoft itself would. The customer may buy support from the partner, but these partners can escalate the problem back to Microsoft.

"The main thing is, there is no broad-based program through which a partner can resell Microsoft support services and get a commission, rebate, etc. on it," DeGroot said via email.

Many longtime Microsoft partners worry about their viability over time as software margins soften and Microsoft moves more of its business to a vendor-hosted and -maintained cloud. That cloud foreshadows a direct sales model and tighter control by the vendor over the customer relationship.

Many Microsoft partners are resigned to what they see as their fate. Asked if he expected Microsoft to cut his business in on software upgrade, support and maintenance money, one veteran VAR said: "Only over Steve Ballmer's dead body."

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