Channel Marker

Nov 21 2008   2:16PM GMT

What ‘net new’ kemosabe?

badarrow Barbara Darrow Profile: badarrow

The dirty little secret of software, is the tectonic shift of the whole business from selling new licenses to selling upgrades. There just aren’t that many green field opportunities left.

“Well, duh,” you might say. “What’s the big deal?” For resellers or for solution providers who sell software licenses as part of their overall practice, the big deal is that most software vendors pay partners margin on “net new” sales or the elusive “customer adds.” But when it comes to the lucrative upgrade- and maintenance contracts partners are out of luck. See ya. Nice knowing ya. Don’t let the door hit you …..

Face it: Maintenance and upgrades are where the real dough is. If you don’t believe that, talk to the top brass at Oracle, who see those juicy contracts as their inalienable right and are most definitely not interested in sharing them. Many partners say that Oracle wasn’t really buying new products and technologies when it acquired PeopleSoft/JD Edwards, Siebel Systems, Oblix, insert-company-name-here as much as it was buying captive maintenance and upgrade revenue streams. Historically, the same argument could be made for Computer Associates, now known as CA. Computer Associates years ago was known as “the Borg” for its tendency to snap up small software companies and milk their maintenance revenue for all it was worth.

Microsoft, which some call the new borg,  hardly ever pays margin to partners on upgrades of its “classic” software.  Microsoft Business Solutions (MBS) pays 20% margin on ERP upgrades. Although don’t ask them because they won’t tell you.

The issue gets worse in the field. When a solution provider registers what he or she feels is a new deal, that often ends up the start of a negotiation. Many times vendor sales reps will mysteriously find that opportunity already in their own paperwork. Or maybe the new deal is a subsidiary or division of a bigger company that has some of the vendor’s software buried in its bowels. If that’s the case, the vendor rep will argue that it is not net new at all. And so it goes.

There are some bright spots on the horizon. Solution providers say that NetApp is extremely enlightened in the way it handles –and shares–upgrade and maintenance revenue. Ditto Sun Microsystems. But in most of the software world, there is a pervasive direct-only upgrade-and-maintenance world view. Should Google ever start selling appreciable amounts of its SaaS goods, it doesn’t take a genius to know there won’t be a huge partner component there either.

So here’s the question: Is there enough “net new” out there to float a resellers boat going forward? Or is this just one more big chunk of evidence in the case that says the software reseller jig is up and it’s time to move on?

2  Comments on this Post

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  • Dan Blacharski
    I don't think the jig is up, but as I mentioned in my blog on ITWorld, VARs will be dancing to a different tune. Any business that resists change is doomed to failure. I cite the US auto industry as an example. Resistance to drastic change and a sense of entitlement to the public trough will eventually spell the demise of the US auto industry as a major force. But VARs will be more resilient than the auto industry, simply because they will be forced to change directions, and will survive the recession better than most.
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  • Patcolbert
    Clearly software vendors with commodity products, like Symantec and Microsoft, have a difficult time paying upgrade fees when they can automate that action and save the margin. Companies like Oracle and CA, however, require a tad more hand holding from partners each year to ensure that upgrades work with other applications/ or training on any enhancements that might be included. I think the price of the upgrade or renewal is probably relative to the work required to support it. I believe that Software resellers that don't add value may be out in the cold if there is no reason to pay them for supporting a product that has no upgrade enhancements. However, that being said, commodity vendors need to ensure that there is no hidden cost of support - like phone calls from the customer. Vendors also need to balance the higher sales cost of selling a commodity product to a new user. Can a reseller afford to be in that business? And, is the vendor paying enough? Those are some of my thoughts.
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