Source (code) of future reseller revenue

The current reseller business model is becoming tired, out of data and unsustainable, warns Peter Ross

Is there a future for the software reseller? Despite relying on the channel for huge swathes of revenue, the vendor community would appear to be doing everything in its power to undermine the commercial viability of the UK reseller base.

The squeeze on margin is becoming ever tighter year on year, with even the most generous margins rarely exceeding 35 per cent. Even worse, vendors are robustly pushing best practice templates and rapid deployment methodologies, effectively removing a significant element of any reseller's revenue – namely, consultancy days.

Just where is the competitive differentiation? With no geographic exclusivity, resellers are falling over each at each prospect tender. The only option is to enter a price war on training and implementation – pushing the margins down towards the 20 per cent mark, which barely covers the salesperson's salary and company car.

Nor does the SaaS model offer any respite. Conversely, it is fast becoming clear that the subscription-based model may be great for customers but does nothing for anyone else involved, from the commodity datacentre hosting providers to the software resellers – even, whisper it, the vendors.

For any individual with the good fortune to set up a reseller business a decade or more ago, today's balance sheet may make uncomfortable reading. Few would deny the glory days were halcyon indeed. Most have managed to make more than a good living from this industry, so why not call time, accept the inevitable death of the VAR, and sell the business while the going is still, almost, good?

But what, exactly, is there to sell? Where is the intellectual property? Make noises about selling the business and the vendor may simply reallocate customers to the competition – all there is left to sell is a disgruntled set of employees and a badly negotiated office lease. Not really enough to support that golfing retirement in the Algarve.

That is one of the most frustrating aspects of the current reseller market: the model adopted by the current vendors provides no opportunities for resellers to create the intellectual property (IP) for building a valuable and saleable business.

A decade ago, the ability to develop add-on functionality or create a product to meet the specific needs of a vertical market was a fundamental component of the reseller business model. What has changed? Vendors simply provide no access to or ownership of the source code.

With this move, they have taken away a key part of value-add.

With access to source code, resellers would have the chance to develop tangible financial value. Whether it is opting simply to white-label something or exploit the source code to develop that innovative business idea that has been hovering on the sidelines for the past five years, source code co-ownership could be compelling.

Co-ownership of an ERP source code would fundamentally transform the sales margin, with resellers rewarded with perhaps up to 95 per cent margin. Secondly, the ability to use the source code to develop additional products or add-ons means you can create IP and build a business with inherent value, and hence saleability.

There is no doubt the established vendors have proven strong partners. They continue to develop strong products, invest heavily in building the brand, and ensure customer recognition.

But the reseller community is paying a high price for this commitment: a year-on-year margin squeeze, escalating competition, and an increasingly commodity product and implementation model that offers no chance to differentiate.

The question is, when does that price become too high? When does the reseller finally say "this business has more to offer than pushing a commodity product – how can we exploit expertise, experience and market knowledge to deliver real value to both customers and the bottom line"?

Rather than enduring the continued pain of a vendor intent on turning the ratchet year on year and reducing margin to unsustainable levels, is now the time to reconsider the role source code might play in the reseller business model?

Peter Ross is director of On Demand Solutions