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Peter Ross, On Demand Solutions

by Stuart Wilson, Tuesday 5 November 2013

Peter Ross, director at specialist business-to-business web e-commerce and ERP software vendor On Demand Solutions, share his opinion on how the current reseller business model is becoming tired, out of data and unsustainable. Ross claims that many resellers do not currently have the ability to innovate, differentiate or develop solutions which meet customers’ needs. Is there a better way of doing channel business?

The source (code) of future reseller revenue

Peter Ross: “The reseller market, indeed the reseller-vendor relationship, has become jaded, tired and out of date. If resellers can’t make any money from selling the current crop of ERP and financials solutions – and let’s be frank, it’s a struggle – the current model clearly is becoming unsustainable. It doesn’t matter how good the product; how effective the vendor’s customer service or how ambitious the R&D; if the financial dots don’t join up the business model is flawed. In this case, fatally.

This state of affairs cannot be blamed solely on the ongoing economic travails – although they have played a part. The problem is that resellers have no opportunity to innovate, to differentiate or to develop solutions that truly meet customer needs. The market has become a one-size-fits-all commodity bun fight.

Just how much more value could a reseller add to the business with access to and co-ownership of the product source code? From white labelling to product development, source code ownership fundamentally changes the financial model, making margins workable again and facilitating the creation of the intellectual property (IP) that delivers long term value for the reseller.

Flawed model

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%. 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% mark, which barely covers the salesman’s salary and company car.

Nor does the software as a service (SaaS) model offer any respite. In contrast, it is fast becoming clear that the subscription-based model may be great for customers, but it does nothing for anyone else involved, from the commodity data centre hosting providers to the software resellers; even, whisper it, the vendors.

Halcyon days

For any individual with the good fortune to set up a reseller business a decade or more ago, while 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.

And that is, without doubt, 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) that is essential to building a valuable – and saleable – business.

Source code

Yet go back a decade, and 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. And with this move, they have taken the key aspect of value-add from the reseller business model.

In contrast, with access to source code, resellers have the chance to develop tangible financial value. Whether it is opting simply to white label the solution or exploiting the source code to develop that innovative business idea that has been hovering on the side-lines for the past five years, source code co- ownership is compelling.

How compelling? Firstly, co-ownership of an ERP source code fundamentally transforms the sales margin, with resellers attaining closer to 95% margin. Secondly, the ability to use the source code to develop additional products or add-ons provides the essential ability to create IP and build a business with inherent value – and hence saleability.

Margin squeeze

There is no doubt that the established vendors have proved to be 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: 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 can play in the reseller business model?”

On Demand Solutions’ primary product, ODSNET, is a low-cost, feature rich web e-commerce platform that is fully integrated with its own in-built ERP software suite.

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