Lots of speculation over what has happened — and is happening — at ERP VAR Hightower Inc of Skokie IL.

It’s been almost a week since reports surfaced that employees were sent home with their belongings in a box and told to await further word. Everyone involved in the company – and what I presume are negotiations over what to do with customers and intellectual property – have been silent.

Unlike seasonal businesses such as landscapers and house painters – consulting is not usually one where you can lay off crews of employees for large gaps of time.

In the consulting world appearing to disband your business prior to having a deal for someone to take over servicing the customers doesn’t exactly put you in a power position for negotiating any potential sale or transfer.

I don’t expect the sounds of silence to continue much longer. Either Hightower is going to need to announce something or Sage likely will do it for them.

This report from Bob Scott last night indicates New York based Net@Work may have a deal for the customer base although nothing officially has been announced as of yet,

SWK handling HighTower client and reseller support effective today bit.ly/GPYOZi

— Brian W Dunn (@brianwdunn) March 23, 2012

UPDATE: March 23, 2012  9:00AM ET – Hightower’s Blog Site has been updated to indicate that “Effective today, Friday March 23, 2012, SWK will be handling all HighTower client support, as well as supporting resellers of HighTower enhancements“.

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Hightower End Looming?

According to one of my 90 Minds members who spoke to their Hightower representative:

We had an open support case with them and got a call from our rep that they were shutting down 

I have a message into Hightower executives. Calls  today (3/20/12) to their phone line listed on the web site have gone unanswered. Update: As of 2:28 pm ET 3/20/12 the phone message is indicating that Hightower is experiencing a serious data interruption to voice and email.

Another independent source reports that according to multiple unnamed Hightower employees:

Hightower employees met at the office and were advised to take an unscheduled and possibly unpaid vacation and  that they’d hear back in a week to 10 days. Email was reportedly shut down over the weekend.

An independent consultant doing subcontracting work for the company reported being told on Monday to put all work on hold. Followup emails to the company representative from the consultant reportedly went unanswered.

It is unknown at this point when Hightower will re-open after  taking what some employees have described as an unpaid vacation.

UPDATE 3/24/2012:  Sage partner Hightower Inc is apparently closing and have transferred the support for all customers and enhancements to another Sage partner. This was revealed in a channel wide announcement sent 3/23/12. Terms of the agreement were not disclosed nor were any further reasons for the sudden transfer. Messages sent to Brian Dunn, CFO of Hightower , were not returned.  A message sent to the new VAR mentioned as assuming responsibility for Hightower was not returned.

According to their web site:

HighTower is a consultant, reseller, implementer, trainer, and software developer of ERP systems, including Sage MAS 90 / 200, NetSuite and SYSPRO. It is a leading reseller, enhancement developer, and Authorized Trainer for Sage MAS 90 ERP and Sage MAS 200 ERP. As an award-winning accounting, distribution, CRM, HR, and manufacturing software expert, HighTower offers experienced professional consulting and technical services that understand how a business works. HighTower is also authorized in the sales and support or Sage MAS 500 ERP, Sage Abra HRMS, SageCRM, and more.

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The key wins listed:

• Serena & Lily
• GoPro
• InkJetSuperStore
• Ultimate Office
• GameWear
• Niner Bikes

This announcement is the first time I’ve awoken to a realization that SaaS products are providing an end-to-end solution (Accounting, Disribution, ECommerce, EDI) in a way that many in the on-premises world have concluded would be years away. I’ve seen the slide decks that claim to offer turnkey solutions but the full package seemed to be elusive.

Of the six showcase wins — all but one specifically note the use of ECommerce, and all six appear to make heavy use of wholesale distribution features by their very mention of “inventory optimization” in nearly every win report. (Note: This keynote was delivered at ETail 2012 – which caters to e-tailers so it’s logical that the win list would be heavily tilted toward e-commerce).

And deal sizes are growing.

Zach Nelson,CEO#Netsuite, says their average selling price rose 40% in 2011. Companies are paying premium prices for #cloud apps. #SaaSU

— Patrick Fetterman (@Plex_PFET) February 28, 2012

GAAP based profit appear to have eluded Netsuite – though with more  larger customer wins like these it could be a trend that reverses and surprises those in the on premises world.

My Take:

The move to cloud computing (SaaS) will likely occur in companies experiencing steady growth and more than minor pains, have distributed office locations that require access to systems and need ecommerce capabilities. Typical smaller company (under $50 million)  on-premises users are unlikely to move immediately from legacy systems without a significant pain factor.

Netsuite

Record attendance of 260 technology members was announced. Most IT Alliance members provide mid-market ERP or related services. The conference is marketed as a collaborative and is heavy on member to member sharing of experiences.

One of the hottest topics at this year’s event was cloud computing. Each conference day spotlighted sessions on creating, adapting and how to change a VAR practice to market SaaS offerings which typically charge customers a lower initial price which means VARS have had to retool their thinking about how to market and provide SaaS services.

During last year’s ITA Fall 2010 collaborative I noted that most IT Alliance member VARS who had adopted SaaS as a business offering were in the early stages of ramping up and offering services. This meant there was not much live feedback about actual results of converting from an on premises to SaaS VAR.

This year’s conference was different and one session about SaaS business best practices featured a prominent Sage partner – Jackie Tiso of JMT Consulting - who is  a 9 year Sage President’s Circle winner and one of their top Non-Profit VARs. Jackie and her firm have been providing a SaaS solution since October 2010.  Here are some notable results that Jackie shared during her session.

Observations: JMT Consulting and Intacct

JMT Consulting has been offering non-profit services for 20+ years. They’ve serviced over 2,000 organizations – primarily with Sage MIP Fund Accounting. According to Jackie, aside from customer and market demand,  their incentive for moving to the SaaS model was that it evened out their revenue stream. Rather than chasing a quarterly sales goal they’ve found the recurring revenue evens out cash flows as well as increases business valuations for the practice.

Craig West, VP of Channels for Netsuite, pointed out that SaaS offering produce much higher recurring revenues for partners than on premises. The common misconception is that SaaS offerings are small (Netsuite’s average sale is $40,000+ which recurs each year) and that they’re collected monthly (both Intacct and Netsuite bill annually).

One thing that promotes renewals? The service for SaaS can be shut off. While this tactic sounds harsh it’s not entirely different than some on premises offerings which can issue expiring license keys that also effectively close down a software solution if maintenance isn’t paid.

Taylor Macdonald, VP of Channels for Intacct , remarked that most customers defecting from SaaS are involuntary churn – typically either because the company goes out of business or is acquired.

One question I offered to Jackie was whether offering SaaS meant that the portion of consulting services – long the bread and butter of most consulting firms – trended downward. According to Jackie they’re still selling similar consulting volumes though the consulting services switch to focus on value added offerings such as reporting or work flow versus prior services which may have required more “break fix” type services to configure workstations and servers and potentially wrestle operating system conflicts.

Typical Lead To Close Times

Both Taylor and Craig indicated that typical lead to close times for new users to purchase SaaS offerings is anywhere from 30-90 days. This lead Craig West to remark “This isn’t a hope and a prayer” – companies are adopting SaaS.

Ramp up times for new VARS to feel as if they’re true experts in SaaS was pegged at 12-18 months by Taylor Macdonald. This is similar to the times other VARS have found when working with more traditional on premises solutions.

Why is it so much faster to close SaaS offerings? According to Taylor it’s because :

• There are so few offerings in on-premises and most of those customers have already seen/used
• Customers are looking at a limited number of cloud options (most likely Intacct, Netsuite, SAP)

According to Jackie:

• Technology sales (customer requires SaaS) are the fastest
• Nobody wants to deal with their IT Department – SaaS is their off-ramp

SaaS Business Model of JMT Consulting

When creating a new SaaS “division” within JMT Consulting Jackie indicated they setup a separate sales division for SaaS. There’s no cross selling of their on -premises customers to migrate to SaaS (which although not mentioned might create serious issues with the on premises software publisher and has reportedly lead to revocation of authorizations for other partners trying similar tactics).

Salespeople at JMT either sell on premises or SaaS. They don’t offer both. Leads are filtered through a central sales area where JMT Consulting sends out a form that is completed by the prospective customer. Once the form is returned JMT determines which solution potentially fits the prospective customer’s needs.

Commission structure for sales people was determined from within a meeting of the group at JMT Consulting. The sales team opted to receive a stream of payments that matched the revenue stream of SaaS as opposed to lump sum commission payouts that would have more closely mirrored the on premises solution sales commissions they were accustomed to.

The Renewal Is Critical

I’ve long believed that the primary measure of customer satisfaction is the annual renewal of software maintenance / subscription. Craig West reiterated that the most important thing is the renewal and continued long term satisfaction of the customer. SaaS business models based on renewal of ongoing subscription will quickly weed out the “Quick Hit” artists who might gear up to sell a lot of new licenses and reap a quick commission.

Under the SaaS model long term customer satisfaction is rewarded with a steady stream of renewal commission payments. Without these renewal payments the VAR also loses access to consulting revenues because the customer cannot elect to stop paying on SaaS and continue using the software as they presently are often able to do with more traditional on-premises offerings.

Interesting Metrics from JMT

Several interesting metrics were shared during this session.

JMT Consulting has approximately 20% of their on-premises customers subscribed to a JMT Consulting support plan. With their SaaS offering JMT has 100% of customers signed up on a recurring support plan — and this is all offered by JMT Consulting and not by the SaaS vendor.

I was not able to followup with Jackie on this metric however I believe the 20% vs 100% difference is probably due more to the difficulty of turning a “time and materials” legacy customer into a prepaid annual support customer. I’d be willing to bet that when JMT went to market with their SaaS offering they removed the ability for customers to pay “time and materials” for support and therefore have a 100% subscription to their own support plan primarily because no other option is offered.

I was curious about the deal level that JMT Consulting observed with respect to sales of on-premises vs SaaS. Jackie indicated that as of now they were seeing about 10 sales of on-premises for every one sale of SaaS.

On the sales lead side of the business it was mentioned that for some webcasts offered by JMT’s SaaS partner there were upwards of 400 people attending. Jackie also indicated that several of their marketing seminars about cloud services had been standing room only.

The SaaS Market and IT Alliance

At the ITA Fall 2010 collaborative there was more of a tone during this same session (summary here) of why should a VAR practice adopt SaaS / Cloud offerings. During the 2011 Fall Collaborative a year later the tone had shifted to not why but “how do we get started”.

Netsuite had 9 firms were staying over after the end of the conference to attend an introductory meeting and learn about becoming affiliated with Netsuite.

Netsuite and SAP have in the past provided VARS to talk about their experiences though this year’s meeting was the first time when members were able to get a first hand look at another member who reported tangible results of their year long marketing effort.

For most VARS SaaS and Cloud offerings are no longer why – but how.

What I found most interesting was actually buried mid-way through the story — and it was this quote from Craig West:

My sense from participating in extensive threads on this topic is that the VAR channel remains wary of SaaS/cloud solution selling. It requires a fundamentally different mindset to selling on-premise solutions where the raft of available add on services is extensive. Craig agreed with my assessment that the vast majority don’t ‘get it’ or remain reluctant to give up their ancillary service support deals: “I think what’s more interesting is this burgeoning whole cloud consultancy thing where they are building whole portfolios that are not just ERP or CRM but collaboration, email, security and telephony. It’s almost like a menu thing.”

I’ve said for a while that SaaS is coming. I don’t know how quickly our customers will demand it. For now it seems mostly to be companies who fit the SaaS model (need strong accounting, revenue recognition, professional services) and have many remote locations where there is true cost savings in using SaaS versus having multiple remote offices wired to a central server.

However the quote from Craig about VARS offering a “menu thing” is where the meat of the challenge for traditional VARS lays.

With SaaS – the days of VARS like us making money from initial consultations, upgrades, setup, training, configuration and break-fix are gone.

Most of these services are either provided by the publisher or no longer required (aka customers don’t think they should pay for them).

What Craig alludes to is the new VAR model which he says is to offer SaaS ERP as a compliment to a collection of services and not just the sole service.

The main question is how quickly demand will grow from our customers for SaaS ERP. I have not seen anywhere that pricing is coming down and most prices I’ve seen for SaaS seems to be in the $15,000 to $20,000 per year (this seems to be the minimum fee level – prices rise quickly based on configuration and they are recurring) which I believe is more than the majority of our typical ERP customers will want to pay.

If and when demand grows it seems likely that to play in the SaaS marketplace as VARS our menu of complimentary services will have to grow significantly and our bread and butter consulting (upgrade, troubleshooting, installation) shrink considerably.

SaaS Consulting: It’s Almost Like A Menu Thing

It’s fitting that the announcement of Baker Tilly broke on Ground Hog Day 2011 because it seems as if we are suddenly starting to relive the very successful practice that former State of The Art CEO David Samuels introduced in 1985.

Under Samuels’ reign at State of The Art the company essentially signed up all CPA firms who had $500 and wanted to be a reseller. No specific training was required. If you could fog a mirror you were on board.

Will The History Of CPA As Technology VAR Repeat?

This practice of onboarding CPA firms worked well. In fact it worked so well that State of The Art was able to go public and subsequently was acquired by Sage UK in 1998 for $ 263 million dollars.

However the aftermath of the “if you can fog a mirror you can resell” phase of State of The Art was ugly.

Slowing Markets Shakes Casual Channel Reselling

Once sales of ERP began to slow there were many concerns that some of the CPA resellers were giving away their own internal copies of the accounting software.  And to be sure there were also more casual resellers who similarly gave away software in order to sell services (which they often poorly performed leaving a black eye on the software).

Gradually Sage ramped up the requirements to be an authorized reseller and most of the casual resellers left.

My question is whether we’re about to see this same pattern repeat. Are we going to se CPA firms jump on the SaaS bandwagon because the requirement to configure and setup the software is removed and it’s now easier for them to consult.

Once the CPA resellers have marketed into their client base, much as they did in the State of The Art days, will there be similar channel conflict where the casual reseller under-prices their services or subscriptions just to gain accounting clients – thereby repelling the pure ERP consulting firms from the market place due to a similar channel conflict as happened in the State of The Art era?

San Mateo, California-based NetSuite reported a quarterly net loss of $6.5 million, or 10 cents per share, compared with a year-earlier loss of $4.5 million, or 7 cents.

Revenue at NetSuite rose 4 percent to $43 million which largely met analyst expectations.

Some interesting items from the call.

• Average revenue per customer is $38,000 – this is up 10%. Lots of talk on the call about moving upstream to bigger customers and away from those smaller ($10,000 and under) deals that tend to churn.
• Net licenses flat – they lost as many as they gained. The claim is that those who were lost were replaced by better (higher revenue) customers.  Lots of talk about how cloud computing is going to slay on-premise computing. And maybe it will. But these earnings don’t show it.  Their customer license growth (flat) is nearly the same as Sage’s recent NA report. Flat customer license growth.
• Netsuite’s vertical specialization is wholesale distribution with services coming up fast bolstered by their Open Air acquisition. Lots and lots of talk about verticalization on the call with very little discussion of which verticals they’d be targeting. Open Air claimed 5,600 customers when they were acquired by NetSuite for $28 million in June 2008.
• OneWorld SRP customers estimated at 50. I’m unsure if this is the same OneWorld roll-out where they’d claimed 38 customers in April 2008 representing a growth of only 12 net new licenses in 1.5 years.  OneWorld is NetSuite’s real-time management and consolidation option for larger companies with multi-national operations. (UPDATE: Re-reading the transcript of the earnings call I think Netsuite is saying that their 50 users represent joint users of OneWorld and Open Air and is not the total OneWorld install).
• According to the call Netsuite is paying 30% commission to VARS who sell their solution. The amount is paid on first year and renewal sales. Only  20%  of their billing is generated from the VAR channel – a number which appeared to be flat year over year. Channel conflict (Netsuite by their own admission is 80% direct) and lack of meaningful services revenue has probably held back most VARS from jumping into a Netsuite partnership.

Comments (Full Disclosure: I am a Sage Business Partner and therefore not independent)

Except for the use of Cloud Computing this seemed like a similar call that Sage or Microsoft could have held.

NetSuite is targeting verticals though they didn’t spend much time saying which ones (I believe it’s wholesale distribution, software companies (same vertical as Intacct) and professional services).

The company is definitely moving away from servicing the low end (seemingly those paying $10,000 or under annually) due to churn. They claim that the users they lost were replaced by better (aka higher paying) licenses.

Recurring commissions are 30% (initial sale and renewal) to the channel. Only 20% of billings are through a channel ( a number which I think is unchanged from prior years).

Interestingly if I read the call right – the flagship (aka high end multi-company consolidation in real time) OneWorld offering ended the year with 50 users. Back in April 2008 when it was unveiled ( http://bit.ly/9Ev49E ) they claimed 38. So that’s a growth of 12 in about a 1.5 year time period. I am not 100% certain this is the same OneWorld flavor since on the call they refer to it was OneWorld SRP (services something or other).

UPDATE: I re-read the call and it looks like NetSuite has a product called OneWorld SRP and the 50 users represents those accounts using both OneWorld and Open World. Personally I find these product names too confusing and similar… but then again isn’t that what ERP has evolved to – using smoke and mirrors to sell…

Going forward Netsuite is changing their internal customer account managers so they each manage less customers. Previously it was a 100:1 ratio and Netsuite sees it moving closer to a 40:1. I think this is probably due to increasing complexity of their deals.

Of those buying the suite – 70% implement CRM.

Nothing I read made me think Netsuite was an opportunity for any but the largest VARS with a heavy vertical tilt who would use Netsuite to complement but not be their complete service offering. This is the same thing that has been on display the last two years at the IT Alliance. The NetSuite partners on stage who tell of their experiences are all using NetSuite as a complement to other service offerings (financing, accounting, mergers, venture capital) and not as a traditional VAR model where they sold software/service plus implementation.

I think cloud computing is still coming and as VARS we’ll have to adapt – though adapting probably means developing a model where the services we offer are not the same ones that the publisher will offer (namely support, training, implementation). Unless we can add some “special sauce” there’s little reason to get back on the treadmill of selling a highly commissioned SaaS offering only to see the commission rug be yanked 10 years down the road when growth in the industry slows (as it will).
Earnings call via Seeking Alpha image via: sfgate