This article was co-authored by George Brown, co-founder of
Partner Economics.
At this year’s Directions North America conference in
Orlando, we presented the results of our latest partner
benchmarking study, along with our forecast for the next few years
in the Microsoft channel. Over more than a decade of conducting
these studies we have observed some critical long term trends that
will shape the future for Microsoft Business Applications VARs and
ISVs. Among them:
- A decline in median services margins to 33.1%, driven largely
by a “utilization gap” that has delivery resources now billing 25%
less than they did 10 years ago. - A decline in median software margins to 30.7%, as SaaS
subscriptions have displaced perpetual licenses. - A median annual revenue growth rate of 7.3%, these days barely
matching inflation. - A decline in median EBITDA to a dangerously low 6.5% as both
services and software margins have compressed.
Concerning as these stats are, this
is really just the tip of the iceberg. We see stronger and more
fundamental pressures impacting the partner P&L going forward.
These include:
- A shortage of delivery resources at a time when project
backlogs are at an all-time high, meaning lost revenue. - A “bidding-up” of delivery costs, as partners largely recruit
scarce existing resources from each other. - An “ageing-out” of delivery resources without a corresponding
increase in “new blood”, or automation. - Direct-to-customer selling by software publishers (Forrester
predicts that by the end of the decade only 1/3 of software sales
will go through resellers, half what it is today) - The emergence of marketplaces which will further
disintermediate today’s Dynamics VAR.
Put all these forces together, and our analysis suggests median
partner EBITDA could be as low as 3% within 5 years. If that
happens, the game will be over.
And then there are even more destabilizing macroeconomic forces
at play, including:
