Many of the leading HR software and business software companies sell their systems through what is called a channel, partners, or VAR’s, which is short for value added reseller. Basically, these are separate independent businesses that sell, support, and offer implementation and training services on the HR software vendor’s systems. I created this article to offer some advice for anyone who is considering entering this type of business. After working for Sage Abra HRMS Software for five years, I owned and operated a VAR business for Sage Abra and a number of other HR software vendors including Ascentis and EBS. I sold my client HR Information Systems list back in October 2008 and started working on CompareHRIS.com and HR-SoftwareBlog.com full time.
Under the channel business model, the prospective VAR will pay some type of upfront fee to the HR software vendor for training on the system, the right to sell the system and the ability to earn commissions. The HRIS vendor might offer leads but most don’t. You will be expected to cover most, if not all, of your marketing and overhead costs. The reward is as you sell these HRM Software, you can receive very high margins because you are taking all the risk. If you never sell anything, the vendor has still collected your start up fee.
The Payout
HR Software margins can range from 20 to 60 percent of software and 10 to 20 percent of annual support revenue. If you, or your staff, perform all the implementation and consulting services to get a new system up and running, you will receive 100% of the consulting fees. Consulting fees for training and implementation can run as high as 50% of the total cost of the software and annual support. Add in the margins and do the math and you will quickly see that it does not take too many deals to earn a decent income. On a $95,000 net deal for a 1,200 employee system, my firm netted over $45,000 upon completion of the engagement. If we had kept the client, we would have made additional future income from that client, as well. Sounds easy right?
Why it’s Not Easy
When I became a reseller ten years ago, HR solutions sales was a much easier industry than it is today. When I was selling systems directly for Sage Abra fifteen years ago one of our qualifying questions was “What HR software solution are you currently using?” The frequent answer back then, for even 500 or larger employee sized companies, was they did not have a system. They were doing everything manually or on spreadsheets. It was a pretty easy sell to take someone from the organizational dark ages to the 20th century. This is not the case today. A far higher percentage of companies now own a system than did fifteen or even ten years ago.
Ten years ago there was also far less competition. Back then, the only HR software company I seemed to compete with was ADP. For the last two years with my VAR business, we were running into four or more strong competitors with every deal. Often times the HR Management Software the competitors were offering were HR products which were lower in price and superior in capabilities than that which I was competing with.
There has been a recent movement where vendors are bringing sales internal. This means as a reseller, you are also competing with the HR software vendor and you can expect not to receive as many leads, if any. During my last year as a VAR we saw tremendous reductions in vendor provided leads. The leads go to the internal sales force not the resellers. If you are going to succeed as a HR software reseller, you are going to have to become an expert in marketing in order to generate your own leads. All of this takes time. As a new VAR, you may very well not see a check for six months at the earliest.
Consider this time line. As a new VAR, you will market the HR system for at least three to four months before you start to generate any real leads. Once you have some valid leads it will take three to four months at a minimum to close any of them; then you still have to finish the consulting before you get paid in full. As a new VAR, expect to cover all operating costs and marketing costs for at least nine months before expecting to see any revenue. I am not talking about a profit either, only revenue. Making a profit may come much later. As I re-read this paragraph it sounds a little scary. It is supposed to be.
These challenges have not only created hazards for new VARs, they have caused existing VARs, including me, to leave the business. To be fair, I left the business because my web business had grown to a level that my time was far better spent working on that side of things than on my VAR business. It’s also important to note that CompareHRIS.com began as an idea to create income to replace income reductions I had seen with my VAR business.
What type of firm will likely succeed as a HR Software VAR?
Now that I have pointed out the negatives, allow me the opportunity to paint a picture of the firm that can succeed as a VAR almost out of the gate. For a new reseller just starting a business it’s a hard road to climb. I would say in today’s market it’s almost impossible. For a firm that already has income, clients, and a pipe line that may not be the case. If your existing firm is already selling other software products, such as accounting or time keeping systems and you are merely looking to add HR Information Systems or HR Management System products to your offerings, you won’t face nearly the hazards of someone just entering the business. You may see fairly quick income from the new product offering by selling to your existing clients or adding the capability to all outstanding proposals. If you work in the HR consulting world, you may have a big leg up as well for the same reasons, you have current income and a pipeline.
The paragraph above should also assist vendors who are looking to grow or start a channel. You want to sign up VARs who will survive.
It takes time
I have painted a pretty grim picture and I meant to; but as a new VAR if you make it past your first several years, things will get much easier. You will start to add consistency to your income from existing clients, referrals, and long close cycle leads. Eventually, you will not see the zero income months. To get to that point, you will have to cover a lot of operating costs and not see much income for perhaps several years before things improve. I hope this advice assists those already in the business or considering getting into it. Comment on the post if you have any questions on entering a VAR business.