Channel Outlook: A Perfect Storm for Microsoft Dynamics VARs?

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: