05: Value-Added Reseller

Steve Preda discusses several examples of successful value-added resellers and how the practice of customization of mainstream software packages expanded their profits and helped grow their companies.

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Value-Added Reseller

Today’s episode is about a topic that came up in a conversation yesterday with one of my entrepreneurial operating system client. This is a software developer. They have a slate of dealers around the world that help distribute their software to their customers, OEMs and end users. And we had a conversation about how to motivate these dealers to have them be more committed, to be able to make more money with that software. And I remembered one of my clients who was a value-added reseller and they did a really great job with that.

And so I thought that maybe it’s worth spending some time talking about value-added resellers and what they do. So this concept emanated from the early 90s when major software companies started to step ahead of the competition, SAP, Microsoft, obviously, also Oracle. And they basically started dominating the field. And all those other companies that were smaller software developers, they found that it was harder and harder to sell their software because everyone wanted to go with the source, sure solutions, the big boys.

And then what happened was some of these companies and also other companies, consulting firms, they started making money by actually integrating these softwares. These companies were called system integrators. They helped companies implement these softwares in their businesses, customize it to their particular company. And also these companies provided training. They provided ongoing consultation services to help the introduction of something like SAP. It can be could be a major job to customize and introduce it in a company. So this is where the value-added reseller concept was created.

Motivating dealers to be more committed is not just about selling software; it's about understanding the power of value-added resellers in creating true partnerships. Share on X

These companies were basically resellers of the software, the SAP software or the Microsoft software. They made a small margin on that software, and they sold all their bundled services together with the software. So what I was wondering about, whether this concept, we can drill a little bit deep into it. And then I remembered my client from back in 2007. It was a software company, was started by an entrepreneur. This was back in Hungary. The entrepreneur’s name was Zoltan Schvarcz, and he had been a software entrepreneur in the 90s. He had a partner and he had a company which was moderately successful at best. They grew the business, but they got over leveraged.

Their margins were laser thin. And then he had the falling out with his partner. So they parted ways around the year 2000. And that’s when Zoltan started his new company called XAPT or XAPT. They called this company XAPT, I guess, because they were implementing the Xceptor software, which is an ERP software from Microsoft. And the business was growing fast. Then around the year 2006, they stumbled upon an opportunity. They implemented, I think it was Navision or Axapta for a Caterpillar dealer.

Actually, they created a customized solution and they were referred to another Caterpillar dealer and they started getting into customizing Navision for Caterpillar dealers, and from then on, heavy equipment dealers and it really caught on and Microsoft started to embrace them. They got some engagements in the US, then in Australia, Canada. They were on stage with Steve Ballmer and the business was starting to grow really leaps and bounds. And I remember they were high margin business.

We worked for them in the year 2007 on a capital raising project, which they eventually turned it down and they went with someone else. But, you know, I looked them up just yesterday and I was shocked. So the last financial statements that were publicly available, which was 2015, showed that they had a revenue of 24 million dollars, which is which is not it’s not extraordinary. But here is what’s extraordinary. Their net profit profit before taxes, 14 million dollars, almost 60% net profit margin. And they are a value-added resource.

All they did was they took a commodity product, a Microsoft ERP system, they customized it to an industry niche, and they got a 60% margin, as if they invented the software themselves. They invented the customization of it. So I thought it’s worth talking about this, because it’s a huge opportunity for many companies. You can look at these 500 pound gorilla players in the software market as companies that squeeze out the small players. But you can also look at it as platforms that give the opportunity to small player to really create a very profitable business.

The value-added reseller model reveals that within the realm of software giants, there lies an opportunity for small players to not just survive but thrive with innovation and customization. Share on X

Let me give you another example. Several years back around the year 2010, I was still running my investment banking business and I wanted to find a good CRM system that I could use. And Salesforce was really the major upcoming player at the time. And I looked at their plain vanilla kind of generic solution. It was a twenty five dollar per seat license, which which did an OK job. But then I was approached by a company that customized Salesforce for investment banks. And they charge $250 a month for basically the same basic package, but it was totally customized.

And I remember I looked at it and it was a lot better. It was clearly what I needed, but it costs 10 times more. So they basically 10x the price point just by customizing that solution for my demography. So that’s what I wanted to talk about. So what is the opportunity? The opportunity is that you can create customized product, you can then engage your customers and you can create an ecosystem around that product. You can pull all your customers together, you can create a community where people share experiences, where people connect with other users, and that’s kind of an added value as well.

Position your professional service firm at the heart of an ecosystem, facilitating a community that fosters collaboration – a high-profit approach awaits. Share on X

And you can be your professional service firm can be in the middle of that ecosystem and you can facilitate that community. And it can be a very high profit approach for you. So just to finish off the set story. So they developed that customization. They actually call it next and the XT. You can look it up. And they grew the company. They started in Hungary, and then they went to Romania, Central Europe, and then they started branching out, starting to sell this Next solution all over the world. And eventually what they did, they spun off the customization department, I guess, or the customization business into a new company, which is now headquartered in the United States. They have 450 employees just doing that service.

And then the rest of the company, which is about 150 employees in Central Eastern Europe, they sold it to another group, which is a European Microsoft system integration group. They have 1,200 employees just integrating Microsoft products for businesses, private businesses all over. So that’s what happened. So they just created customization and that grew into its own business, which became three times bigger as the original business and became a global business from Tiny Hungry. So I just want to share with you the story. So consider becoming a value-added reseller. It’s not such a bad thing, such a bad place to be. If you have comments, I’d love to hear them. So please include your comments.

Becoming a value-added reseller isn't just about selling products; it's about building a community, fostering collaboration, and redefining your firm's place in the market. Share on X

That’s it for today and enjoy this show. Again, please feel free to check out other episodes. In upcoming episodes, I’m going to be interviewing some of my acquaintances, some of my clients who are professional services and technology firms. Many of them also implement EOS, the Entrepreneurial Operating System, which is a great way to get your business to the next level, to break through the ceiling, create the alignment, vision alignment, get your team execute and really forge as a cohesive force together. So that’s it for today and I look forward to talking to all of you very, very soon.

 

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