NetSuite, ex-reseller locked in ugly legal battle

By , IDG News Service |  On-demand Software, NetSuite

In colorful evidence of the competitive atmosphere SaaS (software as a service) poses for vendors and resellers, NetSuite and a Miami company named Skyytek -- a former NetSuite "partner of the year" -- are embroiled in a legal battle, with both sides claiming the other used disparaging remarks to convince customers to switch allegiances.

There has always been some tension between channel partners and software vendors over who "owns" the direct customer relationship, since it can lead to lucrative, ongoing services revenue. And the emergence of SaaS, wherein vendors host the software themselves, has heightened the stakes, with partners worrying they'll be cut out of the loop.

So far that hasn't happened, but NetSuite, for one, has made clear moves toward capturing more services revenue. Last year, it rolled out a new set of implementation methodologies, training courses and support services.

Meanwhile, NetSuite and Skyytek had already ended their relationship several months before Skyytek filed its breach of contract suit in February, issuing a public statement that provided little detail about the reasons for the split, according to published reports. Neither company could be reached for comment.

But now, court documents filed by the parties in U.S. District Court-Northern District of California provide a detailed account of what allegedly led to the breakup.

Skyytek and NetSuite signed a deal in September 2005 that dictated NetSuite would give the reseller 30 percent of the gross revenues from software subscription sales or renewals, according to Skyytek's original complaint. The pact also specified that if the agreement was terminated, NetSuite would continue paying Skyytek for three years, Skyytek alleges.

But the seemingly amicable agreement was only a mirage, according to court documents.

NetSuite made disparaging remarks about Skyytek from 2005 through 2008 to "numerous customers and prospective customers" in the U.S., both "via telephone and in person" and tried to get them to work directly with NetSuite, according to Skyytek's complaint.

NetSuite also failed to approve Skyytek ads in a timely manner and refused or was slow to issue Skyytek-related press releases, according to Skyytek.

In addition, NetSuite has not paid Skyytek in full, and has been late in making payments, Skyytek says.

The company is seeking a variety of monetary damages, and also wants NetSuite to "publish complete retractions" of the statements it allegedly made against Skyytek.

NetSuite's counterclaim to Skyytek's complaint, which also alleges breach of contract, paints a vastly different picture of the dispute.

"In order to claim that Skyytek was eligible to receive higher revenue share under NetSuite's 'Premier Solution Provider Program Guidelines,' Skyytek would enter into contracts or other arrangements with other Solution Providers so as to 'aggregate' its sales of NetSuite's products," the filing states.

Also, in an effort to "pad its revenue generation," Skyytek would tell NetSuite customers that the vendor's services were "deficient," according to the filing.

Sometimes, Skyytek would manage to convince customers that they needed to re-implement NetSuite and should hire Skyytek for the job, the filing adds. "Skyytek would then claim that it generated the future revenue paid by that customer since it had re-implemented the customer's instance of NetSuite."

NetSuite also claims that in 2008, Skyytek "made disparaging remarks about NetSuite to an unnamed industry financial analyst, who, as a result thereof, downgraded NetSuite's stock." As a result, NetSuite's stock price fell, according to the filing.

NetSuite moved to terminate its agreement with Skyytek in August 2008. Under their contract, NetSuite was no longer required to pay Skyytek if the deal was ended "for cause," but NetSuite offered to terminate it "for convenience," giving the reseller a stream of shared revenue for three more years, according to the filing.

So far, NetSuite has given Skyytek at least US$151,178.37, the filing states. The company is seeking damages in that amount, as well as various other sanctions against Skyytek.

It's not often that contract disputes between vendors and resellers end up in public view, since many are settled out of court.

But the channel will always be part of the SaaS landscape, particularly applications aimed at SMBs, since vendors "need a local face" and can't build a sales infrastructure from scratch, said Forrester Research analyst Ray Wang in an interview.

Therefore, it's important for customers to determine the strength of their reseller's relationship with a vendor, according to Wang. "If you've invested a lot in a partner, and the vendor relationship falls apart, you're at jeopardy," he said.

Less mature, or "level one" partner relationships are often referred to as "Barney deals, (i.e., "I love you, you love me" relationships)," Wang wrote in a 2008 report.

Such pacts focus on marketing efforts, such as joint press announcements, versus product integrations, and users generally don't get much of a benefit.

More mature vendor-partner ecosystems will feature things like certified integration between products and a coordinated go-to-market strategy, according to Wang.

The most mature relationships see vendors and partners "share a joint product strategy and effort toward co-innovation," Wang wrote. "Go-to-market strategies focus on rapid implementation methodologies, centers of excellence, and shared training programs."

It's rare to see a partnership reach this level, and in many cases the vendor ends up acquiring the partner, he added.

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