The Effects of SaaS, the Cloud, and Managed Service Providers on Channel Models

CCI speaks with XO Communications Vice President for Channel Development and Strategy, Tom Gorey, in the monthly eNewsletter Channel Management Insights.

Channel models are due to shift again. The growing trend away from "buying systems" to "renting solutions" on a fixed-fee or pay-per-use basis is one driver. So is the emergence of the "Cloud." The use of managed service providers as a channel type is also a major catalyst for this shift. Whose channel models will have to change in response to these developments? Simply put, everyone's -- vendors', distributors' and resellers'.

Vendors will have to gain a greater understanding of channel partner models, review compensation practices and rethink the importance of branding. Distributors will have to put together not only prepackaged bundles but the right packages, and redefine their relationships with resellers. And resellers will have to decide whether they will maintain their role of selling these prepackaged solutions or become distributors themselves, which may be more feasible than ever before.

To find out more about this dynamic time, how to take advantage of the key drivers behind it and the necessary evolution of the channel model, Channel Management Insights spoke with XO Communications Vice President for Channel Development and Strategy, Tom Gorey. The following is a summary of that interview.  

CCI: How are SaaS and managed service providers changing the reseller model?

Gorey: Single SKU transactions will become monthly subscriptions that will bind the reseller to the underlying service provider, or cause it to become one. There's a financial impact to both of these responses.

In the first scenario, resellers become consultants. Intellectual property is what they sell, and they no longer finance inventory. Pricing to end customers is a different paradigm, and resellers may have far less control over price. The distributor will make more decisions, and the reseller will customize the solution for end-users. In addition, the statement of work will evolve around value-added services that are complementary to, but not the core of, the managed service being provided. That changes the marketing value proposition.

If the reseller becomes a provider, this will have an impact on how its business is financed. For example, instead of financing inventory and receivables for a short cycle, a reseller selling services on a typical three-year cycle is going to have to manage cash flow reflecting the combined billing of multiple clients over a longer term. The rule of 78s applies. This change could be profound in today's credit markets.

CCI:  How will the Cloud contribute to changing the reseller model?

Gorey: The Cloud ties into sales funnel functionality. It's not a Siebel product in a back office; it's a subscription for service that resellers can integrate into other things their end customers use. Resellers have been selling boxes to move bits of information; with the Cloud, they won't.

CCI: What should vendors do now to prepare for these changes?

Gorey: Vendors have to review their channel partners to understand their business models better than they have in the past. For instance, larger VARs that tend toward efficient fulfillment models without supporting services are likely to have a more difficult transition. Education and support for business planning through these transitions would likely be good investments now. 

Also, now is a good time for vendors to review compensation models and contract structures to their channels, if they're going to host services and pay agency fees. They should also review how these changes will impact VAR internal compensation models within their businesses. Past efforts at converting traditional go-to-market methods with compensation models based on receiving the proceeds of a sale upon billing have been problematic when combined with compensation from vendors paying residual fees over the life of the contract. Though many of these programs pay out higher over a standard product life cycle, the loading of revenue over a typical three years versus upfront creates focus differential.

Employee turnover mitigates the value of longer payout cycles at higher overall gain. If an employee isn't there to collect, or in the same position, those higher returns never materialize. Vendors and resellers need to understand that, and potentially create different payout programs for transitions.

Another issue to consider with SaaS is branding. Since resellers will be selling functionality, the vendor's name may not be on the product; the reseller's name could be. The hard drive people already lost their identities in the personal computer market, as an example. Computer companies sell drive capacity, not brands. Intel is the exception because it puts a sticker on products. Even so, many people buy processing power, not necessarily the Intel brand.

CCI: How will resellers have to adapt to these changes?

Gorey:  Resellers have the same issues mirrored in the vendor community, plus they'll be at the cutting edge of the integration of services models into legacy systems, where services models and traditional implementations meet. A premium will be placed on resellers that understand the ecosystem of related vendors where integration has been initiated and APIs are in place.

Differentiation is also a concern. When potentially thousands of resellers are presenting solutions from one provider, and that provider sets a price point, how do they differentiate themselves? Training, implementation, services and tying the product into legacy systems are some examples. They also have to be relevant, with a defined value proposition.

In addition, they have to pay attention to the generational change in the workplace. The next generation will expect different things where they buy or work. They don't know the siloed way of doing business, and they expect collaboration inside and outside the company. Plus, they don't need to own anything physical, just functionality.

CCI: In this new dynamic, who owns the client? 

Gorey: Good question. That depends on who provides the invoice and whether the customer looks at the reseller in the same way as before. Issues will also arise around who takes the first call from the client when things break or when the client doesn't understand how to use functions. Will it be the VAR or the application vendor? Will the application vendor understand the context? And where will the client fall in the hierarchy of response on service intervals?

In addition, resellers will have to choose between owning the invoice and customer, or owning the consulting, which will create a number of other issues in how they define their businesses. For instance, if the vendor pays an agency fee for representation, what are the responsibilities of the reseller to the client? Does that change when the client is no longer the one paying the reseller, but the vendor is instead? Is that different when the reseller performs as an outsourced IT provider versus selling to a client with its own IT staff?

CCI:  What shifts will be necessary for pre- and post-sales support requirements?

Gorey: Decisions need to be made for where the first call goes when something breaks, who's responsible for the repair or restoration of service, how communications are handled and at what frequency, and what happens if a customer buys other services from a different reseller or direct from a different service provider and requires interoperability.

In addition, there are financial implications. I'll leave the revenue recognition question to the financial experts who can articulate that better than I can, but there's a difference in receiving income in the first year as a traditional hardware and software license sale and in receiving a revenue stream that extends beyond the first year to two-year, three-year and even longer contract terms. There are also nuances in the services model since longer-term commit contracts that are common in this area don't allow a client to suspend services and still function, as a customer can by delaying a planned hardware or software upgrade. The monthly subscription charge and the services contracted continue.

CCI: What is the scope of the change -- how much and how fast?

Gorey: We're in the beginning stages where the hockey stick is ready to take off. Right now, we're in a bad economy, where people are examining assets and looking for safe bets, efficiency and options. They're more willing to accept input from resellers that can help their businesses survive or grow. Companies that understand the users' needs and how business is changing are capitalizing on their knowledge and experiencing double-digit growth. 

I expect to see a substantial amount of change within the next 24 months, enough that the world will look very different from today. Providing functionality, not a box, and delivering it through the Internet changes everything.

Tom Gorey is vice president for channel development and strategy at XO Communications, a $1.48 billion facilities-based telecommunications services provider. Prior to joining XO Communications, he served three decades in technology companies including a CBS Broadcasting specialty division, Ingram Micro, GTE, Qwest Communications and MCI.

For the past five years, Gorey has been a key driver in XO's indirect channel as the company turned a stagnant sales and revenue channel into annual double-digit growth in both areas, including very strong growth through the recent economic recession. He has a bachelor's degree in architecture with a minor in physics from the University of Washington.

This article was originally published in Channel Management Insights- a monthly e-newsletter from CCI featuring articles and insights related to channel marketing- click here to subscribe.

by Martin McNally
Director of Product Management, CCI

As a product manager and product marketer, I am very clear on the value of software. How about you? Why do you use software to manage your channel, and in particular, the incentive programs you offer them? Or, if you have not yet introduced automation, what might your motivations be for doing so?

The adage "change is hard" can be very true indeed. Rolling software into existing process and relationships requires careful consideration. When a large population of the impacted parties are external (to your company) stakeholders (in this case, your channel partners), treading lightly and deliberately is advisable. But don't let the need for planning stop you. With a well-planned rollout, the immediate and sustained benefits of automation are both significant.

Current market momentum validates the use of software solutions for channel management. It can add value in many ways - relationship-building, access to vendor information and materials, timely communication, increased collaboration among vendor and channel partner, and knowledge transfer to name a few. When introducing software, consider where it can best add value for your organization and channel initiatives. 

• Where might standardization of process be most beneficial? 
• What activities and information need increased visibility?
• Where within your channel program would you like to introduce greater financial controls?
• What components of your channel program - be they program additions or changes - need quick time to market?
• For which aspects of your channel program would you like to better manage costs and understand ROI?

Once you determine why and where you want to automate, the mechanics can be pursued. Keep the goals in mind as you define the "how." You have your blueprint; now build the house. A solution that provides transparency and predictability should be the foundation of any software initiative. Moreover, it supports your growth as well as that of your partners. These objectives will foster channel loyalty, collaboration and compliance and ultimate attainment of shared rewards.

by Martin McNally

Director of Product Management, CCI

Looking for a fresh perspective, I typed “PRM defined” into my search engine the other day. Its reply was “Did you mean: crm defined?” So much for a fresh perspective.

The assumption that CRM and PRM are one in the same may or not be accurate, depending upon your definition of PRM and your business needs for such a solution. The larger stretch and true misconception is believing that a PRM solution enables management of your partners. It does not. PRM significantly under serves those who run or participate in indirect sales programs.

The simple fact is that PRM does not encompass 100% of what’s needed to run your channel program. Regardless of definition, key functionality is missing from PRM software and reliance on these solutions results in an incomplete and ineffective channel program. As evidenced by the bundling of CRM and PRM by software companies and industry analysts alike, PRM is really focused on tracking and managing relationships, and solely from the vendor’s perspective. It does not address the sales and marketing activities endorsed by vendors and performed by channel partners. PRM does not afford the parties any means to bi-directionally communicate, plan, collaborate or execute. Nor does it provide financial controls necessary to administer complex reward or Co-op/MDF programs. But that’s not their fault; even the industry as a whole has a hard time defining what PRM is supposed to do.

The CRM/PRM big boys have a lot to offer, to be sure, but not for the channel. They are not specialists and do not offer functionality necessary to meet the business requirements of channel management. Beyond managing channel conflict and sharing sales tools, as enabled by PRM providers, vendors need to give their channel partners targeted vehicles for promoting and selling the vendor’s wares. Tracking opportunities and managing related incentives are key components of a successful and active channel program.

If you expect your PRM tool to do it all, you will be sorely disappointed. Without a more targeted solution to manage the breadth of your channel program, a vendor does not build partner mindshare and loyalty, both of which are required for the vendor itself to attain increased market share.

Until CRM stands for Channel Relationship Management and PRM includes Program, each with the focused capabilities to sand behind the claims, I will search elsewhere to find an accurate and comprehensive representation of channel management. Whether fresh or stale, CRM, and by extension PRM, is no substitute.

1. For consumer marketers, the trade promotion budget typically represent 50% of the over all marketing budget-or more (a high of 60% and a low of 35% as polled). Despite most packaged goods marketer LOSE as much as 20% on trade programs when comparing overall costs to any lift in volume. I can say that this was reported via a prominent Packaged Goods marketer headquartered in Cincinnati (you connect the dots)

2. It's no doubt that trade promotion effectiveness can still be a strong differentiator. Those manufacturers who have established best practices and insightful analytics have the edge-and are setting the benchmarks for the rest of the industry.

3. People really make the difference, not the software or system. Manufacturers should focus in strategy, and insights to build a library of best practices-and out source back office administration.

4. Less that 1% of trade promotion is spent online-this is interesting as many B2B marketers may not agree with that, but again this is a consumer products group. The challenge here is the lack of insight as to how to effectively measure the impact of online success. This is largely an issue with packaged goods marketers.

5. Trade promotion is a global phenomena, with more than 60% of the programs/spend happening outside the US. Overall, the challenge is developing the infrastructure, program guidelines, and best practices to conform to a global standard.

6. Trade Promotion program design is an art as much as a science. 2 B2B speakers (?!) presented their programs which had similar objectives, similar channels, and yet very different structure.

7. However basic, the key metrics common to most Trade Promotion programs are:

• Budget to spend
• Net incremental sales
• ROI - consumption or shipment based
• ROI - variable and fixed margin
• Incremental spend

8. As with other product/channel types, social media is all the buzz. But like sex as a teen-ager, more people are talking about it than doing it. Retails however, see the value in social media as a relatively low cost means of capturing consumer insight and feedback. No true leaders are emerging from a TPM perspective-yet.

Interestingly, if you remove the point about social media, all the "Hot topics" from this years conference were similar to the topics held by this very organization 20-years ago. Yet despite all the advancements in go-to-market strategies and technologies very little has changed. In fact, the theme of the conference was "Collaboration in a digital age". Perhaps the power of technology has its limits?

by Michael Dubrall- Gilwell Group

As the Internet continues to play havoc with the traditional IT sales process, resellers are discovering a hard truth. Customers are flocking to interactive Web 2.0 communities being introduced by their vendors, downloading vendor videos from YouTube, "friending" their vendors on Facebook, and following their vendors on Twitter. Lured by the popularity of social media sites and the proficiency in which many vendors are starting to develop direct customer relationships, resellers are finding that the informational cord that used to bind them tightly to their customers has been severed.

From a market perspective, this is happening for all the right reasons. Customers get huge benefits by meeting their vendors on-line: better access to information, peer-to-peer networking, faster problem resolution, and easier vetting of new products and services. Besides, what is their alternative? All they can do with their resellers is find a website , download a data sheet, and call their sales rep for more information; a very time consuming process in today's hyperactive marketplace.

If they are going to survive, resellers need to take a hard look at their on-line capabilities and vendors have to help. Let's start with the basics - reseller websites.

Original web 1.0 websites are static and one-dimensional. They were meant to be used by people who were just learning the basics of email, internet, and on-line communications. These websites use "frames" to display documents and files that could (originally) be downloaded over dial-up lines and visitors (customers) were expected to download the information and then leave the site. Today there are more than 100 million of Web 1.0 sites, many of them set up and managed by channel partners. They look outdated and are difficult to use. Outdated web sites are slowly suffocating the channel as vendors just watch their resellers struggle.

Many vendors have moved to next generation web 2.0 websites, which allow visitors to do more than retrieve information. These sites are interactive, interconnected, and multi-dimensional. Their goal is to engage customers (stickiness), to give AND receive information through blogs, wikis, forums, RSS feeds, videos, social networking and more. They engage customers and satisfy more of their needs. Many web 2.0 sites have already evolved into full-blown communities, managed by the new Social Media organizations of IT vendors.

Customer buying behavior has changed a lot since resellers created first their web sites a decade or more ago. Purchasers are now in social media sites, getting product information, educating themselves about vendors, and comparing prices before resellers even know that a sales opportunity exists. Many end users even expect to purchase their products on-line and have them shipped without dealing with a salesperson at all! In other words, a significant (and growing) percentage of the market has moved into an interactive world that makes one-dimensional Web 1.0 reseller sites irrelevant and even annoying.

According to recent Channels of the Future research, SMB resellers give their own web sites a lowly 4.08 rating (out of ten) as to their effectiveness as a marketing or sales tool. Most reseller web sites are still lacking basic web site features like RSS feeds, blogs, wikis, or even forums. In fact, less than 14% of resellers have incorporated any Web 2.0 functionality at all! To make it worse, reseller employees are personally using Web 2.0 tools like social/business networking, blogging, and virtual communities much less than people working for IT vendor companies. The eventual result: resellers are increasingly absent from the sales conversation and vendors are moving ahead to build direct marketing relationships with their end-user customer base. Can direct (on-line) product sales from vendors or aggregators be far behind?

Channel Partners that cannot conduct their own on-line dialogue with customers are allowing their vendors to suck the air their marketing opportunities . The result, a slow death for channel partners.

Michael Dubrall is the Managing Director of Gilwell Group, a research and consulting company that researches "Channels of the Future." He is a regular contributor to Channel Champion and other industry blogs on the subject of next generation partnerships. Join the Channels of the Future group on LinkedIn and visit www.gilwellgroup.com.

For those readers that attended, I'd be interested in your response to the conference overall, as well as any key learning that may have come out of it. This is all somewhat subjective, as all attendees have their own agenda as to the desired learning from such meetings, as well as their actual take-away post conference. I have read impressions of this conference from other attendees on other sites, so I thought it was fitting to submit my own key take-aways:

The economy sucks for everyone right now. Can I use that word? In this context, I mean it in the true sense of the word (cut to the sound of a vacuum taking everyone's budget). During a recession, it is customary for vendor's to rely on their channel to "get the job done", yet -per a reseller panel-each has expectations of the other that are impossible to fulfill due to resource constraints and poor program execution. There was a lot of finger pointing at that session. But the take away from the debate was that resellers' (as a whole) were bad marketers and that vendors aren't sensitive to the needs of their channel partners which ---and this is key-is unique to each reseller, be it leads, cash flow assistance, or simply to ‘butt out' (queue next topic).

Manufacturer sales assistance for reseller-originated opportunities should be invited with their roles clearly defined: A reseller panel (and the conference host himself) articulated instances when a vendor's sales rep tried to "close" an opportunity outside the reseller's processes. This not only complicated matters, but jeopardized the closing due to conflicting information. Apparently, this happens more often than not. Could you be guilty of this?

The financial obligations of vendors to assure channel partner solvency during tough economic times. This is another hotly contested topic as democrat vs republican politics, or Daniel Craig vs Pierce Brosnan (or Sean Connery if you're as old as I am). The net result, though, is that for companies who rely on channel partners for their sales, there is a co-dependency for success, and that even something as simple as adjusting credit terms or as complex as developing sponsored leasing programs can go a long way to assure channel velocity, and maintain cash flow for channel partners-the life blood of small businesses.

Vendor's are totally enamored with Social Networking as "Marketing 3.0". Which is interesting, because no one really knows how to formulate (or at least articulate) a clear social networking strategy-especially for channel partner integration--nor provide clear metrics. But yet, the room falls to a hush when the subject comes up.

Segmenting "lifestyle" channel partners from those who have real growth potential. Gee, there seems to be something like 40,000 registered VARs and resellers in North America (don't hold me to those figures), yet most of them are content with their size with no intention to grow (I believe the speaker said: "they already have their Ferrari"). So how can Vendors identify these "lifestyle" partners so as not to over invest? It takes a comprehensive profiling and scoring system that includes both objective and subjective data-and the list of characteristics is the subject of a future article...so stay tuned for more on that (via a workshop that was conducted by yours truly)

Co-op/MDF programs are "mature" yet most vendors struggle with how to get it right. Per a luncheon presentation, theses funds can make up the lion's share of the channel budget, yet most vendors are not confident that they can effectively measure ROI from their program. I could write an article on this, but I already have. There is enough content on this blog and website to end that problem for ever-‘nuff said.

Back in the 90's (remember then? Clinton was president. We had a budget surplus, stocks were increasing in value. The internet was in it's infancy as a marketing medium...but I digress). Back then there was a HUGE marketing movement called "Word of Mouth" or WOM for short. The "concept" behind WOM (as it was called to us marketing veterans) was the realization that there was no better form of advertising than personal endorsements by actual consumers....nothing you can pay for can actually be stronger for the brand. To substantiate it, there were all kind of statistics tossed around like: "if someone likes your product they'll tell 4 people, but if they DON'T like your product, they'll tell 40 people". Don't hold me to those numbers, but those metrics are about right.

Well, there were all kinds of newsletters and seminars devoted to "Word of mouth" Marketing as a result of this implied power of referral (positive or negative). While basic in concept, for some reason this was a "revelation" to many marketers.

With the dawn of the "Information age" , what was established as "Word of Mouth" marketing became "Peer to Peer", or in it's more simpler form "P2P". Suddenly, people could actually email their friends about your product, or even join user groups and bulletin boards to pontificate on the virtues and/or frustrations of a brand. Wow!!! What a concept!

Now, as we close one decade in this 21st century we find ourselves as a morphing of the concept once again as P2P becomes "Social Networking."

What's the difference that drove this change? Suddenly the "Media is the message."

You see, the core of "WOM" was "Keep your customers happy" because if you don't, they'll tell a bunch of people and sink ya'. If you do, they'll be your greatest ambassador. Hey, look at Nordstrom's. They have less than half the budget of their nearest competitors but had a stronger growth rate because of the customer satisfaction levels.

Now, however, with "Social Networking" we have somehow gotten away from these core marketing attributes of WOM to focus on the vehicles themselves.....from Twitter to submitting restaurant reviews on "Yelp". My point? The technology itself will constantly change, so don't get hung up there. The principles of WOM should not be forgotten and should really be the basis for your social networking initiative.

Compared to ten years ago, products are more complex, channel business models have evolved (think SaaS), channel relationships have become more complex, and customer buying behavior has changed radically. Yet, even with all the changes, many vendors cling to the same basic channel marketing programs and sales models they introduced a decade ago. To be sure, these traditional programs are more automated and easier to use than they were in 1999, but they are also increasingly undifferentiated, outdated, and unproductive. They just don't work anymore!

For channel managers it's time to forget partner web sites, email, PDF attachments, and lead generation programs; move away from webinars and breakfast meetings; and, kick traditional marketing support activities to the curb. Old channel marketing programs delivered in the traditional manner to support outdated sales processes are suddenly and obviously not going to cut it anymore. The successful next generation channel program will be built around Web 2.0 and its virtual communities, social networking, video-file-sharing and web-based collaboration.

Web 2.0 is a game changer for the channel and channel managers have to embrace it. Innovative (and mostly free) sites like Google, Facebook, YouTube, Twitter, Digg, Technorati , and many more are shifting the way people (end-user people) use the Internet to communicate, collaborate, and purchase products. All of this is fueling the use of Blogs, Video on Demand (VOD), Really Simple Syndication (RSS), podcasts, interactive web sites (wikis), and virtual communities by partners scrambling to meet the changing needs of their customers. Every level of the value chain has been impacted.

Reseller sales people increasingly complain about getting swamped by vendor emails (many of which contain presentations and big promotional files) on their Blackberries and PDAs. Reseller sales executives protest more loudly about the time spent on formal sales education when their employees rely on chat rooms and forums instead of webinars for most of their information. Partner Marketing managers expect links, box ads, electronic customer newsletter feeds, and encouragement to develop their own local brands.

Everyone in the channel is starting to understand the potential of group collaboration - as opposed to vendor domination of the sales conversation. Channel Communities (long a buzz word) have formed in places like Yahoo, Google, LinkedIn, and even Facebook as a way to provide information, networking, and even sales support to small groups of like-minded professionals. Now these early virtual communities are shifting to newer, more specialized (and secure) platforms like Xeequa and Partnerpedia that provide more social networking functionality and easier collaboration.

These virtual Channel Communities are becoming the natural replacements for partner portals, but with all the benefits associated with "groupthink," as opposed to vendor controlled knowledge transfer. Next Generation partner marketing is collaborative, responsive, and focused on the needs of the reseller and customer, not just on the fastest way to win the deal.

The next two years are shaping up to be a period of experimentation and radical change. There will be winners and losers. The keys to success will be speed, flexibility, reaction time, and the willingness to make mistakes. Going into 2009, all major vendors already have a social media strategy and most have begun using next generation communications tools with their channel partners. Communities and electronic marketing programs are appearing everywhere. And why not? They are easy to use, cost almost nothing, and, most important, they meet the needs of channel partners and customers better than the outdated marketing programs they are quickly replacing.

The author is Managing Director of Gilwell Group, which provides research, consulting, and enablement services to help organizations measure, manage, and improve partnership productivity through the use and understanding of next generation tools.

The Best Of Breed Approach:

Pros:

• Greater overall functionality: These single point systems are offered by specialists who know the application and channel inside and out, they realize all the variances that users can require
• Professional services personnel understand the business application, and as a result they are better able to help design the right program to meet your needs-especially if you don't already have a complete set of "best practice" driven business rules in place

In addition to program design and deployment, specialized services are available and can provide a more comprehensive solution overall

Cons:

• Integration is required between applications from different vendors, as well as between SaaS and on-premise applications. This integration can be costly and time consuming
• Costs: the cost of managing several systems may (or may not) eclipse that of a single platform

Single Platform Approach:

Pros:

• Common look and feel across all applications for all users
• Common reporting tools that integrate metrics from multiple sources to provide a better overall picture of program or partner health
• Common infrastructure and program architecture on which to standardize all support and administrative resources, which may result in cost and management efficiencies

Cons:

• Essentially, the "cons" of the platform approach are the antithesis of the "Pros" of the best-of-breed approach:

• Because you're buying software only, there are limited specialized services and best-practices associated with a given application that will help you deliver a complete solution in certain circumstances

Well, I'm not sure there can never be any one answer to which is best for all companies in all occasions. Factors such as budget, time lines, business needs for customization, global programs and program type all play into which is the best fit. In any case, I'm interested in your opinion.

What do you think is preferable?

What are the factors that play into your choice?

Craig DeWolf is Vice President of Sales and Marketing for CCI.

Craig's extensive experience spans over 20-years, across a variety of industries and distribution models. This background has given Craig an excellent perspective of the issues facing marketers and their distribution partners, and the solutions that will make them mutually successful.