Designing Effective Channel Partner Programs in the Software Industry

Designing Effective Channel Partner Programs in the Software Industry

Whitepaper from TBK Consult

Author Hans Peter Bech, M.Sc. (econ)

© Hans Peter Bech 2014 First edition Unless otherwise indicated, Hans Peter Bech copyrights all materials on these pages. All rights reserved. No part of these pages, either text or image may be used for any purpose other than personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission, in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal use, is strictly prohibited without prior written permission.

Published by TBK Publishing® (a division of TBK Consult Holding ApS) Strandvejen 724 2930 Klampenborg Denmark CVR: DK31935741 www.tbkpublishing.com ISBN: 978-87-93116-02-3

Designing Effective Channel Partner Programs in the Software Industry

Table of contents: Targeted audience

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Abstract

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Author

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Acknowledgements

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Introduction

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Partner Program Design Criteria

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What is your strategy?

What do you want the business partners to do?

Business Partner Program Objectives

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The Business Partner Agreement versus the Business Partner Program

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The Business Partner Agreement The Business Partner Program

Recruitment The business models of your business partner

The Business Partner Program Elements Business Management Training and Learning Sales and Marketing Customer Support The Business Partner P&L The Business Partner Community

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About the author

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Designing Effective Channel Partner Programs in the Software Industry

Targeted audience

The target audience for this whitepaper is the board of directors, the CEO and the sales and marketing executives of software driven companies1 with ambitions for achieving global market leadership. The whitepaper primarily addresses the challenges of software companies with long value chains.

Abstract

The whitepaper discusses how to design effective business partner programs in the software industry.

The whitepaper explains the design criteria for a business partner program stressing the difference between the business model of the software vendor and that of his channel business partners. Effective business partner programs are based on the best-practice approach for building and growing a business around the software vendor’s product.

The whitepaper also briefly explains the difference between the business partner agreement and the business partner program.

Finally, the whitepaper provides specific recommendations for the content of the business partner program in the software industry. In this context the whitepaper makes recommendations for recruiting and starting partners as well as for managing the portfolio of partners.

Author

Hans Peter Bech

Acknowledgements

Design and lay-out: Flier Disainistuudio, Tallinn, Estonia, www.flier.ee

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Proof reading: Emma Crabtree

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Independent Software Vendors (ISVs)

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Designing Effective Channel Partner Programs in the Software Industry

Introduction

Using a channel of independent companies to resell, implement and/or service customers has been a long tradition in the history of the software industry.

For some software companies the channel has been a major contributor to global success, but for most software companies making it work is a depressing and constant struggle.

The word “channel” is used in the software industry to describe independent companies that assume various roles and obligations in bringing a software product to the customer. The definition is rather broad, since the roles and obligations can vary substantially from “simple” reselling to systems integration, solution development on top of the software, implementation in terms of consulting, project management, customization, training and support.

The common denominator is the fundamental condition that the individual channel partner is an independent contractor operating in his own name2, at his own expense and at his own risk.

This whitepaper discuss and provides recommendations for how to design and manage productive partner programs3.

In this whitepaper we will use the term “business partner” irrespective of the specific role assigned to the 3rd party company.

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You will notice that the whitepaper doesn’t mention any product. We assume that you already have a product, which is and has proven very competitive in certain segments of the market. Building a successful channel of business partners has very little to do with your product per se, but is all about how to do business with your product.

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In channels designed as franchises however, this is not the case.

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For a discussion of when "to partner" and when not "to partner"

please see "Growth Through Partners" (TBK-WIPA-006)

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Designing Effective Channel Partner Programs in the Software Industry

Partner Program Design Criteria

What are your ambitions for the future and what role do the partners play in realizing these ambitions?

What do you want the business partners to do?

How will you motivate business partners to sign up with you and invest in your business according to your business model?

Any software company embarking on the endeavour of building a business partner channel must come to terms with the fact that there are more software companies knocking on the doors of potential business partners than there are potential business partners knocking on the doors of software companies.

Unless you are already a recognized brand4 then building a productive indirect channel of 3rd party business partners is a long term and very difficult endeavour.

What is your strategy?

The first question you must be able to answer satisfactorily is: What are your ambitions for the future and what role do the business partners play in realizing these ambitions?

One of the biggest mistakes software vendors make is considering business partners as a cheap sales resource.

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Business partners are individual businesses making their decisions based on the same investment and P&L5 considerations as the software vendor himself.

SAP: "Our goal is to have 40% of our revenue come from partners by 2015." From the SAP web site in December 2013 4

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P&L: Profit & Loss

Designing Effective Channel Partner Programs in the Software Industry

However, the “investment horizon” of the average business partner is much shorter than yours and their business models are very different. Business partners are looking for very fast return on investment; they expect you to explain how that’s going to be achieved and how you will be there for them in the long term.

Today's business partners are reluctant to deal with software vendors who are out to make a quick buck and who demonstrates a “hit and run” mentality. Most established business partners have had bad experiences with unambitious software vendors who are content with the “1%” market share. Business partners want to work with the market leaders simply because the market pull is much stronger and the long-term profitability more attractive.

As a newcomer to the party no one expects you to be the market leader. However, you must have and demonstrate the ambitions of becoming one. You must then have a convincing product and partner program supporting the probability that you will actually become the market leader.

You must be able to layout a strategy roadmap clearly demonstrating how the business partners will become successful in the slipstream of your ambitions, drive and efforts.

When you have passed the tipping point6 then the game changes completely, but until then you have a mission and uphill job to reach that point. An effective business partner program will provide solid support for your efforts.

What do you want the business partners to do?

Taking a new product to the market through a channel of new business partners is – as indicated above - no trivial task.

Figure 1 illustrates the typical value chain in the software industry. Which of the activities illustrated do you expect the business partners to take care of?

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If you as the software vendor only want to assume responsibility for the product (SPM), then your business partner program must cover all the elements required supporting the business partners’ The tipping point is around the 20% market share mark. When passing the tipping point market dynamics change completely and the market starts pulling your product. Potential partners start calling you!

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Designing Effective Channel Partner Programs in the Software Industry

Figure 1: Sample Value Chain

activities in the rest of the value chain. Just leaving it to the business partner to figure out what to do will not generate any noticeable traction in the market.

Your business partner program must be based on supporting those tasks in the value chain that you expect the business partner should assume responsibility for.

Business Partner Program Objectives

From the software vendor’s point of view the business partner program should support the following objectives: I Attract new business partners signing up and investing in the business.

II Ensure new business partners are finding, winning and making the right type of (happy) customers within the shortest possible timeframe.

III Ensure that the business partners keep growing their business with your product beyond the first initial projects.

IV Stimulate the most successful business partners to do even more.

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V Optimize the “cost of business partner recruitment.”

VI Optimize the management.”

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“cost

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Designing Effective Channel Partner Programs in the Software Industry

Your business partner program will have to change over time.

When you have no or only very few partners then your focus will be on partner recruitment and the activities supporting objective 1) and 2).

As you grow your business partner channel then your focus will shift from to 3) to 6).

The Business Partner Agreement versus the Business Partner Program What is the difference between the business partner agreement and the business partner program?

The Business Partner Agreement

The business partner agreement is the legal and binding terms and conditions, which you and the business partner have signed.

The business partner agreement is the home of all the formal legalese and it is very difficult to change. To avoid expensive administrative chaos you should keep all business partner agreements identical.

Keep the business partner agreement as short as possible and refer to the current business partner program as often as you can.

You need a lawyer to help with your business partner agreement and you should never make a change to the business partner agreement without consulting your legal counsel.

In the early days of building your channel of business partners there will be pressure from your prospective business partners to include as much in the business partner agreement as possible.

Don’t give in.

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Keep the business partner agreement and the business partner program separate.

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Designing Effective Channel Partner Programs in the Software Industry

The Business Partner Program

The business partner program as discussed in this whitepaper is much more flexible and can be changed as the situation changes.

The business partner program is made and changed unilaterally by the software vendor.

Your business partners will not always like this, but you cannot live with having all the details written into a business partner agreement, which is difficult to change.

When you behave reasonably and do not change the business partner program without due notice and logical justifications, then business partners will accept the structure.

Recruitment

In the early days when you do not have many successful business partners under your belt and your brand awareness is very low then your business partner program is the main carrot for new partners.

Just the fact that you have a business partner program will differentiate you from most other software companies.

Together with your ambition and your strategy the business partner program will help justify the resources a new business partner must allocate and invest in the business venture with you.

The clearer a picture of the future and of how to get there you can paint the more effective your partner recruitment activities will be.

There are four issues, which are critical for any business partner: 1. Initial investments required 2. Impact on cash flow 3. Time to revenue

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4. Time to profit Your business partner program should address exactly these four issues for the new partners. We will dig into the details of the business partner program addressing these four issues in the next sections.

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Designing Effective Channel Partner Programs in the Software Industry

The business models of your business partner

The business model of your business partner is very different from your own business model. In many cases the 9 business model building blocks are all different. In some situations you may share the same customer segments, but more often you want a partner channel exactly in order to serve many more customer segments than you could ever cover yourself.

Where the software vendor runs a product based business model, the business partner typically runs a project based business model.

When you run different business models then you will also think completely differently and your organizations will have different skills and management priorities.

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As a software vendor you have invested and are continuously investing heavily in product development. You see your product as your key differentiator. The marginal cost (cost of sales and cost of goods sold) of selling an additional copy of your software is close to zero for you.

The business partner has the relationship with his customers as the most important value element. Your software is just a single element of the value he brings to his customers. His marginal cost of selling an additional copy of your software is very high and he has to pay “cost of goods sold� to you. He is also aware that he is not your only business partner. In order to differentiate against his competitors he must develop customer value propositions, which are independent from your product.

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Designing Effective Channel Partner Programs in the Software Industry

When you understand these fundamental differences and understand the business model of your business partners, then you will be much better positioned to design a productive business partner program.

The Business Partner Program Elements

The business partner program will have to cover the following areas: xx Business Management xx Training and Learning xx Sales and Marketing xx Customer Support xx The Partner P&L xx The Business Partner Community

Business Management

You and your partners are running a business together. Although each of you is responsible for your own P&L the two of you must sit down together from time to time and do the following: xx Understand and align your market assumptions and insight xx Set business objectives xx Develop strategies to achieve these objectives xx Detail the action plans required to execute the strategies xx Define the budgets to support the implementation of the plans xx Follow up on the results and take corrective actions when reality deviates from the plan (which it does all the time!)

The business management activities must be supported by facts from the market and from the results of the business partner’s activities.

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As you will not appreciate going through individual business planning formats with each partner it makes sense to provide a standard business management format.

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Designing Effective Channel Partner Programs in the Software Industry

Getting started

The first iteration of the business management process is based on very little information. As you do this activity with other partners all the time, a new business partner will expect that you know what is the “best practice” for getting started.

As you kick-start the relationship you will have to connect the various organizational functions with each other answering the following questions: xx Who is responsible for the overall business relationship? xx How do we get access to information? xx Who takes care of support (sales, marketing, pre-sales, post sales, sales admin. etc.)? xx Who takes care of special bids7? xx How do we escalate issues (sales, marketing, pre-sales, post sales, sales admin. etc.)?

When signing the business partner agreement you will probably sponsor a kick-off party taking the opportunity of raising the awareness level within you business partner’s organization and get acquainted with the operational people, who are going to make the relationship work on a daily basis.

The Partner Portal

The software vendor must provide access to all relevant marketing, sales, support and product documentation though a web-based portal.

Serving a large number of business partners without an effective “self-service” platform will obstruct the scalability of the software vendor’s business.

Partner Management in the long run

As your channel of business partners grows, the challenges facing your partner management activities change fundamentally.

Any software vendor’s channel of business partners will gravitate towards the situation illustrated in figure 2.

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5% of the business partners are stars capable of growing their businesses and driving the demand for your product.

10% of the business partners can grow their businesses if Reductions in the transfer price in situations where external competition demands so.

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Designing Effective Channel Partner Programs in the Software Industry

5% 10%

85%

Figure 2: The business partner channel pyramid

Training and Learning

supported coaching.

with

business

development

and

management

85% of the business partners have no or only very limited growth potential.

The software vendor will have to adapt the business partner program accommodating the needs of the Stars and the Growth Potential while reducing the cost of management of the large group of partners with no growth potential.

The distribution into the three groups is mainly a function of the management ambitions and skill-sets available in the business partner channel. The software vendor will instigate mechanisms to spot the “partner talent” and direct resources to help stimulate the growth. If the “talent” is not present, then no program or initiative will have any impact.

Although training and learning is particularly critical when starting the relationship there will always be an on-going need as partners grow and/or staff come and go.

Training should take place at all levels in the partner’s organization. The better briefed the staff are, the more likely you are to have a successful relationship with them.

Start with training the sales and marketing people so they are able to do the business planning with you based on factual insight. Then continue with pre-sales and post-sales as required.

Many software companies categorize their business partners based on the type and volume of certified people they employ.

You may want to consider introducing a certification program as your portfolio of business partners grows.

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Sales and Marketing

The top priority with new business partners is to get the first revenue-generating projects as fast as possible.

Many business partners will be reluctant to introduce new products to their existing customers. They are afraid of making mistakes and jeopardizing an existing relationship. However, selling a new product to a new customer is the most difficult

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Designing Effective Channel Partner Programs in the Software Industry

scenario in any sales situation.

Unless there are certain specific circumstances speaking in favour of the “new/new” scenario you should always insist on getting your product sold to the business partner’s existing customers.

Sales cycles longer than 3-6 months are difficult to manage for most business partners. The business models of most business partners do not generate a lot of cash, thus “time to revenue” and time to a cash-positive situation is critical.

Your business partner program must include a dedicated section on how to accelerate the “time to revenue” and the “time to a cash-positive” situation. The investment must be shared between you and the partner.

Customer Support

You must ensure that the customers are well supported.

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With customer support we are referring to all the professional services elements required to find, win, make and keep happy customers. The services include pre-sales demo resources, proposal writing, price and cost estimation, project management, integration services, customization, training and on-going support.

In most business partner models the profit for the business partner is exactly the delivery of these services. It is thus equally important for you and your business partners that the quality of

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Designing Effective Channel Partner Programs in the Software Industry

the customer support services is as high as possible. However, the more comprehensive the software solution is the longer the learning curve is for the business partner.

On site coaching is most likely required in addition to the training until the business partner is self-supporting in all steps in the value chain.

The Business Partner P&L

Bringing together all the elements described above makes up the business partner P&L scenario.

The more experience the software vendor has with setting up new partners the more historical data is available for making a realistic P&L scenario with a new business partner.

Some software vendors are reluctant to perform this exercise with new business partners as it may turn out that the investments are high and the time to a cash positive situation is very long.

However, today most business partners will ask to perform this exercise. Even established software brands will have to perform this exercise convincing (and contributing to) new partners to migrate their solutions to new platforms.

The Business Partner Community

Getting business partners together for conferences and events has a tremendous motivational impact on the business partner community. It is an outstanding opportunity for the executives of the software company to meet up with their most important partners and to make “best partner” announcements etc.

For software vendors creating eco-systems these “physical communities” are critical in building relationships between business partners supporting the growth of the eco-system.

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In the early days of building the channel there may be just an annual partner conference, but as the business partner channel grows the events will get more specialized and take place on the various continents around the globe.

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Designing Effective Channel Partner Programs in the Software Industry

Final Notes

Let me address two critical issues, which many software companies get wrong when building a market through a channel of independent business partners.

Exclusivity

Exclusivity is a situation you want to avoid at all cost when building your business partner channel. Your business partner agreement will most likely clearly state that the relationship is bilaterally non-exclusive.

However, your business partner program must address the issues facing the first business partners you recruit in a new market.

If you leave brand awareness creation and lead generation to the business partners, then the first business partners will be reluctant to invest too much. Their reluctance is based on the fact that they will be investing in building the market for your other business partners. It is a simple version of the economic externalities, which affects any software vendor building a new market through a channel of independent business partners.

You have to take these concerns of the business partners seriously and support their market creation initiatives. You will most likely have to co-fund marketing and lead generation activities in the early stages of market penetration. Alternatively you can award the business partners investing in early market penetration with a "some time-limited" exclusivity, helping them to protect their investments.

Product Margins

Many software vendors try to attract business partners by offering high margins (discounts) on the list prices. The software vendors also use this “incentive” to make up for the initial investments the business partners are making in “learning”, building brand awareness and generating leads.

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If the software only makes up a small potion of the total project price to the customer, then the impact of a higher discount is small anyway.

In general high margins have very little motivational impact on the business partners’ behaviour. Margins are like the salary to employees. They are a hygiene factor. Changes in margin levels

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Designing Effective Channel Partner Programs in the Software Industry

may have an impact, but in the early days of the business partner relationship it is the cash flow that has the biggest impact on the behaviour.

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Software vendors should also be extremely careful of giving away margins on their products. In the long run even small variations in the margin you pass on to the business partners will have a substantial impact on your own P&L and valuation.

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Designing Effective Channel Partner Programs in the Software Industry

About the author Hans Peter Bech has been developing and managing global partner channels in the software industry for more than 30 years.

Hans Peter built the partner channels for companies such as Dataco (now Intel), Mercante, Dansk Data Elektronik (now CSC), RE Technology (now Barco), and Damgaard/Navision (now Microsoft).

As a management consultant Hans Peter has been providing consulting on channel development and management issues to companies such as Microsoft, Danfoss, Proekspert, Jeeves Information Systems, eMailSignature, SoftScan (now Symatec), Netop, EG A/S, CSC Scandihealth and Secunia.

Hans Peter is the author of several whitepapers on channel development and management and he frequently writes articles on the subject.

He started his career as a management consultant in 2003 and founded TBK Consult in 2007. Since then he has built the company to its present position with 24 senior consultants in 16 countries.

Hans Peter oversees the development of TBK Consult as well as performs management consulting assignments for selected clients.

Hans Peter holds an M.Sc. in macroeconomics and political science from the University of Copenhagen. He speaks Danish, English and German and is a certified ValuePerform, ValuePartner and Business Model Generation consultant.

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More about Hans Peter Bech

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