SaaS Channel Compensation

Channel Compensation models

Channel Compensation modelsSaaS Channel compensation is one of the hardest things that software vendors are facing today. If you have a nice traditional software business model with good software maintenance revenue and mature channel, you are reluctant to change or touch it. Let’s dive into some of the difficulties that software vendors are experiencing.

I am currently running educational sessions in SaaS channel development where my audience is given the task to present the business case of a channel partner for a given software vendor. We are using Business Model Canvas to model the business. The task that I am giving to my students is to represent the software vendor leadership team that is trying to recruit a channel partner to become a reseller. The way this is done is to present a Business Model Canvas to the channel partner management team.  If the software vendor management team can’t convince the channel partner of the benefits, then the business model is broken.  I have done this exercise with many software vendors and it is one of the most powerful ways to get the software vendor to think about the partner, not about themselves.

I have bad news for you. There are no exact rules what kind of compensation models a software vendor should have for its channel, but what is known is how to calculate whether a business can be profitable for the channel partner using different compensation models. Why is this? The biggest issue that software vendors have is that many of the processes and tasks that the channel partner has taken care of in the past, have now moved back to the software vendor. One of them is the monitoring the cloud infrastructure, provisioning the solution, upgrading the software etc. In the end of the day, it is all about roles and responsibilities that the software vendor and the channel partner have to agree on. The more the software vendor moves responsibilities towards the channel partner, the more margin the channel partner expects to get and this is very typical in the traditional software channel model. The software vendor delivered the CD or download to the channel partner, but in the new SaaS world, the instance is provisioned by the software vendor and the channel partner becomes the “middle man” between the end user customer and the software vendor. Let’s review some of the industry “standard” commission models and some implications around them:

SaaS Channel Margins

If you look at the percentages, the one that is missing is the typical 10% which is really more of an opportunistic percentage that anybody will give out regardless of business model. If you call a software vendor and tell them that you have a lead, they will pay you at least 5%, but 10% is not uncommon.

When you add an additional 10% (now the total is 20%) it adds more interest to the channel partner. The software vendor can not expect any active sales with this percentage and can’t really ask the channel partner to do any serious account management. This is mainly lead generation activity and typically there are other products that the channel partner is reselling as well.

If we add an additional 10 % (now the total is 30%), this is still too small to be able to build an organization and requires the channel partner to have many different products that they are reselling. Larger reseller with deep pockets to build and maintain an organization, 30% is doable.

When the percentage is 40% or more, the software vendor can expect investments from the channel partner and reporting responsibilities on pipeline to the software vendor channel account manager. This type of percentage is also doable for smaller channel partners that want to build a business around the solution and build a dedicated team.

The biggest surprise that most software vendors are facing when we discuss about the roles and responsibilities is the amount of additional work that the software vendor has to take on. In a pure SaaS channel scenario, the border of responsibilities are blurred and the end user customer ends up in many cases in direct relationship with the software vendor. This has been a big no-no in the past for channel partners as they have wanted to “own the client”. However, the reality is that the cloud is changing the roles and channel partners have to make changes in their models as well. This is a behavioral change that is taking place and can be compared with the changes that are taking place how software sales people are compensated. Nobody wants to change the way things were in the past, but the market and competition is forcing the change and the ones that keep doing the same thing as before, will eventually be on the loosing side. We have already seen this in many organizations.

Before talking about channel margins, the software vendor has to decide what kind of role they expect the channel partner to play and then define how much they can afford to give a way of the margin. Some software vendors have even decided that a channel is not an option in their new business model and this is of course an option if the company has the resources to build its business with its own direct sales and internet marketing methods.

 

 

photo by: woody1778a

Is the cloud killing your business?

Is the cloud kiling your business?

Is the cloud kiling your business?Cloud adoption is accelerating and it is also in the process killing many businesses. I read today an interesting blog entry “Are Cloud Vendors Cutting Out the Channel” and this article explains in great detail what is happening on the marketplace in respect to channel partners including value-added resellers (VARs) and MSPs. I remember vividly when Steve Ballmer suggested strongly a few years ago that Microsoft partners should really start adopting the cloud and a couple of years later, he stated that it might in fact soon be too late as the competition is already doing it. Pure channel partners with a business model to resell without adding any value will disappear from the markets.

I have recently talked to quite a few channel partners and the common message that I heard was that the markets are getting tougher and having a business without having a specialty or vertical experience might in fact kill the business sooner than later. I am seeing this also among software vendors that are refusing to adopt the cloud model. There are thousands of new pure SaaS entrants that want to be new market leaders in their domain and many end user organizations are refusing to go with the old-fashioned model where IT departments are the only part of organization that will be buying software and services. Based on the blog entry today, Tiffany Bova from Gartner concludes that many IT consumers are now “front-office buyers” from departments such as sales, marketing, finance, and human services. These departments are bypassing the centralized IT and this type of “uncontrolled” buying pattern will continue going forward in my opinion.

Microsoft management has been vocal to its partner network that every partner should by now be looking at cloud transformation and Kevin Turner (Microsoft COO) expressed his concern during Microsoft Worldwide Conference in Houston (July 2013) that only 3 percent of the company’s channel network was actively selling cloud services and this included products such as Windows Azure and Office 365. These numbers will change with time and I am convinced that there will be many partners that will experience the pressure the hard way. If the channel partner starts too late with the transformation, it might become irrelevant and have the wrong type of personnel with skills that do not match what the market wants. I am sure that somebody reading this blog will not agree with me, but I have seen already now quite a few channel partners that do not know what to do going forward. There is a real need to reboot the business model and rethink how the company will be surviving in the future.

I forecasted a couple of years ago that Sony will not survive the competition of e-books and devices due to many factors, Amazon Kindle being one of them.  A few days ago, I read that Sony will be exiting the business. Sony had its own e-book format and I was one of the ones that spent hundreds of dollars in books, which now will be converted to Kobo Android devices. I have no intention to buy any new devices. The reason I am sharing this is that even large organizations are forced to change the business model every now and then and consumers make wrong bets on the horse that they should be riding.

When I look at the global markets and what is happening around us, the change has accelerated in software domain and it has taken many by surprise. I would not be surprised that we hear bad news from many large industry dominant players in the software space that the transformation into new generation solutions has failed and consumers and businesses have adopted technologies that are more nimble and easy to use. It is very dangerous to ignore the trends and even more dangerous to think that market leadership means anything without hard work to maintain it.

Complexity of Channel Development for SaaS Software Vendors

Let's have some complexity

Let's have some complexityChannel development can be complex if you have a SaaS solution and you want to ensure that your growth comes through the channel. I have spent my past 20 years involved in software channel development on many continents and I have seen many different variations in both failure and success. I think the biggest obstacle for many software vendors to become successful with their channel is when they ignore to recognize and understand the business model that their channel partners have or are building. SaaS software vendors assume that their solution is the only one that makes sense, but a typical channel partner have tens of other solutions that they can represent.

What SaaS vendors forget in many of the cases is to realize that a channel partner has to make a sizable investment in personnel, marketing, support and any other functions that the company has to have to become successful. What it means in real terms for the SaaS vendor is that a channel partner is making a considerable investment on behalf of the SaaS software vendor. That is what the SaaS vendor is really asking for. Invest in us, and we will then pay you your share of the success. If you do not sell anything, you will be left with your investment. I think every Channel Account Manager (CAM) making outbound calls to potential channel partners need to first figure out how the channel partner can make money and how they can help their business to become better. If the CAM focuses on the product/solution and not on the channel partner business, the relationship will never take off. I have experienced this so many times during my career and every relationship that I have put time and effort to, typically has paid off.  Today, I got a call from a document management software vendor and the CAM not only presented his case well, but gave the reasons why I should take the next steps in the discussion. It takes skills to do what the CAM did and he was focusing on my business, not on how good his solution was technically.

SaaS Channel AlignmentOne way to understand the channel partner is to create a Business Model Canvas for both the channel partner and the SaaS software vendor and then analyze them side-by-side and see if there is business model alignment. What it means in real terms is that each side has an interest to do business, both parties have an opportunity to make money and become successful. I have run workshops using this type of approach and the typical reaction from the software vendor is to realize that some of the foundational thinking has been based on wrong assumptions. It is important to realize that this has nothing to do with the skills of the software vendor, it is just a perspective that they never had and thought of when setting their channel strategy. The key is to help to build the “story” for the channel partner and part of the story is also to identify how your solution fits in the other solutions that the channel partner might be representing. If you want to become successful with your channel, stop focusing on yourself and put some time focusing on the channel and how you can make them happy and successful.

photo by: futureatlas.com

Are you renewing your your business model before it is too late?

Business Model Change will cause many organizations to loose market share
Business Model change will cause many organizations to loose market share

Business Model change will cause many organizations to loose market share

Many organizations are feeling the pain of spinning-out-of-control with their business model. I have spent the last few weeks contemplating on everything that I have learned the past two years in software technology and I have to say that it has even got me off guard how quickly things are changing for companies. Organizations that used to have a solid business model are running into huge difficulties, and mostly not because of bad products, but more or less of not having understood the market correctly. Dallas Morning News wrote about Nintendo’s surprise profit warning today where they say that the game console Wii U has sold 70% less than expected. That is a huge miscalculation from Nintendo, but the issue is not just the console, it is that the market has moved on to games on smart phones and Sony and Microsoft has taken the market with more innovative products that appeal the current gamers. Nintendo is not on their own, we have seen this with many other sectors/players. Who would have thought 3 years ago that BlackBerry market share would drop to be almost non-existent?

What I have also seen happening is the struggle among system integrators and the current business model that is starting to fail them. I have had the luxury to serve not only software vendors and system integrators, but also end user organizations and what I am seeing clearly is an acceleration of interest in providing more cost effective, flexible with full support for mobility with a reluctance to customized and tailored solutions. This has a tremendous impact on system integrators specifically. My guidance to end user organizations is to look at the ecosystem players to identify the best-of-breed solutions, ensure that these solution vendors have defined an API strategy that enables seamless integration between modules without having to do everything from scratch. This is of course not something that many system integrators want to see as many of them have based their survival on selling hours, and doing it with long-lasting projects. The problem with this approach is that many of these long-lasting projects fail as smaller system integrators do not have the skills to manage projects and if the end user organization has negotiated a good contract with penalties, the system integrators ends up “paying for the solution”. I have seen this many times and specifically and this does not have a good impact on any ecosystem in the long run. This is one of the reasons why smaller system integrators have been “swallowed” by the larger ones as system integrators need scale.

Another way to differentiate from the masses is to be very specialized in a given vertical domain (or functional domain) where  you can command the pricing for your delivery. This is something that larger SIs have difficulties with as their scalability comes from using offshore and in these scenarios it is not easy to maintain highly skilled vertical experts where the client is prepared to pay a higher price.

The problem that I see in the market does not apply only for system integrators, there is a huge pressure mounting for traditional software vendors that are still making good money, but with new and exciting entrants popping up from different areas such as Silicon Valley, it is evident that many software vendors will have the same path as Nintendo and BlackBerry. I do not want to sound pessimistic or doom organizations to fail, but I have seen the signs of radical transformation and this is based on my numerous hours each week tracking the market, studying software and working with clients. Just look at the valuation of Dropbox from last week where the investment was based on 10 Billion dollar valuation. It is amazing to even think about this, but I think it is logical. It is a sign from the marketplace that things are changing and valuations are based on what people want and see as being the next wave of things.

Vendor ecosystems are also making huge bets on the next wave of computing. Microsoft is adding data centers around the world like recent announcement of Azure data center in Brazil. IBM is betting their farm on IBM Watson that is in the cognitive computing space and IBM’s acquisition of SoftLayer will increase the competition in the cloud space especially now when IBM announced that they will invest 1.2 Billion in data centers around the globe. What this means to me is that the acceleration of software solutions to the marketplace using new modern ways. This means that it is not good enough to “repurpose” what you have, but  you have to think about how your solution is going to be consumed and how it will fit into other ecosystem players. Think about Dropbox for example. The concept is very simple what they do and there are a myriad other players doing the same thing. They have understood the role of ecosystem and their technology is embedded in every app that is relevant and that has to include document sharing/distribution of some sort.

photo by: PSParrot

What is all this talk about enterprise app stores about?

Iced tea at Georgia's, version 2We are moving into app economy and that is happening very fast. There are many predictions on the marketplace on this trend with Gartner forecasting that 25% of enterprises will have their own enterprise apps stores for managing corporate-sanctioned apps on PCs and mobile devices – all this within 4 years. Others are saying that this is already happening and it won’t take four years. Whatever the case is, ISVs needs to pay attention to this as CIOs in large organizations need to take control of the situation with deployed apps both in tablets as well as smart phones.

I think there is a big misconception in the word “app” when thinking about business models. Many relate an “app” to small apps used by smartphones with either free or almost free business model. These are mostly consumer-focused apps, but the trend is that consumers will be using their smartphones to conduct business using apps, but these apps will be connected to backend cloud solutions that bring the scalability and logic to the game. Look at an app as just the UI to full-blown solutions where end users can run their business with small devices or tablets and use the cloud infrastructure as foundation.

The forecast for App Economy is huge and according to APPNATION, App Economy is going to reach $151B by 2017. What it really means for ISVs and any software developers organization is that they need to really get a better understanding how app economy is going to impact them going forward. CIOs will be asking questions how an ISV will support enterprise app stores and how the ISVs will support these app stores with their solutions. I am a bit amazed how little there is discussion off apps in our workshops but I think this is going to change going forward. Based on the study by APPNATION, the majority of mobile device owners under 45 years are using video apps and this supports my previous blog entry of eLearning.

There will be a need for both consumer-oriented and enterprise-oriented apps stores and it will be a space that will bring new opportunities for many players. The competition in this space will be based on innovation of solutions that people want to use and the use is measured on how much content the apps consume from the cloud. It is not rocket science, but it is a new world that people need to get used to.

In the end of the day, apps will have to be monetized in one way or the other and that is where the subscription economy comes to play and organizations need to understand how to price their solutions and all this based on value pricing.

Have you modeled your digital business based on traditional business models?

flickr featured in metro toronto {notes}Some organizations are trying to move into the digital world, but keeping their traditional business processes intact. I run into one of these again yesterday. I have been contemplating of discontinuing my digital Wall Street Journal subscription for a while as I feel that it has become a bit weak on news and I can get most of the news from other sources as New York Times digital subscription.

Last night, I decided finally to pull the plug and go to the Wall Street Journal web-site to remove my credit card information as the charge has been month-to-month and I knew that my next charge would be 28th. After 30 minutes I gave up as I could not find where to “unsubscribe”. As a final push, I was pretty sure that others might have had the same issue, but of some reason all of my searches went to a page that said “just remove the automatic billing from your account”. I did not find that place… anywhere…. Finally I found somebody else having the same issue and the only way to discontinue is to call them and talk to a physical person. Not even an email would do it, you have to call. What on earth is WSJ thinking? If they want to move into this century and make the customer experience convenient, they should let me discontinue anytime without having to talk to anybody and without them using my time to figure out how to make all this happen. I am sure that newspapers are not swimming in money nowadays, but alienating clients this way does not make it any better.WSJ.com should change their  business processes to work in the digital era.

Do you think I will be going back anytime soon to subscribe if the unsubscribe is so hard? I do not think so. What they are doing to themselves is exactly the opposite. They are trying to hold to the clients in the old-fashioned way by making the process of unsubscribe difficult and unpleasant. What WSJ end up doing with people like me is to push us away even further as they just spent my valuable time for their business process that does not bring me any value at all. The unsubscribe process should have taken me less than 30 second to do. Login to the web-site, go to account settings and remove the recurring billing. That’s it. When I finally got to talk to a person at WSJ, he wanted to connect with me to another department that was busy so he was gracious enough to do it himself so I would not have to call next day or spend any more time on this thing.

Funnily, another similar incident happened today with another company in the bring-and-mortar business. My son has had a pass to 24-hour fitness for a few months and now as he moved to a new city to study at a university, we wanted to cancel his membership. It was very easy to get the membership, but a hassle to cancel. First of all, they did not let us to cancel it at the gym where we signed him up, they told us to call a  number to do it. Guess what… that wasn’t easy either… They said that even if I was the one that did the signup for my son and my credit card is used on the account, it would have to be my son to cancel it.  After serious discussion, the person took off my credit card from the profile…. This organization is also keeping its processes in the brink-and-mortar age and it will take time for them to realize that the new generation of users will not tolerate this kind of waste of time that they are causing their customers. Yes, I do understand that by making this difficult for people, some just ignore the hassle and keep on paying.

What I truly believe is that I should be able to be sitting in the cockpit and deciding where my monies go if I have subscribed to something and specifically if I committed things online without taking to anybody, I should be able to discontinue things without having to go through a process that does not bring any value to me as consumer. I think I have to put a new standard in my family when subscribing to something. I will ask or figure out how to get out from the commitment before committing to anything.

Have you had similar experiences? I am sure you have. If you are building a business where you serve end users, think about what the end user experience that you want your solution/service to bring to the consumer. Do you want it to be appealing and a pleasurable to use? I you do, you should not implement processes that I just gave examples of.

 

Does your channel partner program play a strategic role in your cloud business?

La Villette - 22-08-2006 - 19h32In preparation to my upcoming workshops and seminars, I am updating myself on multiple different things in respect to ISVs (independent software vendors) and one of the key drivers based on the workshops we have delivered the past 2 years is by far the question how ISVs should align themselves with channel partners. Today when doing some reading, I run into an interesting study by Forrester Consulting (commissioned by Avangate, September 2012) where 79% of the researched ISVs (53 US and UK SMB enterprise software publishers) feel that their channel partner program is of strategic importance.

One of the key concerns that ISVs had in this study was that channel partners are ill-equipped in changing their business model from front-loaded licensing model to a recurring model where partners are incented to renew customers as to acquire them. As much as 49% of the ISVs where concerned that channel partners are not going to be able to support new or evolving business models.

Another key finding in the study was that smaller software vendors are ill equipped to expand to new markets and this mainly due to support-related issues. Channel partners expect ISVs to help in marketing and generating demand, but smaller ISVs are typically not funded to be able to support this type of activity.

The study revealed many other factors that the channel partners were concerned about such as channel partners now been able to support end customer over the lifetime of the contract, inadequate efforts in renewing the end customer contracts and overall bad visibility over the end user customer. The roles are responsibilities are definitely changing in respect to ISVs and channel partners and this I have had the opportunity to run a bunch of channel alignment workshops where we map the ISV business model with the channel business model and if there is any misalignment between these, the results are typically miserable.

ISVs have a tendency to dream that their solution is the only solution on the planet that matters, but unfortunately there are others with the same belief. I like to use Business Model Canvas in the channel alignment exercise as it portrays extremely well potential issues that ISVs have to deal with such as giving the opportunity for the channel partner to become profitable. That is easier said than done.

Pricing alone does not make your business model

Most software vendors (ISVs) struggle how to price their solution, specifically when moving the cloud. Many vendors are trying to “retrofit” the current model to the new cloud model, but this just does not work. You just can’t make your pricing to reflect your current business model where everything is based on higher cost structure such as Cost of Customer Acquisition (CAC), cost of having a different operational model in your organization such as support, marketing etc.

When I look back at all of the workshops that I have done in the cloud transformation field, each and every ISV has had to recognize that something has to change in the model and we use the Business Model Canvas to do a simple “sanity check” what kind of things the organization has to change to be able to make this transition. I am not talking about organizations that are “born in the cloud” but  organizations that typically have a successful traditional software business with good but declining maintenance and support revenue. Many of these organizations are now forced to rethink their current business model as smaller and nimbler organizations are “eating their lunch”.

This does not impact only ISVs, but also Systems Integrators (SI) that are used to the “big ticket” development projects and many end user organizations are tired to the ongoing and inflexible “platform” that has been created. This comes back to my previous blogs where I recommend organizations to go to the roots and identify what is “good enough” as a solution for people to be able to manage their business without having to deal with monster projects.

In the end of the day, pricing is just one small piece of the overall puzzle and therefore it is easy to say that without value, people are not willing to pay and if you do not bring value, your overall business model will never work. The Business Model Canvas has 9 building blocks and if one of these building blocks equal zero or is dysfunctional (some are not needed like channel), then the entire business will fail sooner or later. Check out the Business Model Canvas Structure that has been defined by Dr. Osterwalder:

Business Model Canvas

I am a believer in value-based pricing with the recognition that there are competition out there that will eventually force you to evaluate the pricing levels. Just look what is happening with Amazon and Microsoft on the cloud infrastructure front. It is a bloody battle but this is of course great for the consumers and businesses as the cloud becomes even more affordable and non-brainer as development platform.

 

Aligning your business with your ecosystem

Your business is always part of an ecosystem. So is mine. I am completely aligned with Microsoft business cycle that starts 1st of July and ends last of June. Therefore Microsoft Worldwide Partner Conference (WPC) is the most important event for me and my TELLUS team. Why? Because during WPC I will get the first hunch of the direction that Microsoft is taking for the new fiscal year. This year, it will be all about devices and services (with lots of measure around this) and I have to align my services to reflect this direction. What it means in practice is that all our offers have to reflect and build upon devices and services for us to be able to help both Microsoft and Microsoft partners to align themselves with these objectives. If I continue stubbornly to message the “old fiscal year” objectives that do not reflect what the field needs to do, then please do not expect to have much support from your ecosystem, because they are not incentivized to care about that anymore. It might seem shortsighted (which it is many times), but that is they way it is with businesses today. Everybody has to cut their checks and to be able to do that, one has to look at where the money is coming from.

During the years, I have become pretty brutal in focus when it comes to my own business. I have see too many examples of entrepreneurs that are “all over the map” trying to do different things, but really not doing anything well. I do not want to be in that boat. Have I made mistakes? Sure, and lots of them. As an entrepreneur, I see money all of the place and it is one of the hardest things for me to look away from these opportunities especially if they do not contribute anything to the TELLUS “platform”. If these is value add to the platform, then I am willing to invest time in checking it out, but if it is not, then I have to walk away.

Do you have a focus in your business? If you are an SI, do you spread yourself too thin to too many things and then your team is perplexed as they seem not to know anything really well. If you are an ISV, do you have a focus in a vertical or functional area and become world known for it? If not, you need to revisit your plan as being “too many things to all is like not being anything to anybody”. I have witnessed this so many times that it is not even funny anymore. I suggest you run a small exercise using Business Model Canvas to see if your business makes sense.

What I would like you to do is to really contemplate who well you know your ecosystem and the internal working of it and if the answer is: “I really do not”, then you might want to consider doing something about it. Also, if you work within Microsoft ecosystem, you might want to segment it into smaller segments as there are more than 600k Microsoft partner to work with.

 

A Case Study – Creating a VAR Development Program

This blog entry continues on my first blog entry where I concluded that the channel does not work for the ISV, it is the ISV that has to ensure that the channel has the tools to become successful with the solution itself.

In my second blog entry I highlighted a case study of a successful ISV that was able to grow its business by doing the channel development by identifying an impactful approach where the VAR channel felt that it was a win-win situation for both sides.

In this blog entry I am high lightening the VAR development program (Phase 1) that SolidWorks created for its channel and as I stated in my previous blog, this program was almost like a mini-MBA where the ISV wanted to facilitate and help its VAR channel to run its business more effectively. The program that David Skok highlights in his blog entry as phase 1 of the development program is divided into two main areas: Business Management and Sales Management.

VAR Channel Program-001

From the picture above, the channel assessment was reviewed from these two perspectives and each of these perspectives are divided into smaller components that have relevance specifically when running a VAR business.

Cash is king as they say and I have also experienced this as an entrepreneur. What ISVs tend to forget is that somebody has to fund the activity to build the funnel of the solution that the ISV wants to sell. So lets review the typical steps that we expect to happen when an ISV signs up new channel partner:

  • The ISV wants to ramp up the activities immediately once the deal is signed, which means that VAR technical and sales team needs to be trained and educated of the intransiences of the product and learn how to take objections from the target prospect market segment.
  • The ISV expect the VAR channel marketing team to dedicate resources to start building the funnel and sometimes forgetting that there are other products that they might have in their portfolio.
  • The ISV Channel Account Manager puts effort in getting things going as he/she is the one that will have the pressure of getting first deals going and to ensure that he/she meets the budget.

With all of the effort that has been put into the joint effort, the VAR finally signs its first deal and now everybody can be happy. On top of this, the deal is very sizable and this makes the VAR a bit nervous as there are some financial risks that it now has to carry as it carries the paper with the end user organization.

The project starts, everybody is working hard on getting the client happy but sudden and unexpected issues comes up in the implementation. The customer tells the VAR that it is unacceptable and they will not pay until the software has been fixed. The VAR tells the customer that they do not have the means to fix it as it is the ISV that carries that responsibility. The customer tells the VAR that that is not their problem, the responsibility is with the VAR as that is whom they bought the solution from.

As the invoicing relationship of the solution delivery is between the VAR and the end user organization, the VAR runs into issues as an invoice has already been issued from the ISV and they want to get paid.  This puts the VAR management to sweat and now they really understand the consequences of this and need to do something about it.  The ISV wants to get paid, but the channel partner has not got paid yet. Worse than this, the software included bugs that the VAR can’t do anything about and has to wait for a fix. The ISV still wants to get paid, no matter what as its view is that this issue has nothing to do with them. I am sure you get the scoop of the vicious circle.

If the ISV is reasonable, they will work with the VAR and the end user customer to get it right, but unfortunately I have seen cases where the VAR has really run into a wall. I can’t imagine how that feels as I run my own business every day and have to consider risks and rewards when conducting the business. In large organizations with huge cash piles, this might not be a problem, but for the majority of ISVs, SIs and MSPs, this could be a huge issue.

The scenario above describes some of the areas where the VAR has to pay special attention when running its business. The number one in business management side is cash flow and how to manage it when dealing with ISVs and purchase management overall. I have run companies with high growth and one of the most pressing issue seems always be cash flow. People want growth, but with growth you need cash flow. Sales in your books does not mean that you have money in your bank account. Having lots of receivables might feel good, but you can’t feed your family with receivables.

The second area is “Sales Capacity” where typically small VARs become the victims of their own success. Skok concludes that a typical successful VAR is where the business owner is number one in sales, but one person does not scale up to grow the company. There needs to be more than one to scale the business. If the owner becomes the gatekeeper, then that becomes the bottleneck for the growth for both the VAR and the ISV.  What a VAR needs is a strong sales manager that can scale the sales, follow and create processes and the owners should keep away from that (my observation).

Also, what is typically undervalued among VARs and ISVs is market research and what sales people tend to use as an excuse for poor sales is that the “market segment is saturated’. Good research includes information about market size, market share, historic customer growth rates and sales coverage etc..

According to Skok, one of the most difficult task that VARs are struggling with is the requitement. I can really believe this. The key for success is to build an interview process to identify the right candidates and even if you become good at this, you will still fail. I have.

What an ISV might see with its channel is that VARs are hiring new employees, but there are more leaving the company that coming in. So what will happen is that the VAR has new people that are learning “the ropes” and then the ones that have learned are leaving for different reasons. The VAR ends up having a situation where the skills don’t meet the demand of the market.

One key thing that is often ignored is to ensure that the employees have a good view of their professional development,  like sales people having strong  product training, presentation training, and  sales management training.

And finally, and probably one of the most difficult tasks: how to manage and review the pipeline that everybody presents to the management. How should the VAR and ISV ensure consistency in the pipeline? One of the key things for both ISV and VAR is to create a standardized view on the pipeline, not based on each and every sales persons personal definition which is typically biased to his/her own preferences.

The question is what kind of deliverables can an ISV and VAR expect from both Business and Sales Management exercise? The way Skok defines them is in following way:

VAR Channel Program-002

It is obvious that each one of these need to be worked on and each ISV will have to estimate how much to put effort into this exercise. Also, what something might work for one organization, could be very different for another.

The next phase of this case study I will discuss about the way that the case study ISV segmented and categorized its VARs and their ability to grow. Stay tuned for more.