Will Reliance On Direct Sales Bankrupt Your Software Business?

By Matt Pillar, chief editor

A panel of channel and software execs weigh in on the promise, peril, and power of channel programs.

A poll taken at a recent Software Executive Forum underscores the important role the channel plays in support of software industry success. It also reveals an untapped opportunity for software providers to leverage a veritable army of sales agents hungry to differentiate their offerings. At that event, 15 percent of attendees said that at least 75 percent of their sales were derived from the channel. About 40 percent of attendees indicated that channel sales comprised under a quarter of their revenue. Slightly more than a quarter reported zero channel sales. The remainder averaged 50/50 channel-to-direct sales.

I’ve heard that as much as 70 percent of all revenue created by B2B tech companies comes from partners of some sort. That stat has been making the rounds long enough now that its attribution is long-forgotten and likely disputed. It behooves channel service providers, such as Tom Clancy Jr., CEO at Valiant Technology, to believe it for obvious reasons. But software executives who have experience building channels believe it, too. Execs such as Butch Langlois, North America country manager at Vend POS. Both of these fellas joined me — along with Force Management senior partner Paul De- More and Compliancy Group president and CEO Marc Haskelson — for a roundtable discussion on the efficacy of channel programs for software sales.

“My clients aren’t in the market for random nice-to-haves. … As a service provider, my pyramid of customer requirements resembles Maslow’s hierarchy of needs. First, I have to play the role of battlefield medic and get them stabilized, cut off the bad leg, and stop the bleeding.”

THOMAS CLANCY JR., CEO, VALIANT TECHNOLOGY

 

WHY LEVERAGE THE CHANNEL?

Butch Langlois’s company attacked the U.S. market from its home base in New Zealand, and it did so with a vengeance. He shared some of the factors that went into the decision to leverage a partner network to execute the company’s sales strategy here in North America. Scale was the key factor. Vend is in the SMB retail space, and in that space, he says, it’s a question of how you achieve reach. “You can try to raise $150 million dollars, and that kind of money will buy you a lot of salespeople on the street, but without that type of money, it’s really hard to get your product in the hands of those SMBs.” The old Yellow Pages model — where you had people on the street and they were selling product every day — is impossible to scale. “We needed to find a way to get reach because the market opportunities for enterprise- type cloud point of sale and other SMB solutions sales are really powerful.” They’re also cheap in comparison to enterprise sales, so, says Langlois, “Reach becomes the key to get into the market, and the only cost-effective way to get that reach is through partner channels — finding like-minded partners around the country that are a complementary fit with you.”

Marketing expenses climb in correlation with competition. As inbound marketing becomes more expensive and way more challenging, you really need to find new ways to get reach. That’s one of the things Vend has done effectively in North America, where more than a quarter of its revenue comes through partner channels.

“Reach becomes the key to get into the market, and the only cost-effective way to get that reach is through partner channels — finding like-minded partners around the country that are a complementary fit with you.”

BUTCH LANGLOIS, COUNTRY MANAGER, NORTH AMERICA, VEND

 

Marc Haskelson’s company is called Compliancy Group, and it offers a HIPAA-simplifying platform that’s newly available through channel partners. “Two years ago we didn’t have any channel strategy,” explains Haskelson. “We sort of developed it by accident when we recognized that MSPs were a growing competitive threat to us.” So threatened by the channel was Haskelson that he joined the CompTIA Business Applications Advisory Council in part because he thought it would help his company prepare a defensive strategy against the MSP space. “We quickly figured out that MSPs are actually extremely complementary to us,” he says. Haskelson, who’s still committed to CompTIA, is now leveraging the association to help vendors learn how to communicate better with the channel to expand those relationships. “Part of the problem is that often there’s a misunderstanding, or there are trust and conflict issues. The language you’re using and the way you talk about your product or service is very different from one channel partner to the next. Creating a common language playbook will help to achieve a symbiotic and effective relationship with partners,” he says, “one that’s more than simply transactional, where our products justify the partner’s services and their services justify our products.”

THREE TENETS OF CHANNEL PROGRAMS

Whenever he flies, DeMore says he can determine within a few seconds of conversation with the person sitting beside him whether that person has a direct sales background or a partner-facing background. DeMore is senior partner at B2B sales effectiveness consulting firm Force Management. He spent 25 years in channel sales and now works exclusively with vendors to enable channel sales programs. Force Management itself is in the process of building out a 1099 model channel partner program. “Those who don’t sell through the channel always wonder aloud why you’d want to give up that margin,” says DeMore. Once the 101-level scale, new market, and distribution advantages are covered, DeMore shares what he sees as the three tenets a software company needs to have in place when they launch a channel program. The first is executive commitment. “It can’t be, hey, let’s try this, or let’s think about doing this. It’s truly an executive commitment to a channel distribution model from the CEO down — even if it’s just in a specific geography or market,” he says.

The second tenet he cites is to have a clear market segmentation model to avoid channel conflict. “If somebody comes into your swim lane, what are the rules of engagement that you’ll employ to fix it? Channel partner programs take years to build, but just one bad deal can kill it,” he warns.

DeMore’s third tenet is to put yourself in the eye of the partner. “Understand how they intend to make money being a partner of yours. We talk a lot about our ability to reduce the cost of the partner’s sale and get them into markets more quickly and less expensively, but the software provider needs to understand the partner’s value proposition and their opportunity to make money.”

“If somebody comes into your swim lane, what are the rules of engagement that you’ll employ to fix it? Channel partner programs take years to build, but just one bad deal can kill it.”

PAUL DEMORE, SENIOR PARTNER, FORCE MANAGEMENT

 

BE AWARE OF CHANNEL CONFLICT IN ALL ITS FORMS

Haskelson grants channel partners the skepticism they demonstrate about wannabe vendor partners, a skepticism that’s rooted in the importance of client relationship ownership. “Sometimes their presumption, fear, or distrust is that the vendors who court them are just trying to scrape their clients.” But there’s also inherent skepticism on the part of the software executive who’s not so naive as to ignore the fact that the majority of partners in their networks are not going to be stellar representatives of their product if said product is not in the center ring of the partner’s domain expertise. That creates a scenario in which the partner is reluctant to bring the vendor to the table, the vendor is concerned about the partner’s ability to represent the product, and conflict is inherent. Haskelson says compensation can create conflict as well, particularly when a client wants products or services additional to the ones they originally purchased from the partner. “Some of the ways we address these particular conflicts are to generate and distribute leads for our partners and let them cosell with us,” says Haskelson. “In many cases, your partners will also be looking for you to contribute marketing dollars or some marketing support. This creates potential conflict as it relates to the partner’s performance with that investment. You don’t necessarily want to shell out marketing investments to partners if you’re skeptical they’ll do anything measurable with the money.” Compliancy Group has addressed this by giving partners a credit toward its services, but not without a test run. “We won’t dole out a thousand dollars up front,” he says, “but if they hit a sales threshold at an event, for instance, we’ll give them a thousand dollar credit on the cost of the service they’re purchasing.”

Clancy agrees that there’s a lot more opportunity for conflict than the classic, “I sold it to the client and your sales guy sold it to the client so who’s getting the commission?” dilemma. “There’s also conflict in the ‘I’ve got marketing dollars. You want marketing dollars’ scenario, where the vendor makes the partner dance and sing and pay attention to its Wacky Wednesdays sales promotion program and register all their leads.” That’s a form of conflict too, he says, because for this tiny upside that might exist, there’s also this incredible amount of work that has to happen. “The good vendor partners that we’ve had have held my hand through that process to make sure that I’m registering my deals to protect my end,” he says.

“Two years ago we didn’t have any channel strategy. We sort of developed it by accident when we recognized that MSPs were a growing competitive threat to us. We quickly figured out that MSPs are actually extremely complementary to us.”

MARC HASKELSON, PRESIDENT & CEO, COMPLIANCY GROUP

 

WHAT CHANNEL PARTNERS WANT

Clancy’s Valiant Technology can be loosely described as an MSP+. Its primary play is managed services, but it also sells hardware, and software — some of which is written by its internal development team — is a fast-growing line item. As the VAR/MSP representative among our panelists, he stresses his desire for speed- and simplicity-minded partners. “I don’t want a very long and complex value proposition put before me. I don’t even want anybody to use the words value proposition. Don’t say it. Just tell me how it works, what are my points, what am I going to get on this deal, how you’re going to support me, and what I have to do to get into the program.” Huge margins, he says, aren’t the carrot that mature channel partners such as Valiant are looking for. While he expects a reasonable margin for his sales efforts, like most operationally mature service providers, his primary MO is to get solutions that efficiently solve client problems to market. “Simplicity and clarity are important because my clients aren’t in the market for random nice-to-haves. It’s important that my vendor partners understand that as a service provider, my pyramid of customer requirements resembles Maslow’s hierarchy of needs. First, I have to play the role of battlefifield medic and get them stabilized, cut off the bad leg, and stop the bleeding, before I even start thinking about the nice-to-haves, like wouldn’t it be great if your mice were all color-coded.” If you really want to increase your engagement from good IT partners, advises Clancy, make sure you’re addressing a very real end-user issue.

Pointing a finger at the hardware vendor community that, until recent years, has largely underpinned the VAR model, Clancy bemoans complexity. “If your partner portal requires an entire three-day training session for me to understand how to register a deal, I really have very little interest. Even for a quar- ter-million-dollar hardware deal, I don’t want to deal with that.” Thankfully, he says, software execs tend to know how to make an elegant UI and a “pretty decent portal.”

For Clancy and his fellow channel advocates cited herein, channel programs make a world of sense. Perhaps Haskelson sums up the advantage to software execs best when he says, “You’re basically putting the burden on some other company to do sales and just giving them things that they can sell to end users. It’s a pretty damn good program.” For much, much more insight from Clancy, DeMore, Haskelson, and Langlois, tune into Ep. 09 of Channel Voice, The Channel Executive Podcast at channelexecutivemag.com.