Technology manufacturers have long known that an indirect sales channel can be a pretty direct route to growth. Distributors and resellers typically drive 70% or more of a tech vendor’s revenue—a huge number but perhaps not a surprising one. Channel partners provide easier access to the fast-growing small and midsize business segment. They help vendors expand into new geographies without requiring big on-the-ground investments. They boost a product’s appeal by grouping it with complementary offerings. And, of course, they put so many more promoters, proponents, and evangelists for a vendor’s wares out in the field.
All of this is well and good. But in this case, leaving well enough alone is a mistake. The technology business—and the channel itself—is undergoing unprecedented shifts. End users increasingly want to procure their technology “as a service” instead of as a one-time purchase. Acquisitions are rapidly consolidating channel players. New technologies are giving distributors and resellers more choice in what they sell.
To keep channel sales growing, many vendors will need to rethink the way they work with and offer incentives to their partners—both traditional collaborators like resellers, distributors, and independent software vendors and next-generation partners like cloud service providers and telcos. This is no small undertaking, but vendors who master five key rules can optimize the sales channel. (See the exhibit.)
The rise of cloud-based services—for everything from software applications to infrastructure—has revolutionized the way technology is designed, sold, and used. Instead of paying for a product upfront, an end user will make smaller payments on an ongoing, subscription basis. While some vendors—including major software players like Adobe and Microsoft—initially viewed this “as a service” model as a new way to sell direct, most ultimately discovered that the channel is critical here, as well. Many buyers—small and midsize businesses, in particular—prefer purchasing all of their technology from a single source. They often leverage the financing and support options that resellers offer. And they expect in-depth sales conversations linking technology to business impact, which is the channel’s forte.
But “cloudifying” the channel raises some unique challenges. Vendors must ensure that their partners have the ability—and incentive—to sell a cloud-based solution. At the same time, most vendors will still need to keep traditional offerings available—and moving. That’s because in some situations—such as when end users have predictable IT capacity needs or a consistent baseload—it can be less expensive to use on-premises solutions (or to use cloud solutions for only the variable component above the baseload). Indeed, even as cloud sales rise, the market for traditional offerings is still growing. This means that tech vendors need to capture—and quickly expand—as-a-service revenues while still supporting the traditional model.
So how do savvy vendors do this? In our experience, a three-pronged approach can set the stage:
Second and more important, vendors will need to find new partners to achieve their cloud business goals. A cloud-ready base comprising 10% to 15% of existing partners is insufficient to fully capture the as-a-service opportunity. To fill the gap, vendors can turn to a new breed of channel players: cloud service providers (CSPs) or managed service providers (MSPs), who came into being with the cloud and focus exclusively on as-a-service offerings. Already, CSPs and MSPs deliver more than half of channel-based cloud revenue. Targeted recruiting programs—potentially in partnership with larger distributors, hosting platforms, and even complementary vendors—can help woo these “born in the cloud” resellers.
Another consideration is what, exactly, makes for a cloud-friendly incentive. Since upfront revenue is limited, cloud partners are unlikely to find a traditional revenue-based incentive appealing. Instead, incentives should be tied to different metrics such as new-subscriber acquisitions and utilization. Indeed, utilization is a particularly important KPI for models like the cloud, which depend on recurring revenue. If customers aren’t using a particular solution, they aren’t likely to keep paying those monthly fees. So vendors and channel partners need to ensure that there is a plan for tracking—and sustaining—utilization.
Balancing cloud and traditional incentives is crucial, but it’s just one component of a smart incentives strategy. Consolidation within the channel is increasing the power—and bargaining position—of larger distributors and resellers. Big players can be choosers, and they’re going to go with vendors that bring them the strongest returns. Vendors should carefully consider the economics of their partners and develop a formula that gets the channel’s attention. Early-pay discounts, back-end rebates, business development and marketing funds, as well as ad hoc investments with the channel partner are all useful here. HP, for example, offers early-pay discounts, among other incentives, to sweeten the pot in a lower-margin category.
At the same time, vendors should leverage incentives to focus the channel on strategic goals. Tech companies know where they want to take their business—growing a specific market or customer segment, for example—but they need to make their priority the channel’s priority.
A savvy mix of incentives, then, furthers partner economics while setting partners in a specific direction. Many vendors will likely need to adjust their existing incentive programs to get the mix right, but in doing so, they can choose from an array of levers. They can include things like an extra rebate on sales to targeted customer segments, incentives for attaining certain technical certifications, incentives to penetrate a market with a new solution, or rebates for attaching services at a specific level.
As powerful as they can be, incentives aren’t a panacea. Occasionally vendors will need to consider when some tough love is required. A performance improvement program (PIP) can be an effective mechanism for driving results from a lagging distributor, but many vendors wait too long before taking action. The key is to have clear thresholds and timelines. For example, if a distributor does not achieve quotas for two quarters, this should trigger a PIP. Developed by the distributor, the plan should have appropriate goals, actions, and metrics to reach acceptable levels. A good rule of thumb is to require tangible, quantifiable improvement within three to six months.
While the right incentives can go a long way to ensure commitment from the channel, vendors need to take additional steps to strengthen relations with their partners. The key is to eliminate the ambiguities and burdens that often hold back channel partners, while teaming up to grow customer lists and sales. This combination of clarity, convenience, and collaboration can be a powerful way to focus the channel on selling—and finding ways to sell more of—your products. In our experience, best practices include:
Focus, of course, is a two-way street. As vendors modernize their channel relationships, they also should zero in on distributors that can best help them scale. Here, the consolidation among distributors can work to a vendor’s advantage. If a tech company can get the same—or greater—coverage working with fewer, but stronger, distributors, it doesn’t have to spread its resources supporting many smaller players. At the same time, it can give each distributor a larger share of its business, providing each with an incentive to invest in the relationship. In fact, in the RFP process, savvy vendors will ask distributors what actions they are willing to take to gain more of the vendor’s business. Approached in this manner, consolidation can be a win for both vendors and distributors.
Many vendors will underemphasize—or overlook entirely—opportunities to spark enthusiasm in the brand. Fortunately, there are proven ways vendors can set up their partners for success:
Finally, vendors should examine—and likely adjust—their channel support organization. While streamlining administrative processes can go a long way in keeping partners focused on sales, there is a lot more that goes into a transaction—particularly when it comes to larger deals. Partners may need to call on the vendor for product demos, technical support, and pricing assistance, among other things. Providing these resources may seem straightforward, but in practice, most vendors either provide too little support—effectively starving their channel support teams—or they overinvest, raising costs and blurring the line between supporting a partner’s sales and micromanaging them.
So how can vendors strike the right balance? The first step is to define the appropriate coverage for each channel partner. Large distributors and resellers typically require dedicated resources, while smaller partners can be supported by shared, territory-wide teams, in conjunction with distributor resources. Costs should be lower for indirect sales than for direct sales, but resources—and the outlays for them—should be appropriate to support the revenue opportunity.
Next, vendors need to ensure that the channel has sufficient autonomy. That means avoiding the temptation to shepherd every large deal and ask for updates every few days. Striking the right balance between support and interference is a delicate business, but some vendors have learned how to do it well. Cisco, for example, is very good at supporting the channel more on larger opportunities and end users, while allowing partners to run with the SMB and most midmarket business. The idea is to let the channel do its job while being available—when needed—to support a transaction. The result is more committed channel partners and a better cost structure.
As vendors cast their eyes to their own organization, they should also ensure “channel neutrality” for their field reps. Reps can often sway how deals are fulfilled, and if channel partners feel that a field rep has a bias for moving deals direct, they will avoid that rep—or worse, work with another vendor. Some vendors incorporate a three strikes rule, terminating a field rep who repeatedly violates the company’s channel neutrality policy. Of course, the best scenario is to avoid those violations in the first place. One way to do that: compensate field reps equally whether a deal is filled direct or through the channel.
The channel has long been a reliable way for technology vendors to grow sales, market share, and reach. But maintaining that success means not maintaining the status quo. As technologies—and end-user preferences—evolve, vendors need to make the right changes in how they enable and support their channel partners and what incentives they offer. By optimizing the channel, vendors not only keep up with the rapid shifts in the industry but they also prosper from them.