By: Dann Anthony Maurno
In Part 1 of this series, The York Group President Harald Horgen described the risks of ISV-channel partner relationships, on both sides.
The rewards are there for strategic partners – but, they must do the math. Horgen suggests that the technology-oriented ISVs must put themselves in the partner’s place and ask, “How does this technology, however magnificent it is, make business sense?”
In turn, channel partners are tasked with filtering ISVs with selection criteria that lead to meaningful business conversations.
MSDynamicsWorld: You advise channel partners to calculate revenue objectives carefully.
Harald Horgen: That’s what really determines if the relationship has its own vision for success.
The biggest driver in whether or not a partner can make money with the solution comes down to the gross margin that they can generate from the total transaction.
A strategic relationship is one where the channel partner becomes self-sufficient to a very large extent. They’re doing their own marketing to building their own pipeline. They have a dedicated or designated sales person and that’s absolutely the essential part of it; they ideally have a full-time salesperson working on a specific solution and driving that business, supported by a funded marketing plan from the partner. That partner is responsible for this product, they go through sales training with the ISV, and they are compensated on the outcome of the sale.
If a partner doesn’t have that, then it’s not strategic, it is just something in the portfolio, and by definition it becomes a very reactive approach, an opportunistic approach to sales.
So a good first measure of a strategic relationship is if it warrants a full-time salesperson?
That’s the lynchpin for us: what does it take for a partner to dedicate or to designate a salesperson to work on a solution? That becomes a financial decision. Channel partners have to understand what the cost of a salesperson is and what the expected return is going to be.
It varies by geography, but in the US, if you look at the fixed and variable cost of a salesperson and you add in the marketing costs, overhead, and allocation, the range Is typically a $150,000 to $250,000 all-in cost.
So for modeling purposes the cost is $200,000 to an organization. That’s where we really spend time with ISVs and channel partners; what is that model? What does the transaction look like?
Let’s say for the sake of example, a subscription is $100,000 a year, and the ISV is giving their partners 30 or 40 percent. The ISV sees it as a $30K to $40K revenue opportunity on a recurring basis to the channel partner. But any time you sell into the enterprise market, the transaction can involve services; data migration; back-office integration with other applications; some customization and custom app development; training; and sometimes business process reengineering.
So we ask ISVs to model out the line items of a successful deployment; what does that generate in terms of billable days and the expected gross margin? You can model out and say “Well we’ve got a $100,000 subscription to 30 percent margin, to the partner that’s $30,000. We have 40 days of services at $1,500 per day to generate $60,000 in billable revenue at a 50 percent gross margin for another $30,000.”
Now we have a $60,000 gross margin contribution in the first year from a transaction. If a full-time salesperson has a $200,000 cost, the partner has to sell at least three transactions to break even. But most organizations will have a target that’s much higher than just breaking even, maybe two to three times the cost of the sales person. Now you can look at the model and ask, “Is there a large enough market between the channel program and the existing customer base to produce eight to 12 transactions in a year?”
You suggest that the ISV bears responsibility for those margin calculations.
Yes, that they have a completely different conversation with a channel partner. It’s no longer “We’re the only solution that does blah blah blah and you should be grateful to represent us.” They can have a business conversation with a channel partner and say “This model works if you can produce eight to 10 transactions the year. This is our target customer, it matches or doesn’t match with your own customer base. How many sales can you get from your existing customers? Does that provide a foundation for becoming strategic?”
And then it becomes a business decision for the channel partner.
Aside from the business model, you suggest that channel partners create ISV selection profiles, a short list of criteria.
Yes, and it stops them from having meaningless conversations. That’s where we come from. Once a channel partner identifies, “This is a sweet spot for us, these are the types of transactions that we would be willing to invest in,” then from that they can build a checklist and say “Well, we want solutions that are targeting specific verticals. We want solutions that generate the following types of professional services that align with our competencies. We want transactions that generate the following overall gross margin.” [See graphic.]
You describe as well how Microsoft’s One Commercial Partner initiative places a huge emphasis on P2P activity. What will be the impact?
Every decent channel partner will see a significant uptick in unsolicited inquiries from ISVs around the world, who want them to spend their precious time and resources to make a product successful in their territory.
And so when we [work with] channel partners, we [create a] model ahead of time. We look at what it takes for them to be successful, so they have a filter when an ISV contacts them, and they can ask “What’s the margin on the solution? What is the services component?”
We’ve put together an Excel calculator that would take either an ISV or partner through all of the line items on what a transaction would look like. [See graphic.]
How does the Microsoft Partner Center help in this P2P vetting?
The Partner Center will become a really great place to identify potential partners in other marketplaces. But it doesn’t eliminate the need to go through a thorough vetting process and to have a clear understanding of what the business expectations are.
The risk with these electronic platforms – as we’ve seen before – is that it promotes a lot of portfolio relationships where you can find a partner for a specific situation. Say you’re in the US selling to Ford, but you need to support it in Germany, in China, in Brazil. [The ISV will] use something like the Partner Center to identify partners in those markets. Those partners will be very happy to take on the product because they get the relationship with Ford in Brazil; they get the services they get the margin on it. A great opportunity for that channel partner.
But if the ISV wants that partner in Brazil to become a long-term strategic partner, they need to go through the rest of the process of defining what should the relationship look like.
I’ve used this analogy before, that the risk [of electronic P2P platforms] is being like Match.com, with lots of “one-night stands” and very few sustainable relationships, as opposed to a more structured matchmaking process like eHarmony where there’s a very clear alignment between the partners and a better understanding.