Partner Profitability

Partner Profitability

Partner Profitability

Six of one, half a dozen of the other

ARN recently brought together six vendors and six channel partners for a discussion on profitability. What follows is an edited transcript of the conversation with a number of breakouts focusing on major discussion points of the day. They include lead generation, deal registration and rebates. We also tackled the contentious issue of vendors recruiting from within the channel.

Brian Corrigan, ARN (BC): What is a fair level of profit for resellers to make?

David Henderson, EMC (DH): Our challenge is to take a holistic view of profitability - our partners are driven by balance sheet, driven by cash flow, driven by P&L [profit and loss]. At a transaction level, most of my partners say their sales costs on a campaign can be as much as 14 points so why would they be interested in talking about four or five points? Are vendors ready to address the issue of sales cost?

BC: There is a feeling that vendor sales teams fail to understand how a reseller works. Dealers need margin but vendors are working to targets based only on revenue.

John Donovan, Symantec (JD): It depends on what sort of deal we are talking about. If it's an early lifecycle sale as part of a complex solution then the expectation from the partner is that there's a considerable amount of profitability built into the sale to allay investments they've made into the legality of the contract, sales training and technical support. I don't think there's a lack of knowledge of the complex infrastructure that exists within the reseller community from the vendor perspective. Vendors who don't appreciate that don't have a loyal community that works with them.

DH: But do our sales organisations understand the complexities of the transaction? It's not uncommon for sales guys driven to revenue targets to ignore margin. If you are looking for a vendor [as a reseller] the first question you ask is about the compensation plan. If margin is part of it then they get it.

Moheb Moses, Channel Dynamics (MM): I agree. The vendor people we work with understand gross profit (GP), but go a level below to the guys on the road and it's completely different - all they talk about is revenue. Talk to a reseller and all you hear is GP. Distribution is different again because it's all about cash flow. When a rep is focused on revenue that is the language they use when talking to a partner and that creates disconnect.

Chris Luxford, 3D Networks (CL): The challenge is that vendors are revenue driven and do not understand profitability. Profitability is cash flow, balance sheet and P&L. It has to be a mutual thing - you need the vendor to be profitable and the partner to be profitable. Even when you get sales people within a vendor that do understand margin, their view is that we as the vendor need to make the most. They squeeze us for margin so they can make more.

BC: When a vendor brings a reseller into a major contract, what is the right point to do it? Steve Murphy, Frontline Systems (StM): Vendor sales teams are inclined to think of the partner as the last link in the chain and therefore think they've added little value. The great reps I have met are the ones that engage a partner of choice early on in the piece and move the transaction forward that way.

JD: When we identify opportunities through a pipeline management system, there is a nominated partner because we are not foolish enough to believe that what we are selling is the total sales opportunity. Generally, it is a component of a much larger solution. By bringing a partner in at the end, there is stuff we aren't aware of . It becomes a case of who's going to do it for the least margin. This adds no value to our partner relationship or end-user opportunity. It has to be done at the start of the deal.

DH: The concept of being a partner at the end of a sales transaction is derogatory. It undervalues the basic principle of the relationship. It positions the partner with their customer as only good for fulfillment. How insulting is that after you have nurtured relationships over years and a vendor comes in saying you are worth three points for fulfillment? Agreements must be signed early in the sales transaction; deal registrations put in place so we can work together on the campaign.

John Walters, Ingram Micro (JW): Outside of the big tender deals, what price do you put on the trusted advisor relationships that resellers bring to the table and the vendor accreditation investments they make? How do you measure that?

DH: Why are vendors dictating margin? Partners negotiate the transactions because they have the relationships.

JD: How true is that statement? How often, in large account deals, does the partner determine end user purchase price?

CL: I have never had a vendor tell me I can only take so many points on a specific deal. What I have seen is the vendor negotiating end-user price and then telling the partner what their buy price is. The expectation is that you will make all your money on services. My challenge as an integrator is that there is a cost of sale around the product and that is typically more than 10 points - especially on some of those complex, early lifecycle deals. It can be over 20 per cent. Even services are starting to become commoditised so the real challenge is for a vendor and reseller to agree on a joint profitability model. It can't focus solely on partner profitability because that cannot be disconnected from vendor profitability.

Nick Mayhew, Microsoft (NM): A systems integrator or value-added reseller does not take a deal-by-deal approach. The focus is on customer acquisition. You accept the high cost of sale in a first deal to acquire the customer. What vendors need to do is support the channel for taking that position.

Craig Neil, NSC Group (CN): As an integrator, we run a three-ring circus as a sales, delivery and support organisation. If I look at profitability across those three groups it is very different. We have had years where we were only firing on two cylinders. Two areas might be working really well but you lose money on the third and your bottom line is not where you need it to be. Vendors are always pushing us to grow the sales area because that is what matters to them but we have learned that if we can't get all three working in a deal we will walk away. I have had my main vendor come to us and ask us to do all the services on a deal but tell us they want to do the support. We refer that to another party because we don't want it. It's just not worth it. The market we are in is good and we can afford to be choosy.

CL: While we have choices in vendors, the reality is we would rarely swap because the investment is enormous. Every time a vendor releases a new product, and our incumbent vendor releases about 10 per quarter, it's about a $100,000 investment for us. We have seven offices around the country and I need at least one person in each to be skilled up. You typically have to fly them into Sydney for training, pay for the course, get equipment into our labs and then there are associated costs like having an engineer out of the field for two or three weeks. Vendors are all over you to sell the latest and greatest product because they are trying to get that out into the market. I have asked my major vendor partners if they can spread that investment cycle.

Anthony Smith, IBM (AS): In almost every opportunity I have seen we make sure the partner takes a positive margin position. Where acquisition of new clients is driven by price, because there are some companies that don't care about channel partners, we will lose money to help a channel partner acquire that business.

MM: You can't ask a vendor to do staggered releases if their competitors are releasing new products. But a lot of my clients are vendors so I try to go to a lot of the presentations. Some weeks I am flat out with them. As a reseller, you need one or two vendors in each product segment. If you try to see all of them I don't know how you get any work done. One role a distributor can play is to put on events where resellers can go and see several vendors.

DH: There are three revenue streams - hardware, software and services - but there's a trend in the market where vendors have decided they like services and are going to take them direct. We are downsizing our services capability because that is the long-term future of the channel.

CL: Some vendors go to existing customers selling longer lifecycle product. Early lifecycle needs vendor support, that's a given, but with traditional product a customer might ask for a direct relationship and the vendor agrees. The reseller is there for basic fulfillment at no money or to provide services. I have seen examples where a vendor has signed up for tighter service level agreements at a lower price. We might be doing the service today at $50,000 a year but they have signed up for increased SLAs at $30,000 a year and told us what a great deal it is. We say no thanks. It is happening because of the competitive nature in the vendor environment. It's cyclic and won't last.

Andrew McLean, Intel (AM): Intel has a services business, which a lot of people don't know about, that takes products into market segments where we might not have been playing. That creates a pipeline for people building standards-based hardware. They can then sell into an environment where they don't necessarily have the resources or the motivation to create new markets for our products. It's up to everybody else to address that business.

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