The Software Partner Channel and the Customer Value Propositions

Whitepaper from TBK Consult

AuthorHans Peter Bech, M.Sc. (econ)

© Hans Peter Bech 2013

First edition

Unless otherwise indicated, Hans Peter Bech copyrights all materials on these pages. All rights reserved. No part of these pages, either text or image may be used for any purpose other than personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission, in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal use, is strictly prohibited without prior written permission.

Published by TBK Publishing® (a division of TBK Consult Holding ApS)

Strandvejen 724 2930 KlampenborgDenmark CVR: DK31935741www.tbkpublishing.com

ISBN: 978-87-93116-03-0

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Targeted audience 4

Abstract 4

Author 4

Acknowledgements 4

Introduction 5

When “to partner” or not 5The rule of thumb 7

Channel Value Adding Requirements 8

The fundamental principles of competitive value creation 10The relationship between value proposition and management areas 10

Changing the Customer Value Proposition 12The value proposition and the management challenges 12

Changing a software company from a direct to an indirect channel approach 13

About the author 14

Table of contents:

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The target audience for this whitepaper is the board of directors, the CEO and the sales and marketing executives of software driven companies1 with ambitions for achieving global market dominance.

The whitepaper is primarily addressing the challenges of software companies with long value chains.

The whitepaper discusses why the Customer Value Propositions of software vendors and their resellers by definition must be very different and what the consequences of these differences are.

The whitepaper lists the typical reasons why software vendors choose an indirect channel of resellers to reach the customers and the typical reason why software vendors choose not to go though resellers, but sell their software directly.

The whitepaper explains why the change of channel strategy requires a change in the software company’s Customer Value Proposition and therefore also requires fundamental changes to the way the company operates.

The whitepaper recommends that the software company changing from a direct to an indirect channel approach consider splitting the company in two separate business units with separate P&L responsibility.

Hans Peter Bech

Design and lay-out: Flier Disainistuudio, Tallinn, Estonia, www.flier.ee

Proof reading: Emma Crabtree, TBK Consult, ecr@tbkconsult.com

1 Independent Software Vendors (ISVs)

Targeted audience

Abstract

Acknowledgements

Author

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Software companies have historically had a very strong preference for selling their software indirectly through a channel of resellers2.

The word “channel” is used in the software industry to describe independent companies that assume various roles and obligations in bringing a software product to the customers. The definition is rather broad, since the roles and obligations can vary substantially from “simple” reselling to system integration, solution development on top of the software, implementation in terms of consulting, project management, customization, training and support.

The common denominator is the fundamental condition that the individual channel Partner is an independent contractor operating in his own name3, at his own expense and at his own risk.

What decides if a software vendor shall or can sell his software through an indirect channel of resellers or if he is better off growing his company by selling the software directly to his customers?

A software vendor will typically choose an indirect channel for scalability purposes and for one or more of the following reasons:

There already is an established channel of resellers for this • type of software.

He believes he can achieve faster access to the market • through the resellers with established customer relationships as opposed to building these relationships though his own organization.

He believes he will get access to domain knowledge and skills • required for vertical and/or horizontal market coverage, which will be very cumbersome and expensive to achieve though his own organization.

He believes he can motivate resellers to enhance the software • enlarging the reachable market (eco-system effects).

2 The term ”reseller” is here used for any type of 3rd party company engaged in selling a software brand to his customers irrespective of the degree of value add.3 In channels designed as franchises however, this is not the case.

Introduction

When “to partner” or not

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He believes he can overcome language and cultural barriers • in foreign countries faster than though his own organization.

He believes that the indirect approach requires less • investment, less people and less management attention.

Software vendors will typically refrain from using an indirect channel of resellers for scalability purposes for one or more of the following reasons:

There is no established channel for this type of software•

The business opportunity provided by the software is not • interesting for resellers (unknown brand, too little value add, cost of sales too high, too few deals etc.)

Customers will not accept delivery through resellers•

Partners do not add any value to the customers•

Higher risk of customer dissatisfaction due to poor performing • partners

Having to “give away” gross margin on the software•

Having to “give away” major portions of gross margin on the • auxiliary revenue elements of the total solution

Slower access to the market because of loss of control over • sales and implementation resources

Slower access to the market because the learning curve of the • resellers are too steep and too long

Risk of damaging market reputation due to unprofessional • resellers

Risk of not learning directly from the market, but having to • rely on information filtered by the resellers

Lack of reseller channel operational know-how with the • software vendor

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The rule of thumb in the software industry for when to partner or not is illustrated in fig. 1.

Well-known and simple products requiring little “implementation” services are normally sold directly to the customer through ecommerce portals and call centres.

Very complex solutions with long sales cycles, requiring substantial implementation services are normally sold directly to the customer through the software vendor’s own direct sales force and implemented by the software vendor’s own professional services organization.

Anything in between may be served through a two or three tier indirect channel of resellers.

The decision to go through an indirect channel of independent partners has a profound impact on the software vendor’s customer value proposition.

In generic terms any customer value proposition always has three value elements:4

4 Please see the section: “The fundamental principles of competitive value creation” on page 10

The customer value proposition

The rule of thumb

Figure 1: When “to partner” or not in the software industry

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Software requiring customization and implementation services to work properly for the customer must be delivered through a value proposition where the Customer Intimacy value element is dominating.

Software consumed without any associated services must be dominated by the Product Leadership value element.

Operational Excellence is a value element with very little impact in the software industry. Without the need for manufacturing, warehousing and physical logistics there is very little optimization and competitive advantage potential in the operational processes in the software industry. Operational excellence is mainly required in project and customer relationship management5.

Let’s assume that a software vendor has a very competitive product that doesn’t require any implementation services to be used effectively.

The vendor can choose to sell the product directly to the customers.

Let’s assume that the software vendor considers that channel partners can extend his market reach. What types of customer value propositions should these resellers have?

5 For software delivered as a cloud based service there may be a substantial operational excellence element. Availability, price and the quality of the Service Level Agreement are important elements for the customers.

Channel Value Adding Requirements

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The software vendor could be interested in resellers with very strong customer relationships, through which the software could be recommended and sold. However these types of partners will not be very interested, as the products require little professional services. They may make a little margin on the products themselves, but without a need for associated services the products will not improve their relationship with the customers and the customers could easily acquire the products elsewhere.

He could also be interested in resellers offering easy access for customers to buy the software. Such resellers would have a strong Operational Excellence value component.

Such resellers would typically provide value to their customers by having a large assortment of products and would provide instant and easy access to purchase and download the products.

These types of resellers live off small margins on large volumes of products and would be very interested in products for which there is a high demand.

Let’s consider that the software vendor’s product requires substantial implementation services to become functional for the customer. He is then clearly interested in a reseller with Customer Intimacy as the dominating value element and Operational Excellence as the second priority, while Product Leadership doesn’t play any role at all.

The software vendor and his resellers never share customer value propositions!

In the last example the software vendor must improve his Operational Excellence value element otherwise he will not be able to recruit and manage his resellers. He is looking for partners with strong Customer Intimacy value elements and some Operational Excellence (project and delivery management). However, resellers with a strong Product Excellence value component are of no interest to the software vendor.

Figure 2: The software vendor's Customer Value Proposition

Figure 4: Resellers with a strong Customer Intimacy value element are not interested in standard products

Figure 3: Resellers with Operational Excellence as the dominating value element are interested in products in high demand.

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With the book “The Discipline of Market Leader” – published in 1995 - Michael Treacy and Fred Wiersema introduced the principles behind the three value elements. The book also introduced the relationship between the customer value proposition and the operating processes, the management systems, the business structure and the culture required to deliver on the value proposition.

TBK Consult considers that any company has 15 management areas divided into 5 perspectives6:

The Financial perspectiveFinancial performance x

The Management PerspectiveSetting objectives xDefining strategy xTaking action xManagement skills and competencies x

The Customer PerspectiveThe Product/service xThe Customer Relationship xThe Image x

The Internal Processes PerspectiveOperations xRegulatory & Environment xCustomer Management xInnovation x

The Learning/growth PerspectiveOrganization Capital xInformation Capital xHuman Capital x

Delivering a specific customer value proposition to the market and growing it to the position of market leader requires a specific combination of the management areas, which each company must engineer for itself.

6 The TBK Consult principles are based on an extension of the Balanced Scorecard principles.

The fundamen-tal principles of competitive value creation

The relationship between value proposition and management areas

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Building and maintaining the internal infrastructure to deliver a certain customer value proposition and outperform the market is a long-term project.

Figure 5: Sample management ratings for company charting the changes required for supporting its' Customer Value Proposition more effectively

Ideal curve Importance average

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The Customer Value Proposition analysis above also explains why it is extremely difficult for software vendors who are serving their customers directly to move to an indirect reseller based business model.

The Customer Value Proposition in Figure 5 is strategically unfocused, which is required for serving customers directly with a Customer Intimacy driven value proposition.

The software vendor’s Customer Intimacy and Operational Excellence value elements are developed to serve customers directly and are of no value to the resellers.

The resellers want a software vendor with a strong focus on Product Leadership enabling the resellers to add value through their own services associated with the product.

Changing the Customer Value Proposition is a risky, expensive and long-term project.

Why?

Mastering each element in the value proposition requires completely different management focus, organizational skill sets, financial KPI’s, customer relationships and internal procedures.

Product Leadership requires the ability to innovate faster than your competitors. You have a strong product focus, because your innovation strategy requires being three steps ahead of the market. You must produce blockbusters from time to time that can provide return on your investments is innovation and product development. You will most likely have a product serving a very large market and you are obsessed with global market share.

The value proposition and the management challenges

Changing the Customer Value Proposition

Figure 6: Customer Value Proposition of a software vendor serving customers directly

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Customer Intimacy requires deep and long lasting customer relationships. Cost of sales is high and professional services are your key delivery. You most likely have few, but very large customers. You are obsessed with utilization and customer lifetime value. You must take one market at a time, thus local market share is more important than global market share.

Operational Excellence requires focus on processes and metrics. You must be capable of continuously squeezing waste out of your operational processes. You will most likely have a product serving a very large market and you are obsessed with global market share.

The software industry gives birth to many software companies that take a direct channel approach to their local market in the early days of the company’s life cycle. When the time comes for scaling, the opportunity for taking an indirect channel approach is considered. Especially when moving into new (geographic) markets the indirect channel approach seems attractive for the reasons mentioned above.

However, a software company cannot move from a direct channel to an indirect channel approach without making fundamental changes to the management focus, the organizational skill sets, financial KPI’s, customer relationships and internal procedures.

The fastest solution is probably splitting the software company into two units with separate P&L7 responsibilities:

A “software house” with no customer projects xA “reseller” serving customers, but with no core software xdevelopment responsibility

The “software house” will now focus on product development and channel recruitment and management. They will no longer serve customers directly.

The “reseller” will focus on winning and serving customers. They may do some product development to enrich the product for their customers and reuse certain features across their customer base, but their primary focus is the individual customer and the lifetime value of this relationship.

7 P&L: Profit & Loss

Changing a software company from a direct to an indirect channel approach

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About the authorHans Peter Bech has been developing and managing global partner channels in the software industry for more than 30 years.

Hans Peter built the partner channels for companies such as Dataco (now Intel), Mercante, Dansk Data Elektronik (now CSC), RE Technology (now Barco), and Damgaard/Navision (now Microsoft).

As a management consultant Hans Peter has been providing consulting on channel development and management issues to companies such as Microsoft, Danfoss, Proekspert, Jeeves Information Systems, eMailSignature, SoftScan (now Symatec), Netop, EG A/S, CSC Scandihealth and Secunia.

Hans Peter is the author of several whitepapers on channel development and management and he frequently writes articles on the subject.

He started his career as a management consultant in 2003 and founded TBK Consult in 2007. Since then he has built the company to its present position with 24 senior consultants in 16 countries.

Hans Peter oversees the development of TBK Consult as well as performs management consulting assignments for selected clients.

Hans Peter holds a M.Sc. in macroeconomics and political science from the University of Copenhagen. He speaks Danish, English and German and is a certified ValuePerform, ValuePartner and Business Model Generation consultant.

More about Hans Peter Bech

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