the software partner channel & the customer value propositions

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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.

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  • 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 12Changing 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 companys 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 vendors own direct sales force and implemented by the software vendors 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 vendors 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.

    Lets assume that a software vendor has a very competitive product that doesnt require any implementation services to be used effectively.

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

    Lets 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