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January 13, 2004

Are you and your software ready for indirect sales channels?
Take our Channels Readiness Quiz (part 1)

by Bruce Hadley, SoftwareCEO

It's one of the top 10 themes in the SoftwareCEO Discussion Forums: Where can I find resellers for my software? What should I pay them? How do I organize them? And etc. and etc.

The undercurrent here, among far too many software entrepreneurs and smaller ISVs, is the sense — the optimism or prayer — that as soon as they sign up some resellers, their sales will take off.

In fact, many of our forums posts begin something like this: "We've completed the engineering, we have a great product, and our two non-paying beta customers are happy. How do we get signed up with systems integrators/software distributors/the top VARs/Wal-Mart?"

Our response: Slow down, Sparky.

First of all, what makes you think the indirect sales channel will be interested in you? And, more importantly, what makes you think the indirect sales channel is where you ought to be?

We talked about this quandary with our favorite channels guru, Ken Beam, who also happens to be one of our discussion forums moderators.

Beam's company, The VAR-City, builds upon Beam's 23 years of IT industry experience, all of it dedicated to channels. He managed indirect sales channels for a number of heavy-hitters, including Baan, GE Access, Intergraph, Oracle, and Sun Microsystems.

We posed the question to Beam: How does a software company know when it's ready to go indirect? Our new "Channels Readiness Quiz" is the result of several hours of conversation and tons of excellent guidance from Beam.

This week, we'll give you the first part of the quiz. Next week, we'll finish up with the remaining questions and a guide to scoring. From this exercise, you should have a pretty good handle on your software company's suitability for indirect sales.

OK, on with the quiz. We'll pose each question with a scoring block off to the right, then follow with the answers and explanations. So, read the question, score yourself, then go on to each answer. No cheating, boys and girls.

Editor's note: If you're not a SoftwareCEO Site Member, you'll want to save your score from this week's questions, because on next Tuesday this portion of the quiz will be locked away in our members-only Editorial Archives.

Question #1: Familiarity with partner designations
The term "reseller" is a catch-all phrase for all the inhabitants of the channel community. Give yourself 1 point each for clear definition of these 7 terms: Agent; Reseller (Retail); Distributor; VAR; SI; Sales Influencer; and ISV (OEM). Give yourself a bonus of 2 points for knowing how to deploy each of their unique skill sets.

Answer/analysis:
"An agent is somebody who is involved in some other field of endeavor," Beam says. "For example, a CPA. They discover there's an opportunity for ABC software vendor. The vendor comes in and completes the deal; the agent has very little to do with it.

"The agent is typically going to get about 10 percent of the license dollars, not the total invoice. They are what I call passive resellers; it's a good way to introduce someone to your company. I think of agents as being on the tip of the funnel: They haven't quite tipped in.

"It doesn't hurt to have a bunch of them out there, because you're not dedicating any resource or marketing dollars to them. They're not carrying your logo; it's more a matter of, they know someone who can help out the end-user, often their client.

"At some point, they're going to say, 'Ten percent is nice, but we'd like more' — and that's when you roll out your channel manual and show them what's required."

The term Reseller used to apply only to those channel partners who actually had brick-and-mortar storefronts, but it's gone upside down, Beam says. "Today, they are typically order takers. They're not adding any value, they're filling orders.

"Examples are Software House International (SHI), Amazon, CDW — though CDW takes it a slight notch up, in that they do supply some support and hand-holding."

Resellers can usually buy software for around 30 percent off the vendor's MSRP, but then sell to end-users for a discount off list — it can be 5 to 30 percent off, depending on the competition, Beam says.

"They're working off volume. They may make only 5 percent on a deal, but they'll only spend 10 minutes on the phone, and if they do enough of those it's going to make sense."

A value-added reseller, or VAR, should live up to the implication of the acronym: They add some particular value to the transaction, and can recommend a product to match a need.

"If the customer says, 'I need this kind of package,' the VAR can make a recommendation and can support it," Beam says. VAR discounts are typically the same as those given resellers.

SI is shorthand for "systems integrator." "An SI is a VAR on steroids," Beam says. "They can bring many, many applications together into one tightly-bundled solution.

"They're the ones that are out there banging the drum, and they're making money on the product and on all aspects of the services components: training, installation, and product support.

Another variation on this is the Sales Influencer. "They don't' care if they ever make a nickel on the product," Beam says. "In fact, they don't even want to be involved.

"They want to bring the vendor in, close the business, and then get the vendor out of there, because now the Sales Influencer is going to provide everything else.

"A lot of resellers are going to this model now: They're going to act in every way as if they're making money on the deal, but in fact they make no money on the license — though in some case money is tossed over the fence.

"The Sales Influencer's attitude is, 'I just want to make sure that the customer chooses this software vendor, because I know that it's a six-month engagement for me, and I'm not carrying the receivable of the software license.

"Cisco and HP, among others, are recognizing that resellers don't want to take possession. They are building a reseller channel that really consists of extremely high-powered agents.

At this highest level of end-user control, the software company may be shut out of services, but also enjoys a huge reduction in support costs. "Instead of getting 1,000 calls from 1,000 end users, Oracle gets one call from one SI or sales influencer, because there's something beyond his skill level," Beam says.

In exchange, the reseller may get up to 30 percent of the maintenance contract revenues — but we'll come back to that later.

ISV stands for independent software vendor; when they come looking for an OEM deal, they represent another type of channel opportunity.

The acronym OEM comes from "original equipment manufacturer," and can refer to any relationship under which Company A sells Company B's product. It used to be that the product would always be re- labeled under Company A's brand name, but in the software industry that's no longer a given.

"At the lowest level, an OEM deal is a CD insert — a small product that's separate from but complementary to the vendor's products," Beam says. "This helps the vendor fill a niche. At the highest level, the two software companies get together and commingle their code."

"Every one of these deals is negotiable; I've never seen any two of these that are alike. But they're nearly always based on license revenues, and usually look at the sales quarterly."

Because OEM negotiations are significant, they're often handled by the direct sales organization rather than the channels manager, Beam says. "What you have when you're done is a revenue stream that's a little more predictable than other reseller types."

Why spend so much time on word play? Because it isn't play, Beam says. "This is one of the toughest decisions you'll make — deciding which type of partner is consistent with your product, your market, and your culture.

"Knowing which type of partner you should have is a giant first step in figuring out your channel strategy. You can have a blend, or course, as long as you're smart about it."

A note about exceptions outside the U.S.
One final note on the subject of definitions: Our primary focus in this quiz is on U.S.-based reseller channels; the rules change somewhat when you go overseas.

"In the U.S. , you have vendors, distributors, and a whole family of resellers," Beam says. "Those distributors do not sell to end-users; the resellers would kill them.

"Overseas, you have a different model: distributors and resellers can be one and the same; it depends on the country and your product. In some cases, the distributors actually own the resellers."

In addition, the percentages and compensation amounts quoted here are for North America. Because reseller relationships and levels of service vary so widely, you'd be wise to run comparables for each region you want to enter.

Having said that, however, the principles for selling through indirect channels are consistent worldwide, whether your resellers are in Idaho or Israel. The terms — verbal and financial — may differ, but management issues will not.

Question #2: Competitive channel research
The more you agree with the following statement, the higher your score: "We're confident we have a competitive channel value proposition, and it's based on thorough, objective knowledge of our competitors' partner program offering."

Answer/analysis:
Your direct sales organization will likely know a great deal about your competitors' software and services, and that's part of the issue here. But the second part of the equation is knowing how your competitors work with reseller channels, and your direct reps may not know much about that.

"After you identify primary competitors, you need to understand what differentiators allowed them to win, and in cases where you won, what gave you the edge," Beam says. "I'd also look at pricing, though I hate using pricing as a differentiator.

"If you're consistently losing against Brand X, and Brand X owns a big chunk of the industry, that indicates you're probably not ready for channels."

What constitutes a "big chunk"? It depends on the market, Beam says. "If you have 5 percent of the security software market, you're doing really well. If you've got 5 percent of infrastructure management, you might not be doing so well."

But all of that is end-user perspective. What the reseller really wants to know is how your offering will stand apart from the competition. If your distinguishing feature is "great service," that may appeal to the end-user, but the reseller doesn't care.

"I like to see a feature-function comparative matrix," Beam says. "Show me your competition, show me where you match up, and put an X in the matrix where your product is differentiated. Don't stack the deck and leave out key areas; the reseller will see through that."

The important focus here is the reseller's point of view: They're looking for a differentiator for themselves. "They want to reach into their bag and pull out a club that fits the hole," Beam says.

"If they look at your matrix and say, 'You know, we've already got this feature covered with this product, and that function covered with that product,' you should move on to the next reseller.

"This has everything to do with what the reseller needs, and nothing to do with what the end-user needs. An enlightened owner of a VAR company is going to be looking at your product and your channels program as it relate to their profitability.

"They're going to assume that you've got a good product during the initial conversation. But if the conversation is going to progress, they'll want to know why they should add your product to the mix they sell — which could mean they'll drop someone else's.

"They want to know what your business plan is, and how your reseller program shapes up. What it is it about your program and product that makes this worth their investment? That's where you have to have your business proposition clearly defined."

Give yourself five points here only if a) you know your products' strengths, b) you've done your research on competitors' products, c) you know how the competition uses channels, and d) you know you can offer your resellers more.

Question #3: Product viability / Channel appeal
Is your product packaged and priced to attract resellers?

Answer/analysis:
"Resellers love bundles and they love SKUs," Beam says. "They want something they can put down on a proposal — something by part number that they can identify for ordering purposes."

Do you need a pretty box? A year ago, the answer was yes, says Beam; today, no, thanks to the Internet: Everything is done digitally. But resellers do need to be able to relate your software to a SKU.

"Even with the Internet, eventually the product is sold by a human. If that human has to go through a huge bloodletting project to configure a product — well, the reseller is always going to gravitate to the easiest product to sell."

One fix: Come up with an if/then order form. If the customer has this operating system, then you need this SKU; if the customer wants the reports module, then you need this SKU; and so on. Ideally, after they get all the answers from the end-user, they push a button and can say, "OK, here's what you need."

You may think your product lineup makes sense, but, chances are, you've been living awfully close to it for many years. The product names and configuration that are common sense to you may well be gibberish to a reseller.

Beam suggests this test: Put your product lineup in front of an outsider who knows the industry but not your product. If they can understand your product hierarchy in five minutes, fine — but if they can't, you've a got a problem.

Also, a note here about naming: As you move into the indirect channel, product names become more important. "The name of the product needs to allude to what its function is," Beam says. "There has to be something that clearly differentiates its function. The reseller doesn't have a lot of time for interpretation and translation."

Give yourself the maximum five points if you are confident your products are packaged for optimum reseller ease and attraction. Score zero for "don't know" answers.

Question #4: Average transaction size, per sale, pre services
Score 1 point if your average sale — software plus maintenance but not services — is less than $20,000

Score 2 points if your average sale is between $20,000 and $30,000

Score 3 points if your average sale is between $31,000 and 50,000

Score 4 points if your average sale is greater than $50,000

Answer/analysis:
This one's pretty obvious: The bigger the ticket, the more opportunity there is for the resellers to make money. True, there are some resellers who can make it up on volume — the retail resellers like SHI and Wal-Mart and Office Depot — but as we explained in Question #1, they're order-takers.

Unless you've already got a huge funnel of demand built up, you'll find it very difficult to attract them. That isn't to say it isn't possible, but this quiz is all about readiness. In that light, the higher your product price, the easier it will be to attract resellers.

Question #5: Product branding / Industry awards
Give yourself 5 or 6 points if you got a "Best Of" award from a major publication such as Infoworld or PC Magazine or a top analyst group like Gartner within the past two years.
Score 3 or 4 points if you have a recent award from a vertical industry publication or niche analyst group, or an award that's more than two years old from a major publication.
Score 1 or 2 points if you only have customer case studies.
Score zero if you have none of the above.

Answer/analysis:
"Imagine the reseller is in front of the purchasing agent, he comes in with a new product, and he needs to get it approved," Beam says. "If the recognition for the product does not exist, the reseller is at a disadvantage.

"Endorsements from leading industry publications and analysts are necessary. You need to have been evaluated and reviewed and picked the 'best of' within the past year or two. If all you've got is customer stories, that's worth the low end of the scale."

There is a way to earn bonus points here, however: If one or more of your customer case studies includes a partner component, give yourself an extra point or two.

For example, if the case study with your end-user Company X describes how Acme Systems Integrators installed the software, got everyone trained, and made everything hum, the resellers will love you.

These kinds of stories don't necessarily make it any easier for resellers to sell your software, but it will make it easier for you to attract resellers.

Question #6: Potential for channel conflict
Score 1 point if you sell your product on the Internet

Score 2 points if your direct sales reps and channel partners have no boundaries on their sales territories or their target customers

Score 3 points if you have clearly defined boundaries for direct and indirect sales

Score 4 points if you sell through indirect channels only

Answer/analysis:
Zero conflict is the best you can do, and that gives you the maximum four points in our quiz.

"Having a channel program that permits conflict to occur is the dumbest thing you can do," Beam says, "especially because it can be avoided from the beginning. If conflict happens, it means you didn't plan very well from the beginning. And, there are a lot of hidden costs to that conflict.

"If you have direct sales reps already, you need to establish boundaries for territories: If direct people are playing here, then channel people are not allowed there, and vice versa.

"You can establish that demarcation by product, by industry, by geography, by end-user revenue. Using industry splits, by the way, is a good way to develop incremental revenue: You bring on channel partners who have expertise in an industry where you don't.

"Geography is not one of my favorite ways to do it, because of corporate overlap. But most of those deals are one-off, so it's possible to put the lion and the lamb in the cage together — still, someone is going to have to make a decision as to how revenues are shared.

"Companies that use territories defined by end-user revenue often do so because direct sales people are darned expensive. Direct sales people should be chasing the big deals, the million-dollar deals, not the $100K deals; put your channel to it. Use the reseller channel to pick up the scraps that fell off the table.

"The only reason a reseller is in the Fortune 500 company is that the direct sales guy or gal has invited them in. This is one of my favorite methods, because it's fairly easy to define, and it goes to the reason for channels.

"Sure, it can get fuzzy. A direct rep might say, 'These people aren't in the Fortune 500 this year, but I've seen their financials, and they will be next year' — because he doesn't want the reseller to go after it. Someone still has to police it."

Question #7: Organizational buy-in
Which of the following statements most closely matches the situation at your company?

a) "Our direct sales team is not happy with the decision to add a channel organization." Give yourself negative 1 point.

b) "We know it's something we should be doing, but the overall attitude is guarded." Give yourself 1 point.

c) "Shouldn't be a problem." Give yourself 2 points.

d) "Compensation is already in place to embrace channelsÜwe're ready!" Give yourself 3 points.

Answer/analysis:
"Even when all the best channels practices and principals are properly in place, a lack of full buy-in and corporate support can deliver diminished returns," Beam says.

That's a nice way of saying: If you don't have everyone on board, don't let this ship leave the dock, because you'll find yourself swimming.

Buy-in from you direct sales force is especially crucial. They may never learn to love the reseller channel — after all, they're competing for some of the same dollars — but they must at least respect your company's business reasons for setting it up.

Question #8: Channel team infrastructure
Give yourself 10 points if you have an experienced, full-time channel manager and a dedicated technical specialist to support channel pre- and post-sales activities.

Note that we're talking about two separate people here, both of them dedicated wholly to the channel program. If you have a technician on loan from your direct sales organization, your maximum score here is 5 points.

Answer/analysis:
This one's worth a lot of points — 10 percent of the total in our quiz — so Beam offers additional scoring examples.

"You can earn 1 to 3 points here if you've got a slim budget, and you're dipping your toes in the channel," he says. "For example, you've got someone on staff who, among their other functions, is trying to determine if it makes sense to invest in channels. Your company has nodded toward the channel but not made the commitment.

"Give yourself 4 to 6 points if you have a req open or you have someone on board with channels experience, but that person is operating solo, and must gather resources wherever he can. In other words, you've got a jack of all trades, because you're hoping to offset the lack of having an SE.

"You get 8 to 10 points if you have both a channel manager and an SE, and that SE is dedicated to the channel — he has no dotted-line connection to the direct sales organization. It's the kiss of death is to tell the channels group, 'You can have this person when he has time' — it never works. Never."

That's part of the reason we only allow you 5 points total here if your SE is shared with the direct sales group. The second reason, Beam says, is justified paranoia.

"The reseller is scared to death of an engineer on loan from the direct sales organization. That SE is taking information back to the direct sales group, which is, quite literally, a direct competitor to the resellers.

"They're afraid the direct reps will then swoop down and take their business away. It's called poaching, and it means that that shared SE will always be viewed as a spy."

Question #9: Channel manager compensation
Score from 1 to 5 points according to how accurately the following statement reflects your company's reality:

¿Our channel manager compensation package falls within the industry norms, and we have an aggressive MBO incentive to rapidly move new partners through the sales training and technical certification process.î

Answer/analysis:
You should expect to pay your channel manager a base salary of $65,000 to $85,000, says Beam. He or she will also get a percent of channel revenue, usually based on incentives; the typical range is 10 to 15 percent, but can go to 20 percent.

Of course, if your channels program is new, there will be no revenues to pay commissions on; in these cases, Beam suggests you factor in incentives based on management by objectives (MBOs).

For example, the channel manager might earn a $1,500 bonus for each new reseller signed up, and another bonus for working with them through their first successful sale.

It's important that your channel manager come from the IT industry, Beam says. More specifically, if you're in the software business, your channel manager should have a software background.

"There are so many issues that are specific to software — like returned merchandise," he says. "However, it is not important that the channel manger come from your particular vertical or technical niche.

"The only time that comes into play is when you know that your channel is always going to be small, and you're never going to be able to hire a dedicated SE. In those cases, you need to have a hybrid channels manager with technical skills."

Next week, we'll give you another 12 questions and the scoring key for the entire quiz. Plus, we'll tell our Site Members how they can download a PDF of the complete test for later reference.