January 20, 2004

Are you and your software ready for indirect sales channels?
Take our Channels Readiness Quiz (part 2)

by Bruce Hadley, SoftwareCEO

Last week, in part 1 of this article, we gave you the first nine questions in our Channels Readiness Quiz. This week we'll finish up with the 12 remaining questions and the scoring key. If you'd like to get a PDF of the complete test in tabular form, it's available in the Sales and Distribution section of our Downloads Library.

Question #10: Resource segregation for channel programs
Give yourself up to 5 points if you can honestly say the following for your company:

ËWe have taken great care to align our company's resources and personnel to strategically and tactically support our resellers in all aspects of the sales cycle."

Answer/analysis:
Ken Beam, who heads up software sales partnership firm The VAR-City, says successful segregation will show up in three primary areas: training, marketing and executive management of the channels program.

"You shouldn't give yourself high points here unless there's a clearly defined training process for resellers," he says. "There's a schedule, and there's a course specifically designed for resellers, containing both sales and technical certification components. If you can't say exactly what your reseller training program looks like, you don't score."

The same goes for marketing, Beam says: You have to be prepared to show the reseller exactly how you're going to help him market his company. While most software vendors dream about VARs who give what Beam calls the perfect response—"We don't need no stinkin' leads"—most resellers expect your help in filling the funnel.

It could be that you'll provide materials with the reseller's name on it, maybe you'll offer trade show support, or perhaps there's a co-branded product—whatever marketing support you offer must be already in place before you'll have much success recruiting resellers.

To make this marketing segregation work, you need someone in your marketing department who's worked with channels before. "Without this person, and without the right attitude, your marketing group will always view the VARs as a nuisance," Beam says.

Finally, and probably most importantly, the executive in charge of your channels program must be segregated from your direct sales force. Beam doesn't think you should get 5 points here if you plan to have your VP of sales run it.

"VARs are afraid of the VP of sales," Beam says. "Nine out of 10 of those VPs come from a direct sales background, and the VARs know they'll be treated like a redheaded orphan.

"What really matters to VARs is that they have a dedicated and experienced channel manager, someone that they can touch everyday. If you go into this thinking that VARs are like end-users, you're wrong; you're going to need someone who can handle their hot buttons, their whines.

"If your person has a VP Channels title, your resellers will throw a party for him, but if he has a VP Sales title, they'll assume he's a monster."

By the way, vertical industry and/or technical experience doesn't make a great channels manager, Beam says; channels management experience does.

"It takes years to develop a good channels manager; it takes a few weeks to develop technology expertise," says Beam. "It's the VAR that needs to be an expert on the product, not the channels manager."

Your channels manager must tackle a huge, multi-headed monster in setting up reseller channels. To illustrate the complexity and sheer work involved, Beam shared with us a document he uses to explain the ChannelBuilder Elite program—the process he employs to create software sales channels for his clients.

Built upon phases he calls "Research," "Optimize," and "Initiate," the document shows an organizational timeline for the detailed tasks and process that must be addressed during the first 90 days, regardless of whether you're outsourcing or doing it yourself.

Question #11: Channel budget — administration & operations
Which of the following sounds most like your company?

a) "We'll just take what we need from the sales budget." Give yourself 1 point.

b) "We've set some dollars aside to seriously evaluate a channel model; it's at least a six-month experiment." Score 2 points.

c) "We're committed to building a channel organization and have allocated funds accordingly." Score 3 points.

Answer/analysis:
"These three answers, as simple as they sound, represent 80 percent of all the answers I've gotten in more than 20 years of doing this," Beam says.

"Generally speaking, your costs will be 25 to 30 percent of the revenue you want—but that's on top of what you're paying your channels manager. In fact, that ballpark assumes that you have all the necessary pieces in place. In other words, the channels revenue isn't going to arrive just because you have a budget."

With that in mind, Beam suggests you work backwards from your revenue goals to arrive at your costs. How much revenue do you need to generate in the first year of you channel to consider it a success?

"If they say a million dollars, then we've put a stake in the ground," Beam says. "Now you know you have to sell X number of licenses to achieve that million dollars, so it's a matter of working backwards to figure out if the numbers actually fit.

"How many resellers will you need, each selling how many licenses, to get to that million dollars? Assuming your price point is enough to encourage resellers to bite, you can then figure out how many resellers you'll need.

"From that point, you've got the beginning of your admin and ops budget. To support 10 resellers will be a very different proposition than supporting 100."

Question #12: Channel budget — sales & marketing
Consider co-op, MDF, proof of concept, NFR software, co-branded marketing material, and trade show support, then choose one of the following as the best match for your company:

a) "We can do the brochures, but what's MDF?" Give yourself 1 point.

b) "We're willing to provide some additional marketing dollars if it's case-justified." Score 2 points.

c) "We plan to allocate a percent of invoiced sales, or some other pre-determined amount, to support and/or offset our partner's marketing and training costs." Score 3 points.

Answer/analysis:
Maximum points here are earned both for your familiarity with the way channel programs are supported with marketing and sales dollars, as well as your willingness to do so.

MDF is an acronym for "market development funds," a subset of co-op; in short, the software vendor provides funds to promote the product.

"It's typically 2 to 3 percent of the revenue the reseller generates, but can be offset by free product," Beam says, "and it's based on invoice, not list.

"There are two ways to apply it: pre-approved use of MDF—for example, a market mailing campaign—and authorization required. In the second case, the reseller might call the manufacturer to get an OK for a wine and cheese party or a golf outing the reseller wants to host for his prospects."

MDF is not a lot of money in percentage terms, but it's important money because it can be applied directly to the reseller's bottom line—it's pure profit.

"You need to have the awareness that you will have to ante up some money," Beam says. "You have to be willing to put dollars on the table. Normally, it's a percentage of revenue generated—it's not money that's automatically set aside. Look at it as commission, and don't begrudge writing the checks.

"One really clever way to do it is to grant X number of licenses when the reseller reaches a certain point of revenue. These can either be outright licenses that the reseller can sell, or NFR licenses: 'not for resale' licenses the reseller can use for demo and internal training purposes."

You'll most commonly hear NFR used to refer to software, while "eval" or "demo" (or "demo unit") typically refers to hardware or a combination of the two, says Beam.

The phrase "proof of concept" comes into play when there's an end-user who is willing to issue an open invoice, but only after the software has been proven to work in an actual implementation. "In these situations, the ISV may have to provide time and talent to the reseller to get it set up," Beam says. "Are you willing to commit the resources?"

Question #13: Channel profitability expectations
This is another statement-matching exercise; which of the following sounds most like you?

a) "If we can't show a profit in the first six months we're out of the game." Score zero points.

b) "We'd like to see profits in first six months, but incremental revenue growth will justify a one-year commitment." Give yourself 1 point.

c) "We have a target revenue number for the first year, and will measure our success against that at the end of the year." Score 2 points.

Answer/analysis:
"This once again goes to an evaluation of your commitment to channels," Beam says. "Channels take a long time. Realistically, you're looking at one year before you're confident that you've got a solid channel.

"You need to know that there are costs involved before you're going to see a return. To establish stake in the ground, it gets back to the second question of this quiz: Competitive channel research.

"If you're just starting out, it may be fuzzy, but you need to put the stake in the ground somewhere. This is where you do if-then scenarios. Figure out what your resellers are going to sell, and how much it's going to bring you."

Remember, as we said in our discussion in part 1 of this article, profit considerations for resellers outside the U.S. are different than for those within; financially, it's often a whole different model.

Question #14: Amount of reseller discount, off MSRP
Score 1 point if the reseller discount is less than 15%.

Score 2 points if it's 16 to 20 percent.

Score 3 points if it's 21 to 28 percent.

Score 4 points if it's 29 to 35 percent.

Score 5 points if it's 36 to 40 percent.

Score 6 points if it's more than 40 percent.

Plus: Give yourself 1 bonus point if the discount schedule is linked to the reseller's certification level, and 1 more bonus point if it's linked to the reseller's annual revenue.

Answer/analysis:
"The more margin there is, the more appealing it's going to be to resellers," Beam says. "I like to see the discount based on commitment and their attainment of goals. The more they sell, the greater the discount they get.

"Sometimes, these margins can be held back and paid retroactively—so the resellers know that if they get to the end of the quarter, they can be bumped into a better margin tier."

Question #15: Partner revenue opportunity
Do your resellers provide services? Score 1 point if they provide training, another point if they do implementation work, and another point if they provide first-level tech support. If you only want them to sell software, you get zero points.

Answer/analysis:
"Channel partners will align with vendors that give them the majority of pre- and post-sale services," Beam says. "It's as simple as that.

"Your relationship is more appealing to them if they can provide more. If you let the resellers do these things, they'll find your offer more appealing. If you shut them out, you'll find it hard to make friends in the channels."

Question #16: Maintenance contracts
Do your resellers receive a percentage of first-year and future maintenance contract sales? If yes, and they handle tier 1 support calls only, give yourself 1 point. If they handle all but critical support issues, score 2. If you keep all maintenance revenues to yourself, score zero.

Answer/analysis:
"The amount that resellers can earn on maintenance contracts depends on the amount of their involvement in providing support," Beam says.

"If they only take the first call, to make sure everything is plugged in, they'll probably get around 10 percent of the maintenance fee. If they are handling just about everything but the most critical issues, then they can get up to 30 percent.

"You're paying them for the amount of effort they're taking away from you. There's a real danger here that if your channel is too successful, you'll bury your internal technical resources."

The bottom line on maintenance revenues: If you aren't willing to share, the resellers won't want to play.

Question #17: Partner profile and prospecting criteria
Score 1 point if you don't know where to start.

Score 2 points if you know that your ideal resellers will have expertise in a vertical industry only (e.g., legal, healthcare, banking, etc.).

Score 3 points if you know that your ideal resellers will have a particular technology expertise only (e.g., wireless, storage, security, etc.).

Score 4 points if you'd like your resellers to have a combination of industry and technology expertise.

Answer/analysis:
"This really gets to your own ability to recognize what you need, to profile the perfect reseller partner," Beam says. "What does the best reseller look like? What would they be selling? What is their in-house talent?

"If you're targeting a particular industry, and you're therefore looking for resellers in that industry—let's say it's hospitals—well, at least you've thought it out that you need to leverage the VAR channel in that direction.

"However, the reseller herd has been culled to the point that you're not going to find people who just do hospitals anymore. If there was a VAR just doing hospitals, they're out of business today.

"To get the maximum 3 points, you've thought about applying other technologies to your vertical. For example, 'We've been strong in storage for hospitals, but we'd like to find people who understand document management, because there's a natural affinity between the two.'

"That's a better way to go, because it provides more opportunities for everyone to win. You get an expanded market, the reseller gets the differentiation of his skill combined with your product, and the end-user gets a specialized but integrated solution."

Question #18: Training & certification
Rate your formal sales and technical training process. If you don't have an existing reseller/partner certification process, you're not allowed to give yourself the full 5 points here.

Answer/analysis:
There are a number of signs that indicate you're worthy of maximum points on this question, Beam says:

"During the recruiting process—which can be a fairly intimate dance—you as the vendor need to clearly state that on the day the contract is signed, you want to have the reseller's sales and technical people scheduled for training: dates, locations, and so on.

"The software vendor must make a commitment to immediate training; the reseller is looking for direction. You should have a channel manager assigned to that account, with MBOs attached to show that the reseller is meeting their objectives, on a timeline. Put your channel manager at the point of the spear on that one.

"You need to have a one-day sales training course that provides the reseller with access to the marketing material and competitive information, on CD or extranet or both.

"It's really very easy to adapt whatever training you're using now for your direct people, with one exception: You'll need to add some reseller training on the rules of engagement—clearly defined boundaries regarding channel conflict.

"You also need to have a technical or certification track; usually you'll modify your admin training course. This may include implementation training, and resellers may have to take some script courses, driver courses—whatever the product requires for them to walk out of there and implement the product. The nature of your software will dictate how complicated this is.

"At the conclusion, you should have something to give them—a plaque or certificate they can put on the wall and their Web site that indicates a higher level of commitment. If they're competing against other resellers, this gives them a higher level of differentiation."

You can earn top points on this question if you have a partner's manual already in place. Not only does this help with training, it's invaluable with ongoing channel management, Beam says.

"The partner manual contains all the materials, marketing and sales and technical; it's the reseller's reference book. Later, when the reseller calls in with a question, the channel manager says, 'Go to page 26 of your partner manual, look at the bottom of the page, there's your answer.' In time, some resellers learn to check the manual before they call.

"The partner manual is not just a matter of how you sell the product; it's everything," Beam says. The partner manual can also help with follow-on hires—i.e., new employees at the reseller's company who've not been through the training course at your headquarters. However, Beam says he wouldn't rely on the manual and "home schooling" alone.

"Online certification is becoming more and more popular, and I'm inclined to endorse it," he says. "These can take the form of an open-book test; you're really testing their ability to apply your solution.

"One of the best resources I've found is to go to your own tech support people, and ask them to independently write the 20 most common questions they're asked by your end-users. That consensus becomes the test that your resellers should take."

Question #19: Partner access to sales/marketing tools
Do your partners have access to all necessary resources—brochures, presentations, price lists, quote forms, tech docs and FAQs, etc.—via a 24x7 ËPartnerNet"?

Answer/analysis:
"Customers and sales have been lost to poor response time," Beam says. "If you don't give resellers everything they need, when they need it, your sales and theirs are at risk."

"If I have to get a proposal out Monday morning, I want to know that I can get everything I need to put a reasonable and intelligent proposal together in time."

Should you allow your resellers to customize your sales and marketing tools? "Changes should be OK, as long as you have the ability to review," Beam says.

"The point here is that you need to give them access to the library of existing scripts and tools that they can use in their implementation.

"Of course, you hope that they will then add their work to the library that's available to other resellers. You might want to pay them royalties on that, or give them recognition, but sometimes just an announcement that we have a script that does so-and-so is enough."

Question #20: Partner levels (tiers)
Most successful channel programs employ partner tiering: e.g., Platinum, Gold, Silver, based on quantifiable sales factors. Rate your understanding of the purpose and value of such an identifier scale.

Unless your channel manager aggressively works to matriculate your partners to the next level, you should not give yourself the maximum 6 points here.

Answer/analysis:
"Tiers are important because it's an indicator of the resource you're willing to apply," Beam says. "At the platinum level, you've probably got your own phone number into headquarters, you have a single designated channels manager, and so on.

"The resellers want to know that if they do everything they're supposed to do, that they can move themselves up the ladder. They don't want to make the full commitment at the outset, but they want to know that the path exists."

Also, keep in mind that the designation you provide to resellers can be an important sales differentiator for them. End-users are inclined to believe that your platinum reseller has experience and skills that the resellers in less-shiny tiers don't possess.

Question #21: Reporting & measurement
Which of the following is most likely to be uttered by your management team?

a) "Report what? Measure what?" Score zero points.

b) "Nothing formal, but we'll certainly track revenue performance." Give yourself 1 point.

c) "Resellers are required to write a business plan and we'll monitor their progress accordingly." Score 2 points.

d) "Our channel managers visit each reseller partner quarterly to review their compliance with training, use and distribution of marketing dollars, and revenue goals." Score 3 points.

Answer/analysis:
"Each channel manager should be given the opportunity to evaluate the resellers on a quarterly basis," Beam says. "This should be a formal report, in which the channel manager and the reseller sit down and go over the details: 'Let's go over last quarter's MDF, last quarter's sales,' and so on.

"The report should review and set down in writing what will be done next quarter. If they're not meeting their obligation, then that could very well impact their discount level, the number of leads you send them, or change their level from platinum to gold—any number of negative things."

Do these report sessions really need to be conducted in person? Yes, Beam says, they do. "If you're not doing it, your competition is," he says, "and it's all a mindshare game. You need to be firm, fair, and fully engaged. To do all that, you need to be in front of them. "

Beam shared another document with us that offers a great example of what your channel manager's quarterly report might look like. It's his Channel Managers' Reseller Business Plan, and it includes some sample data to show you how it might be filled out.

Total possible score, questions 1 through 21:

SCORING

If you scored less than 27 points:
This quiz may well have been the best investment in reseller channels you could make—especially if it guides you away from further time and energy in pursuit of a reseller program.

Based on your score, it's a good bet that you have been entertaining the thought of creating a reseller program, but hadn't anticipated the grueling requirements and complexities in establishing and maintaining a partner channel.

Our suggestion: Watch and wait. Build up your knowledge, through learning opportunities such as the SoftwareCEO Discussion Forums.

If your score is 27 to 43 points:
If you scored in this range, you're off to a good start. You understand that there's more to creating an effective reseller program than hiring somebody with marketable channel skills, yet your score suggests that you're still on the light side of making the financial or resource commitments to the program.

With more research, you should be able to improve your score and prepare your team for a successful effort in the future. Review your responses to (F) Potential for channel conflict and (G) Organizational buy-in; if your combined score on those two was 3 points or less, concentrate on what you need to do to improve those scores.

Although they're not the highest-value questions in our quiz, failure to achieve high scores in those areas will prove counter-productive to your goals throughout your channels program.

If your score is 44 to 84 points:
OK, you're on the cusp of a winning channel concept. If your score is on the high side of this range, there are just a few things that you may need to rethink.

Look at those questions where you scored below the mid-way point, and ask yourself: Are there changes you'd be willing to make?

If you scored on the low side of this range. take a few extra moments to see which questions zapped you. If they fall into the pricing or packaging categories, don't despair—those aren't deal breakers.

Deal-breakers would be a tentative commitment to a long-term channels program, and/or the potential for direct sales and indirect sales conflict.

If you scored 85 points or higher:
Congratulations! Your organization is channel-ready.

You have a clear understanding of the marketplace, how your product(s) and channel program stack up against the competition, and you've made the necessary commitment to a properly aligned infrastructure.

Keep in mind, however, that without a sharp and constant focus on daily administration, your competition, and uncompromising execution, even the best-conceived channels program is still likely to struggle.