Roundtable: Improving the channel's bottom line

How to retain profitability within the channel is an issue vendors, distributors and resellers have to constantly stay focused on
(L to R): Angela Logan-Bell (Express Data), Cam Wayland (Channel Dynamics), Steve Martin (Symantec), Jamie Warner (eNerds), Matthew Sainsbury (ARN), Nadia Cameron (ARN), Craig Somerville (Somerville Group), David Lenz (Ingram Micro), Nick Stranks (Ethan Group), Sean Bishop (Harbour IT), Tony Heywood (Klikon Solutions), Joe Arcuri (Synergy Plus) and Brian Nisette (Frontline Systems).

(L to R): Angela Logan-Bell (Express Data), Cam Wayland (Channel Dynamics), Steve Martin (Symantec), Jamie Warner (eNerds), Matthew Sainsbury (ARN), Nadia Cameron (ARN), Craig Somerville (Somerville Group), David Lenz (Ingram Micro), Nick Stranks (Ethan Group), Sean Bishop (Harbour IT), Tony Heywood (Klikon Solutions), Joe Arcuri (Synergy Plus) and Brian Nisette (Frontline Systems).

How to retain profitability within the channel is an issue vendors, distributors and resellers have to constantly stay focused on. ARN asked a collection of industry veterans to come together and discuss ways to achieve better partner profitability in a changing climate.

Nadia Cameron, ARN (NC): Why are there still issues around partner profitability today?

Craig Somerville, Somerville Group (CS): That’s a very broad question as there are a host of issues including vendor personality disorders – are they a vendor or partner organisation for example? Staff is another big issue in our industry – the churn of staff, lack of staff and training them. I come from a contracting background where you have a structured award system, which means you can take someone with a certification and know what that person is like. I’m not saying we have to bring in an awards system, but we don’t have that capability in IT. There’s competition too, which is difficult but also healthy. We have a blended business and operate in several areas. This means we’re competing against traditional integrators on the one hand, but then suddenly find customers are buying products from e-tailers who sell at no margin.

NC: Was the focus on partner profitability lost during the downturn?

Nick Stranks, Ethan Group (NS): We didn’t actually suffer much of a downturn during the GFC because a lot of those no-margin businesses Craig is talking about were so uncompetitive they were unable to survive at that level, and a number of larger players disappeared. So you’ve picked up their staff, you’ve picked up their customers. What also happened through that rationalisation was that wages came down because people just wanted jobs. So profitability wasn’t overly affected. In terms of ongoing profitability, I think the cost restructuring that took place during the GFC – getting rid of some dead wood, moving people on and changing the way we expected our people to work – was beneficial for us long-term.

Jamie Warner, eNerds (JW): We saw on the horizon the need to restructure the business and put new systems in place to improve efficiencies and profitability. But certainly, you do see a tightening with the vendors and products around margins and profitability and you need to be aware and dynamic around the product sets you’re using.

David Lenz, Ingram Micro (DL): One of the interesting things we saw was diversification of business. For example, people who spent the previous year moving into markets or having a blended model including managed and professional services as well as product. At the same time, the opening of new opportunities was where vendors started to look and there were efforts to get in touch with new partners. What you’re also seeing is partners who have built themselves up in these areas now looking for the next white space they can get into – do I want to focus around security, or get into networking as part of a managed services model.

Cam Wayland, Channel Dynamics (CW): What was surprising was seeing vendors and resellers investing in training of staff during the GFC. That’s part of the reason why I think those smarter businesses have come out in a better position, as they are better prepared to take off from where they were with the right people doing the right things.

NC: Was there as much focus on profitability between the vendor and the partner?

CW: We see the good, bad and the very indifferent in there – it really depends on the vendor and also depending on whether there is external pressure from the US. There were good people leaving businesses that had done good things and had good relationships in the channel. It’s that channel memory that gets lost in terms of who is doing what.

Angela Logan-Bell, Express Data (ALB): There is a linkage there with available credit for the channel, which was a definite challenge last year. Because a lot of the credit financiers were based in Europe, they went into panic mode. Locally, it wasn’t as painful but there were definitely businesses that went under. Fortunately, what we’re now hearing is that credit providers are trying to localise their information and segment out Australia because they see the economic climate is different. However, the way they view resellers has changed: They are not looking at credit history or payment history, they are looking at financials and balance sheets.

CS: I think most of us put a bigger emphasis on services [during the GFC], which is a bigger risk business. We’ve spent an immense amount of money on structure and systems and we’re only at the beginning of that. But if we want to be extremely good in that space and be profitable, we have to have the systems. It’s like the sales cookie-cutter style – with services, you’re taking something that’s not the same every time and making it repeatable with reliability and utilisation.

Steve Martin, Symantec (SM): During the GFC, we saw a transition from selling the solutions and understanding customer problems, more to supplying what’s been asked for. When you transition to that supply model, you have nothing else to differentiate on but price. That then had flow-on effects on margin and the quality of sales and account management staff to engage effectively with the customer to determine what problem has been addressed. There has been a lot of pressure on the industry in the last 12-18 months to get the deal done quickly because organisations needed the business, versus stopping and asking ‘what’s the problem, let me be the IT expert in your business and provide you with the right advice and solution that makes sense’.

Sean Bishop, Harbour IT (SB): Clearly, keeping staff and the training up is important. I think we’ve also forgotten the importance of basic relationships and knitting. We saw several organisations go under who forgot that.

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NC: Is there more vendors can do to build a partner’s long-term profitability?

SB: Vendors need to make it easier for partners – if we made it difficult for our customers to work with us, they wouldn’t do any business with us.

Joe Arcuri, Synergy Plus (JA): It’s the frameworks and process, and the lack of control locally. I’ve mapped out our last three-year spend, and our targets are going up every year but our rebate structure is going down. The amount of people that used to cover our account is significantly less, and the response times to get evaluation equipment, data or pricing are not enabling the business to perform.

CS: Ten years ago, if an opportunity came in the door, you would make a call, the machine would work and drive you to a sale. I’ve just come from a recovery meeting today with one of my vendors because I actually went to another provider for equipment I’d spent five months trying to source for an opportunity. It’s too hard. And if I want to do it, I have to achieve full-blown certifications before I can source pricing to do the deal. We spend so much more time managing our vendors. Our job is to bring technologies to market, but because there is so much new technology, it’s a lot harder than it used to be. In fairness to the bigger vendors, they have a lot of technology and there’s lots of stuff coming out they struggle with. We have demand and customers we could sell it to if we could productise it, but it takes a year to productise it because the machine is so slow.

JW: With SMBs like ours with 20 people, you’re dealing with enterprise-level businesses. Vendors have thousands of staff and they’re structured in a way to cope with that size of business. Just that as a principle brings up issues around communications and how you deal with each other. The other thing is larger vendors will have a faster turnaround of staff, so if you’ve built a relationship with someone and it goes, it’s hard. On the flip side, the integrator really has to drive the relationship and grab whoever it is in the vendor or distributor.

JA: If we treated our clients the way our vendors treated us, we’d all be broke. We have lost a significant amount of business in the last few months, and it’s not our fault, it’s because we’re tainted by vendor perception.

SB: We had a significant deal with a printer vendor which we tried to negotiate pricing on, but the vendor just claimed we’d make up the margin on services. But that’s my business.

Brian Nisette, Frontline Systems (BN): Vendors compete with us all the time, which is the problem. One of our vendors is planning to change their compensation plans for staff to gross profit, which means if they give margin to a reseller, the rep gets less commission. So there’s less incentive for him to bring in a reseller.

SM: One of the challenges we see going forward is getting you to invest enough of your time in training and gaining knowledge, so you can successfully deliver these solutions to the end customer. We are privileged to have a large portfolio of solutions, but if we get technology one into a customer and it’s not working properly, we won’t get technology two, three or four in there.

Nick Stranks, Ethan Group (NS): We have had several staff accredited in a vendor’s technology in the past, and have asked the vendor to support us as a result, but then they’ll tell us they’re scrapping the accreditation. We go through it again, but then there’s specialisations introduced in the US, or the rules change. In the meantime, we find out another three partners have been invited into the program without any accreditation at all, yet we’ve spent $800,000 building those resources. If vendors put something in place, it’s either got to be with a select group of partners you concentrate your resources on, or you have to recognise and market the partners who have invested and are doing things well.

JA: What is the value of accreditation for a business partner these days? It’s a me-too. You’re not getting anything special that allows you to continue to invest and back that product into your business and build opportunity around it.

BN: It comes back to that vendor commitment. If I went to vendor Z and said I had a large customer who will only buy from me, I’m sure they’d give me their pricing even though I don’t have the accredited staff. I’d rather invest money in a vendor that I know will support me in a deal.

CW: Do you think that mentality is being driven by the quarterly targets vendors are so focused on?

CS: I’m not sure what the solution is, but it’s huge bugbear for a lot of us who have been in this business a long time. There are vendors we have built whole markets for, who support us in year one or two, then there’s a change and the market we build is suddenly not protected.

TH: Part of that partner profitability equation is about having long-term tenure in your relationships with vendors.

SM: Most importantly, your relationships have to extend beyond the core business unit. You’ve got to take the time to build relationships above, below and sideways because nobody stands still. My question for the table is whether you all prefer some form of specialisation? This at least narrows the field and your expertise is rewarded. Or is it better to stay in a broader, open market where you compete against anyone including the seagulls?

TH: It does depend on how broad your product set is. Specialisation has been built to drive deep capability into the channel. The cost associated with being a broad-brush product with a level of expertise is impossible. So we either rely on distribution or vendor or provide that, or we go deep into one area of technology.

JA: If we wanted to go down the path of having a dedicated relationship with a specialised X or Y vendor, you will get penalised by other vendors around rebates because it’s an attach and measurement. All of a sudden, you’ve lost $100,000 in rebates. You have to measure what’s good for you as an organisation in the front-end, as opposed to what’s right in the back-end and it’s a difficult and fine balance.

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NC: Should vendors be recognising a partner’s annuity business?

CS: Not yet. Our market is our annuity. We build that annuity all the time when we build a new market, but the vendors never support us. We don’t want them wiping that out with the stroke of the pen. If I build a business with technology X, and service that market and the customer keeps buying from me, it should be my business. What happens though is I build that business but the vendor sees 35 other resellers and more products they can push into the market and it just becomes another product for me.

BN: The other issue is that if you’re at the top of that market, vendors think you’re too big of a risk to have it all. So they will actively put other resellers in there. The continuity of ownership in a customer’s account sits with the reseller.

SM: I’d like to touch on deal registration. We as Symantec have a bucket of cash to provide our partners with to reward them for behaviour we’re looking for. Opportunity, deal registration is one of those. It’s not because we want to know who the customer is, it’s because we want to know where the opportunities are so we can help you close them at an accelerated rate, rather than have them go to a competitor.

NS: While it influences our behaviour, it doesn’t always drive behaviour at the vendor’s end to recognise the time and investment we have to put in to do it. And if we lose the opportunity because someone drives by, the 3 per cent time investment around pre-sales work and getting ready for that opportunity means that sometimes we don’t trust enough or see value in the registration process. Or worse – a direct end-user rep ignores us and enters the deal as a direct one.

SM: Opportunity registration for a vendor is where we can identify a security, backup, archiving or other solution opportunity is. Our goal should be – and sometimes it misses on execution – to engage with that partner to ensure the deal goes down with Symantec.

NS: If I hypothetically sell $1m worth of stuff, I’d much rather waive the 10 per cent rebate and instead have one of your reps worth $100,000 come to my meetings and work out of my office. I can then take him in knowing I have a card-carrying Symantec person, saying to the customer ‘we are supporting the reseller approach being taken’. If you want to spend the money, invest it in your own people to help drive this kind of behaviour in your business. Co-fund a head or train the rep. Look at my turnover and say ‘here is $500,000 worth of professional services time’ or half a million dollars in people, which is an incentive for me to go out and find a deal. I guarantee that will give you more of a return than paying a company the profitability through a rebate for doing it.

JA: I’m not sure I agree – we have five funded heads from one vendor in our business, and have had that for years, but we’ve been given budget to sell more this year yet been stripped down to two funded heads. I can’t strip the people out of my business because they’re supporting my teams nationally, so now I have to spend $300,000 more to cover that vendor.

CW: Through our channel research, often the number one thing that comes back is formal business planning and opening up the lines of communication. I’m curious to know how many of you have a formal business planning sessions with key vendors around engagement problems.

TH: The business planning with vendors is somewhat academic because they are coming from the point of view of how many units they can sell, whereas we are looking to build profitability in our business.

JW: I’ve done some planning with Express Data around how many client prospects we can get out of a particular marketing activity. It wasn’t a massive planning meeting, but there was discussion around client acquisition rather than units.

NS: We have gotten down to metrics on marketing and worked out how much it costs for each meeting generated, per customer acquisition. The one thing we don’t allow anymore is vendors to dictate our plans because we know the best way for us to spend those dollars is to do it our way.

SM: That’s exactly the behaviour we want – we want businesses to be proactive and understand where they sit. You’d be surprised how rare that skill is in our industry.

NS: We are a very mature company now and professional in the way we deal with vendors, but there is a substantial business change that needs to occur once you get to a certain critical mass. You can’t be casual, you’ve got to be professional and have an ROI on those initiatives. If you eventually want to list your company and move forward, they are the kinds of things you need to.

ALB: We like to tailor our campaigns, the challenge is to get the scale. To be able to scale across your customers and the depth with those customers so you can retain them, but then building your business and developing individual campaigns, is a major question.

JW: It seems there are a lot of resellers with 20 staff who aren’t operating their business effectively. They’re not strategising around marketing or scaling their business, or exit strategies.

CW: It’s the disadvantage of working in the business, not on the business. Resellers are typically technology companies passionate about the technology and focused on the customer service, but the business skills are weak. One of the weakest thing we see is the marketing skills – how do they promote to their database, what’s the communication message, what’s my unique sales proposition to the customers. But more importantly, how do you market yourself back to the vendor to access those vendor resources? The smaller the reseller, the more challenging that is.

BN: You have to get to a certain size before you can really dedicate marketing resources. We have 110 people and three people dedicated to marketing, but when we had 50 people, we didn’t have a single marketing head. Even with three people, half of our time is spent selling to the vendor to get pricing or whatever. We really have to do two sets of sales before any order goes out the door. The same thing with marketing: We think about how we market to the customer, but then we need to focus on how we’re marketing back to the vendor.

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NC: What is the next step towards achieving better profitability in your business?

NS: The single largest factor driving profitability into our business will be improving the quality of the sale to the customer. Forty per cent of your business now needs to be annuity-based – managed services, people and not a volume product. The more we get into the space, the easier it is to achieve better volumes of scale and efficiency. Over the next few months, we will continue to sell on the track which drives benefits for our company. If that means we can’t sell to every customer, then that’s it. No longer can you act like companies used to act pre-GFC – we have to act in our best interest and the customer’s.

TH: The mantra I constantly say internally is the only reason for acquiring a new customer is to sell them a managed service. If I can’t sell that with a monthly view to what that customer is doing, then I’ll trivialise the relationship with that customer because they’re trivialising me.

JW: Increasing profitability in the SMB [100 and under] space will be driven by the vendor and product suites. There is a way at the moment, using cloud, to drive infinitely more margin from the same sale value. It’s repeatable.

CS: We have to make decisions on our businesses where we see profitability. This is part of what makes some businesses tick and some not. There’s investment in services, decisions between cloud and delivering IT internally – as business owners, we have to sit down and work out where we see our future. Do we build infrastructure and provide managed services, or do we do it as a project integration model? If anything comes out of today, I hope all CEOs of vendors read this, take a deep breath, then re-evaluate the way they look at and support their channel, and build partner programs. That is one of our biggest costs, but we need our vendors. We have a buoyant industry ahead and lots of opportunity.

SB: There are many variables on cloud but it is one of the most exciting opportunities out there today and a key one. Leveraging vendor relationships and streamlining those as much as we can is also important, and looking after number one, which is the customer and staff. It’s pretty basic, but it’s all you need to do – key technologies, staff and customers.