Sales tales: Channels Strategy: the When, Which, Why and How?
Today’s tale: Channels are for Scaling Inside the Tornado
by Stephen Allott, Venture Partner, Seedcamp Sales Tales
and Vargha Moayed, Chief Strategy Officer, UiPath
British Telecommunications p.l.c. first re-branded as British Telecom and then again as “BT”. But their new ATM network switches from Stratacom, a Silicon Valley startup, did not work. BT installed Netcool/OMNIbus, their new fault management software. Now the Stratacom gear worked well.
Nortel was the telecom equipment gorilla. Stratacom was the new kid on the block. Telecom Italia was the battleground. A package of Stratacom ATM switches managed with Netcool beat Nortel head to head for the Telecom Italia business. News of the head to head win flashed around the Stratacom sales force. And around Silicon Valley.
Next stop Tokyo and Nippon Telephone and Telegraph (“NTT”).
“I arrived at Narita Airport, Tokyo, with 2 suitcases,” Stephen recalls.
“One entire case was filled with beautiful gifts. I had read the book on Japanese business etiquette on the flight from San Francisco. In coach, I could not sleep.”
“After the long bus ride into the city and I was met by my gracious hosts, Itochu, one of the biggest Japanese trading houses. The next morning Itochu took me to see NTT. Inside their main network command centre, we discussed NTT using Netcool. Itochu’s decision to resell Netcool would be determined by NTT’s interest and the other Japanese prospects we went to see. We toured around Tokyo handing out gifts. Customer demand was the key.”
“NTT said yes to Netcool. I flew out with an empty suitcase and a reseller deal with Itochu.”
“Cisco Systems then announced their acquisition of Stratacom and took the fight to Nortel. I asked my new friends at Itochu to tell Cisco that NTT had selected Netcool. The news filtered up the Cisco organisation, all the way to California.”
“Next stop for me, Cisco HQ in a hot San Jose, to negotiate a new global private label OEM deal with Cisco. Branded as Cisco InfoCenter, Cisco took Netcool everywhere.”
All successful B2B software companies use channels to a greater or lesser extent.
Why: enable head to head wins and you have the crack cocaine of channels. Cisco / Stratacom shows the way.
How: get your channel to invest in skills, appoint a dedicated product manager with a target and give your product a part code.
Those are the headlines. Let’s dive into the detail.
Channels are eventually an essential component of scaling, be it for offering complementary implementation services, extending selling capacity, reaching a specific market segment (e.g SMB) or expanding geographically.
Channels can be used for multiple reasons depending on the type of products you are selling, the maturity of your market and your geographical ambitions
Let us start with type of products, if you are selling a product that is implementation heavy (e.g. an ERP), then for you to succeed, you obviously need your clients to be able to implement your product properly. So you are going to need “implementation” type of partners in addition to simple “reselling” type of partners; many partners are both, but not all are.
Maturity of your market, one traditional mistake that start-ups make is believing that partners are going to be the main drivers of their growth in the early days, that they will evangalise on their behalf. They won’t. Most partners, especially the large ones respond to market demand, they seldom create it. Unfortunately, you are going to need to create it on your own. So your channel effort typology will need to evolve as your company and market matures.
Geographical expansion, quite often partners are used for geographic expansion when building a direct sales force in all corners of the world can be awfully inefficient and time consuming. Furthermore, some countries (e.g. Russia, China and the Middle East) are very difficult to penetrate without a strong local partner. Japan has large trading houses like Itochu or Mitsubishi.
Will channels enable us to scale faster?
At first, channel partners will not enable you to scale faster, they can even be a “drag”on your resources as often they are easier to talk to than end user clients. So be aware that they can become a “resource” trap, especially the very large ones, consider for instance that EY has more 12,500 people at partner level worldwide! You can be spending days and months talking to partners to no avail! However engaging a minimum with your channel partners is necessary, because it takes time to evangelise them, so might as well start early, having some “sort” of partnership even if it does not yield any immediate sales can be a “seal” of quality and re-assure prospective buyers.
Which ones should we use?
At first, you should try to find those up and coming boutique partners that have a “deep” understanding of your domain or are willing to build the expertise. Someone that sees your product as a way to grow its business and gain market share. It is of course a trial and error to find such partners but often they can be very useful for you to learn about how your product is implemented, re-sold etc…
As your market grows and your product’s reputation increases, you will find it easier to connect and actually get results from larger partners. The secret there, especially with implementation oriented partners is to get them to invest in training their talent on your technology. That is a sign of true commitment as time is their main currency. Once, they have trained on your technology, they will be more likely to “push” your solution.
Do not believe that a global (or even national) re-selling agreement signed at the HQ will magically translate into additional sales on the field. You are going to need to “work” your partners on the field with the proper incentive for the direct sales force to cooperate with partners. Short of this effort, you will see little results.
Does that vary by geography? Is the domestic US channel strategy the same as China?
It is interesting to notice that the importance and roles of partners increases the further east you go from the US market. In the US customers are used to and prefer to buy directly from the vendors themselves, whereas for instance in APAC, they almost exclusively buy from partners and Europe is somewhere in between. There is a rational reason for this. Historically, most software companies have been founded in the US and as explained earlier, they had to evangelise for themselves hence creating a strong direct sales channel and hence having a lesser role for partners. After a couple of years of success, they would then enter the European Market usually with a beachhead presence in the UK due to language and cultural proximity.
So, by the time they were ready to enter the European markets, their product category and reputation was more established, and they had less of an appetite to build an extensive direct sales force in a fragmented market with dozens of languages and legal frameworks. Likewise, the European partners were more willing to jump in as the product, the market and the company were not any longer unknown. As a result, European partners have historically had an opportunity to play a larger role in re-selling and implementing than their US counterparts and as result developed a more sophisticated talent pool to do so. This phenomenon is further exacerbated in APAC.
What types of channels exist?
There is a spectrum of channels from pure reselling to pure implementing on the other end.
Distributors: In some complex countries/territories you have, these type of companies who do not necessarily try to invest or understand your product in depth, they are “meta” channels, they in fact can on your behalf “manage” other channels. In this case management is more of the legal kind, taking care of the particularity of the territory specificities, covering exchange rate risks, billing and invoicing.
Further on the value chain, you have value added resellers (“VARs”), that are a bit more involved in understanding technology and can dedicate sales people to re-sell your technology,
OEMs are resellers that embed or bundle your technology with complementary technologies or services usually targeting a specific industry vertical. Cisco were a private label OEM for Netcool.
Finally systems integrators are implementation/consulting type of channels who deeply understand your technology and help clients actually implement it. Some of them only do “implementation” but most do both “implementation and re-selling”.
We should mention for completeness two further types of potential channels, that are more “co-selling” type (i.e bidding side by side their product and services but are not re-selling agreements).
The first type are complementary technologies. That is the case for instance of Cloud Providers that are happy to push for specific cloud based applications because it generates additional revenues for their main product: cloud infrastructure
The second type is managed services/outsourcers. This is the case of many BPO or managed services providers whose business model is to run and manage the technology that you have sold to their clients. The more technology to be managed, the more business for them.
The maturity of potential channel partners you could use is a factor. Ask if there is there a ready made channel to plug into?
The account control of potential channel partners is a factor. US Federal Government business is owned by specialist integrators.
Channel conflict: how can you manage it?
The most knotty problem is channel conflict between your direct reps and your channels. The worst is when your star rep has been working on a deal with a big account and your newly signed channel partner demands it goes through them. Paying “double bubble” commission to both your direct and channel rep can be ruinous. If you run a mixed direct and channel model, we recommend a pay once system. Direct reps should be given named account lists and get paid on the deals in their accounts that go direct or through a channel. Channel reps only get paid outside the named accounts lists.
EU Competition law and US Anti-trust law apply. If you try and fix markets get legal advice on your channel contracts. US software companies are often sceptical that EU Competition rules apply to US law agreements between US parties but the “effects” doctrine applies and means that EU rules can govern.
Our first and foremost idea is that a channel strategy does not consist of signing channel agreements and hoping that they will start performing on their own. It requires deliberate, constant management for it to yield results.
Channels need to be trained and motivated. Remember they usually have several other products and services to sell rather than yours.
While it is necessary to have channel managers, it is a mistake to create silos between the direct sales team and the channel management teams. effective channel management required a constant inter-play between direct sales and channels.
** Inside the Tornado by Geoffrey Moore