The Software Partner Channel in a Business Model Context
Whitepaper from TBK Consult
Author Hans Peter Bech, M.Sc. (econ) This whitepaper discusses if applying Osterwalder’s Business Model Framework will help B2B software companies better understand the idiosyncrasies of the channel and thus define measures and initiatives making their channel more productive.
© Hans Peter Bech 2013 First edition Unless otherwise indicated, all materials on these pages are copyrighted by Hans Peter Bech. 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. First published by TBK Consult in 2013 in electronic format only: TBK Consult Holding ApS Strandvejen 724 2930 Klampenborg Denmark CVR: DK31935741 ISBN 978-87-995228-9-7
The Software Partner Channel in a Business Model Context
Table of contents: Table of contents
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Targeted audience
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Abstract
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Business Model Generation
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The Channel
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The software industry channel definition The value chain When to partner and when not to partner Example: Microsoft Dynamics Example: SimCorp
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The Partner Based Business Model
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Example: Microsoft Dynamics The Channel Customer Segments Customer Relationships Value Propositions The Partner Value Proposition Key Resources Key Activities Key Partnerships P&L Revenue streams Cost Structure The profit line
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The Hybrid Model
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Example: A successful hybrid
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Targeted audience
The target audience for this whitepaper is the board of directors, the CEO and the sales and marketing executives of B2B software driven companies who are or who are considering building a partner channel to achieve global market dominance. The whitepaper is applicable for all types of B2B software-driven value chains.
Abstract
The whitepaper discusses if the application of Osterwalder’s Business Model Generation framework can help B2B software companies define and build more successful partner channels. The whitepaper concludes that the business model framework is extremely useful in helping software-driven companies understand what it takes to build and manage a channel partner network. The whitepaper stresses that a business model using a channel of independent partners to serve customers is completely different from the business model that takes the same product directly to customers. The main reason why most B2B software companies have massive challenges with building and managing a successful partner channel is the assumption that the other 8 building blocks of the business model are unaffected by the choice of channel. That is not the case.
Author
Hans Peter Bech
Acknowledgements
Design and lay-out: Flier Disainistuudio, Tallinn, Estonia, www.flier.ee
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Proof reading: Emma Crabtree, TBK Consult
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The Software Partner Channel in a Business Model Context
Business Model Generation
When Alexander Osterwalder & Yves Pigneur published their book “Business Model Generation” in 2010 we had already been using the term ”business model” for more than a decade. The term “business model” became popular during the first “dot com” boom at the end of the nineties. However, there was no real definition or framework for explaining what a business model was until Osterwalder & Pigneur published their book.
Figure 1: Business Model (Osterwalder)
It is beyond the scope of this whitepaper to repeat the principles of the business model. A free summary is available from Osterwalder’s web site. >> Business Model Generation Preview
The Channel
As you can see in fig. 1 one of the nine business model elements (building blocks) is named “Channels.”
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The question this whitepaper will discuss is: Does it have any impact on the other business model elements if we leave some or all of the channel responsibilities to independent 3rd parties as opposed to the direct approach, where we take all the responsibility for and finance all channel activities ourselves?
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The Software Partner Channel in a Business Model Context
According to Osterwalder the main activities of the Channels are: I Creating awareness II Helping customers evaluate III Helping customers purchase IV Deliver V Providing after sales support
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The channels in the B2B software industry can assume just a few or many more functions than those mentioned by Osterwalder.
The software industry channel definition
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 value chain
A value chain describes the steps and activities required to find, win and keep happy customers.
Figure 2: Sample Value Chain
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The Software Partner Channel in a Business Model Context
All B2B software products have a version of the value chain illustrated in fig. 2. When is it feasible and when is it desirable to involve third parties in the value chain?
When to partner and when not to partner
The software-driven industry represents completely different value chains. While some software companies rely entirely on partners (e.g. Microsoft, Milestone Systems and AutoDesk) others do not (e.g. SimCorp, SAP, Epic and Edlund)1.
Figure 3: When and how to "partner" in the software industry
The rule of thumb says that software products with simple and/ or easy to understand functionality and a low price can be sold directly over the Internet or through a call centre.
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When the functionality and price increases and selling over the Internet becomes difficult, the channel typically changes from In the software industry we even have very successful business models that don’t have a traditional sales organizations (e.g. 37signals, Atlassian, eMailSignature and ZenDesk). 1
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a 1-tier to a much more complicated 3-tier model 2. The 3-tier model, where vendors are using the established reseller network of a distributor, is required to compensate for the low margins, which makes it difficult to invest in building a proprietary 2-tier model. As price and functionality increases the proprietary 2-tier channel model becomes more feasible and may even be advantageous. As price and functionality increase even further the learning curve of the proprietary 2-tier channel model becomes steep and long. Each deal becomes strategic with long sales cycles and serving the customers through independent partners becomes too risky. We are better served with returning to the 1-tier channel approach.
Example: Microsoft Dynamics.
In the Microsoft Dynamics value chain the partners are developing vertical and horizontal add-on solutions (co-creating applications), providing customization, implementation and support services. The partners are an important and necessary element of the Microsoft Dynamics customer value proposition. Without the partners Microsoft couldn’t deliver anything! Although Microsoft Dynamics is the core of their partner’s business only a fraction of the partner’s revenue comes from Microsoft Dynamics licenses. The Microsoft Dynamics partners are called “Value Added Partners” as they provide crucial value to the customers without which Microsoft Dynamics would have no value to customers. With Dynamics Microsoft has created self-propelling eco-systems where thousands of partners enhance the value of the product to the customers.
3-tier distribution is a reminiscence from the past where products were physical and needed warehouses and physical distribution. 3-tier distributors with a large network of resellers may still be valuable for certain software product, but they are a dying breed.
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The Software Partner Channel in a Business Model Context
Example: SimCorp
SimCorp is a leading provider of investment management software solutions and services for the global financial industry. The SimCorp software solutions portfolio supports global investment management organizations to mitigate risk, reduce cost and enable growth all along their value chain. SimCorp services are designed to support their clients in achieving the maximum return on their solution investment and in improving their competitive advantage. With more than 170 of the world's foremost financial institutions relying on SimCorp software and services, the company has established itself as a proven value-creator for its clients. SimCorp operates the channel directly. They have their own direct sales force, their own pre-sales staff, their own domain consultants, their own implementation staff etc.
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SimCorp makes 10-15 new deals per year. The insight and the resources required in selling a SimCorp solution makes it very difficult to run a pure-play Value Added Reseller channel model.
The Partner Based Business Model
I will argue that unless you are SAP, Oracle or some other global dominating player in your market the choice of channel must be made from the very start.
Example: Microsoft Dynamics
Microsoft Dynamics is primarily based on the acquisition of Great Plains, Damgaard and Navision – companies that chose a pure-play Value Added Reseller channel model from the very start.
Changing channel strategy when you are out of the startup phase and moving into scaling is very, very difficult. I will describe some examples of successful hybrid models later, but the rule of thumb remains with choosing your channel strategy very early.
Dynamics AX, NAV, GP, XAL and C5 were designed with the Value Added Reseller in mind.
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The Software Partner Channel in a Business Model Context
Great Plains, Damgaard and Navision were very successful in building their business models. They managed to create ecosystems where partners were extending the reach of their products. Partners also assumed responsibility for many of the value chain functions, multiplying the market penetration capability tremendously. But don’t be mistaken: it didn’t happen overnight. Both Damgaard and Navision were founded in 1983 and were acquired by Microsoft in 2002. It took almost twenty years to build a company, which was attractive for acquisition by one of the market consolidators. Building a channel-based ecosystem requires patience. It is not the fastest route to market. Let’s take a look at all the business model building blocks and identify the differences between the direct and the indirect model.
The Channel
Obviously the channel element of your business model is different when you choose to let 3rd parties run some or all of the channel functions. You can use the illustration in fig. 2 to help you define which of the tasks in the process of “finding, winning and keeping happy customers” you will pass to 3rd parties. Many software companies believe they can leave all the channel obligations to 3rd party resellers. Assuming that independent resellers will take responsibility for brand building and awareness creation on behalf of the vendor is somewhat naive. There is a world of difference being a partner of e.g. SAP, IBM, Oracle and Microsoft and being a partner of a completely unknown brand.
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Building a brand through a channel of 3rd party resellers takes a very long time. If you leave all channel activities to the partners then we will claim that the probability of success using this approach is very slim. Some software companies use a direct channel in some geographical markets and an indirect channel in others. That is certainly an option although a difficult one to manage.
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Please observe that OEM and white labelling are NOT channels. Unless you can enforce an “Intel Inside” type relationship with your OEM and white-labelling customers, they become your customers and not your reselling channel partners.
Customer Segments
Assigning channel operation to 3rd parties will decrease control over your market segmentation and your market focus. That’s a two-edged sword. For Microsoft Dynamics the partners extend the market reach way beyond what Microsoft could ever have achieved with their own resources. However, where 3rd party channel partners may extend your market reach they may also bring your products to segments in the market where there is a very poor fit. Partners may push hard on you to provide this fit because they are comfortable in this segment, while customers, who have acquired your product and experience inconveniences will do the same. We have several examples of 3rd party channel partners and distributors who have mis-positioned a B2B software product in the market. The agony of dealing with unhappy resellers and customers is time consuming and the damage to the brand can be very high as the press pick up on unhappy customer experiences. The risk for SAP, Oracle, Microsoft, IBM, and HP etc. of partners mis-positioning their product is negligible, but for the small software company building a brand it can be downright devastating. When you have only a few partners, their mistakes will reflect back on you. That is not the case when you have hundreds or thousands of partners.
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Customer Relationships
Introducing 3rd party resellers in your channel will also change your relationship with the customers. If you want to build a brand and you choose to use 3rd parties to run your channel activities you must still consider your relationships with the customers.
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The Software Partner Channel in a Business Model Context
They are still your customers! The relationships with the customer will depend on a number of issues: xx Do you still deliver something directly to the customers? xx Will you continue to invoice all or some deliveries? xx Will you maintain the license or service level agreement relationship with the customers or do you provide your resellers a right to sub-license? xx Do you want to know the identity of your customers? xx Do you want the option of communicating directly with them? x What do you do when a customer becomes dissatisfied with his reseller and wants to change? Occasionally we hear software companies claim, “our partners/ resellers are our customers!” We believe that is an unfortunate misconception. If your partners/resellers are your customers then they must be Independent Software Vendors “consuming” your software as a component in their own branded software. Then you are in a completely different business and need to operate a completely different business model. If you use 3rd party resellers as a channel to reach your customer (who should recognize and appreciate your brand) segments then these 3rd party resellers are NOT your customers - they are your channels.
Value Propositions
Your value propositions will have to change substantially when you assign 3rd parties to run some or all of your channel functions.
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First of all you need a Customer Value Proposition and a Partner Value Proposition. Those are not identical. Is the partner an integrated part of
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The Software Partner Channel in a Business Model Context
your customer value proposition? If your partners are not a part of your Customer Value Proposition then why do you need them? Are they only valuable to you but not to your customers? Successful B2B software business models using a channel of 3rd parties have integrated customer value propositions.
The Partner Value Proposition
While your Customer Value Proposition is tied to the benefits of your product/service the Partner Value Proposition is completely different. The Partner Value Proposition explains how the partner can build and run a successful business based on your products. Thus, the Partner Value Proposition is heavily loaded with initiatives and measures to help the partner to get started, shortening the time to revenue and the time to profit. Please observe that there is a world of difference between recruiting and managing partners if you are already a recognized brand in the market as opposed to the situation where you are completely unrecognized. For the unrecognized brand the partner value proposition must be very compelling and attractive compensating for the risk and effort it takes to build a business with your product.
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The partner value proposition should be designed to support building and accelerating the channel partners’ business model for your product. This is particularly tough when you have no or only few partners. As you grow the number of channel partners and can show success stories your value proposition becomes more convincing. However, in any situation your partner value
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The Software Partner Channel in a Business Model Context
Key Resources
proposition must “grease the wheels” of your partners’ business model where you now become your partners’ “Key Partner.” Assigning 3rd parties to run you channel functions will introduce the need for specialized resources. If your product is to be enriched or enhanced by the partners you must have resources developing, maintaining and supporting SDK’s and API’s. You must have formalized product management interacting with your partners and customers driving the direction of your product development. You must have Partner Recruitment Managers to recruit and Partner Account Managers to manage partners. You must have product marketing and partner portals to support your partners channel obligations. As you grow your channel you will have to deal with the inherent idiosyncrasies of a 3rd party partner channel. In brief, you will have to manage the performance pyramid. Our experience shows that less than 5% of your partners will have the ability to grow their business as fast or faster than your market. Another 10% will be able to grow if they get a helping hand from the outside. 85% of your partners will not have the management potential to grow at all.
A Stars < 5% B Growth Potential < 15% C No Growth Potential > 85%
You will need resources to manage these differences in your partner channel.
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Key Activities
Assigning 3rd parties to run your channel functions will introduce the need for additional and specific partner related activities. You will need additional legal support as the presence of 3rd parties introduces a new layer of contractual obligations and frameworks. You will need a much more structured approach to product
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management and product marketing as compared to running your channel functions using your own internal resources. You will need partner programs, partner recruitment, partner management, partner pipeline management, partner forecast management, partner events, partner training etc. Working with 3rd parties adds substantial overheads compared to working directly with your own resources.
Key Partnerships
The key partnerships may not be affected by the choice of channel.
P&L
Choosing 3rd parties to perform you channel functions has a fundamental impact on your revenue streams and your cost structure.
Revenue streams
Imagine SimCorp3 was to pass on sales and implementation to a channel of 3rd parties. Then they would pass €66M of professional services revenue to their partners. They would have to pass €3040M of maintenance revenue and approximately €20M in new license revenue. Out of their 2012 total revenue of €209,2M they would have to pass in the magnitude €121M to the channel and keep €88,2M for themselves. If they decided to keep sales, and pass on the implementation to a 3rd party partner channel the revenue would “only” drop to €143,2M.
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We are not aware that SimCorp has any such plans, but the example illustrates that the choice of channel has a dramatic impact on the revenue streams. The big question is if such a move on SimCorp’s behalf would have any dynamic impact on sales and implementation capacity? Would sales grow to compensate for the loss of margin? Unlikely. There are 10-30 deals per year globally in this market. Using All information from the SimCorp annual report 2012
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The Software Partner Channel in a Business Model Context
resellers to penetrate the market will not have any significant impact on the number of deals open at any time. Using a channel of resellers in a global market with 10-30 deals per year is not a viable business model. Both SimCorp and the individual partner would consider this approach far too risky. SimCorp may consider developing implementation and consulting partners who could compete for the services portion of the business. This would make “the whole product” from SimCorp more competitive and only jeopardize SimCorp’s lowmargin professional services revenue.
Cost Structure
The cost structure of SimCorp would change accordingly. They would no longer need the headcount for delivering professional services to the customers. If they passed sales to a partner channel they could relieve most of their sales force and the associated cost of sales. Instead they would need to engage partner recruiters and partner managers. They would have to develop new legal frameworks and implement new processes and programs for on-boarding and managing partners. Again, we are not aware that SimCorp has any such plans, but the example illustrates that the choice of channel has a dramatic impact on the cost structure as well.
The profit line
Would SimCorp be a more profitable business applying an indirect channel approach? I don’t think so.
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Referring to the illustration in fig. 3 SimCorp is to the extreme east together with companies such as Epic, Cerner, Agfa, CCI and Systematic. The combination of available market (up to 30 deals per year), the size of the deals, the domain knowledge required and the need for control makes a partner model less appropriate and very risky.
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The Hybrid Model
We have briefly mentioned the option of hybrid channel approaches mixing direct and indirect channels. Companies such as IBM, HP, Oracle and SAP exercise hybrid models. Some of these variations are related to various product lines, but in some situations companies may exercise hybrid channels for the same products. The typical way to manage hybrid channels is to define which customer segment should be served through which channels. E.g. the vendor serves the top enterprise market directly while 3rd party resellers serve the SMB market. We have also seen successful cases of building a channel on top of a direct channel driven business model.
Example: A successful hybrid
A software company, that was very successful selling their product directly to the market, received an increasing stream of inquiries from resellers, who wanted to include the software in their portfolio. The reason for these inquiries was straightforward. The software company had managed to sell directly to the resellers’ customers taking away some of the reseller’s business. If the resellers’ did nothing, more and more business would go away. Selling directly is costly. The software company did a P&L analysis and found that they could grow revenue faster and with higher margin by allowing resellers to take on their products also. They defined very simple “game rules” and applied a “partner first” approach in case of channel conflict.
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The hybrid model worked very well and there were only a few cases of channel conflict requiring management attention.
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Hans Peter Bech
Hans Peter Bech has been developing and managing global partner channels in the software industry for more than 30 years. Hans Peter built the partner channels for companies such as Dataco (now Intel), Mercante, Dansk Data Elektronik (now CSC), RE Technology (now Barco) and Damgaard/Navision (now Microsoft). As a management consultant, Hans Peter has been providing consulting on channel development and management issues to companies such as Microsoft, Danfoss, Proekspert, Jeeves Information Systems, eMailSignature, SoftScan (now Symantec), Netop and CSC Scandihealth. Hans Peter is the author of several whitepapers on channel development and management and he frequently writes articles on the subject. He started his career as a management consultant in 2003 and founded TBK Consult in 2007. Since then he has built the company to its present position with 24 senior consultants in 16 countries. Hans Peter oversees the development of TBK Consult as well as performing management consulting assignments for selected clients. Hans Peter holds an M.Sc. in macroeconomics and political science from the University of Copenhagen. He speaks Danish, English and German and is a certified ValuePerform, ValuePartner and Business Model Generation consultant.
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More about Hans Peter Bech
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