Welcome Daniel O'Boyle Kelly with this guest post. Daniel is an IDC Consulting Director who supports my SBS group.
Its with a fair amount of regularity these days that I come across some vendor slideware extolling the virtues of their "partner profitability" initiatives. This, in many ways, is a good thing. Yet with few exceptions, when peeling back the layers, improving profitability relates in large part to giving 'a few extra points' to push a vendor's technology or platform. While improving margins may indeed lead to better profitability, vendors need to better meet today's business challenges for the channel and without question, challenge number one is maintaining positive cash flow.
In a recent custom survey IDC conducted for a large software vendor, we asked no fewer than 400 of their partners about a number of business performance metrics. The positive takeaway is that at least 75% of them were experiencing positive cash-flow coming into their businesses. Of course, the flipside is that a quarter were on the bubble or in fact in negative cash-flow - an ominous position to be in during these times. What is even more stark is that when breaking down the numbers by partner size, almost a third of those channel partners with less than 10 employees were break even or negative cash-flow. In the past, when the focus was on revenue growth, rapid sales cycles could possibly carry some partners through any 'profit valleys'. But with both the number of deals and length of sales cycles being extended, partners need to shift focus to cash-flow as KPI number one to manage the business. And a few concerted actions now could keep a partner's head above water:
- Seek out vendor financing and special incentives to power specific technology buying and thus shorten sales cycles. If incentives are not obvious, partners might want to hound their vendors for options claiming that other providers are stepping up. SAP and Microsoft are currently offering 0% financing on certain business applications. Cisco recently announced the "Now's The Time" offering that lets partners offer their customers no payments and no interest for three months on all Cisco hardware, software and bundled services for deals of $30 million or less.
- Identify general channel financing options beyond traditional vendors as a way to convert bookings to cash. For instance, Tech Data has an arrangement with NexCap to provide much valued capital through Reseller financing. By structuring a deal through this arrangement, resellers can improve cash flow as accounts receivables are converted to cash in 5-7 days. There are other arrangements out there too. Now is the time for partners to at least understand their options.
- Most importantly, partners should get disciplined on all their billing and collection practices. In a recent IDC survey, we found top channel performers had average days sales outstanding of 45 days versus typical average 64 days collecting valuable cash faster and able to fund growth or debt repayment. Even if partners need to work with customers and be creative to match their budgetary constraints, it will pay to hammer out predictable schedules. Proper terms and milestone scheduling is key and forecasting accuracy should be incented similarly to other MBOs.
Clearly, vendors need to support their partners with more options and possibly 'new ways to fund deals' type training. We will be tracking their efforts ….stay tuned.