Michael Fauscette

Partner ecosystems

Monday, August 18, 2008

Let’s face it, the partner model of most large software vendors is in a state of rapid change. There are a host of reasons for this change ranging from the new, emerging business models like SaaS, to simple market economics, but the change is real. I suppose we’ve used the word “ecosystem” off and on for a few years and it definitely falls into the “trendy” word bucket (and we applied the term to everything from customers to partners). Nevertheless, the use of the term seems to fit where we’re going with our view of the software partner program model.

I’ve blogged and talked a bit about P2P networking already so I won’t go back through that topic, but I do want to look at the shift to a vendor led ecosystem. The point to point partner model that is by far the most prevalent one applied to alliances, partners and channels models is becoming much less effective. Several leading software vendors have started using the ecosystem term to describe their partner programs, including SAP. Even more traditional firms like Autodesk are starting to understand that their current models are not as effective as they could be.

So what’s a software ecosystem and why do we care anyway? Wikipedia defines an ecosystem: “denotes the physical and biological components of an environment considered in relation to each other as a unit” This definition starts to get to the importance of the word and what we mean by applying it here. The key to the ecosystem model is “interdependence” (and not codependence, by the way). This is where the P2P effect is most pronounced and programatically the largest change required by most vendors. IBM has a very developed P2P model / program called ValueNet. Other vendors are starting to develop programs that encourage or even facilitate P2P solution development and go-to-market. This interdependence changes the interaction model of the partners and the importance of that interaction. If the success of my business is really tied to the success of several other businesses, and in fact to the success of my customer as well, my priorities have to shift. And this is not just a shift in strategy, my business tactics are also different. My go-to-market plans are different and even my sales compensation models have to change and align with my new business plans.

We’re still in the midst of this shift and will be for some time, but look for this change to accelerate over the next 2-3 years. The partners and vendors that embrace this shift will gain competitive advantage. The ecosystem model will have an added effect of causing partners to coalesce around several large “centers of gravity” as we move to vendor mega-economies around the major software vendors like Oracle, SAP, IBM and Microsoft.

Hybrid Partners?

Thursday, August 7, 2008

In the software partner world there are Value Added Resellers (VARs), distributors and Value Added Distributors (VADs), System Integrators (SIs) and Independent Solution Vendors (ISVs); at least that’s the way the world was organized (and yes, I’m sure there are a few other partner types that I just slighted but you get the idea anyway). In general the roles that each of these partner types played were pretty clear. For example VAR’s sold software and sometimes offered basic services like installation and training; SI’s generally offered more complex implementation and integration consulting; and ISV’s developed and sold software build on a software vendor’s platform.

A funny thing started happening a few years ago and I see it happening more and more often. The traditional lines are eroding and a new partner type (or types??) is emerging. The three business models are, in many cases growing more and more alike. SI’s, for example, under considerable margin pressure over the last several years, are reselling products and also building their own software offerings to give them unique value (often vertical specific value) for their customers AND increase their overall deal margin. VAR’s are adding more and more advanced consulting capabilities to round out their offerings and we are seeing more VAR’s build and sell their own software solutions. This too was a reaction to revenue and margin pressures. the same pressure pushed the ISV’s into expanded offerings as well. The lines are continuing to blur as more hybrid business models emerge. The new partner is much more of a vertical focused 1-stop solution shop.

So how does this play in the P2P networking world that I’ve discussed in some detail? While on the surface the two seem contradictory I don’t believe that is the case. I believe that we are seeing two unique ways to solve the same issue. In the one hand some partners are building off their core competencies and establishing solution networks to provide the 1-stop solution for the customer and on the other, some partners are expanding their core competencies to include the full offering under one roof. It will be interesting to observe these two models over the next few years to see if there is a clear advantage to one or the other.

P2P, Building a solution

Thursday, July 31, 2008

The concepts behind P2P networks are not new, and more progressive partners have used the approach for many years. The term and its more widespread adoption are new as are the software vendor programs that facilitate partners building P2P networks. Most partners in the not so distant past resisted P2P networking, mostly because of the perception that they were giving up some business rather than gaining an advantage. This was especially true of Value Added Resellers (VARs) whose business models often included a smattering of activities ranging from the software sale through SW installation, customer training, light SW customization and tier 1 support. In some ways this “we’ll do anything” attitude was a precursor to providing a full solution.

Now VAR’s are starting to talk P2P and to develop collaborative solutions. This is a significant step and serves customers and the VAR business well. IDC’s research shows that partners that engage in P2P networks increase revenue and profits significantly (Insight, Doc #207912 / Jul 2007, Charting the Partner-to-Partner Business Model: IDC Focus Group Findings, By: Stephen Graham, Darren Bibby, Paul Edwards). So how does a partner build a P2P solution offering and what should the partners involved look for in the relationship? First let’s understand what’s desirable in a P2P network and then we can look at the details. P2P solutions are market (in other words customer) driven. They solve a business problem (or several problems) and are focused on the customer. They are most often focused on an industry vertical (or sub-vertical) and are built to be 90% out of the box solutions. The network then, must provide the necessary components of a full solution; industry vertical software, vertical process knowledge, implementation expertise, customer relationships, etc. What we often see is a combination of a VAR and an ISV...but the network could also include a system integrator if the VAR doesn’t have the vertical process expertise to work through the customer issues.

The key elements of building the successful P2P network are:
-Trust - the network most often evolves from existing relationships
-Legal framework - a trust relationship is not enough, the partnership must be built on a sound legal and formal framework
-Everyone participating in the network must behave like a node, including the vendor.
-Build the partnership on a sound financial basis. It’s essential that all participants clearly understand the financial implications and advantages of the relationship.
-Focus on the customer problem / opportunity.
-Get involved in networks that utilize your core business assets / strengths (which of course presupposes that you know your core strengths)

Customers turned partners?

Monday July 21, 2008

There is a lot of talk about new partner types springing up around SaaS vendors. IDC identified two new types in a document published last Fall: The Emerging SaaS Channel by Erin TenWolde, Darren Bibby, Sep 2007 - Doc # 208547. The document does an excellent job of showing two types of business focused partner types, one around vertical specific business processes and another that combines SaaS offerings with other business services. I’ll probably look at the evolution of these partner types in more detail in a later blog, but for now I want to focus on the business services provider and another emerging trend, that of SaaS customers electing to become distribution partners for their SaaS vendor. I’ve seen several examples of this recently and although I’d call them partnerships of opportunity for now, that is, no vendor is out seeking to convert their customers into distribution channel partners; it wouldn’t be a surprise in the not to distant future to see more formal programs start to form.

So let me use a real life example to demonstrate this...the vendor is Clarizen; a project execution software vendor that deploys in the SaaS model...by the way, check them out if you’re looking for a web 2.0-like project execution tool that is extremely powerful and simple to use) and the partner is 24/7 Service, Inc.. 24/7 is a telcom provisioning and maintenance solution that utilizes a SaaS solution. The relationship between 24/7 and Clarizen began in the traditional way, 24/7 needed a project management solution for the PBX provisioning projects that they delivered. They ruled out some of the more traditional solutions due to cost, inflexible licensing or difficulty of use. Last Fall 24/7 selected Clarizen as its’ project management tool and started using it for their deployment projects. As their customers interacted with the Clarizen solution, the customers started asking 24/7 for more information on the product. As 24/7 referred more and more customers to Clarizen it became evident that the relationship between the two companies should evolve into something different. For Clarizen, they gained a very strong referral partner and advocate and for 24/7 they gained an additional way to generate revenue and increase customer satisfaction. Here’s the 24/7 web page that talks about the solution.

Are traditional resellers really ready to embrace SaaS models?

Saturday July 19, 2008

This will be a common theme for quite some time I suspect, can traditional VAR’s really make the shift to SaaS channel models and what will those models look like? I’ve watched all the major software vendors struggle with channel business models around SaaS for a few years. Even the pure play SaaS vendors haven’t really moved to an indirect channel model.

First, why is this even an issue...why not stay in a direct distribution model? Traditional software vendors moved to an indirect model for scale and for the ability to deal with small and medium businesses (SMB) in their local market and in a model that is much more cost effective than maintaining a direct sales force of the size that could serve these customers. The same concepts apply to SaaS offerings, which are possibly an even better fit for most SMB customers. This is even more true in our current economic environment where capital expenses (which would include both on premise software and the hardware to run it) are difficult to fund. It’s a compelling argument to fund the software out of operating budgets and to reduce both hardware and IT resource expenses.

So what’s the issue for traditional VAR’s and software vendors? The problem lies in a couple of different areas. The first issue is the compensation model from the vendor to the VAR. The second issue is the ability of the VAR to shift their own business model from the on premise, up front revenue model to some other compensation model.

How do software vendors compensate VAR’s (and other partners) for SaaS sales? In an on premise model the most common method is to establish a “dealer” relationship where the VAR buys the software up front and inventories it until it is sold to the customer on a perpetual license agreement...the difference from the purchase price and the sales price is the margin for the VAR (generally 25-35% markup). Sales people are compensated on this up front margin and the VAR plans its’ cash flow around this up front model. In a subscription license agreement like a SaaS sale there is no up front license fee and no transfer of ownership, the software is provisioned over the Internet and the customer simply “rents” its use. Clearly the traditional compensation model won’t work. There are a few models that SaaS vendors are experimenting with, including referral fees, influence fees and agency fees. I’ll leave referral and influence models to a later blog and focus on the agency fees here. I attended the Microsoft Worldwide Partner Conference a couple of weeks ago where Microsoft announced the new Software + Service partner program. In that program Microsoft builds off the model they used for partners with SaaS CRM software. In the new program Microsoft pays its’ partners 12% of the first year contract value and 6% of the recurring value on renewal. This is one of the first clearly articulated reseller programs, we’ll have to wait and see how many partners will adopt the new model.

From the VAR perspective a shift in business model requires both strategic and tactical changes in their business. The shift from up front license revenue to a recurring license fee changes many things from cash flow to sales compensation models. In addition there is a fundamental shift in resources that is required to embrace the new business. The cost of sales needs to be lower to maximize margins, perhaps through increased use of inside or telesales resources. The services model is also very different both from a skill type and from the type of services that are offered. SaaS implementations tend to be shorter and tend to be focused on business process change and training rather than customizations and infrastructure set up. Many traditional VAR’s have strong technical skills but are less proficient in business process. The investment in shifting resources on both the sales and implementation teams could be costly and take time to execute. There is an overall potential for business disruption that will have to be dealt with. So is it easier for new partners to develop the business model from scratch or for traditional VAR’s to make the transition? Time will tell...