Session pre-read

1. CHANNELCORP white paper
transition
transformation
and
growth
2014

2. about us
Copyright 2014
All rights reserved. No part of this work
covered by the copyrights hereon may
be reproduced or copied in any form or
by any means – graphic, electronic, or
mechanical, including but not limited
to photocopying, recording, taping, or
information storage and retrieval systems
– without the permission of the publisher,
Channelcorp Management Consultants
Inc., Vancouver, Canada.
Publisher:
Margaret A. Stuart
Channelcorp Management Consultants
Inc.
CHANNELCORP is a registered
trademark and servicemark of
CHANNELCORP Management
Consultants Inc. The mark,
CHANNELCORP, identifies the
Management Consulting Services,
Executive Education Services,
Publications and Software Products
developed and/or delivered and/or
marketed by CHANNELCORP
Management Consultants Inc.
Channelcorp is a global leader in the provision of channel economics, partner finance and
channel growth consulting, strategic education and practical channel wisdom to the IT
industry. Channelcorp was created in 1989 by Marg and Bruce Stuart.
Channelcorp assists channel leaders in vendors and channel partners make lasting
improvements to their organization’s performance. As management consultants we are
known for our unique specialized knowledge and focus, directness and the analytical rigor
to solve tough, complex problems. As strategic educators we are hired for our unrivaled
subject matter expertise and content, coupled with our proven ability to make a powerful
behavior changing impact at all levels of client organizations.
Our depth and breadth of experience in the industry is unparalleled. As a result we
generate solutions that no one else can. We have completed consulting assignments for
hundreds of organizations and provided strategic education to thousands of channel
leaders around the world.
We invite you to read “transition transformation and growth”. If you have any questions
regarding the growth of cloud channels, please do not hesitate to call us.
phone 604 263 6811
email info@channelcorp.com
©CHANNELCORP
i

3. table of contents
sections
1
how channelcorp sees the channel changing in 2014
page 1
2
growth through transition and transformation – part 1
page 2
3
growth through transition and transformation – part 2
page 7
4
growth through transition and transformation – part 3
page 10
5
growth through transition and transformation – part 4
page 20
©CHANNELCORP
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4. how channelcorp sees the channel changing in 2014
The key issue in 2014 is the transitional and transformational changes required in
vendor and partner business models as the IT industry (worldwide) accelerates into
a long term structural shift from transactional to recurring revenue models. The issue
is not cloud, or SaaS or MPS (managed print services). The issue is the changes to
business’s income statements, balance sheets and patterns of cash flow consumption
and cash flow production that are driven by the move to annuity based revenue
models. The crucial dynamics at work are covered in depth in the Channelcorp book
“Emerging issues…strategies for IT channel growth”.
Knowledge of three key areas of change are crucial to understand where the industry is
headed:
partner/reseller changes
valuation model changes
vendor/distributor changes
partner/reseller changes
The customer facing reseller industry is beginning to split into three types of businesses:
classical, transitional and transformational businesses.
The classical partners will do in 2014 essentially what they did in 2013 and before. With
focused management, a good tight plan and a talented ecosystem around them, they will
be profitable and may even grow. But for classical partners without a clear vision of their
future, life will be tough in 2014; a defensive battle will rage as they attempt to retain their
installed base in the face of competition from transitional and transformational partners.
In many cases longtime members of their customer base may not even consider them for
cloud/SaaS focused RFPs. Lost sale analysis will be the order of the day for the classical
partners. Vendor investments in business transition training or consulting assistance for
“very invested partners” will be money well spent.
Many of the businesses that we know identify as transitional and transformational
businesses began the change in 2009/10/11. The businesses that had cash to invest
accelerated the reworking and repurposing of their businesses in 2013. Growth rates of
30-50% will continue for these businesses in 2014 as their previously classic transactionalbased model shifts into a recurring revenue/annuity/subscription business centered on
cloud/SaaS/MPS and hosted solutions. Rather than engage in price driven defensive
strategies to maintain the classical base, these businesses have embraced and invested in
front of the change in the industry. They have created offensive value based strategies to
maintain their base, expand share of wallet in their base and generate net new business
for themselves and their vendor partners. They are also becoming more valuable per
dollar of revenue.
valuation model changes
Current valuation data is showing that for every one percent shift in revenue blend
from the classical, transactional model to the transitioned or transformed recurring
model, business valuation may increase by two to four percent. Our research indicates
that a 100% recurring revenue business can be 2 – 4 times more valuable than a similar
sized transactional business. This is the reward for the risk engaged in transition and
transformation of reselling businesses.
©CHANNELCORP
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5. vendor/distributor changes
From the vendor and distributor perspective the first challenge in 2014 is to make sure that
their business, product and solution propositions provide the “right types of programmatic
fuel” to feed the classical, transitional and transformational partners that currently coexist
in their partner portfolios. Without the right “fuel” there will be no partner growth, and
existing sales levels may stall, or backslide. The second challenge, especially for software
vendors (or those hardware vendors that also sell software), is to figure out how to re
engineer their own “classical” business models that were purpose built to drive transactions
around on premise solutions in the face of the damage that the cloud/SaaS/MPS recurring
revenue model can inflict on income statements, balance sheets, investment, cash flow and
corporate valuations.
2014 is the year to go to school on the essence of the financial and business dynamics
at work in the industry. Without viable and sustainable partner business models revenue
flows are at risk. Channelcorp has published “Emerging issues…strategies for IT channel
growth to help you and your organization plot your course.
growth through transition and transformation
part 1
The next year to eighteen months are critical to the growth and sustainability of
reselling organizations throughout the world. The reselling industry is being split into
classic, transitional and transformational businesses. New species of partners are
emerging to occupy the space between the vendor and the end user customer. Resellers
need to decide whether they plan to see the cloud as a defensive problem or an
offensive opportunity and then decide what their growth trajectory will look like.
This is the first in a four issue series of Channelcorp intelligence. During this series
Channelcorp will help reselling organizations (and indirectly vendor and distribution
organizations) map out their key strategic, tactical and operational moves for the next
few years. The time has come to grow through embracing and driving transition and
transformation rather then being apprehensive and indecisive.
classic, transitional, transformational businesses
With a new year right in front of us it is becoming clear that there are some new patterns
developing in the structure of channel partner ecosystems the world over. The last three
to four years has been like an enormous tide of cash rushing out of the industry. With
this extended low tide has come the exposure of a group of “have” businesses and a
much larger group of “have not”, or “have less” businesses. The “have not” or “have less”
businesses will need to make some very careful decisions in the next two to three years to
ensure that they survive and thrive or that the eventual sale of the businesses will generate
solid return for the owner(s).
“Classic” businesses will look and do in 2014 many of the same things that they looked like
and did in 2013 and 2012. The centrality of cloud solutions and recurring revenue models
to these businesses will not likely change appreciably. As long as these businesses are
excellently run, lets say within the top 15 to 25% of the performers in their markets, these
businesses will be fine in 2014 but 2014 and 2015 may require them to think seriously
about transition or transformation.
There are a group of channel partner businesses in the industry that are “transitional” in
strategy and execution. These businesses have clearly been born as “classic” businesses.
These “classic” businesses were augmented by a smattering of cloud solutions and the
development of sources of recurring revenue in 2013 with more on the horizon for
©CHANNELCORP
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6. 2014. Revenues in 2013 (and before) were predominately transaction driven. But these
“transitional” businesses are moving fast and hard to complement their “classic” roots and
capabilities with a transition to the cloud and the resultant recurring revenue models. The
“transitional” partners are growth partners pursuing a growth agenda.
At the other end of the business model development spectrum are a group of
“transformational” businesses that are leaving their “classic” and “transitional” roots behind.
Some of these “transformational” businesses have their roots in a now abandoned “classic”
business model with the business model transformation taking place over a 24 to 36
month period. Moreover some of these transformational businesses are brand new to the
industry and have been established by serial entrepreneurs or alliances for the purpose
of driving the growth of a cloud centric recurring revenue focused business approaches.
These transformational startups require substantial capital - 24 to 36 times monthly
expenses until they are self sustaining…but properly fueled they are growing really fast!
The cloud business and investment environment is emerging as a complex set of related
but highly diverse business models and investment appetites.
At Channelcorp we think that it is very possible for all three structures to coexist in
the marketplace moving forward. Properly run and with appropriate infrastructure
investments being made, there are end user customers available for all. In addition there
a range of directions that existing and new partners can take their businesses in the
emerging channel ecosystem.
the emerging channel ecosystem
From the perspective of the business you run the new landscape means that there are
a number of directions that you can decide to take your business in the cloud space. At
present we are able to identify at least seven distinct business models. Some of these
business models may be consistent with your current business plans and some of them
definitely will not be. The number of species and sub species of business models that will
emerge will most certainly go up over time.
The Type 1 model is a cloud reseller that may already be a classic reseller of on premise
products or maybe a business that is new to the cloud partner ecosystem. The Type 1
business looks closest to a current classic partner but is likely a hybrid between a historical
VAR business and a cloud centric business. In this model a shift is being made from
transaction driven revenue and cost models to recurring revenue/annuity models.
The Type 2 model is a distributor or a Master VAR (MVAR)-a middleman with an evolving
role and a dynamic set of economics. The volume distributors (like Ingram Micro) the full
line value distributors (like Avnet) the specialty value distributors (like Westcon Group)
and a host of Master VARs are all finding their way in the cloud space.
The Type 3 model is a cloud builder who creates and sometimes hosts private clouds for
their larger portfolio of clients.
The Type 4 model is a cloud application provider who is offering their applications to
others in the cloud ecosystem.
The Type 5 model is the cloud infrastructure provider who offers public clouds to their
clients.
The Type 6 model is a cloud technology provider whose focus is improving the clouds of
others with improved technology.
The Type 7 model is the cloud aggregator, the systems integrators of the cloud.
©CHANNELCORP
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7. what should you know for sure?
The changes that all of us are seeing in the IT industry are structural and not transitional in
nature. As a businessperson you cannot afford to miss structural changes in your business.
The cloud looks like one of those structural changes.
If you have made money as a partner of a vendor in the past you should look hard at
the cloud offerings of your incumbent vendors as a component of your cloud business
strategy. If you have not made a past investment in a partnership with a vendor under
consideration, you should seriously assess the “give and the get” associated with the
vendor’s program as compared to the other cloud investment opportunities being
presented to you. Do your due diligence.
Focus on your cloud business plan. You can be sure that your competitors are rapidly
developing the ability to respond to your customer’s request for cloud solutions. As a
minimum, you need to develop your capability such that your offerings will at least be
considered in a competitive situation.
There are a number of directions that you can decide to take your business in the
cloud space. Think about your business strategy options before you make tactical and
operational decisions.
partner business strategy options
It is important to really think about how the cloud investment decisions fit into the
overall business strategy and plan that you are currently on target to execute. Not all of
your peers and competitors are doing this…although 90% of VARs report that they are
engaged in the cloud business, more than half tell Channelcorp that they are simply making
their strategy up as they go along. More than one third of resellers reported in recent
CompTIA research that they either have no cloud business road map or only a partial
business roadmap to guide their cloud investments and strategy. We will hopefully cause
you to think about some of the business and corporate strategy decisions that you should
be thinking about as you consider investment in the cloud business opportunities you are
being presented with.
cloud and defensive strategy
Lost sale analysis by resellers of IT solutions is revealing that many deals are currently
being lost by classic and even transitional resellers because they are not able to offer their
existing and new clients a cloud based solution to the potential client’s problem. At the
extreme, incumbent solution providers are not being “considered” for new business in
what they consider to be their “installed base” because their clients do not believe that
their have a cloud capability when that is what the RFP requests. This is a problematic
situation. That will eventually result in customer churn.
What will happen to your company’s value if you are not being asked to respond to
requests for proposal in your installed base because your client does not think that you
are able to provide a cloud solution? Most of the value in your business resides in your
installed base. Ongoing erosion of your base has a negative impact on your businesses
value. The most obvious reason for value loss is the requirement to find new revenue
sources to replace the losses to base erosion. Cost per revenue dollar associated with
new business exceeds the cost per revenue dollar of businesses generated by your
installed base by three to five times. Base erosion reduces revenue levels while increasing
the cost associated with the acquisition of replacement business. This confluence of
factors results in lower profitability, eventually driving lower valuations.
Do some serious, disciplined lost sale analysis in your business. Find out how many cloud
solutions have been sold into your installed base in the last twelve months by any other
©CHANNELCORP
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8. company other than yours. Right under your nose and unknown to all! Your research will
tell you (as Channelcorp’s research has told us) that the competitive environment that
has been created in your installed base requires you to make at least some preliminary
investments in your cloud capability. You will find that if you do not make these defensive
investments in cloud capabilities that base erosion and value degradation of your business
will accelerate in the future.
cloud and offensive strategy
Transitional and transformational resellers are using their cloud capabilities to generate
new business from existing clients, and new business from new clients. The cloud story is a
growth story for these businesses. The cloud investments that they are making is offensive
strategy. The offensive moves are focused on driving growth and increasing business
value. For example, in a group of VARS that was engaged in the cloud business last year,
approximately half expected sales growth to be in excess of 50% next year. In this case
a good offensive strategy is the best defensive strategy. Transitional and transformational
reselling organizations have moved clearly and confidently to establish an offensive cloud
business. They have developed a business plan and invested properly to execute it. They
are defending and expanding their installed bases while acquiring customers that are brand
new to them. They are delivering “net new” and penetrating “white space”…all good, for
all concerned The process of developing and executing these business plans coupled with
the investment in the infrastructure and skills to acquire new cloud clients has made them
better at defending and expanding their installed base.
channelcorp reseller cloud strategy framework
Channelcorp thinks that transitional and transformational resellers have six different
strategic options that they can use to frame their investment in a cloud computing,
recurring revenue future. The option that the business is going to select is driven by
corporate strategy heritage, the business skills of the management team, the current
financial condition of the business, the characteristic of the classic service support training
and consulting business, the sales and marketing talent base of the organization, the
characteristics of the installed base of the business, management’s propensity to invest in
growth and the local competition faced by the business.
The Channelcorp reseller cloud strategy framework will help you develop a workable
corporate strategy that will be coherent, comprehensive and consistent enough for you
and your team to successfully implement a cloud strategy.
born classic…stay classic This is an old school strategy that will be a slow liquidation
strategy unless you are by far the best reseller of cloud solutions in your market. This
will be a successful platform for a transitional or transformational strategy if you can
build a portfolio of alliances with key providers of cloud solutions. If you stick with this
strategy you risk being continuously worried about client retention and consideration.
Cloud capabilities will become table stakes in your market. Market data suggest that cloud
capabilities will become “gotta have”capabilities in twelve to thirty six months.
born classic…complement with transition to cloud This transitional strategy is
consistent with market trends. It could produce many winning corporate strategies based
on the cash generation platform of a successful classic reselling business model. This
strategy starts as a defensive strategy focused on client retention and defense of the
installed base.. The strategy transitions to an offensive growth strategy once the installed
base begins to turn towards the cloud offerings. Success in the installed base creates
reference accounts to help acquire new clients while keeping churn down.
born classic…full transformation to cloud This is a dramatic business and corporate
strategy transformation that is executed over a twenty four to thirty six month period.
A plan is made to harvest and maybe even exit the base business in order to align the
©CHANNELCORP
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9. strategy and investment around emerging opportunities in the cloud marketplace. This
is an “all in, bet the company strategy” that could win big, or lose big…it all depends on
your execution skills. This corporate strategy decision is based on return on invested
capital(ROIC). The focus is to dramatically increase the value of the business often ahead
of a major liquidity event. Capital to execute this corporate strategy comes from external
sources of debt or equity, or by current operating profits and/or by the sale of the classic
installed base to another organization.
born cloud…stay cloud This market transforming strategy is the reselling equivalent of
the salesforce.com strategy. As a startup, either affiliated or not affiliated with an existing
classic reseller, there is the benefit of no incumbent cost structure, no inappropriate
organization structure and no group of unsuitable personnel. Unfortunately startups
have no customers until they start to market and sell. The “Born cloud…stay cloud”
strategy will need sizeable amounts of capital to be in place to pay the marketing,
sales and technical salaries until the portfolio of recurring revenue (annuities) created
begins to cover the costs and then create cash surpluses. These businesses represent
excellent opportunities to create something of value for the next generation (daughters/
sons/employees) of reseller business owners without diluting your ownership of the
“mothership”. The strategy also represents a potential exit or retirement strategy for
“50/60/70 something” owners who want to have something valuable to sell in five to
seven years.
born cloud…complement with classic This is a transformational strategy that provides
full coverage for end user clients regardless of how they wish to consume a particular
solution. This is the future end state for reselling businesses that start out as “Born
cloud” businesses. The classic components of the portfolio will be sourced using selling
relationships and alliances with resellers and partners still engaged in the classic part of
the market. The alliance between a “born cloud…complement with classic” and a “born
classic… stay classic” or a “born classic…complement with transition to cloud” will be very
profitable and practical.
do nothing This is an old school (oldest school) strategy that will sentence the business
to an “always hungry never starving” existence. This strategy is a slow or maybe fast
liquidation strategy depending on how fast the installed base ditches you for suppliers that
can offer and deliver cloud based solution. Fewer than 25% of the resellers in the market
are pursuing this strategy.
things to think about
How do investments in your cloud business fit into the overall business strategy that
you are currently on a path to execute. For example, if you are currently thinking about
a liquidity event around your business you need to be thinking about how the cloud
investments in the short term may impact the value of your business in the longer term.
Are you currently losing deals in your installed base because you can’t deliver solutions in
the form your clients want to consume them? Can you afford not to discover this in case
you need to start playing defense? If you are making defensive investments to hold the
value in your base you might as well think bigger and bolder and think about growth with
cloud solutions
If you are thinking about making cloud investments think about corporate strategy…
specifically what businesses do you want to be in and how do you want to be in them.
Invest in financial modeling tools to help you and your team build a quantitative and
financial picture of your potential cloud business. You must know and create your own
financial “truth”.
©CHANNELCORP
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10. We are confident that in order to realistically be an investor(with two to four dedicated
people) in a cloud business your organization will require $400,000 to $500,000 of
investable capital that you can afford to have invested for up to twelve quarters. This
means that if you have 10% or more of last year’s revenue in cash or near cash (investable
funds) then you need to be a business with at least four to five million dollars of revenue
in 2013, or have access to “outside” debt or equity capital.
Finally, if you have the capital to invest, and the organization that can execute the required
business model in the required manner then the investment in it can have a strong positive
impact on the long-term value of the business.
In the next part of this paper Channelcorp will provide insights into what we are learning
about the impact of business model transition and transformation on business valuations.
The shift from a transactional/on premise business model to a cloud based recurring
revenue model looks like it is having a profound effect on the values and valuations of
reselling businesses.
growth through transition and transformation
part 2
The shift from a transactional on premise business model to a cloud based recurring
revenue model looks like it has a profound effect on the values and valuations of
reselling businesses. In this section we provide insights into what we are learning about
the impact of business model transition and transformation on business values. Do
not hesitate to contact us if you have need for further insights.
recurring revenue and valuation
What does Channelcorp know about the impact of building a cloud based, recurring
revenue business on the potential value of a reselling business? Based on our research,
modeling and consulting we have learned a great deal. The focus and purpose of this issue
is to help readers understand the potential for increasing the value of the business by
investing in and successfully executing a cloud centric strategy.
the experience – the multiples
It currently appears that full line/mature software companies are being valued differently
than their cloud counterparts. Price earnings ratios of a portfolio of publicly traded cloud
centric software companies trade at approximately two to three times the price earnings
ratios of a portfolio of more established (read classically structured) on premise focused
companies. We also know from recent merger and acquisition activity that some very
strong earnings multiples are being paid for cloud centric reselling organizations.
We know that values of cloud and even managed print services reselling businesses are
anywhere from two to four times that of partners of the same size (in revenue terms) not
employing a recurring revenue or annuity model.
the value acceleration
What is it about the cloud business that suggests that it will provide a dramatic
acceleration to the growth of the value of a reselling business? There are in fact a number
of drivers that would support the expectation of valuation acceleration:
©CHANNELCORP
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11. Cloud contracts are annuities
EBIT
ROIC
Growth
When a reseller salesperson sells a cloud contract of three years in duration, the net
present value of every dollar of monthly revenue is worth approximately $2.50(assuming
a 10% discount rate, no up sell and no client loss). Longer contracts increase the value.
Well run cloud reselling businesses are comfortably generating a sustainable EBITA in the
range of 25 to 30%.
After the first two or three years, cloud reselling businesses appear to have no problem
generating rates of return on invested capital far in excess of the weighted average cost of
the invested capital. Every percentage point of ROIC in excess of the cost of capital goes
straight to the growth of company value.
Cloud business growth happens has three key drivers. Over time the average contract
size sold by a cloud reseller increases. We know that a predictable proportion of clients
are “up sold” during the course of a contract, meaning the monthly contract amount goes
up. The market for cloud solutions can be comfortable forecast to grow at 25 to 35% per
year.
do the math
Based on our modeling Chancellor estimates that for every percentage point of cloud
revenue that you add to the revenue blend of your business you will increase the value of
your business by 2 to 4%.
what should you know for sure?
There is strong evidence that well managed and well financed transitioned or transformed
cloud centric resellers are worth more per revenue dollar than their “classic” counterparts.
This holds true even if the classic counterparts have been in business longer and are
more established. The valuation multiple appears to be in the range of two to four times,
depending on the specific circumstances.
There are a number of key business drivers that support the expectation in the growth of
the value of the reseller business with the addition of a cloud focused business or practice.
Properly executed, a cloud business can add 2 to 4% to the value of the business for
every percentage point increase in the revenue blend of the business. Taking the cloud
revenue blend in the business from 0% to 10% could increase the value of the reseller by
20 to 40%.
transitions and transformations…what has to happen
Don’t make a change unless it is both necessary and useful; but if it is both necessary and
useful, don’t hesitate to make it …FAST.
What has to happen depends on where you are right now and where you wish to take
your business in the future. There is obviously no free lunch when it comes to your
participation in the cloud business. Investments lead returns, expenses lead revenues and
time and money are interchangeable. Some partners will look at the cloud opportunity
and pass, while others will analyze it as a truly business building investment opportunity
and jump at the chance to invest in a high growth market with big vendor backing and
limited competition. Some partners will have enough capital to invest, and some will not.
Whatever you decision outcome you owe it to yourself, your management team and your
business to ask and answer the following questions:
©CHANNELCORP
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12. How fit are you to transition?
What might you have to build and why?
How to engage with selected cloud vendors and distributors?
how fit are you to transition?
Before you and your team start to think seriously about making an investment in building
out a cloud business you want to be taking a good look at some of the key aspects of
your existing business.
You will want to start off with some thinking about a Destination Plan. As you look out
into the future, three to five years, what do you want the organization to look like? What
do you want it to be doing and what resources will it require to do what you want it to
do. Will cloud be part of the destination? But before you generate a destination, you
want to do thorough assessment of your current fitness to transition.
How is your organization’s financial health? How much will the cloud investment
potentially cost? How will you finance your cloud business?
How are your organization’s marketing capabilities? Do you have the funds to invest in
marketing infrastructure and programs? Do you have the right type of marketers engaged
in the right type of activities to generate the right number of prospects of the right type?
How are your organizations sales capabilities? Can you train them to sell cloud? Does your
current sales compensation model support the sale of cloud offerings? Will you need to
hire new sales resources with a new sales profile with more success selling smaller deals
but configured as annuities? Will you need to overlay these new people on your legacy
sales force?
How are your organizations administration and system capabilities? Do you currently have
the capability in place to run the billing and compensation systems required by the cloud
business?
How are your organizations technical capabilities? Will the people commit to becoming
trained and certified on the various cloud solutions you will need in your cloud portfolio?
Do your technical people have the ability to adjust to the routine and predictable nature
of the services business that is driven by the cloud business? Are they currently in a
structure of large extended projects staffed by deep specialists…can they change when
required? Will you need to hire different technical resources?
Once you have honestly assessed your existing fitness level and ability to transition you
and your team can start thinking about what you might have to build and why.
what might you have to build and why?
The successful cloud business will require capabilities in seven key areas:
leadership
strategy
marketing
sales
finance
technology
administration and support
Some organizations that consider investment in the cloud business may already have
many of the resources that are required in place. Others will need to make the capability
acquisition part of their destination plan in order to be successful.
©CHANNELCORP
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13. Leadership from senior management is crucial to cloud success. The transitions and
transformation because discussed here do not ‘bubble up from the rank and file”. These
changes are leader led. Because the scale and scope of the reskilling that is required is
so broad and deep it is extremely unlikely to happen in organizations that does not have
a senior management group and named executive sponsor that really wants to see the
transition or transformation happen and the cloud business grow.
Strategy and strategic direction provide a vital roadmap for the destination plan and all
the transitional and transformational investments that will be made. Is the cloud business
investment defensive or offensive in nature? What is the plan to integrate the cloud
business into the existing businesses you have? If you are a startup what do want to be?
(See “growth through transition and transformation – part 1”)
Marketing’s role in the cloud business is to create prospects for sales and to keep the
installed base aware of the partner’s offerings. It will need one person who is responsible
for the required planning and execution. It will need investments in programs and
activities that generate the required output at the expense levels available. One thing is
for sure, many more leads will need to be manufactured to feed the deal flow required to
build the cloud business.
The Sales role in the cloud business is to turn prospect into contracts, and then maintain
them and then up sell them. In order to perform this role the sales force will need to be
properly trained and then compensated for what you want them to do. This will require
a change in approach to, and structure of, compensation. It may also require you to find
new sales talent.
Finance and the availability of capital obviously play a key role in the transition and
transformation of your business. In order to be successful a cloud partner has to have
adequate capital that they can put at risk for the required amount of time, and then have
the ability to manage the organization through the unprofitable and cash flow negative
startup stage to profitable growth and then maturity.
Technology and technical knowledge plays a very specific role in the cloud business.
Technical resources will need to be generalists capable of talking to business people
about business problems and solutions. If these people do not currently exist in your
organization you will need to make them, buy them or rent them.
Administrative and support tools and resources will be required to operate a business
that has fundamentally different requirements than the classic business partner. Annuities
and recurring revenue stream present a challenge to legacy systems and structures that
will overwhelm them if they are not segregated and dealt with using dedicated systems
and processes.
growth through transition and transformation
part 3
The purpose of this section is to provide readers with guidance and strategic focus
to direct 2014/2014 investment growth and profitability in partner organizations. The
material is presented in the form of ten partner growth conversations, in two parts:
part 1
conversation 1 – The fundamentals
conversation 2 – Implications
conversation 3 – The operating cash cycle (OCC)
©CHANNELCORP
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14. conversation 4 – Attach products and services in 2014
conversation 5 – What about the cloud and MPS
part 2
conversation 6 – Making $ with service
conversation 7 – SMB strategy
conversation 8 – Mine the base for new profit
conversation 9 – Is 2014 the year to go vertical?
conversation 10 – Provide confident leadership
Your role in the channel management system will dictate the impact of the ten
conversations on your 2014 activities.
figure 1 — channel management system
players
influencers
partners
coaches
suppliers
source: CHANNELCORP
If you are a player, you carry a quota. You know that in spite of everything, your quota will
be bigger in 2014 than it was in 2013. You know that your key job this year will be to help
solve partners transition and transform while solving cash flow problems. You may want
to make sure that your partners are having the conversations at the senior levels of their
organization. If you are a coach, a manager of players, you will want to make your players
aware of the issues that surface in this edition of Channelcorp intelligence and make sure
that your players are initiating the right conversations with their partners. You will also
want to make sure that your players understand the transition and transformation issues
as well as channel economics and partner finance. If you are a supplier, you need to pay
attention to the areas of your partners’ businesses that require channel programs that will
impact the income statement, balance sheet, and cash flow. Use the conversations to test
whether you have channel programs in the right places. If you are a business partner, you
will want to use this article as a blueprint for 2014/2014. You might also use the content to
guide strategic conversations with the various account managers that your vendors have
assigned you. In any event, there is something for everyone in this edition of Channelcorp
intelligence.
©CHANNELCORP
11

15. conversation 1 — the fundamentals
For 2014 Channelcorp is delivering five fundamental messages to business partners. All
five are related to cash flow management:
1
2
3
4
5
transitions on three dimensions
cash flow/profit impact of growth
business model shift
cash is king
plan to grow profitably
Vendors and distributors over the last few years have driven their partners to transition
on three dimensions, often without thought for the impact on partner investment and
management. Figure 2 is a diagram of the situation.
figure 2 — transitions on three dimensions
existing
technologies
installed
base
new
technologies
new categories
of technologies
"net new"
existing
clients
new
clients
new
markets
solutions-driven
services-driven
products-driven
source: CHANNELCORP
Transitions from existing clients to new clients, and existing technologies to new
technologies, were driven by the pursuit of “net new”. Transitions from a productdriven business model to a solutions-driven business model were painful. In all cases the
investment led the return and the expenses led the revenues requiring excess available
cash. In many cases the transition caused revenue gaps and/or cash flow problems. These
cash flow problems are now showing up and becoming painful for business partners.
The cash flow and profit impact of transitions and growth is a serious driver of sources
and uses of cash in partner businesses. Figure 3 is a diagram of the impact of new revenue
on accounting profit and cash flow.
©CHANNELCORP
12

16. figure 3 — cash flow/profit impact of growth
source: CHANNELCORP
Existing products sold into existing accounts generate a positive cash flow and accounting
profits. New cloud products/existing accounts and/or existing products/new accounts
generate zero or slightly positive cash flow and accounting profits during the first year. All
other scenarios generate negative cash flow and accounting losses in the first year; after
the first year everything that was new becomes part of the installed base . . . if you stayed
the course. Business partners with cash flow problems will need to be presented with
recurring revenue opportunities by their vendors and distributors that will generate cash
and deliver accounting profits in 2014. Money supply will be the business partners’ key
impediment to growth.
Business model shifts from a product, to a service, to a solutions focus have challenged
business partners for several years. Figure 4 provides an outline of the challenge.
figure 4 — business model shift
source: CHANNELCORP
Everything changes when a partner transforms a transaction focused product-driven
business into a recurring revenue focused cloud-driven business.
©CHANNELCORP
13

17. cash is king
Cash flow is everything. The cash messages for cloud focused business partners are:
calculate your cash metrics
– cash cycle
– cash required/revenue dollar
– cash generated/revenue dollar
calculate the cash impacts of growth (see figure 3)
set targets for cash generation
– cash generated per quarter
– cash generated per person
– cash generated per transaction
set strategies for cash generation
execute the strategies and measure progress against targets
We will not lose business partners because they are not profitable; we will lose them
because they run out of cash!
Channelcorp’s big warning to partners in 2013 was to make sure that they did not bleed
themselves to death by letting sales get way ahead of collections. 2014 will be about
serious cash flow management through cloud investment management, receivables
management, inventory management, payables management and making fixed costs
variable.
For many, 2014 and 2014 will be about learning how to grow profitably again.
Channelcorp is talking to partners about:
building a plan to grow return on invested capital with a cloud focused business
building a plan to grow marketing productivity
building a plan to grow sales productivity
building a plan to grow transaction productivity
We are encouraging partners to get their vendor and distributor account managers
involved in their transition, transformation and growth plans and to focus once again on
profitable growth.
We are all in a challenging time. It will take all of us pulling together to get ourselves out.
conversation 2 — implications
Much of the business transition work that partners started in 2009 or 2010 was not
finished by the end of 2013.
The transitions on three dimensions that were set in motion in 2009/10 take two-to
three-year projects to complete. Transitions and transformations to new markets, new
technologies and the cloud/recurring revenue business model are expensive and timeconsuming for business partners to execute . . . and now markets have cooled and credit is
tight. Tough decisions will need to be made.
©CHANNELCORP
14

18. Underlying business growth and the new “transition/transformation-related” investments
are, at the best of times, difficult to finance out of internally-generated cash – essentially
2012/12 earnings. Given the current liquidity challenges, reasonably priced externallygenerated cash, in the form of debt and/or equity, if available at all, comes with a heavy
financial cost and often the reduction of flexibility for the business owner. Debt financing
may be hard to come by in 2014.
What will the cloud business be? Tactical plans around why, what and how to grow are
difficult to execute. Should you grow revenue, shrink expenses, or both? Should you grow
return on invested capital (ROIC) . . . what investment base should you use? Should you
grow marketing productivity – how do you increase it? Should you grow sales productivity
– how do you increase it? Should you grow transaction productivity – how do you
increase it? What needs to happen to grow cash flow?
The 2014 message is very clear – be very careful that you have enough cash to finish what
you start.
conversation 3 — the operating cash cycle (OCC)
As we all move into challenging economic environments, we need to understand business
partners’ operating cash cycles (OCC). You need to understand this whether you are a
channel partner or a vendor or a distributor . . . and it does not matter what your job is.
Fear in this environment will paralyze you. Master the reduction of operating cash cycles
and duration. Understand how to do more with less cash, or more with the same amount
of cash.
Businesses require cash as fuel to survive, sustain and grow. Business partners will not
fail because they run out of sales or have too many expenses. Business partners will fail
because they run out of cash. In order to expand or grow a business partner, more cash
has to be provided as fuel. In order to survive a business must continue to generate
sufficient amounts of cash. Sources must be equal or greater.
There are three sources of cash in a business partner’s company:
debt – borrowed cash
equity – cash from stock sales
internally generated cash from profits, lower expenses or the unlocking of non-cash assets
to generate cash
Vendor and distributor programs that reduce partners’ investments in inventory, shorten
collection periods and/or extend partners’ payment terms for product are sources of
cash. These important programs allow a business partner to unlock the cash traditionally
invested in these assets. For example, an account receivable is essentially a loan to an end
user to purchase products and services. End user leasing serves to reduce the amount of
cash “invested” in accounts receivables therefore unlocking cash that can be put to other
“investment” uses within the business. It is crucial that all involved in the industry know
how to use vendor and distributor channel programs to assist channel partners reduce
the cash required to generate a gross margin dollar.
The operating cash cycle (OCC) (figure 5) is the clearest way to zero in on the potential
impact that vendor and distributor financial programs can have on the cash position
of a business partner. A business partner’s OCC represents the amount of time that a
company’s money is tied up in inventory, accounts receivables and any other current
assets before the company is paid for the products or services sold. The shorter a
business partner’s OCC, the faster the company can redeploy its capital to grow. In
addition, reductions in OCC can result in lower cash requirements per revenue dollar,
higher amounts of growth financeable with the same amount of cash invested and higher
©CHANNELCORP
15

19. levels of return on invested capital (ROIC). It is safe to say that anything that can be
done to reduce a business partner’s OCC should be examined by the business partner
senior management in concert with their vendor or distributor account manager, channel
manager, or partner manager.
The business partner’s OCC and the duration that the company’s cash is tied up is driven
by a number of factors:
accounts payable period – how long vendors or distributors give business partners to pay
their bills (or how long business partners take)
inventory holding period – how long business partners hold inventory (if at all)
collection period – how long it takes business partners to get paid for goods and services
sold and delivered
figure 5 — the operating cash cycle (OCC)
source: CHANNELCORP
Figure 5 combines the three factors to provide the OCC and duration. The table below
(figure 6) will illuminate the impact that these factors have on the OCC of business
partners and the duration for which cash is tied up. The formula is:
inventory holding period + collection period – accounts payable period
figure 6 — typical vs. excellent OCC and duration
inventory
holding
period
collection
period
A/P
period
OCC
duration
typical business partner
20 days
50 days
30 days
70 days
40 days
excellent business partner
5 days
30 days
40 days
35 days
(5 days)
source: CHANNELCORP
©CHANNELCORP
16

20. As can be seen in figure 6, there is a tremendous difference between the OCC and the
duration between typical business partners and excellent business partners. Further
analysis of figure 6 points to the collection period, and its reduction, as a major driver
in values of the OCC and the duration that cash is tied up. The OCC of the excellent
business partner is less than 50% of that of the typical business partner. What this means
is that the excellent business partner requires less than 50% as much cash to support a
dollar of revenue as the typical business partner. In fact, the excellent business partner, with
a duration of negative 5 days, has a theoretical internally financeable rate of growth of
infinity and no requirement for outside cash.
What is clear in figure 6 is the impact on OCC and duration made by the reduction in
inventory holding period and collection period, and increases in accounts payable period.
conversation 4 — attach products and services
In a downturn, capital expenditures disappear before operating expenses are reduced.
Those who attach products and services will generate more cash and will be more
profitable than those who don’t.
In 2014 partners will need to consider implementation of an “attach only” strategy. The
fundamental questions for partner businesses is how to make attach happen. Products
must have other products connected – storage, output devices, software. Clusters of
attached products require service, support, training and consulting to be attached. Leases
need to be sold. Cross-selling needs to happen. Why?
The answer is simple . . . there is a linear relationship between transaction size and
transaction profit (figure 7).
figure 7 — increase transaction size
source: CHANNELCORP
Transactions have a virtually fixed cost through a very wide range of transaction sizes.
When you increase the number of gross margin dollars generated by a transaction
through a focus on attach, you increase profit without increasing the cost of the
transaction (or increase the transaction yield faster than transaction cost). More gross
margin dollars from fewer transactions increases profits and return on assets.
©CHANNELCORP
17

21. Services need to be attached; products need to be attached. Understand the “attach”
related programs that your vendors and distributors are offering.
figure 8 –— increase transaction yield
source: CHANNELCORP
By attaching services with higher gross margin levels than the underlying products in the
solution, the transaction yield increases. Increasing the gross margin dollar yield of the
overall transaction increases the gross margins generated by a specific revenue size of deal
(figure 8).
Every way you analyze it, any partner profits in 2014 will require attach as a key profit
strategy component. Partners should make sure that all proposals are being “fully clothed”.
Make the client take attach out. Compensate partner sales people for selling larger,
attached transactions. Position partners as Solution Providers so that clients expect fully
clothed solutions to be proposed by partner sales people. Coach partner sales people on
what to attach, when to attach, and how to attach.
conversation 5 — what about the cloud and MPS?
What about the cloud computing and managed print services (MPS) businesses? Both are
potential game changers for vendors and distributors in the IT business and certainly for
customer facing business partners. Both will put pressure on the existing business models
and business approaches of almost all business partners.
At Channelcorp we think that the key issues regarding cloud computing and managed
print services are financial and not technical. Although security comes up as a cloud
impediment to adoption as page accounting and billing does in MPS, most of the technical
issues associated with the businesses in question have been or will soon be ironed out.
What has not been ironed out so thoroughly is the financial impact of transitioning to
sell these offerings or the “classic” business models of incumbent channel partners. More
specifically few vendors can actually tell partners what impact buying the cloud or MPS
“franchise” will actually have on their existing income statements, balance sheets and cash
flow. In fact it may be clearer for many partners to view opportunities as freestanding new
entities in true franchise model form.
©CHANNELCORP
18

22. Cloud solutions and MPS are tailor made for the channel. Both will be sold to sub
enterprise (SMB/SME) customers by various species and sub species of channel partners.
Because the annuity economics of these businesses differs so dramatically from the
traditional “title taking” models of the IT industry, transition will have a large impact on
partner operations and economics. The selling of products as services will also require
different sales marketing and sales force activities and approaches. Net net, we are
talking about some major partner business re engineering and the creation of brand
new divisions that may be organizationally, financially and culturally independent from the
parent companies. We will find that it may be easier for you to build new than to retrofit
an annuity business model into one built on the classic title taking buy/inventory/sell/
service of the IT reselling industry.
The cloud, SaaS and MPS market numbers are compelling to even the biggest skeptics of
“the next big thing”.
CompTIA research indicates that 60% of end user customers plan to increase their
investment in cloud based solutions by 5% or more next year. More than half of those
who plan to invest plan to use a business partner to assist them. That means that
approximately one third of your customers are going to be looking for a business partner
to help them make an investment in a cloud based solution. Obviously the key financial
driver in a cloud based solution is the opportunity to do the same or more with the
solution for lower fixed cost and a lower total cost of ownership for the solution. In order
to be considered by your clients you probably have to be in the cloud business at some
level, with someone. Can your sales people sell cloud based solutions?
In the SaaS market IDC is projecting a 25% compound annual growth rate through to
2014. IDC also predicts that the shift to a SaaS model will result in a nearly $7 billion US
decline in worldwide license revenues in 2012 alone. This number will obviously accelerate
as the transition to the SaaS model takes hold. By 2014 IDC expects 34% of all new
business software will be purchased as a SaaS solution. This is big news in a very profitable
part of most business partner businesses. Is your business structured to be profitable with
35 - 50% of your software sales going to SaaS base?
In the Managed Print Services space Photoizo reports that the MPS market worldwide
continues to grow at a compound annual growth rate of more than 25%. North America
continues as the most mature MPS market with 50% of the worldwide volume. According
to Photoizo worldwide market size of MPS has grown from $9.5 billion in 2006 to $20.3
billion in 2009. By 2014 the projected size of the worldwide MPS market is $59.7 billion.
In fact by 2014 MPS will account for over 50% of the total distributed imaging business
market. Is your business structured to be profitable with 50% of your printer/consumable
business going to managed print?
Clearly conversation 5 needs to be held in the context of conversations 1 – 8. Decisions
surrounding conversation 9 have an impact on the fundamentals, the operating cash
cycle and the attach strategy for products and services. Making $ with cloud service
(conversation 6) and SMB Strategy (conversation 7) are critically connected to
conversation 5 as are conversations 8 (mine the base for new profits) and 9 (is 2014
the year to go vertical?). Nothing will happen in cloud, SaaS or MPS space without the
provision of confident leadership (conversation 10).
©CHANNELCORP
19

23. growth through transition and transformation
part 4
Part 3 of the “growth through transition and transformation” section focused on five of
ten conversations:
The 2014 fundamentals, Implications, The operating cash cycle (OCC), Attach products
and services in 2014, and What about the cloud and MPS?.
Part 2 examines the final five conversations:
Making $ with service, SMB strategy, Mine the base for new profit, Is 2014 the year to
go vertical?, and Provide confident leadership.
conversation 6 — making $ with service
Cloud services are “sticky”. Once an organization begins to buy cloud service from you, it
is difficult for them to stop. An interdependency builds up that may strengthen in the face
of layoffs in the customer.
Attach and conversation 6 are clearly linked. Conversation 6 is about making money with
services. Two key questions underlie the partner service strategy:
1 what service line breadth and depth will partners be able to offer their clients?
2 what “service manufacturing” strategy will partners pursue – make vs. buy vs. mixed
hybrid strategy?
What partners sell, or the nature of the cloud service line that partners offer clients, will
be partially determined by whether partners are running a horizontal or vertical strategy
in the market.
figure 9 —horizontal strategy and breadth
source: CHANNELCORP
©CHANNELCORP
20

24. Running a horizontal strategy requires a service offering that has breadth – lots of
potential offerings at some standard level of technical excellence dictated by regional
competition. Line breadth will be achieved by a combination of in-house offerings and
partnered offerings from the partner’s ecosystem. Without adequate line breadth, partner
sales people will not have anything to “build up” solution sales.
figure 10 — vertical strategy and depth
source: CHANNELCORP
Running a vertical strategy requires a cloud service offering that has sufficient technical/
industry depth to define the partner organization as a source of knowledge and expertise
that can be trusted. Line depth will be achieved by a combination of in-house offerings
and partnered offerings from the partner’s ecosystem. Without a cloud service offering
with adequate depth, the partner organization will not be taken seriously as a provider of
vertical solutions. Needless to say, without a cloud service offering that has sufficient depth,
it is very difficult for partner sales people to make the vertical sale.
Many business partners may have excess cloud service capacity that they will try to resell
through other partners. . This is an opportunity to sell cloud services you do not have to
cover the investment while another business keeps their bench busy. The “cloud services
manufacturing” strategy that partners select has critical impacts for the financial side of the
business, especially return on invested capital. The level of “connectedness” of a partner to
a series of business partner ecosystems has a strong impact on the cloud service offerings
that they can offer to the market.
©CHANNELCORP
21

25. figure 11 — service manufacturing strategy
source: CHANNELCORP
At one end of the cloud service manufacturing strategies spectrum partners can “make”
all the service that they sell with their own infrastructure. This strategy provides higher
margins, but requires higher levels of fixed costs as a percentage of total cost. This cost
structure results in higher levels of financial risk.
On the other hand, most of the major cloud vendors in the IT industry have rolled out
very intelligent and profitable cloud service reselling programs whereby partners can resell
cloud services manufactured by others for an agency fee. The agency fees are lower than
the margins if partners create the service themselves, but the investment and risk is lower.
In fact, return on invested capital may be higher for cloud services that partners resell than
for services that they manufacture in-house.
2014 service action plan
Step 1 Do a Customer Audit to find out what cloud solutions partner clients want to
buy and who they want to buy it from.
Step 2 Rework the portfolio of cloud services that partners offer based on Step 1.
Step 3 Decide upon which cloud services partner will create in-house – start with those
required by the base that will give the partners high utilization.
Step 4 Fill out the portfolio of cloud services with those available from key vendors and
third party service providers.
conversation 7 — SMB strategy
It just so happens, even in a downturn, that the SMB (Small, Medium Business) sector is still
the fastest growing sector of most economies around the world. Second, SMB is a sector
of the economy that is notoriously difficult to make money in, even in a hot economy.
Transaction costs in SMB approach transaction costs in the Enterprise sector. Transaction
Yield in SMB are substantially smaller. As a result, SMB transactions are rarely possible to
make money with if you don’t attach something.
©CHANNELCORP
22

26. figure 12 — cracking the code in SMB
Enterprise
SMB(a)
SMB(b)
transaction revenue
100,000
20,000
20,000 + 6,000
COGS
70,000
16,000
16,000 + 3,000
gross margin $
30,000
4,000
7,000
SG&A
20,000
5,000
5,000
(1,000) * 5
2,000 * 5
(5,000)
10,000
profit
10,000
source: CHANNELCORP
Figure 12 shows the problem. In order to generate $100,000 in SMB revenue, a partner
may have to engage in five or more SMB transactions to generate the same amount of
revenue as one Enterprise transaction (Enterprise vs. SMB(a)). Figure 12 also shows that in
order for the SMB transactions to generate the same amount of gross margin dollars as an
Enterprise transaction, there has to be service attach happening (Enterprise vs. SMB(b)).
Figure 13 shows the mechanism, albeit difficult, by which a “naked” $10,000 transaction
changes economics as it drags $20,000, $40,000 and finally $60,000 in incremental
products/services at 25%. At an attach/drag/clothing rate of little more than two, the profit
on the SMB transaction begins to look like the profit on the Enterprise transaction shown
in figure 13.
figure 13 — attach/drag/clothing vs profit
.
base transaction
20k – 16k – 5k
= (1k)
profit
drag transactions
20k – 15k
= 5k
incremental profit
source: CHANNELCORP
The message in Conversation 7 is very clear. Cracking the Code in SMB requires an attach
strategy for all hardware and software, plus a robust service, support, training, consulting
and financing offering. Strategically, partners need to think about their SMB business from
the perspective of transaction yields and transaction costs.
©CHANNELCORP
23

27. figure 14 — TC fl vs. TY ›
source: CHANNELCORP
What will your transaction yield increase strategy be? What will your transaction cost
reduction strategy be? Most partners are pretty close to the lowest Cost Per Order
Dollar that they can be, therefore the yield increase strategy is crucial to SMB profitability.
Figure 14 shows how transaction cost reductions can make smaller transactions profitable,
and how transaction yield increases can increase the profit of the transaction.
conversation 8 — mine the base for new profit
From a financial perspective, the client a partner should sell to is very clear. The partners’
installed base, providing it has not been “tapped out” (or gone out of business), provides
the revenue in the shortest time frames, at the lowest cost per revenue dollar. Figure 9
explains the situation very clearly. For 2014, partners sales management should prioritize
sales targeting in the following order:
p
riority
1
2
3
4
5
target
Sell to your installed base
Sell to someone new in your installed base/
make the account a market
Sell something new to your installed base
Sell to new clients
Sell something new (to you) to new clients
investment/rev $
less than 15¢
15¢
30$
30¢
60¢
Seen another way, in 2014 partners will need to be very specific regarding what zone they
invest marketing and sales effort in.
©CHANNELCORP
24

28. figure 15 — getting selling zone priorities straight
source: CHANNELCORP
Focus on zone 1 is logical and rational. Zone 2 requires partners to rethink their key
accounts as markets with segments. Have partners fully penetrated all of the various
markets that exist within accounts that are familiar with the partner and therefore trust
the partner? Zones 1 and 2 should be fully exploited prior to investment in zones 3/4/5
because they will be the key source of internally-generated cash.
Zone 3 is generally less expensive and faster for partners to generate cash in than zone
4. The simple fact is that most partners master new products/services in existing clients
better than they attract new clients. Partners should finish zone 3 before they begin to
pour money into zone 4.
Nothing will happen in zone 5 in 2014 other than high cost new revenue that will result in
negative cash flow, and accounting losses – face it. If a partner can not afford to be in zone
5, they should stay out of it.
2014 plan for sales and marketing action: finish off zones 1/2/3. Extend reach, (subject to a
partner’s cash flow situation), into zones 4/5.
conversation 9 — is 2014 the year to go vertical?
Is 2014 the year to go vertical or to accelerate the transition of the partner business to a
more vertical focus? The answer to this depends upon the partner’s cash flow situation.…
and your cloud investment strategy.
All partners have a vertical business; check the installed base and you will find clusters of
clients from similar businesses or industries. Even without a vertical focus, many partners
tend to successfully gravitate to solving problems that they know how to solve, thus
creating a vertical installed base that actually “crumbled into place”.
Current pressure to verticalize is coming from clients and vendors. Risk is everywhere.
Clients want solutions providers that will provide them with a competitive advantage in
the industry that they are in. Technology risk aversion is pushing clients towards those
who can provide evidence that they have done it before successfully. From a marketing
perspective, all else being equal, vertical beats horizontal. Many vendors’ product/
market strategies call for partners that have a vertical capability. Hardware, software and
telecommunications vendors are all calling for and rewarding those partners that can
provide evidence of vertical expertise. The twin pressures of the market and the key
vendors are difficult for partners to resist … but the required resources will be difficult to
finance.
©CHANNELCORP
25

29. figure 16 — twin pressures to verticalize
source: CHANNELCORP
In order to develop a successful vertical business, what do partners have to think about in
2014?
figure 17 — cash flow profit impact of verticalization
source: CHANNELCORP
1 Cash flow – figure 17 tells the whole story. Business partners must be able to finance a
vertical focus (see conversation 3).
2 Attach – vertical and attach are linked strategies. To be successful in vertical markets,
transaction sizes must become larger (through attach) and transaction yield must
become larger (through service attach) (see conversation 4).
3 Service and support – vertical and service/support are linked strategies. To be
successful in vertical markets, a partner has to be demonstrably and usefully different
©CHANNELCORP
26

30. from the competition. The basis of the differentiation is the partner’s ability to sell,
service, support, train and consult (see conversation 5).
4 SMB – vertical and SMB are linked strategies. Cracking the code in SMB requires the
lowering of transaction costs and the increasing of transaction sizes and transaction
yields. A vertical formula allows a partner to create a sales/solution “set play”
which results in lower transaction costs. Through attach and service sales, based
on demonstrable and useful capabilities, transaction sizes and yields increase (see
conversation 6).
5 Growth – vertical and growth are linked strategies. In a rather ironic twist, a partner’s
installed base will not always be thrilled about moves to verticalize. They like partners
the way they are . . . serving them. Their clients worry about whether or not they will
leave them behind. Vertical growth will therefore require partners to move out of
zone 1 and maybe zone 2 (see conversation 8). Partner vertical growth may come
from zones 3/4/5 with a resultant increase in investment requirements (again, see
conversation 8).
6 Differentiation – vertical and differentiation are linked concepts. You need to be
demonstrably and usefully different in the market to succeed. Your differentiation will be
based on knowledge, experience and reputation.
Key verticalization issues are related to cash flow and investments in the transition of
organizational functionality.
cash flow – potentially painful
expenses lead revenues – Year 1 will most likely be a negative cash flow year
investments lead returns – Year 1 will require surplus working capital to finance
transition of functionality – most likely painful
dedicated marketing resources are a must have
marketing and marketing structure changes will be required
sales strategy and perhaps sales force changes may be required
offering strategy needs to be crisp and clear – offering needs to be excellent
management clarity has to be superlative – no sloppy thinking allowed
conversation 10 — provide confident leadership
Critical and integral to partner performance in 2014 and 2014 is the ability of the
partner’s CEO and senior management team and the vendor and distributor channel
teams to provide confident leadership for their people. Specifically, what do the employees
of partners want to know about management plans for they next two years?
1 Will we survive and sustain the business that we have? Will I retain my job?
2
Where will we grow?
– historic/core business
– new business
– hybrid of old/new business
©CHANNELCORP
27

31. 3 How will we grow?
– internal/organic growth
– external growth – merger/acquisition
4 What products/services/markets will we focus on?
– existing clients/existing products and services
– new markets in existing clients/existing products and services
– existing clients/new products and services
– new clients/existing products and services
– new clients/new products and services
5 What Technology Strategy will we run? How close to the state-of-the-art will we
attempt to go?
– first-to-market
– second -to-market/fast follower
– late-to-market/cost minimizer
– market segmentation/verticalization
6
What external growth systems might be pursued?
– technical alliances/partnerships
– business alliances/partnerships
– mergers/acquisitions
7 How can we help?
The provision of confident leadership is the foundation to the execution of all key plans
for 2014.
figure 18 — 2014 in a nutshell
source: CHANNELCORP
call to action
The purpose of this paper has been to lay out a strategic roadmap for survival,
sustainability, growth, investment and profitability in 2014. As stated in Part 1 your role in
the channel management system dictates the questions for contemplation and the calls to
action that arise.
©CHANNELCORP
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32. partners – You should be having any/all of the ten conversations with your management
team. You should be talking to vendor account managers about the implications.
action – Have the conversations with your management team and your account managers.
players – Your channel programs need to support partner focus on attach/service/SMB/
growth/verticals. You need to be talking to your partners about the program/strategy
linkage. Your channel programs need to be R/E/A/L.
action – Understand the program/strategy linkage and have the conversations with your
partners. If your programs are not R/E/A/L, give immediate feedback to your channel
marketing group so they fix it – fast.
coaches – Make sure your players understand what growth strategies their partners are
trying to execute. Make sure your players understand the financial issues and the program/
strategy linkage. Make sure your suppliers/influencers understand the 2014 partner
growth/investment issues.
action – Probe and question your players to discover what they know and what they are
doing.
suppliers/influencers – Understand—we mean really understand—the impact of your
programs/policies/promotions on issues of attach/service/SMB/growth/verticals.
action – Make sure that your programs are R/E/A/L and they have the desirable impacts
on partners’ income statements, balance sheets, cash flow and return on invested capital
(ROIC).
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33. CHANNELCORP
Founded in 1989, Channelcorp is the IT world’s leading channel growth consulting
and executive education firm.
Channelcorp publishes three of the world’s premiere books on channel strategy and
reseller performance improvement, as well as the leading analytical newsletter,
Channelcorp intelligence. With primary distribution to more than 30,000 IT channel
executives worldwide, Channelcorp intelligence explores and defines channel
programs, channel marketing, channel development and partner growth.
With assignments in over 40 countries, Channelcorp is directly involved with channel
executives and managers from more than 500 firms and indirectly with audiences of
channel and partner professionals from thousands more.
public & in house workshops
Channelcorp hosts new versions of “Channel Management and Transition” and “Cloud
Channel Growth” programs in Santa Clara and London because things have changed.
Channel Management and Transition 2014
Santa Clara, CA 8/9 April
London, UK
1/2 July
In 2014 channel partners of all species are transitioning from transaction driven business
models to a blend of transactional and recurring revenue business models. These
transitions are structurally changing the job of, and knowledge required by channel
managers in the field. This unique two-day program is for quota carriers, their teams and
those who manage the teams. The primary focus of Channel Management and Transition
is to provide attendees with the skills and approaches required to grow and transition
their partners to the required blend of transactional and recurring revenue models. As a
result of the program attendees will know the “what to do” and the “how to do it”. They
will learn the “hard” business and financial knowledge required to grow in today’s market.
$2500US per attendee. Team rates for 5 or more.
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34. Cloud Channel Growth 2014
Santa Clara, CA 10/11 April
London, UK
3/4
July
“Cloud” revenues are growing at 4-5 times the rate of the IT industry as a whole.
North America is the largest market (40-50% of WW revenue) but emerging markets
are growing twice as fast as developed markets. For much of the market CLOUD IS
A CHANNEL BUSINESS. The 2014 version of Cloud Channel Growth is an intensive
two-day, four-part program for vendor channel personnel (channel strategists, product
marketers, channel marketers, channel developers and channel managers) and partner
management assigned to grow cloud, SaaS and MPS channels. Day one examines utility
model economics, cloud/SaaS/MPS players and channel models, “cloud math” and the
financial dynamics of cloud businesses including valuation and ROIC metrics. Day two
focuses on vendor cloud channel issues as well as partner investment and profitability
issues and implications. This program will produce cloud channel competent people of the
highest level. $2500US per attendee. Team rates for 5 or more.
handbooks
Emerging Issues…Strategies for IT Channel Growth
first edition (167 pages/122 figures/$200)
Original Channelcorp research and insights focus on how to grow and transform
contemporary IT channels, channel partners and channel strategies. Includes sections
“Ignite cloud channel growth”(24 pages) and “Transition and transformation…structural
change required (9 pages).
Ecosystems and Alliances Handbook
first edition (200 pages/89 figures/$200)
The Ecosystems and Alliances Handbook is the only IT industry focused reference book
available for channel and alliance professionals needing to design, develop and execute
successful ecosystems and alliance strategies. This unique, concise guide will provide you
with a practical blueprint to direct your ecosystem and alliance build out plans.
Reseller Management Handbook
eighth edition (250 pages/160 figures/$200)
The eight edition of the Reseller Management Handbook continues to be the IT industry’s
single source of focused, practical advice to help business people profitably grow and
transform solution providers and business partners. The Reseller Management Handbook
has been written for employees, managers and owners of computer hardware, software
and telecommunications solution providers around the world. It also shows the “quota
carrying” and “partner facing” channel professionals working for the IT world’s vendors
and distributors how solution providers operate.
Channels Handbook
third edition (303 pages/206 figures/$200)
The third edition of the Channels Handbook is the only channel strategy and channel
management guide written for the worldwide IT industry. This handbook contains
answers to all of the key questions that arise when vendors need to build high
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35. performance channel strategies for products and services. If you have contact with the
products, programs or organizations driving your companies indirect channel strategy. The
Channels Handbook will provide the guidance to grow fast and save your organization time
and money.
LivePlan-30 DAY RISK FREE PILOT
Channelcorp and LivePlan have teamed up to offer readers a 30 DAY RISK FREE PILOT
of the cloud based business planning solution LivePLan. LivePlan is the best cloud based
business planning solution that Channelcorp has found publically available on the market.
You can use LivePLan to model your recurring revenue business (cloud/SaaS/MPS) as a
freestanding entity. You can then use LivePlan to merge financial models of your traditional
business with the recurring revenue models to get the whole business-planning picture.
Details: https://app.liveplan.com/promo?pm=CHANNELCORP_1
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