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Last year we brought together channel marketing specialists from leading vendors in diverse IT segments to for a round-table discussion to exchange best practice on delivering services through the channel. They came from network operators, server manufacturers, print, mobile terminals, software and network equipment. They came to explore how the issues are different for network, financial, software, maintenance or value-added services and whether best-practice is transferable between them.
This is what they said:
The Service Market
The IT industry is moving from a solution-based to a service-based model. According to VAR Business, “IT services sold through or with other service providers [indirectly] account for approximately 40% of all service revenues in 2006.“ According to Gartner, although “Support services continue to be the most frequently sold through other service providers [indirectly]. Professional [integration] services are gaining focus.” Managed services, in particular, are projected by Gartner to grow at 20% pa, with network operators projected to have a 32% market share by 2011
These value-added services are also highly attractive to partners, being at the same time higher value of sale, higher margin and higher growth than the traditional, simple services.
The Challenges
However, taking up this opportunity has many challenges, both for the partner and the vendor.
For the partner the issues are around:
• Business Model
• Cash Flow
• ROI on investment
• Certification
• Provisioning, Billing & ticketing infrastructure
• Marketing: Services are vendor-neutral, so less support is available
• Adoption push: The sale is never done on an subscription service
• Skills investment
• ‘Co-opetition’ with other channels
• Turning sales hunters into farmers
• Need to increase customer knowledge rather than technical expertise
For vendors it is around:
• Brand Loyalty (Solutions and services being ‘white-labeled’ by MSPs)
• Balance of power (The partner becomes the customer of record, The distributor becomes application-hoster)
• Margin: commoditisation of services
• Strategy: Should vendors enable or deter the trend?
• Transition management: Canibalisation of existing user base
To discuss how vendors and service providers are addressing these challenges, we tried to answer three questions:
1. What is the role of channels in selling services?
· What kinds of partners are used to reach what kinds of customers?
· Are channels just sales agents or can they add value to services?
· Should channels be involved in service renewals?
· Is there a conflict of interest with reseller-provided services?
· What is the role of distribution?
· How do ‘white-label’ service partners differ from resellers of branded services?
Delegates were selling a whole range of services through the channel, including managed, hosted, professional, MACs (move-add-change), support (remote and on-site), break-fix and extended warranty.
This was especially for the SMB, where ‘packaged’ technical services or hosted software is very commonly delivered via partners.
For those with enterprise-grade, specialist solutions, this biggest issue is channel conflict. Partners do not have the services skills that customers want, but are threatened if the vendor tries to provide these direct.
Those targeting the small and medium-sized business do not have the luxury of delivering services directly (at least not profitably). For them, the issue is getting their existing, product-oriented partners, that are only skilled for simple access and integration services, to resell more advanced services. One security software provider said less than 0.05% of their business goes through ‘referral-only’ partners. Nearly all resell, even if their margins are low.
2. How should channels be recruited and supported?
· What makes a good service partner? Can hardware resellers sell services effectively?
· How should services partners be recruited and trained?
· What kind of support do they want and how can it best be provided?
· What is the role of portals, PRM, MDF and other support infrastructure?
Certification was seen as key. Partners need to be able to ‘show their driving license’ to customers. But driving that certification is a challenge. Also, even if the partner is supposed to provide service, they feel it is often the biggest brand (ie the vendor or network service provider) that will be called, whatever the help-line number provided by the partner.
A combination of ‘sticks’ and ‘carrots’ is used:
Some put in place an audit process to measure the nature of escalations, end-user satisfaction and service renewal rates. These are then used to determine the discount the partner gets on service. The fewer escalations, the less it costs the vendor and the higher the discount. Others have a form of ‘no claims bonus’ rebate system. Measurement can also be a challenge. Partner customer satisfaction ratings can often be higher than directly supported customers because they have more visibility with the end-user and it includes the vendor-provided Tier Two (escalation) support.
Others refuse escalations from non-certified partners. There was an agreement that this needed to be rigorously applied or the certification is not respected. Still others have a standard contract that includes both product supply and service support, with no opt-outs.
Others have specialist service delivery partners who are available to provide specialist services to other partners in an ‘ecosystem’. However, this is not nearly as developed as the ‘solution-finder’ ecosystem available for ISVs (Independent Software Vendors) to sell to partners. There are legal issues with trying to provide this kind of ‘dating agency’, so most leave that up to distributors to manage.
It was felt vendors were their own worst enemy in commoditising services for the SMB. To fight this, some vendors, such as Microsoft and Cisco are investing heavily in certification branding.
3. How can channels be incentivised to increase business?
· Is it just about margins?
· How do we balance rewards relating to ‘finders fees’ and on-going ‘annuity revenues’?
· Are traditional ‘Gold, Silver, Bronze’ partner programs relevant?
Many vendors have service attach-rate targets for partners, but these are not often strongly applied. They rarely, for instance, affect rebates.
Some service providers are providing service renewal bonuses to partners in order to reduce churn, but it is normally the damage to the partner’s credibility as a ‘trusted advisor’ that prevents active churn. Most vendors provide incentives to do renewals, but some, frustrated by the lack of take-up, are doing those direct.
The attach and renewal rate is often governed by the difficulty in selling the annuity service. Many provide the infrastructure for delivering renewal notices either copied to or through the partner. However a challenge is that partners do not invest in the systems to take advantage of this information.
Conclusions
Significant challenges remain in enabling partners to deliver vendor-provided services. Vendors have developed a variety of techniques to overcome these, but it is not clear they will work in the new world of ‘cloud’ computing. Adoption of these services is currently still low, so, despite best intentions, vendors are naturally focussed on today’s issues instead of the future.
We will all be watching this area keenly.
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