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                     Keep Your Customers Close and Your
                     Channels Closer: 5 Essential Strategies for
                     Customer Intimacy and Channel Revenue Growth
Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h




    Keep Your Customers Close and
    Your Channels Closer: 5 Essential Strategies for
    Customer Intimacy and Channel Revenue Growth
    Executive Summary                                                           customers can flexibly adjust capacity or capability without
    Software producers and intelligent device manufacturers                     having to swap out hardware. While these innovations
    drive 40 percent to 67 percent of their revenues from their                 provide a competitive advantage against commoditization,
    channel partners. Yet, channel processes are often costly                   the role of channel partners will have to evolve in order for
    and inefficient. Most vendors also complain about their                     them to thrive.
    lack of visibility into channel partners and end customers.
    Intelligent device manufacturers also lose 4 percent of gross               In this whitepaper, we demonstrate how vendors and their
    profits to the “grey market”- sales by unauthorized brokers                 channel partners can grow revenues by streamlining channel
    that undercut the vendor’s pricing. Both software producers                 processes, plugging grey market revenue leaks and learning
    and intelligent device manufacturers are beginning to evolve                more about their customer base, while transforming their
    their revenue models. For example, many intelligent device                  business models. Our research shows that vendors can
    manufacturers are developing ways for customers to field-                   grow revenues by 20 percent-30 percent through these
    upgrade their products, resulting in business models where                  approaches.


                                                                                      Component C
                         Ent it lements
                                                                Manufacturer                              Component
                                                            or Software Producer                           Supplier
                                               Product A
                                    (embeds Component C)                           Product B
                                           100 units                                           50 units

                                            Distributor D1                           Distributor D2
                                                                    Product A
                                       Product A                                                Product B
                                          40 units                50 units                      40 units

                                             Reseller R1                               Reseller R2

                                                             Product B                          Bundle (A + B)
                                        Product A
                                          40 units               10 units                       30 units

                                          End Customer E1                           End Customer E2
                                                                                                                       Usage

                                            40 units of A                Product A                                Product B
                                            10 units of B                Business Unit B1                 Business Unit B2
                                                                             30 units of A                  30 units of B

    Figure 1: A realistic and complex channel ecosystem


2                                                                                     Flexera Software: FlexNet Operat ions White Paper Series
Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h




Complexities of Channel Ecosystems                                                 Make (Configure)-to-Order and Make-to-Stock
The channel ecosystem for software producers and intelligent                       inventory models
device manufacturers is a complex network of company-to-                           Make (or Configure)-to-Order models are common for
company interactions and hand-offs.                                                computers and networking equipment. In these scenarios, a
                                                                                   final product is assembled using components. Some of these
End customers use channel partners for a variety of reasons1                       components may originate from the manufacturer; others
including their:                                                                   might be sourced from upstream suppliers. As an example,
                                                                                   a storage solution could be assembled by a manufacturer
  • Geography in many markets: channel partners are the                            like HP using components from HP and interface cards from
    only way customers can buy a vendor’s products as the                          one or more compatible card manufacturers. In a Make
    vendor may have no sales coverage                                              (Configure)-to-Order model, the vendor does not build or
                                                                                   assemble the product until an order is placed by a channel
  • Technology expertise
                                                                                   partner. Typically, as a result, the vendor knows who the
  • High level of customer interaction and service                                 end customer is, and the various channel touchpoints
  • Understanding of end customer needs                                            involved in the order.

  • Exceptional technical support
                                                                                   Make-to-Stock models, where a finished product is placed
  • Fast turnaround and delivery                                                   with channels, are becoming increasingly rare in some high-
  • Relationships with many vendors and complementary                              tech markets. In a Make-to-Stock scenario, a product might
    partners                                                                       spend months on a reseller shelf before being fulfilled to an
                                                                                   end customer.
  • Reputation of vendors or brands they sell/recommend
  • Aggressive pricing                                                             Many manufacturers are also overlaying postponement
                                                                                   strategies on these inventory models. Postponement strategies
The various flavors of channel partners (e.g., distributors,                       refer to a manufacturing approach where product variations
value added resellers, systems integrators–refer to the                            are pushed as close to the end customer as possible. As
glossary for an overview of terms used in this article.) offer                     an example, a printer manufacturer might have a duplex
varying levels of value along the above dimensions.                                printing capability (the ability to print on both sides of the
                                                                                   paper). There are two ways to deliver this capability. First,
In our experience, channel interactions become complex                             a manufacturer could create two distinct products, one
based on the following factors:                                                    without duplex printing and one with it. Second, using
                                                                                   a postponement approach, a manufacturer might build a
Number of tiers between a vendor and their end customer                            single base product without duplex printing and offer duplex
The number of intermediaries in the demand chain has a                             printing as an add-on option for channel partners and end
direct impact on how difficult it is to track your installed                       customers. The postponement approach frees the manufacture
base as a vendor. For example, in Figure 1, we depict a                            from having to predict how many duplex-printing-capable
realistically complex demand chain consisting of a vendor                          printers might be sold; they can simply build the base product
whose product is sold through two tiers: a distributor tier and                    and let customers and channel partners order the duplex
a value-added reseller (VAR) tier. In this example, the VARs                       printing add-on as the need arises.
own the customer relationship. More often than not, vendors
do not have any idea about who their end customer is.                              These models complicate many aspects of doing business in
                                                                                   the channel ecosystem, including:
“Vanilla” products versus highly configurable product bundles
A “vanilla” product applies to situations where all end                               • Revenue recognition: many vendors cannot recognize
customers receive the same product. In contrast, in Figure                              revenue for units shipped to channel partners until
1, some distributors carry one product while others carry                               those units are actually purchased and delivered to
a different product set (Product A versus Product B). Some                              end customers
resellers like Reseller R2 assemble a product bundle                                  • Entitlement splits, transfers and mergers: As an example,
using Product A (from Distributor D1) and Product B (from                               Distributor D1 in Figure 1 might purchase 100 units of
Distributor D2). End customer E2 orders the bundle from                                 Product Ac. They might then ship 40 units to Reseller R1
the reseller. The experience for end customer E2 can be                                 and 60 units to Reseller R2. Reseller R2 might in turn sell
significantly more complex for the initial purchase and                                 30 units to End Customer E2. Keeping track of all these
ongoing activities than end customer E1. For example,                                   ownership changes can be a daunting task.
E2 has to keep track and activate two products (if product
activation is required) and if required, keep track and return                        • Channels also require more physical deliveries of software
the bundle to the reseller, when needed.                                                and updates, which increases costs and reduces
                                                                                        margins, in addition to impacting customer service.


1. Driving Channel Growth in the Global Market: Global State of the Market Research, Institute for Partner Education & Development, April 2008

Flexera Software: FlexNet Operat ions White Paper Series                                                                                              3
Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h




    Size of the end customer organization: consumer versus small,                       Percent Revenues from Channel Partners
    medium or large business
    Selling into a large businesses poses challenges as these                                                                  67%
    customers would like to manage their entitlements. For
    example, in Figure 1, End Customer E2 might want to ship
                                                                                              40%
    Product A from their bundle purchase (Product A + Product
    B) to Business Unit B1 and Product B to Business Unit B2.
    Again, allowing these types of ownership transfers and
    keeping track of them can be a huge challenge for channel
    partners, vendors and end customers.

    Size of vendor organization                                                       Software Producers         Intelligent Device Manufacturers

    Many manufacturers are themselves large global
    organizations with a complex internal supply chain.
    A final product can contain components sourced from
    various business units and might go through several more                    Percent of Channel Revenues by Software Category
    touchpoints such as a regional distribution center (e.g., in
    Asia) to a country sales organization (e.g., the vendor’s                                                      All Software 40%
    Australian sales organization) and then to one or more
                                                                                Consumer Applicat ions                                        91%
    levels of channel partners. Many complexities result,
    including keeping track of products and the components
    they contain for transfer pricing purposes, lower margins,                          System Software                                77%
    pricing issues and lengthy fulfillment lead times.
                                                                                   Content Applicat ions                             71%
    Royalty Management and Usage of Embedded Components
    Vendors who embed software or hardware components                                  Security Software                      58%
    from other vendors into their products have an added
    challenge of keeping track of the usage of these embedded                         CRM Applicat ions           29%
    components to allocate revenue splits. In Figure 1, Product
    A embeds a component from a component supplier. The                                              Salesforce.com $%
    business arrangement might call for the vendor to pay the                Figure 2: Average revenues from channel partners
    component supplier 10 percent of their product revenues.
    In other cases, the component might be trialware (e.g., a
    30-day trial to a piece of software on a laptop; the vendor
    sells the laptop in this example) and the component supplier                                                  5%
                                                                                                                  More t han 500
    might owe the vendor 10 percent of component revenues
    (e.g., as consumers convert trialware into a paid license)
    delivered by the vendor. Such royalty arrangements might
    result in one party or the other leaving money on the table.
    In the first example, the vendor owes royalty payments to                                                      15%
    the supplier for each unit of a final product sold, whether                                                  101-500
    or not the royalty-bearing component is activated by a
    customer, clearly to the vendor’s disadvantage. In either                                 58%                   22%
    case, both parties would be keen to know the usage of                                 Less t han 50
                                                                                                                  51-100
    components to accurately track revenue splits.




                                                                              Figure 3: 42% of software producers use more than 50
                                                                              channel partners




4                                                                                   Flexera Software: FlexNet Operat ions White Paper Series
Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h




                                                                               Challenges reported by Software Producers
                                                                                         and Channel Partners
                                                                                               Software Producers         Channel Partners
          Channels are becoming more
           important to revenues but...                                    Have to rely more on channels to make
                                                                                                    sales targets
                                                                                                                                               52%

                                                                                                                                                   56%
                                                                        Reluctant to put money into joint marketing                                              80%
                                                                            Channel Partners with very little sales;                                               86%

             Channels are not optimized                                                        Too many partners                                                  85%

                 based on performance                                   Less leads coming from software producers                                  55%
                                                                  Increased competition between channel partners                               50%
                                                                               and with vendor’s online channels                                           70%
                                                                   Lack of/little communications between partners                       38%
                                                                                          and software producers                               50%

                                                                            Periodic sales reports difficult to collect                      46%
                                                                                                    and aggregate                               55%
                  Lots of manual processes                                                         Cut channel costs                         44%
                              for channels
                                                                          Margins decreased for channel partners                 22%
                                                                                                                                                                 80%
                                                                          Difficult to manage international partners                           50%

                                                                        Partners demanding faster product delivery               22%
                                                                                                    and fulfillment                                  60%

       No visibility into customer base                                  Lack of/little visibility over final customers                              60%

                                                                      Lack of interest from channel partners to push
                                                                                                                                                     60%
                                                                                                      your products

Figure 4: Top Channel Challenges for Software Producers

Business Challenges: Software Producers, Intelligent                                • Competition between channel partners of a given
Device Manufacturers and their Channel Partners                                       vendor
Channel partners, on average, account for 40 percent2 of
revenues of software producers and 67 percent3 of revenues                       Inefficient and manual channel-facing processes
for intelligent device manufacturers. 42 percent of software                     Both vendors and channel partners agree that channel-
producers use more than 50 channel partners (see Figures                         facing processes have a long way to go with respect to
2 and 3). While 52 percent of respondents (see Figure 4)                         efficiency. Some of the symptoms of inefficiencies they
would admit that channel partners will play an increasingly                      report include (see Figure 4):
important role in growing revenues, many hurdles remain.4
Specifically:                                                                       • Lack of or little communications between vendors and
                                                                                      channel partners with respect to leads, opportunities,
Channel tiers are top-heavy with lots of                                              product catalog and pricing changes, promotions and
underperforming partners                                                              sales information
The usual approach to growing channel revenues is
to recruit more partners. But, the channel structure for                                “Due to order errors, duplicate efforts within the sales
many large software producers and intelligent device                                    channels and the inability to track shipments in real-time,
manufacturers is already top-heavy with non-performing                                  Seagate realized its need for a consistent process and a
channel partners. In part, this is the result of recent years of                        single system through which their distributors and OEMs
mergers and acquisitions by vendors, with channel partners                              worldwide would be able to quickly and accurately
of acquired companies being tacked on to existing tiers.                                conduct business transactions…”5
The symptoms of this lop-sided structure include (see Figure                            – P. Bose and R. Dey, Infosys
4 for details):
                                                                                    • Periodic sales reports are difficult to collect and
  • Lots of channel partners with very little revenue                                 aggregate
    contribution                                                                    • Vendors want to cut channel costs while channel
  • Vendors reducing partner marketing funds                                          partners complain about declining margins
  • Channel partners complaining that they get fewer leads                          • Vendors are finding it difficult to manage international
    from vendors                                                                      partners

2. Worldwide and North America Software Channel 2008, IDC, August 2009
3. Positive Growth and New Market Perspective Paint Healthy Outlook for Pervasive Technology Channel, Dan Neel, Everything Channel (www.channelweb.com),
   May 2007
4. Software Channel Survey 2009, Avangate
5. Channel Stewardship: Driving Profitable Revenue Growth in High-Tech with Multi-Channel Management, P. Bose and R. Dey, Infosys, August 2007

Flexera Software: FlexNet Operat ions White Paper Series                                                                                                                 5
Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h




      • Channel partners are demanding faster product delivery                     at steeply discounted prices and target end customers by
        and fulfillment                                                            undercutting the vendor’s prices. On average, grey market
                                                                                   prices are 27 percent lower than the vendor’s pricing,
      • Recruiting new channel partners is hampered if the
                                                                                   which eats into profits for both vendors and their legitimate
        vendor is perceived as difficult to do business with
                                                                                   channel partners.
         “A recent IPED study has proven that 50 percent of channel
                                                                                      “The grey market has many sources, i.e., unauthorized
         partners are dissatisfied with the relationship with their
                                                                                      dealers obtain products from a variety of sources normally
         vendors...this is due to a multitude of reasons, including
                                                                                      at a discounted price either due to price arbitrage, abuse
         the need for: better training, product customization, better
                                                                                      of incentive programs, or simply because the products are
         communication, simplified MDFs and partner programs,
                                                                                      not what they seem. For example, an OEM may choose to
         more shared leads and better deal registration. The bottom
                                                                                      discount products for a particular end customer to increase
         line: Vendors spend much time and money securing
                                                                                      sales, especially if there is a stiff competition for that
         partners to market their products; however, they must
                                                                                      customer. To obtain deeply discounted products for open-
         enhance their ability to address many of these issues in
                                                                                      market speculation, a channel partner may deceive the OEM
         order to retain existing partners.”6
                                                                                      into deep-discounting products for non-existent customers and
         – Institute for Partner Education & Development
                                                                                      then divert those products to the grey market for possibly
                                                                                      greater gain. Some brokers may misrepresent themselves in
         “We have to invest in providing self-service processes for
                                                                                      the authorization process and use the resulting relationship
         our channel partners. Until now, we have been focusing on
                                                                                      to obtain discounted goods that are then diverted into the
         making better “widgets”. Now we also have to compete
                                                                                      grey market.” 7
         at making the ordering/renewal process better for the
         channel partners so partners will continue doing business
                                                                                      “Our products are available at 90 percent discounts to
         with us.”
                                                                                      regular prices in the Chinese grey market”
         – Director of Licensing for a prominent network equipment
                                                                                      – Large Software Producer
           manufacturer

                                                                                   Software and hardware business models are converging
    Lack of visibility into end customers
                                                                                   Virtual appliances are emerging for delivering complex
    When you think of channel partners, think of customer
                                                                                   on-premise software. A virtual appliance “provides a
    usage and demand information. Ideally, information about
                                                                                   turnkey experience similar to today’s hardware appliances.
    your customer’s usage of your products should flow back to
                                                                                   Deploying an appliance can be as simple as a few clicks,
    vendors, with physical goods and entitlements flowing from
                                                                                   with only configuration tweaks that need to be made. And
    the vendor to customers in response, as shown in Figure 1.
                                                                                   since the appliance pre-integrates an entire software stack
    Most software producers and intelligent device manufacturers
                                                                                   into a composite package, it should only receive one stream
    we talk to say they know very little about their customers
                                                                                   of patches, most likely from the ISV, which nearly eliminates
    when channel partners make the sale and nurture the
                                                                                   complex regression testing. No longer will the channel be
    relationship with customers.
                                                                                   able to rely on installation and maintenance services as an
                                                                                   entryway to the end user.”8
      “Information is everything. Knowing your customer is the
      #1 goal”
                                                                                   Software as a Service (SaaS) is expected to grow faster than
      – Intelligent Device Manufacturer selling portable computing
                                                                                   on-premise software, with some analysts estimating that 25
        devices to educational institutions
                                                                                   percent of software revenues will be delivered as SaaS by
                                                                                   20119. Hardware products are becoming more software-like
    Grey market revenue leakage is growing for intelligent device
                                                                                   as intelligent device manufacturers enable customers to order
    manufacturers
                                                                                   capability and capacity on demand. In short, software and
    Intelligent device manufacturers lose, on average, $10B of
                                                                                   hardware revenue models will be more similar than different
    their gross profits to grey market sales, which translates into
                                                                                   in future. The role of channel partners is indeed murky under
    4 percent of high-tech industry profits6. The value of grey
                                                                                   these transformations.
    market goods grew to about $58B in 2007, up 80 percent
    cumulatively since 2002 (equates to 12.5 percent year over
    year growth).                                                                  Five Strategies for Customer Intimacy and Revenue
                                                                                   Growth
                                                                                   Given the challenges that vendors and their channel
    The grey market is driven by unauthorized brokers who
                                                                                   partners face, we have found that five strategies can
    purchase the vendor’s products from legitimate channels


    6. Driving Channel Growth in the Global Market: Global State of the Market Research, Institute for Partner Education & Development, April 2008
    7. Effective Channel Management is Critical in Combating the Grey Market and Increasing Technology Companies Bottom Line, KPMG Grey Market Study Update,
       2008
    8. Software Appliances Are Changing Channel Dynamics, J. Waxman and B. Waldman, IDC, November 2008
    9. Gartner Market Trends: Software as a Service, Worldwide, 2008-2013, Sharon A. Mertz, Chad Eschinger, Tom Eid, Hai Hong Huang, Chris Pang, Ben Pring,
       Gartner, 5 May 2009

6                                                                                         Flexera Software: FlexNet Operat ions White Paper Series
Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h




help vendors learn more about their end customers while                          assistance, and marketing can be effectively made with the
allowing both channel partners and vendors to grow                               best partners. Those vendors that are able to combine good
revenues. These are discussed below.                                             data with good analysis won’t care about flat-out partner
                                                                                 recruiting alone. They will beat the competition because
Strategy 1: Know your best partners by analyzing                                 they’re doing more with the right partners.”
performance
To get a handle on lop-sided channel tiers and the resulting                   Strategy 2: Enable self-service for channel partners
lackluster channel performance, vendors must invest in                         Given the complexities of the channel ecosystem, in
systems that help them assess how much each channel                            particular, business scenarios related to “Make-to-Stock”
partner is actually contributing to the top line. To do this,                  inventory models and delivery of complex product bundles, it
every order and its associated entitlements should capture                     is essential to enable self-service for channel partners to serve
all touchpoints starting from the vendor through a complex                     customers and channel partners in the best possible manner.
demand chain (as in Figure 1) to the end customer.
                                                                               Self-service should include capabilities for a channel
To be sure, many vendors do have manual processes in                           partner to:
place by which partners could submit gross revenues they
have delivered in a given period. While this is valuable,                        • View what they ordered
it is not at the level of product families. As a result, it is                   • Understand what their customers ordered
not possible for vendors to rationalize channel partners
and incentives based on product family, geography or                             • Add/modify customer records as agreed to between
other criteria.                                                                    the vendor and the partner
                                                                                 • Understand what products and associated services their
Tracking and analyzing order-level partner performance will                        customers are using
enable you to:
                                                                                 • Administer transfers, mergers and splits of entitlements
  • Measure the effectiveness of joint marketing programs                          between end customers
    with partners, at the level of products being promoted
                                                                                 • Allow electronic fulfillment of software and updates
  • Set up performance based sales incentives for
    individual products                                                        These capabilities could reside within a Partner Portal, a key
  • Assign leads to best partners for a given product based                    initiative that many vendors are thinking about to increase
    on past performance                                                        channel visibility and improve communication. These
                                                                               capabilities should also integrate to Partner Relationship
Studies show that revenues from channel partners can grow                      Management systems for automating order processing,
their revenues by 40 percent10 when vendors identify and                       payments and invoicing.
nurture the best performing channel partners. This would
translate to about 20 percent higher revenues for a typical                      “Seagate has dramatically reduced order errors and
intelligent device manufacturer and about 11 percent higher                      duplicate effort, decreased their costs per order by 60
revenues for a typical software producer.                                        percent on average and capitalized on new and enhanced
                                                                                 revenue opportunities. The company has also gained direct,
IDC11 sums it up as follows:                                                     real-time visibility into distributors’ and OEMs’ sales and
                                                                                 order processes”12
  “Vendors will not be able to get ahead by simply adding
  more partners than the competition. 2009 will be the                         Studies show that streamlined processes and deeper
  year that the best vendors use “partner analytics,” or the                   adoption of customer-facing systems can grow revenues by
  intelligent analysis of partner data, to make better informed                5 percent13.
  decisions about which partners to invest in, and which
  partners to demote or even drop. With lower partner                          Strategy 3: Establish a direct connection with end users
  program budgets, getting smarter about allocating resources                  The easiest way to learn more about your customers is to
  to partners will be critical. Vendors should be leveraging                   ask them to register their product prior to usage. There
  their partner data to understand which partners are the                      are several ways to do this. Many software producers
  high potentials, which are the influencers, which ones do                    we work with gather basic customer information (e.g.
  great cross-sell, and which ones are missing opportunities.                  company name, contact email) as part of a product
  With that knowledge, investments in training, support, sales                 activation experience. Other vendors that do not use


10. High-Tech Channel Evolution: Solutions for Sustainable Growth and Success, The JS Group, 2007
11. IDC Worldwide Software Business Solutions 2009: Top 10 Predictions, M. Fauscette, D. Bibby, M. Wardley, M. Levitt, M. Webster, A. Pang, S. White, M.
    Perry, B. Lykkegaard, A. Konary, R. Mahowald
12. Channel Stewardship: Driving Profitable Revenue Growth in High-Tech with Multi-Channel Management, P. Bose and R. Dey, Infosys, August 2007
13.,14. Maintenance Revenue Protection 2.0: The Urgent Threat and What Software Vendors Can Do About It, Chris Dowse and Ben Galison, Neochange, 2009


Flexera Software: FlexNet Operat ions White Paper Series                                                                                                   7
Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h




    product activation still gather non-personally identifiable                     “Upsell / Cross Sell Incentives - Most vendor programs put a
    information on their end user’s usage of their software                         disproportionate amount of emphasis on Solution Providers
    products after opt-in by end users to gather this information.                  bringing in net-new customers. New customers are valuable,
                                                                                    but they take longer to win and cost more to persuade. Don’t
    In-product messaging is also an effective way to engage                         eliminate incentives for winning new customers, but to add a
    with end users on an ongoing basis to inform them of                            component that pays partners an incentive for winning more
    possible updates, new product announcements and other                           business by penetrating existing accounts more effectively.”
    promotions. In addition, establishing a direct connection to
    end customers increases the value of software maintenance                       “Most vendors allow partners to profit from the sale of the
    by using entitlement-based updating to ensure customers                         initial warranty and support services - whether the partner
    only receive the patches and updates their support contracts                    will deliver those services or not. But more vendors than ever
    entitle them to.                                                                are allowing partners to participate in the renewal of these
                                                                                    service packages as a way to provide partners with future
    Revenues can be enhanced by 5 percent14 by knowing                              earning potential.” 16
    more about your installed based and driving upgrades and
    upsells of your products.                                                    Offering these opportunities will make vendors more
                                                                                 compelling for channel partners:
    Strategy 4: Tie channel incentives to product activation by
    end customers                                                                   “From a channel partner perspective, the big problem is to
    The source of the grey market for your products can often                       get us to actually use a vendor’s system. One reason we
    be tied back to abuse of channel incentives by partners,                        would use a vendor system is if it helps us with maintenance
    such as misrepresenting or faking end customer information.                     renewals. The big problem we face today is that when a
    Tracking entitlements (e.g., sold-to customer name) as they                     customer comes to us for a renewal, we don’t know fully
    move through the demand chain (in Figure 1 for example)                         what the customer owns to give them a complete quote.
    along with enforcing product activation is the only sure way                    We only know what the customer bought through us, not
    to know who the end customer is, who they purchased their                       the complete list of products they own from the vendor in
    products from and under what incentive program.                                 question, which limits the value of maintenance renewal we
                                                                                    can sell the customer.”
    While 51 percent15 of manufacturers collect device serial                       – Director Sales, Mid-market Reseller17
    numbers from channel partners as part of their claims
    submissions for incentive programs, it is cumbersome                         Proactive maintenance renewals, upgrades and upsells can
    or impossible to correlate serial numbers to incentive-                      contribute to 5 percent revenue growth.
    eligible end customers until end customers call the
    vendor for technical support. As an example, suppose a                       Conclusions
    manufacturer offers distributors a 10 percent rebate for                     Table 1 summarizes these five strategies and their economic
    units for Product A sold during the month of September. It                   impact on vendors and channel partners. Taken together,
    is difficult to accurately determine actual sales of Product                 these strategies can grow vendor revenues by 20-30 percent
    A by the distributor during September, in addition the                       and channel partner revenues by 40 percent.
    system being open to abuse (e.g., claiming rebates on
    serial numbers sitting on the shelf). However, if the vendor
    tracked entitlements sold to the distributor and the product
    activations during September from customers who bought
    from the distributor, such verification would be easy.

    Strategy 5: Empower channel partners to grow revenues via
    cross-sells, upsells and maintenance renewals
    With the impending shift in revenues to Software as a
    Service (SaaS) and virtual appliances, traditional revenue
    streams for channel partners (e.g., installation and
    configuration services) are under threat. One response that
    vendors can offer is to delegate technical and customer
    support to resellers. They could also empower channel
    partners to cross-sell and upsell products to existing
    customers and renew maintenance.


    15. Effective Channel Management is Critical in Combating the Grey Market and Increasing Technology Companies Bottom Line, KPMG Grey Market Study
        Update, 2008
    16. Engage Your Partner in the Total Business Opportunity, Institute for Partner Education & Development, April 2008
    17. Maintenance Revenue Protection 2.0: The Urgent Threat and What Software Vendors Can Do About It, Chris Dowse and Ben Galison, Neochange, 2009


8                                                                                       Flexera Software: FlexNet Operat ions White Paper Series
Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h




Table 1. Summary of the Five Strategies and their Economic Impact

 Business Challenge                      Strategies                                                  Estimated Economic Impact

 Channel tiers are top-heavy with        Know your best partners by analyzing channel                40% revenue growth for channel
 lots of underperforming partners        performance at the level of individual product              revenues which translates to:
                                         families. Invest in and nurture the best performing            • 20% revenue growth for
                                         partners                                                         a typical intelligent device
                                                                                                          manufacturer
                                                                                                        • 11% revenue growth for a
                                                                                                          typical software producer

 Inefficient channel facing              Enable channel self-service for orders, entitlements,       60% lower costs per order
 processes                               renewals                                                    5% higher revenues

 Lack of visibility into installed       Establish direct connection with customers.                 5% higher revenues through effective
 base when channel partners                 • Cross-sell and upsell products based on your           cross-sell and upsells
 make the sale                                understanding of products used
                                            • Protect maintenance revenues by updating or
                                              upgrading only entitled customers

 Grey market revenue leakage is          Tie channel incentives to product activation by end         1.5% of revenue growth for a typical
 growing                                 customers                                                   intelligent device manufacturer

 Software and hardware                   Empower channel partners to cross-sell and upsell           5% revenue growth
 business models are converging,         products and renew maintenance
 threatening traditional revenue
 streams for channel partners

 Total Impact                            About 20%-30% higher revenues for vendors. Note that the above benefits may or may
                                         not be additive.




Flexera Software: FlexNet Operat ions White Paper Series                                                                                            9
Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h




     Glossary

      Term                                       Definition
      Vendor                                     A software producer or a intelligent device manufacturer
      Software Producer                          A company that is primarily in the business of selling software products
      Intelligent Device Manufacturer            A company that is primarily in the business of selling hardware devices. Examples
                                                 include: computer and networking equipment, medical equipment, test and
                                                 measurement equipment, imaging products etc.
      Original Equipment Manufacturer            A company that supplies components to other companies to incorporate into an
      (OEM) supplier                             end-customer facing product. Example: Flexera Software FlexNet Operations
                                                 incorporates Cognos reporting. In this example, Cognos is the OEM supplier to
                                                 Flexera Software.
      Distributor                                A channel partner that primarily fulfills orders from downstream VARs and SIs.
      Value Added Reseller (VAR)                 A channel partner that performs a number of specialized tasks to enable a solution
                                                 for an end customer. Specialized tasks might include product installation, training,
                                                 configuration and bundling with other software/hardware provided by the VAR.
      Systems Integrator (SI)                    A channel partner that assembles a complex solution using components sourced
                                                 from many vendors.
      End Customer                               A consumer or business that uses a software or hardware product
      Entitlement                                What the customer purchased. Example: 10 copies of Adobe Acrobat; 100 ports of
                                                 a LAN switching capability in a LAN switch.
      Product Activation                         The process by which a customer fulfills the rights to use a software or hardware
                                                 product.
      Transfer pricing                           Transfer pricing refers to the pricing of contributions (assets, tangible and intangible,
                                                 services, and funds) transferred within an organization. For example, goods from
                                                 the production division may be sold to the marketing division, or goods from a
                                                 parent company may be sold to a foreign subsidiary. The choice of the transfer
                                                 price will affect the allocation of the total profit among the parts of the company.
                                                 This is a major concern for fiscal authorities who worry that multi-national entities
                                                 may set transfer prices on cross-border transactions to reduce taxable profits in their
                                                 jurisdiction. This has led to the rise of transfer pricing regulations and enforcement,
                                                 making transfer pricing a major tax compliance issue for multi-national companies.

                                                 Source: Wikipedia


     About Flexera Software
     Flexera Software is the leading provider of strategic solutions for Application Usage Management; solutions delivering
     continuous compliance, optimized usage and maximized value to application producers and their customers. Flexera
     Software is trusted by more than 80,000 customers that depend on our comprehensive solutions- from installation and
     licensing, entitlement and compliance management to application readiness and enterprise license optimization - to
     strategically manage application usage and achieve breakthrough results realized only through the systems-level approach
     we provide. For more information, please go to: www.flexerasoftware.com




10                                                                                   Flexera Software: FlexNet Operat ions White Paper Series
Flexera Software LLC                      Schaumburg                                United Kingdom (Europe,                   Japan (Asia,                              For more office locations visit:
1000 East Woodfield Road,                 (Global Headquarters):                    Middle East Headquarters):                Pacific Headquarters):                    www.flexerasoftware.com
Suite 400                                 +1 800-809-5659                           +44 870-871-1111                          +81 3-4360-8291
Schaumburg, IL 60173 USA                                                            +44 870-873-6300

Copyright © 2011 Flexera Software LLC. All other brand and product names mentioned herein may be the trademarks and registered trademarks of their respective owners.
                                                                                                                                                                               FNO_WP_Channel_Oct11

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Keep Your Customers Close and Your Channels Closer

  • 1. W H I T E PA P E R Keep Your Customers Close and Your Channels Closer: 5 Essential Strategies for Customer Intimacy and Channel Revenue Growth
  • 2. Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h Keep Your Customers Close and Your Channels Closer: 5 Essential Strategies for Customer Intimacy and Channel Revenue Growth Executive Summary customers can flexibly adjust capacity or capability without Software producers and intelligent device manufacturers having to swap out hardware. While these innovations drive 40 percent to 67 percent of their revenues from their provide a competitive advantage against commoditization, channel partners. Yet, channel processes are often costly the role of channel partners will have to evolve in order for and inefficient. Most vendors also complain about their them to thrive. lack of visibility into channel partners and end customers. Intelligent device manufacturers also lose 4 percent of gross In this whitepaper, we demonstrate how vendors and their profits to the “grey market”- sales by unauthorized brokers channel partners can grow revenues by streamlining channel that undercut the vendor’s pricing. Both software producers processes, plugging grey market revenue leaks and learning and intelligent device manufacturers are beginning to evolve more about their customer base, while transforming their their revenue models. For example, many intelligent device business models. Our research shows that vendors can manufacturers are developing ways for customers to field- grow revenues by 20 percent-30 percent through these upgrade their products, resulting in business models where approaches. Component C Ent it lements Manufacturer Component or Software Producer Supplier Product A (embeds Component C) Product B 100 units 50 units Distributor D1 Distributor D2 Product A Product A Product B 40 units 50 units 40 units Reseller R1 Reseller R2 Product B Bundle (A + B) Product A 40 units 10 units 30 units End Customer E1 End Customer E2 Usage 40 units of A Product A Product B 10 units of B Business Unit B1 Business Unit B2 30 units of A 30 units of B Figure 1: A realistic and complex channel ecosystem 2 Flexera Software: FlexNet Operat ions White Paper Series
  • 3. Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h Complexities of Channel Ecosystems Make (Configure)-to-Order and Make-to-Stock The channel ecosystem for software producers and intelligent inventory models device manufacturers is a complex network of company-to- Make (or Configure)-to-Order models are common for company interactions and hand-offs. computers and networking equipment. In these scenarios, a final product is assembled using components. Some of these End customers use channel partners for a variety of reasons1 components may originate from the manufacturer; others including their: might be sourced from upstream suppliers. As an example, a storage solution could be assembled by a manufacturer • Geography in many markets: channel partners are the like HP using components from HP and interface cards from only way customers can buy a vendor’s products as the one or more compatible card manufacturers. In a Make vendor may have no sales coverage (Configure)-to-Order model, the vendor does not build or assemble the product until an order is placed by a channel • Technology expertise partner. Typically, as a result, the vendor knows who the • High level of customer interaction and service end customer is, and the various channel touchpoints • Understanding of end customer needs involved in the order. • Exceptional technical support Make-to-Stock models, where a finished product is placed • Fast turnaround and delivery with channels, are becoming increasingly rare in some high- • Relationships with many vendors and complementary tech markets. In a Make-to-Stock scenario, a product might partners spend months on a reseller shelf before being fulfilled to an end customer. • Reputation of vendors or brands they sell/recommend • Aggressive pricing Many manufacturers are also overlaying postponement strategies on these inventory models. Postponement strategies The various flavors of channel partners (e.g., distributors, refer to a manufacturing approach where product variations value added resellers, systems integrators–refer to the are pushed as close to the end customer as possible. As glossary for an overview of terms used in this article.) offer an example, a printer manufacturer might have a duplex varying levels of value along the above dimensions. printing capability (the ability to print on both sides of the paper). There are two ways to deliver this capability. First, In our experience, channel interactions become complex a manufacturer could create two distinct products, one based on the following factors: without duplex printing and one with it. Second, using a postponement approach, a manufacturer might build a Number of tiers between a vendor and their end customer single base product without duplex printing and offer duplex The number of intermediaries in the demand chain has a printing as an add-on option for channel partners and end direct impact on how difficult it is to track your installed customers. The postponement approach frees the manufacture base as a vendor. For example, in Figure 1, we depict a from having to predict how many duplex-printing-capable realistically complex demand chain consisting of a vendor printers might be sold; they can simply build the base product whose product is sold through two tiers: a distributor tier and and let customers and channel partners order the duplex a value-added reseller (VAR) tier. In this example, the VARs printing add-on as the need arises. own the customer relationship. More often than not, vendors do not have any idea about who their end customer is. These models complicate many aspects of doing business in the channel ecosystem, including: “Vanilla” products versus highly configurable product bundles A “vanilla” product applies to situations where all end • Revenue recognition: many vendors cannot recognize customers receive the same product. In contrast, in Figure revenue for units shipped to channel partners until 1, some distributors carry one product while others carry those units are actually purchased and delivered to a different product set (Product A versus Product B). Some end customers resellers like Reseller R2 assemble a product bundle • Entitlement splits, transfers and mergers: As an example, using Product A (from Distributor D1) and Product B (from Distributor D1 in Figure 1 might purchase 100 units of Distributor D2). End customer E2 orders the bundle from Product Ac. They might then ship 40 units to Reseller R1 the reseller. The experience for end customer E2 can be and 60 units to Reseller R2. Reseller R2 might in turn sell significantly more complex for the initial purchase and 30 units to End Customer E2. Keeping track of all these ongoing activities than end customer E1. For example, ownership changes can be a daunting task. E2 has to keep track and activate two products (if product activation is required) and if required, keep track and return • Channels also require more physical deliveries of software the bundle to the reseller, when needed. and updates, which increases costs and reduces margins, in addition to impacting customer service. 1. Driving Channel Growth in the Global Market: Global State of the Market Research, Institute for Partner Education & Development, April 2008 Flexera Software: FlexNet Operat ions White Paper Series 3
  • 4. Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h Size of the end customer organization: consumer versus small, Percent Revenues from Channel Partners medium or large business Selling into a large businesses poses challenges as these 67% customers would like to manage their entitlements. For example, in Figure 1, End Customer E2 might want to ship 40% Product A from their bundle purchase (Product A + Product B) to Business Unit B1 and Product B to Business Unit B2. Again, allowing these types of ownership transfers and keeping track of them can be a huge challenge for channel partners, vendors and end customers. Size of vendor organization Software Producers Intelligent Device Manufacturers Many manufacturers are themselves large global organizations with a complex internal supply chain. A final product can contain components sourced from various business units and might go through several more Percent of Channel Revenues by Software Category touchpoints such as a regional distribution center (e.g., in Asia) to a country sales organization (e.g., the vendor’s All Software 40% Australian sales organization) and then to one or more Consumer Applicat ions 91% levels of channel partners. Many complexities result, including keeping track of products and the components they contain for transfer pricing purposes, lower margins, System Software 77% pricing issues and lengthy fulfillment lead times. Content Applicat ions 71% Royalty Management and Usage of Embedded Components Vendors who embed software or hardware components Security Software 58% from other vendors into their products have an added challenge of keeping track of the usage of these embedded CRM Applicat ions 29% components to allocate revenue splits. In Figure 1, Product A embeds a component from a component supplier. The Salesforce.com $% business arrangement might call for the vendor to pay the Figure 2: Average revenues from channel partners component supplier 10 percent of their product revenues. In other cases, the component might be trialware (e.g., a 30-day trial to a piece of software on a laptop; the vendor sells the laptop in this example) and the component supplier 5% More t han 500 might owe the vendor 10 percent of component revenues (e.g., as consumers convert trialware into a paid license) delivered by the vendor. Such royalty arrangements might result in one party or the other leaving money on the table. In the first example, the vendor owes royalty payments to 15% the supplier for each unit of a final product sold, whether 101-500 or not the royalty-bearing component is activated by a customer, clearly to the vendor’s disadvantage. In either 58% 22% case, both parties would be keen to know the usage of Less t han 50 51-100 components to accurately track revenue splits. Figure 3: 42% of software producers use more than 50 channel partners 4 Flexera Software: FlexNet Operat ions White Paper Series
  • 5. Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h Challenges reported by Software Producers and Channel Partners Software Producers Channel Partners Channels are becoming more important to revenues but... Have to rely more on channels to make sales targets 52% 56% Reluctant to put money into joint marketing 80% Channel Partners with very little sales; 86% Channels are not optimized Too many partners 85% based on performance Less leads coming from software producers 55% Increased competition between channel partners 50% and with vendor’s online channels 70% Lack of/little communications between partners 38% and software producers 50% Periodic sales reports difficult to collect 46% and aggregate 55% Lots of manual processes Cut channel costs 44% for channels Margins decreased for channel partners 22% 80% Difficult to manage international partners 50% Partners demanding faster product delivery 22% and fulfillment 60% No visibility into customer base Lack of/little visibility over final customers 60% Lack of interest from channel partners to push 60% your products Figure 4: Top Channel Challenges for Software Producers Business Challenges: Software Producers, Intelligent • Competition between channel partners of a given Device Manufacturers and their Channel Partners vendor Channel partners, on average, account for 40 percent2 of revenues of software producers and 67 percent3 of revenues Inefficient and manual channel-facing processes for intelligent device manufacturers. 42 percent of software Both vendors and channel partners agree that channel- producers use more than 50 channel partners (see Figures facing processes have a long way to go with respect to 2 and 3). While 52 percent of respondents (see Figure 4) efficiency. Some of the symptoms of inefficiencies they would admit that channel partners will play an increasingly report include (see Figure 4): important role in growing revenues, many hurdles remain.4 Specifically: • Lack of or little communications between vendors and channel partners with respect to leads, opportunities, Channel tiers are top-heavy with lots of product catalog and pricing changes, promotions and underperforming partners sales information The usual approach to growing channel revenues is to recruit more partners. But, the channel structure for “Due to order errors, duplicate efforts within the sales many large software producers and intelligent device channels and the inability to track shipments in real-time, manufacturers is already top-heavy with non-performing Seagate realized its need for a consistent process and a channel partners. In part, this is the result of recent years of single system through which their distributors and OEMs mergers and acquisitions by vendors, with channel partners worldwide would be able to quickly and accurately of acquired companies being tacked on to existing tiers. conduct business transactions…”5 The symptoms of this lop-sided structure include (see Figure – P. Bose and R. Dey, Infosys 4 for details): • Periodic sales reports are difficult to collect and • Lots of channel partners with very little revenue aggregate contribution • Vendors want to cut channel costs while channel • Vendors reducing partner marketing funds partners complain about declining margins • Channel partners complaining that they get fewer leads • Vendors are finding it difficult to manage international from vendors partners 2. Worldwide and North America Software Channel 2008, IDC, August 2009 3. Positive Growth and New Market Perspective Paint Healthy Outlook for Pervasive Technology Channel, Dan Neel, Everything Channel (www.channelweb.com), May 2007 4. Software Channel Survey 2009, Avangate 5. Channel Stewardship: Driving Profitable Revenue Growth in High-Tech with Multi-Channel Management, P. Bose and R. Dey, Infosys, August 2007 Flexera Software: FlexNet Operat ions White Paper Series 5
  • 6. Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h • Channel partners are demanding faster product delivery at steeply discounted prices and target end customers by and fulfillment undercutting the vendor’s prices. On average, grey market prices are 27 percent lower than the vendor’s pricing, • Recruiting new channel partners is hampered if the which eats into profits for both vendors and their legitimate vendor is perceived as difficult to do business with channel partners. “A recent IPED study has proven that 50 percent of channel “The grey market has many sources, i.e., unauthorized partners are dissatisfied with the relationship with their dealers obtain products from a variety of sources normally vendors...this is due to a multitude of reasons, including at a discounted price either due to price arbitrage, abuse the need for: better training, product customization, better of incentive programs, or simply because the products are communication, simplified MDFs and partner programs, not what they seem. For example, an OEM may choose to more shared leads and better deal registration. The bottom discount products for a particular end customer to increase line: Vendors spend much time and money securing sales, especially if there is a stiff competition for that partners to market their products; however, they must customer. To obtain deeply discounted products for open- enhance their ability to address many of these issues in market speculation, a channel partner may deceive the OEM order to retain existing partners.”6 into deep-discounting products for non-existent customers and – Institute for Partner Education & Development then divert those products to the grey market for possibly greater gain. Some brokers may misrepresent themselves in “We have to invest in providing self-service processes for the authorization process and use the resulting relationship our channel partners. Until now, we have been focusing on to obtain discounted goods that are then diverted into the making better “widgets”. Now we also have to compete grey market.” 7 at making the ordering/renewal process better for the channel partners so partners will continue doing business “Our products are available at 90 percent discounts to with us.” regular prices in the Chinese grey market” – Director of Licensing for a prominent network equipment – Large Software Producer manufacturer Software and hardware business models are converging Lack of visibility into end customers Virtual appliances are emerging for delivering complex When you think of channel partners, think of customer on-premise software. A virtual appliance “provides a usage and demand information. Ideally, information about turnkey experience similar to today’s hardware appliances. your customer’s usage of your products should flow back to Deploying an appliance can be as simple as a few clicks, vendors, with physical goods and entitlements flowing from with only configuration tweaks that need to be made. And the vendor to customers in response, as shown in Figure 1. since the appliance pre-integrates an entire software stack Most software producers and intelligent device manufacturers into a composite package, it should only receive one stream we talk to say they know very little about their customers of patches, most likely from the ISV, which nearly eliminates when channel partners make the sale and nurture the complex regression testing. No longer will the channel be relationship with customers. able to rely on installation and maintenance services as an entryway to the end user.”8 “Information is everything. Knowing your customer is the #1 goal” Software as a Service (SaaS) is expected to grow faster than – Intelligent Device Manufacturer selling portable computing on-premise software, with some analysts estimating that 25 devices to educational institutions percent of software revenues will be delivered as SaaS by 20119. Hardware products are becoming more software-like Grey market revenue leakage is growing for intelligent device as intelligent device manufacturers enable customers to order manufacturers capability and capacity on demand. In short, software and Intelligent device manufacturers lose, on average, $10B of hardware revenue models will be more similar than different their gross profits to grey market sales, which translates into in future. The role of channel partners is indeed murky under 4 percent of high-tech industry profits6. The value of grey these transformations. market goods grew to about $58B in 2007, up 80 percent cumulatively since 2002 (equates to 12.5 percent year over year growth). Five Strategies for Customer Intimacy and Revenue Growth Given the challenges that vendors and their channel The grey market is driven by unauthorized brokers who partners face, we have found that five strategies can purchase the vendor’s products from legitimate channels 6. Driving Channel Growth in the Global Market: Global State of the Market Research, Institute for Partner Education & Development, April 2008 7. Effective Channel Management is Critical in Combating the Grey Market and Increasing Technology Companies Bottom Line, KPMG Grey Market Study Update, 2008 8. Software Appliances Are Changing Channel Dynamics, J. Waxman and B. Waldman, IDC, November 2008 9. Gartner Market Trends: Software as a Service, Worldwide, 2008-2013, Sharon A. Mertz, Chad Eschinger, Tom Eid, Hai Hong Huang, Chris Pang, Ben Pring, Gartner, 5 May 2009 6 Flexera Software: FlexNet Operat ions White Paper Series
  • 7. Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h help vendors learn more about their end customers while assistance, and marketing can be effectively made with the allowing both channel partners and vendors to grow best partners. Those vendors that are able to combine good revenues. These are discussed below. data with good analysis won’t care about flat-out partner recruiting alone. They will beat the competition because Strategy 1: Know your best partners by analyzing they’re doing more with the right partners.” performance To get a handle on lop-sided channel tiers and the resulting Strategy 2: Enable self-service for channel partners lackluster channel performance, vendors must invest in Given the complexities of the channel ecosystem, in systems that help them assess how much each channel particular, business scenarios related to “Make-to-Stock” partner is actually contributing to the top line. To do this, inventory models and delivery of complex product bundles, it every order and its associated entitlements should capture is essential to enable self-service for channel partners to serve all touchpoints starting from the vendor through a complex customers and channel partners in the best possible manner. demand chain (as in Figure 1) to the end customer. Self-service should include capabilities for a channel To be sure, many vendors do have manual processes in partner to: place by which partners could submit gross revenues they have delivered in a given period. While this is valuable, • View what they ordered it is not at the level of product families. As a result, it is • Understand what their customers ordered not possible for vendors to rationalize channel partners and incentives based on product family, geography or • Add/modify customer records as agreed to between other criteria. the vendor and the partner • Understand what products and associated services their Tracking and analyzing order-level partner performance will customers are using enable you to: • Administer transfers, mergers and splits of entitlements • Measure the effectiveness of joint marketing programs between end customers with partners, at the level of products being promoted • Allow electronic fulfillment of software and updates • Set up performance based sales incentives for individual products These capabilities could reside within a Partner Portal, a key • Assign leads to best partners for a given product based initiative that many vendors are thinking about to increase on past performance channel visibility and improve communication. These capabilities should also integrate to Partner Relationship Studies show that revenues from channel partners can grow Management systems for automating order processing, their revenues by 40 percent10 when vendors identify and payments and invoicing. nurture the best performing channel partners. This would translate to about 20 percent higher revenues for a typical “Seagate has dramatically reduced order errors and intelligent device manufacturer and about 11 percent higher duplicate effort, decreased their costs per order by 60 revenues for a typical software producer. percent on average and capitalized on new and enhanced revenue opportunities. The company has also gained direct, IDC11 sums it up as follows: real-time visibility into distributors’ and OEMs’ sales and order processes”12 “Vendors will not be able to get ahead by simply adding more partners than the competition. 2009 will be the Studies show that streamlined processes and deeper year that the best vendors use “partner analytics,” or the adoption of customer-facing systems can grow revenues by intelligent analysis of partner data, to make better informed 5 percent13. decisions about which partners to invest in, and which partners to demote or even drop. With lower partner Strategy 3: Establish a direct connection with end users program budgets, getting smarter about allocating resources The easiest way to learn more about your customers is to to partners will be critical. Vendors should be leveraging ask them to register their product prior to usage. There their partner data to understand which partners are the are several ways to do this. Many software producers high potentials, which are the influencers, which ones do we work with gather basic customer information (e.g. great cross-sell, and which ones are missing opportunities. company name, contact email) as part of a product With that knowledge, investments in training, support, sales activation experience. Other vendors that do not use 10. High-Tech Channel Evolution: Solutions for Sustainable Growth and Success, The JS Group, 2007 11. IDC Worldwide Software Business Solutions 2009: Top 10 Predictions, M. Fauscette, D. Bibby, M. Wardley, M. Levitt, M. Webster, A. Pang, S. White, M. Perry, B. Lykkegaard, A. Konary, R. Mahowald 12. Channel Stewardship: Driving Profitable Revenue Growth in High-Tech with Multi-Channel Management, P. Bose and R. Dey, Infosys, August 2007 13.,14. Maintenance Revenue Protection 2.0: The Urgent Threat and What Software Vendors Can Do About It, Chris Dowse and Ben Galison, Neochange, 2009 Flexera Software: FlexNet Operat ions White Paper Series 7
  • 8. Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h product activation still gather non-personally identifiable “Upsell / Cross Sell Incentives - Most vendor programs put a information on their end user’s usage of their software disproportionate amount of emphasis on Solution Providers products after opt-in by end users to gather this information. bringing in net-new customers. New customers are valuable, but they take longer to win and cost more to persuade. Don’t In-product messaging is also an effective way to engage eliminate incentives for winning new customers, but to add a with end users on an ongoing basis to inform them of component that pays partners an incentive for winning more possible updates, new product announcements and other business by penetrating existing accounts more effectively.” promotions. In addition, establishing a direct connection to end customers increases the value of software maintenance “Most vendors allow partners to profit from the sale of the by using entitlement-based updating to ensure customers initial warranty and support services - whether the partner only receive the patches and updates their support contracts will deliver those services or not. But more vendors than ever entitle them to. are allowing partners to participate in the renewal of these service packages as a way to provide partners with future Revenues can be enhanced by 5 percent14 by knowing earning potential.” 16 more about your installed based and driving upgrades and upsells of your products. Offering these opportunities will make vendors more compelling for channel partners: Strategy 4: Tie channel incentives to product activation by end customers “From a channel partner perspective, the big problem is to The source of the grey market for your products can often get us to actually use a vendor’s system. One reason we be tied back to abuse of channel incentives by partners, would use a vendor system is if it helps us with maintenance such as misrepresenting or faking end customer information. renewals. The big problem we face today is that when a Tracking entitlements (e.g., sold-to customer name) as they customer comes to us for a renewal, we don’t know fully move through the demand chain (in Figure 1 for example) what the customer owns to give them a complete quote. along with enforcing product activation is the only sure way We only know what the customer bought through us, not to know who the end customer is, who they purchased their the complete list of products they own from the vendor in products from and under what incentive program. question, which limits the value of maintenance renewal we can sell the customer.” While 51 percent15 of manufacturers collect device serial – Director Sales, Mid-market Reseller17 numbers from channel partners as part of their claims submissions for incentive programs, it is cumbersome Proactive maintenance renewals, upgrades and upsells can or impossible to correlate serial numbers to incentive- contribute to 5 percent revenue growth. eligible end customers until end customers call the vendor for technical support. As an example, suppose a Conclusions manufacturer offers distributors a 10 percent rebate for Table 1 summarizes these five strategies and their economic units for Product A sold during the month of September. It impact on vendors and channel partners. Taken together, is difficult to accurately determine actual sales of Product these strategies can grow vendor revenues by 20-30 percent A by the distributor during September, in addition the and channel partner revenues by 40 percent. system being open to abuse (e.g., claiming rebates on serial numbers sitting on the shelf). However, if the vendor tracked entitlements sold to the distributor and the product activations during September from customers who bought from the distributor, such verification would be easy. Strategy 5: Empower channel partners to grow revenues via cross-sells, upsells and maintenance renewals With the impending shift in revenues to Software as a Service (SaaS) and virtual appliances, traditional revenue streams for channel partners (e.g., installation and configuration services) are under threat. One response that vendors can offer is to delegate technical and customer support to resellers. They could also empower channel partners to cross-sell and upsell products to existing customers and renew maintenance. 15. Effective Channel Management is Critical in Combating the Grey Market and Increasing Technology Companies Bottom Line, KPMG Grey Market Study Update, 2008 16. Engage Your Partner in the Total Business Opportunity, Institute for Partner Education & Development, April 2008 17. Maintenance Revenue Protection 2.0: The Urgent Threat and What Software Vendors Can Do About It, Chris Dowse and Ben Galison, Neochange, 2009 8 Flexera Software: FlexNet Operat ions White Paper Series
  • 9. Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h Table 1. Summary of the Five Strategies and their Economic Impact Business Challenge Strategies Estimated Economic Impact Channel tiers are top-heavy with Know your best partners by analyzing channel 40% revenue growth for channel lots of underperforming partners performance at the level of individual product revenues which translates to: families. Invest in and nurture the best performing • 20% revenue growth for partners a typical intelligent device manufacturer • 11% revenue growth for a typical software producer Inefficient channel facing Enable channel self-service for orders, entitlements, 60% lower costs per order processes renewals 5% higher revenues Lack of visibility into installed Establish direct connection with customers. 5% higher revenues through effective base when channel partners • Cross-sell and upsell products based on your cross-sell and upsells make the sale understanding of products used • Protect maintenance revenues by updating or upgrading only entitled customers Grey market revenue leakage is Tie channel incentives to product activation by end 1.5% of revenue growth for a typical growing customers intelligent device manufacturer Software and hardware Empower channel partners to cross-sell and upsell 5% revenue growth business models are converging, products and renew maintenance threatening traditional revenue streams for channel partners Total Impact About 20%-30% higher revenues for vendors. Note that the above benefits may or may not be additive. Flexera Software: FlexNet Operat ions White Paper Series 9
  • 10. Keep Your Customers Close and Your Channels Closer: 5 Essent ial Strategies for Customer Int imacy and Channel Revenue Growt h Glossary Term Definition Vendor A software producer or a intelligent device manufacturer Software Producer A company that is primarily in the business of selling software products Intelligent Device Manufacturer A company that is primarily in the business of selling hardware devices. Examples include: computer and networking equipment, medical equipment, test and measurement equipment, imaging products etc. Original Equipment Manufacturer A company that supplies components to other companies to incorporate into an (OEM) supplier end-customer facing product. Example: Flexera Software FlexNet Operations incorporates Cognos reporting. In this example, Cognos is the OEM supplier to Flexera Software. Distributor A channel partner that primarily fulfills orders from downstream VARs and SIs. Value Added Reseller (VAR) A channel partner that performs a number of specialized tasks to enable a solution for an end customer. Specialized tasks might include product installation, training, configuration and bundling with other software/hardware provided by the VAR. Systems Integrator (SI) A channel partner that assembles a complex solution using components sourced from many vendors. End Customer A consumer or business that uses a software or hardware product Entitlement What the customer purchased. Example: 10 copies of Adobe Acrobat; 100 ports of a LAN switching capability in a LAN switch. Product Activation The process by which a customer fulfills the rights to use a software or hardware product. Transfer pricing Transfer pricing refers to the pricing of contributions (assets, tangible and intangible, services, and funds) transferred within an organization. For example, goods from the production division may be sold to the marketing division, or goods from a parent company may be sold to a foreign subsidiary. The choice of the transfer price will affect the allocation of the total profit among the parts of the company. This is a major concern for fiscal authorities who worry that multi-national entities may set transfer prices on cross-border transactions to reduce taxable profits in their jurisdiction. This has led to the rise of transfer pricing regulations and enforcement, making transfer pricing a major tax compliance issue for multi-national companies. Source: Wikipedia About Flexera Software Flexera Software is the leading provider of strategic solutions for Application Usage Management; solutions delivering continuous compliance, optimized usage and maximized value to application producers and their customers. Flexera Software is trusted by more than 80,000 customers that depend on our comprehensive solutions- from installation and licensing, entitlement and compliance management to application readiness and enterprise license optimization - to strategically manage application usage and achieve breakthrough results realized only through the systems-level approach we provide. For more information, please go to: www.flexerasoftware.com 10 Flexera Software: FlexNet Operat ions White Paper Series
  • 11. Flexera Software LLC Schaumburg United Kingdom (Europe, Japan (Asia, For more office locations visit: 1000 East Woodfield Road, (Global Headquarters): Middle East Headquarters): Pacific Headquarters): www.flexerasoftware.com Suite 400 +1 800-809-5659 +44 870-871-1111 +81 3-4360-8291 Schaumburg, IL 60173 USA +44 870-873-6300 Copyright © 2011 Flexera Software LLC. All other brand and product names mentioned herein may be the trademarks and registered trademarks of their respective owners. FNO_WP_Channel_Oct11