Core Perspective: Partnering Models in the IT Channels

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IT Channels have been undergoing a dramatic change in the way in which vendors and partners interact. The models that define the relationships between partners and vendors have become diversified as the industry moves from a “sales” to a “solutions” based paradigm. Core Strategies believes that understanding the distinctions of the various models is very important to the vendor community. This report seeks to provide the following information on these distinctions:

1. To clearly define the types of relationships currently being developed and deployed by vendors and their Solution Provider partners.
2. To define the characteristics of the various Solution Provider business models.
3. To provide guidance about the needs of the various Solution Provider Models.

Relationship Models

Resale – Sell-through relationships via indirect sales channels. In this model, vendors sell products to Distributors and/or Solution Providers who then sell the products to and end-user customer.

1. Channel Model – This model is a classic sell-though model in which the Solution Provider (often simply called “The Partner”) acts as an independent sales organization to end-users. In this relationship the partner bills the end-user and pays the vendor for the products they provide. The partners generally enhance their profit margins by providing additional services including customization of hardware and software and after-sale support. This model can be “single-tier” where the partner buys products directly from the vendor or “two-tier” where product is initially sold to a distributor who then sells the product to the partner. In some geographic regions (e.g. Latin America) the channel can be “three-tier” which involves an additional layer of distribution.
2. OEM – This model describes a relationship between two vendor partners where the OEM purchases products from a vendor and then embeds the vendor’s product into their own. In some cases the OEM product is co-branded and both the vendor and the OEM partner’s name and brand appear on the offering.

Alliances – Sell-with relationships that demonstrate a strong co-development and co-branding relationship between two or more partners. In general, the respective partners do not resell the products of the other partners however; there are cases where a resale relationship may also exist. An example of this is the relationship between Hitachi Data Systems and Cisco where Hitachi has an agreement with Cisco to purchase and resell Cisco components to further enhance the value of the Hitachi offerings.

There are several types of Alliances to be noted:

1. Endorsement – where the Alliance partners agree to endorse each others products thus enhancing the brand of each.
2. Marketing – Joint marketing agreements that describe the value of the partnerships and the products thus enhancing the value proposition of the total solution.
3. Integration – Where one partner’s product (e.g. software) is actually integrated or embedded in the other partner’s product creating a more complete product that more adequately addresses the business problem of the end-user.
4. Solution – Where two or more partners co-develop a product offering that addresses the business need of a particular vertical industry.
5. Organizational – The complete merger of two or more partners to create an organization that creates products and solutions otherwise not possible without internal development. This is becoming a popular methodology and is demonstrated in the recent acquisitions of software companies by hardware companies (e.g. EMC’s acquisition of several software companies that compliment their storage infrastructure products).

Referrals – A relationships between a vendor and a third party where the referral partners send leads or make recommendations about a vendor's products but do not actually sell the offerings. While this model has been around for many years, only know are vendors recognizing the impact of referral partners and, therefore, are creating programs and reward structures to gain traction.

Solution Provider Models - The following models describe the prevalent models currently in use in the partner community. It is important to note that many partners blend models. The models are based on the primary source of revenue for each model type.

1. Service partners – derived 70% or more of their revenue from the delivery of service around a particular product but less that 10% from the actual sale of the product.
2. System Integrators – A type of Service partners that works with end users to create a comprehensive solution based on the business need of the end-user
3. Product Partners – derive more than 70% of their revenue from the sale of products that they have built. Products can be software, hardware or a combination.
4. VARs – derive 50% of their revenue from the resale of hardware or software and 50% from the services and solutions they have created around these products.
5. Service Providers – derive 50% of their revenue from the resale or co-delivery of service packages created by their vendor partner. The relationship can be either a resale or referral based model.
6. Hybrids – As noted above, many Solution Providers adopt one or more of the previous models depending on circumstance and end-user needs and preferences.

Logistics Models – The resellers’ focus on supply-chain and the process of efficiently moving products from vendor to end-users at the lowest possible costs. In this model, more than 75% of revenue is derived from the sales of products and less that 20% from the sale of services.

1. Volume Distributors – Providers of warehouse space, financial assistant and delivery in the classic two-tier model. Most distributors carry a multitude of hardware and software products. In general, distributors fulfill demand but do little to create demand for a vendor’s products.
2. Value Distributors – Also providers of warehouse space, financial assistance and delivery. However, this model derives 20% or more from value-added services for the product they carry. Usually this model carries a smaller number of products and specializes in a specific area of technology (e.g. storage or telecom)
3. Corporate Resellers – a broad spectrum of resellers that provide a wide range of products that require little modification.
4. Retail – providers of technology products to SOHO and consumer markets and provide a broad range of products. These resellers range in model from Computer Superstores and Internet resellers to Mass merchants and Office Superstores.

Solution Provider Focus – Core Strategies has identified three primary characteristics used by partners to develop their business plans and sales strategy focus:

1. Company Size – based on the number of employees and/or revenue
2. Vertical Market – the industry in which the end user participates. Popular examples include: Financial, Health Care and Multimedia
3. Geography - Regions (e.g. Europe, Asia, Americas), Countries (e.g. U.S., Canada, U.K.) or regions within countries (e.g. New England, Southwest U.S.)

Guidance of Solution Provider Needs and Programs – Core Strategies adheres to the belief that vendors need to create sales, partnership and programs that are "REAL" programs where the acronym REAL stand for:

R – Revenue – Channel Programs that enhance revenue
E – Expenses – Channel Programs that reduce expenses
A – Assets – Channel Programs that suppress asset investment
L – Liabilities – Channel Programs that suppress liabilities

When creating a new program for Solution Providers vendors should ask themselves the following questions prior to program implementation:

• Do your programs make sense from an investment vs. results perspective?
• Are the activities to be successful clear to your partners?
• Are your programs REAL? Do they positively impact partner cash flow and working capital?
• Are your Channel Programs profitable – for you and your partners?
• Is the Business Proposition of your programs clear?
• What needs to happen to your programs to succeed?

Most vendor programs have not been developed through a dialogue with partners and built around their needs and goals. Most vendor programs are based on partner models that are no longer valid and consist of the standard practice of rewards partners solely on revenue achievement with MDF, Co-op funds or rebates. Vendors should consider rewards programs that create true partnerships based on today’s business models and the REAL needs of the partners. Core Strategies recommends points based rewards programs that based on the following;

• Points for Sales Targets AND Growth
• Points for Solution Sales
• Points for software and/or services
• Points for training achievements
• Points for closing leads you have provided
• Points for new business
• Points for competitive take-outs
• Points for customer satisfaction

By creating program and rewards around these metrics, vendors can create programs that create incremental, profitable sales for all partners in the solution stack.

Conclusions

The sales channels of 2004 and beyond are drastically different and more diversified that they have ever been before. Resellers and Vendors are focused on solutions and services that created higher profit margins and vertical solutions to real world business problems. By recognizing the various models and creating programs based on the needs of the partners, both vendors and partners can successfully create lasting and profitable relationships.

For more information, contact Charlie Wallace at 831-476-5643.

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