An ROI Reality Check — Part 2
by Hobart Swan
In Part 1 of this two-part series, we talked with John Ericksen, Channel Impact’s senior vice president of strategy, about the current state of ROI measurement. In Part 2, we asked Ericksen about concrete steps vendors can take to improve ROI measurement, how they can use ROI to gain competitive advantage, whether there really is a killer metric for measuring ROI, and what the future holds for ROI measurement.
CCI: John, we ended the first part of our discussion by talking about whether the current trend toward integration of disparate systems and software packages are going to make ROI measurement any easier. You noted that it holds great promise but that we’re still at the early stages of seeing any such benefit.
Lacking any kind of technological magic bullet to make ROI measurement a breeze, it sounds like it will still be up to us humans to find better ways to measure such returns. I wonder if you could expand on something you said earlier—about the need for vendors to understand how their partners make money.
Ericksen: I think that if that you’re really trying to understand your channel business, then you’d be well served to develop a P&L viewpoint of your channel activities. By that I mean measuring the same things that a normal P&L does, but doing it with respect to the overall channel.
A channel P&L would include the revenue sold through the channel and the gross margin on that channel revenue. You might have channel SG&A [Selling, General & Administrative] expenses related to sales, the marketing demand generation dollars spent on the channel, and potentially some costs for training & enablement. You would subtract your contra-funded channel dollars from the revenue to get a true margin. If you put together a P&L that reflects all these inputs, then you’ll have a much better sense of what you really get out of your channel sales.
The other factor that we think is important, not just from a revenue perspective, is going back to the customer base the channel is intended to serve so you know who your customers are. How many customers are there in the channel? What kind of lifetime value do these customers have by segment?
If you start looking at the channel from this perspective, then you begin to understand not only what you’re selling to whom, but what the potential market is for the channel. If you know how many customers there are and how many you sell to, then you can start to calculate your rate of penetration for that market. And that can help you understand if your problem is that you don’t have enough customers—or that you aren’t selling enough to the customers you have.
This can also help you measure your efficiency by giving you insight into the wallet share you have in your installed base. Maybe your people are selling into a customer—but getting only 30 percent of the possible revenue from that customer. If that’s the case, you have an opportunity to work with your partners to help them increase their and your wallet share.
CCI: What about measuring the benefits of MDF programs in particular. Do you have any tips on that?
Ericksen: There are four steps that can help vendors get a better sense of their return on MDF investment. Step 1 is to define up front the result that you would like to get from an MDF program. By setting a goal, you’ll have a clear target to test against at the end of the program.
Step 2 is to keep track of how the MDF is being spent as the program runs. Collecting this kind of data should be part of the process. This isn’t something that people tend to do. They might start by saying, “I’m going to do this activity. I need this amount of money. I think I’m going to get this out of it.” And they might have to submit some proof of performance after the program ends. But they rarely capture data as the MDF program progresses.
Step 3 is to analyze the results of the MDF program every six months, doing it the exact same way you measure the effects of any activity. You look at the dollars spent, any other channel inputs, and what you think you got out of it.
Step 4 is to consider what you learned from the analysis, and then use that information to make adjustments to your MDF activities.
CCI: How else can this idea of focusing in on best practices help vendors understand ROI?
Ericksen: I’ve given some thought to how some vendors view the channel in a kind of binary way: The channel is good when it results in an incremental deal; bad when it just fulfills an opportunity the vendor has already created. I think that’s a pretty simplistic way to look at the channel.
Vendors would benefit by taking a more careful look at the role the channel plays in fulfilling vendor-initiated deals. Which fulfillment steps should be handled by the vendor’s sales team? Which ones could be completed by partners? If, for instance, the sales team isn’t spending all of its time on the follow-up steps of each sales cycle, it could be freed up to generate more new deals.
As a vendor, you can optimize your sales productivity, your cost of sales, and your profitability by finding the best ways to work with your partners to fulfill every opportunity—no matter where that opportunity comes from.
CCI: That really points to the importance of finding the best partners. I think that a common mindset among vendors is to see the value of measuring ROI as a way to maximize profit. But it can also serve as a very tangible demonstration of the benefits a partner stands to gain from working with the vendor. Do you agree with that?
Ericksen: I do. Having a good grasp of ROI means being able to show partners the impact that working with you can have on their P&L. This would include the base sales and margins that a partner could expect to receive on the vendor products and packaged services (like maintenance, subscriptions, etc.) as well as the amount of the partner’s own services that drag along with the sale. Then show the incremental impact of your programs and initiatives on the partner sales and margin. You can also model the effect on cash flow by inputting your payment terms and having the partner put in the payment terms they give to customers. ROWC impact will be Margin X Working Capital terms.
All of these tangibles help a potential partner create a “before” pictures of the business they do without working with the vendor, and then an “after” picture that shows all the add-backs and incrementals they would get from being a part of your partner ecosystem.
ROI helps you show partners that their return on working capital will be the margin multiplied by their working capital term. And, if you have both the P&L and the working capital modeling available for your partners, you’ll understand how to improve the impact of your business on the partner’s P&L. And that’s a powerful thing as vendors compete for the best, most productive channel members.
CCI: So let me just turn that perspective around for a second and ask if there is one killer metric that vendors can use to identify which of their partners have the best ROI.
Ericksen: I think the biggest concept vendors need to get their heads around in terms of managing a channel and measuring performance is not to think in terms of average productivity for all their partners. Since running a channel is really an exercise in managing a group of partners with various characteristics, then statistical methods are the most applicable. People need to re-focus on how to effect the aggregate performance of a group of partners, which requires thinking in terms of a normal distribution, means, variances, and probabilities vs. an average.
For example, if a vendor has 100 partners and 65 of them are moving in the right direction, 65 of them are achieving greater profitability and improving their productivity metrics. Then things are moving in the right direction, assuming these 65 are not the 65 smallest. Conversely, if average productivity is going higher because of five partners and the other 95 are flat to down then that is a problem.
CCI: So this goes back to that same idea of looking for best practices and focusing on them.
Ericksen: That’s right, Chris. Vendors will need to get a lot better at finding the activities and the partners that deliver the best ROI, then concentrate on them. The easy path is to just take a shotgun approach and try anything with any partner. When you do that, you spread your resources too thin. And you have little chance of determining which factors lead to higher profitability.
We’ve found in our work that vendors are at different stages of the life cycle in terms of their ability to build and leverage a channel like this. Our goal is to help them find the partners and the activities that get them moving in the right direction—that help them get better at understanding and working with the right partners. And developing ways to measure ROI is a fundamental building block for this.
CCI: I wonder if we could end with you giving us a glimpse into the future. First, what do you predict will happen in the channel over the next five years or so?
Ericksen: We think that success in the move to cloud and to software as a service is predicated on the ability to manage customer retention. Many vendors and partners have gaps here in terms of renewing contracts or renewing licenses or maintenance contracts. If those kinds of problems don’t get solved, then vendors won’t achieve their desired results from the channel in the future. So we think there will be a lot of channel focus in those areas in the future.
CCI: And what about things that might affect vendors’ ability to measure ROI on channel investments?
Ericksen: I think more and more companies—vendors and partners alike—will adopt ROI measurement as a core discipline. This is especially true given its potential to help vendors gain competitive advantage in the channel.
I also think that the linkage between sales and marketing investment will become more measurable and predictable—and will become a key driver of incremental revenue, particularly for mid-market and small types of business.
CCI: I’m just curious. Why do you say that it’ll be truer for these specific kinds of businesses?
Ericksen: Because with enterprise accounts and major accounts, vendors normally have account representatives who interface directly with the customer. The need to do demand generation marketing to these customers is a lot smaller, simply because it can be done by the account reps.
But there are so many SMB companies out there. Most of them purchase so infrequently that for the sales team to be productive, it has focus on customers with the highest potential. Understanding your channel ROI is what helps you figure out who those high-probability customers are.