January 2014 Feature

An ROI Reality Check — Part 1

by Hobart Swan

John Ericksen
In the following two-part series, we discuss the inner workings of “Return on Investment” or “ROI” — the ruler by which an increasing number of channel activities are being measured. To get to the bottom of this infamous metric we interviewed John Ericksen. John is senior vice president of strategy for Channel Impact, a Silicon Valley consultancy that helps technology companies build and execute winning channel strategies and drive partner success. Prior to joining Channel Impact, Ericksen held several executive positions at Cisco, including heading its worldwide channel incentive programs, leading its Asia Pacific channel sales, and designing its SMB go-to-market model, “Partner Plus.” Ericksen holds a B.S. degree in computer engineering from UC Santa Barbara and an MBA from the University of Chicago.

In Part 1 of the series, we asked Ericksen to give us a kind of reality check about the current state of the channel with respect to ROI measurement. We looked at some of the common approaches vendors take to measure ROI—and some common mistakes. We also discussed the role of scorecarding, control group experimentation, and whether new technology is poised to make ROI measurement any easier.

CCI: It seems like the drumbeat for demonstrable ROI is getting louder and louder. Here at CCI we’ve been hearing about the tremendous pressure channel marketers are under to demonstrate ROI for everything they’re doing in the channel. But it’s not easy to measure return on investment given the complexity of the channel, especially when people have different ideas of what “ROI” means. So let’s start with your definition of “Return on Investment.”

Ericksen: Well, whether you’re talking with the leader of sales, the owner, or the CEO, I think what people mean by ROI at the most basic level is a model that helps them predict the return they’ll get when they invest a certain amount of resources. But the devil is in the details. Constructing a model that accurately measures ROI for a specific market can be tricky. The model has to be nuanced to give vendors insight into the kinds of activities—and the kinds of partners—that lead to more sales and higher profitability.

If you think about the channel’s GTM as a system then the concept of ROI refers to measuring the efficiency of the whole system. The investments or “I” piece of ROI refers to elements such as marketing dollars spent on demand generation, training dollars spent on enablement, program dollars spent on partner profitability efforts, headcount dollars spend on territory sales people and headcount dollars spent on channel managers. The return or “R” piece of ROI refers to sales or incremental sales generated by the channel as an output of your investment and activity.

The channel system doesn’t function well with just headcount for sales and channel managers or just program dollars or marketing investment—it needs the right mix. The point about improving your ROI comes down to understanding which activities and efforts you are doing move the needle and which don’t so you can invest in the right places and de-invest in others. The art piece of this should be mixed from a data-based perspective and analytical perspective in order to optimize this effort.

CCI: What are some of the more common ways vendors are trying to measure ROI these days?

Ericksen: They’ll look at sales dollars per territory account manager, head count, or at revenue per partner metric. Then they might look at incremental sales or create proxy measurements. For instance, a sales team might look at the percentage of the channel dollars they’ve sold through deal registration (with the assumption that deal registration is incremental revenue), or growth of channel sales for a particular technology category. The marketing team might try to analyze the value of marketing-qualified leads or sales-qualified leads, and then try to track those leads down the funnel from marketing to closure.

CCI: Do you think this is the right way to measure ROI?

Ericksen: Well, generally speaking, the vendors who are able to get their heads around ROI are the ones who a) understand what they’re using the channel for, b) understand how their partners’ businesses work and how their partners make a profit, c) have sales teams that know how to work collaboratively with their partners and, d) are good at execution.

These are the fundamentals you need in place to accurately measure ROI. They help you understand if you’re achieving the goals you set, and which subset of customers and partners really matter to you. Knowing these kinds of things can help you find the activities that drive results—which is, after all, what ROI is all about.

CCI: What do you think are some of the most common mistakes vendors make in trying to measure ROI?

Ericksen: Benchmarking what a competitor is doing and blindly copying instead of learning the concept and applying it to their unique market position. Not starting with what the customer needs before building the channel program. Ultimately, if you build your channel program to reflect what the customers need from vendor + partner then you are doing everyone a favor—customer, partner, and vendor.

The first mistake is not starting with the customer needs when building a channel program. Number two is benchmarking what your competitors are doing, and then trying to meet these benchmarks. Instead, you need to understand the basic concepts behind ROI measurement and develop a small set of benchmarks unique to your channel. Even for the largest companies, there are only three or four key initiatives that really move the ROI needle within a channel. Trying to stay on top of a list of 20 benchmarks you’ve compiled from your competitors isn’t possible and isn’t effective.

The last mistake I would mention is when vendors don’t understand their partners’ profit and loss statements. How partners measure P&L should be a big driver behind the way vendors build channel programs and incentives.

CCI: I’d like come back to understanding P&Ls. But isn’t getting good ROI closely tied to choosing the right partners? Here at CCI we’re very interested in scorecarding. In fact, we’ll soon release a white paper that outlines what we think are some of the best practices in that regard. What have you seen vendors doing right when it comes to scorecarding?

Ericksen: When we examine partner segmentation, we look at it through the lens of who our clients’ target customers are. For instance, some partners may be critical for the mid-market on down, but not suitable for the enterprise.

We use detectable techniques to separate out the partners that are actually spending time in a specific market segment—who are consistently working in that space instead of just generating random, opportunistic transactions every now and then. This helps our vendor clients focus on the partners they need to spend time with in a given market segment. And it can help the vendors create a profile for their ideal partners per customer segment. This profile can be very useful should the vendor decide that it’s time to acquire new partners.

CCI: You’ve talked about the need for vendors to establish and understand some key fundamentals in order to get the best ROI measurement: what they want out of the channel, what benchmarks apply to their business models and markets, which partners are delivering the best value, and how their partners make their money. What else has changed in terms of vendors’ ability to grasp channel ROI?

Ericksen: I’d like to think that it’s easier now than in the past because companies like CCI and Channel Impact are focused on helping vendors find the best ways to measure ROI. That being said, execution at the field level is always hard and requires continuous work.

That’s why we emphasize the need to test in real-world conditions. There is theory behind our approach to measuring ROI. But we also work in partnership with our vendor customers, learning together so that we can breathe life into the theory. If you look for ways to improve ROI using a theoretical model only without tempering it with real-world channel experience, then turning any insights you gain into action isn’t easy.

For instance, we believe on a theoretical level that channel success is dependent on two critical factors: using channel leverage to reach more end customers and to make those customers happy—and finding ways to increase your partners’ profits.

Usually when you use the channel you’re going after customers you don’t work with all the time. Success depends on your ability to work together with your partners, combining your business intelligence and segmentation to first find customers and then find ways to satisfy those customers. But if you can also work with your partners to reduce the cost of those sales, then you can improve your and your partners’ profitability and ROI for each customer you work with.

So both of those things need to happen for you to have successful channel operations. And it is only by getting into the trenches with our vendor clients that we see what it takes to bring that theory to life.

CCI: This brings up the issue of control group experimentation. This is something that we’ve seen touted by some consulting organizations. Consultants offer to work with channel vendors to guide them through a control group process so the vendor can experiment with different channel engagements or channel incentivization techniques. What’s your take on these types of experiments?

Ericksen: I think they make sense from an overall perspective. They help vendors understand the results they can get from a certain activity, a certain customer segment, or a certain partner group. If one type of activity is creating a significant statistical difference, then the vendor can choose to spend more time and resources on that activity and less on others.

The challenge for most organizations is that they typically run a number of activities and initiatives at the same time, so it can be very difficult to isolate the effects of a single activity. The interesting thing is that in our experience, a relatively small number of activities and initiatives are moving the needle. The rest of the channel activities suck up a lot of time and resources without delivering much ROI. So vendors can really benefit if they can identify those key drivers. In fact, we’ve found that vendors can double their ROI without any existing MDF budget increase—just by focusing on those best practices.

But as I say, it can be tricky to tease out just what these best practices are. Sometimes increases in ROI can be clearly attributed to an activity you’ve just begun. More often, isolating the benefits of a single activity can be like trying to untangle a pile of rope. But to the extent that running a control group experiment can help a vendor tease out those activities that show benefit—and these experiments can do that—then they are worth the effort.

CCI: It seems like the ways to measure ROI that you’ve talked about so far have to do with things people can do. What about from a systems perspective? Is the current trend toward integration of disparate systems and software packages going to make ROI measurement any easier for us humans?

Ericksen: It’s true that some of the newer PRM systems have more advanced capability, such as providing better models for profiling partners and for managing both partner activities and the vendor’s interactions with them. But the reality is that very few vendors have fully implemented these new systems. Even when they do, technology by itself doesn’t get it done. You also have to know how to use these systems the right way—and keep them up to date.

So, yes, there is promise from the systems side in terms of making ROI measurement easier. Some vendors have implemented new cloud-based PRM systems. And they’ve fought through the process of integrating the technology to improve their ability to manage a channel. But I would say that we’re at the beginning stages of seeing benefit from the systems side.

In Part 2 of our conversation with John Ericksen, we’ll dive into the ROI measurement weeds a bit more. In particular, we’ll ask him about specific steps vendors can take to more accurately predict the return they’ll get from the investment of precious resources, how knowing your ROI gives you a competitive advantage, what the future holds for ROI measurement, and whether there really is a killer metric for ROI.