July 2010 Feature

Is It Time to Change Your Channel Model?

The effects of SaaS, the Cloud and managed service providers

Channel Management Insights speaks with Tom Gorey, XO Communications Vice President for Channel Development and Strategy

Channel models are due to shift again. The growing trend away from “buying systems” to “renting solutions” on a fixed-fee or pay-per-use basis is one driver. So is the emergence of the “Cloud.” The use of managed service providers as a channel type is also a major catalyst for this shift. Whose channel models will have to change in response to these developments? Simply put, everyone’s — vendors’, distributors’ and resellers’.

Vendors will have to gain a greater understanding of channel partner models, review compensation practices and rethink the importance of branding. Distributors will have to put together not only prepackaged bundles but the right packages, and redefine their relationships with resellers. And resellers will have to decide whether they will maintain their role of selling these prepackaged solutions or become distributors themselves, which may be more feasible than ever before.

To find out more about this dynamic time, how to take advantage of the key drivers behind it and the necessary evolution of the channel model, Channel Management Insights spoke with XO Communications Vice President for Channel Development and Strategy Tom Gorey. The following is a summary of that interview.

CMI: How are SaaS and managed service providers changing the reseller model?

Gorey: Single SKU transactions will become monthly subscriptions that will bind the reseller to the underlying service provider, or cause it to become one. There’s a financial impact to both of these responses.

In the first scenario, resellers become consultants. Intellectual property is what they sell, and they no longer finance inventory. Pricing to end customers is a different paradigm, and resellers may have far less control over price. The distributor will make more decisions, and the reseller will customize the solution for end-users. In addition, the statement of work will evolve around value-added services that are complementary to, but not the core of, the managed service being provided. That changes the marketing value proposition.

If the reseller becomes a provider, this will have an impact on how its business is financed. For example, instead of financing inventory and receivables for a short cycle, a reseller selling services on a typical three-year cycle is going to have to manage cash flow reflecting the combined billing of multiple clients over a longer term. The rule of 78s applies. This change could be profound in today’s credit markets.

CMI: How will the Cloud contribute to changing the reseller model?

Gorey: The Cloud ties into sales funnel functionality. It’s not a Siebel product in a back office; it’s a subscription for service that resellers can integrate into other things their end customers use. Resellers have been selling boxes to move bits of information; with the Cloud, they won’t.

CMI: What should vendors do now to prepare for these changes?

Gorey: Vendors have to review their channel partners to understand their business models better than they have in the past. For instance, larger VARs that tend toward efficient fulfillment models without supporting services are likely to have a more difficult transition. Education and support for business planning through these transitions would likely be good investments now.

Also, now is a good time for vendors to review compensation models and contract structures to their channels, if they’re going to host services and pay agency fees. They should also review how these changes will impact VAR internal compensation models within their businesses. Past efforts at converting traditional go-to-market methods with compensation models based on receiving the proceeds of a sale upon billing have been problematic when combined with compensation from vendors paying residual fees over the life of the contract. Though many of these programs pay out higher over a standard product life cycle, the loading of revenue over a typical three years versus upfront creates focus differential.

Employee turnover mitigates the value of longer payout cycles at higher overall gain. If an employee isn’t there to collect, or in the same position, those higher returns never materialize. Vendors and resellers need to understand that, and potentially create different payout programs for transitions.

Another issue to consider with SaaS is branding. Since resellers will be selling functionality, the vendor’s name may not be on the product; the reseller’s name could be. The hard drive people already lost their identities in the personal computer market, as an example. Computer companies sell drive capacity, not brands. Intel is the exception because it puts a sticker on products. Even so, many people buy processing power, not necessarily the Intel brand.

CMI: How will resellers have to adapt to these changes?

Gorey:  Resellers have the same issues mirrored in the vendor community, plus they’ll be at the cutting edge of the integration of services models into legacy systems, where services models and traditional implementations meet. A premium will be placed on resellers that understand the ecosystem of related vendors where integration has been initiated and APIs are in place.

Differentiation is also a concern. When potentially thousands of resellers are presenting solutions from one provider, and that provider sets a price point, how do they differentiate themselves? Training, implementation, services and tying the product into legacy systems are some examples. They also have to be relevant, with a defined value proposition.

In addition, they have to pay attention to the generational change in the workplace. The next generation will expect different things where they buy or work. They don’t know the siloed way of doing business, and they expect collaboration inside and outside the company. Plus, they don’t need to own anything physical, just functionality.

CMI: In this new dynamic, who owns the client?

Gorey: Good question. That depends on who provides the invoice and whether the customer looks at the reseller in the same way as before. Issues will also arise around who takes the first call from the client when things break or when the client doesn’t understand how to use functions. Will it be the VAR or the application vendor? Will the application vendor understand the context? And where will the client fall in the hierarchy of response on service intervals?

In addition, resellers will have to choose between owning the invoice and customer, or owning the consulting, which will create a number of other issues in how they define their businesses. For instance, if the vendor pays an agency fee for representation, what are the responsibilities of the reseller to the client? Does that change when the client is no longer the one paying the reseller, but the vendor is instead? Is that different when the reseller performs as an outsourced IT provider versus selling to a client with its own IT staff?

CMI: What shifts will be necessary for pre- and post-sales support requirements?

Gorey: Decisions need to be made for where the first call goes when something breaks, who’s responsible for the repair or restoration of service, how communications are handled and at what frequency, and what happens if a customer buys other services from a different reseller or direct from a different service provider and requires interoperability.

In addition, there are financial implications. I’ll leave the revenue recognition question to the financial experts who can articulate that better than I can, but there’s a difference in receiving income in the first year as a traditional hardware and software license sale and in receiving a revenue stream that extends beyond the first year to two-year, three-year and even longer contract terms. There are also nuances in the services model since longer-term commit contracts that are common in this area don’t allow a client to suspend services and still function, as a customer can by delaying a planned hardware or software upgrade. The monthly subscription charge and the services contracted continue.

CMI: What is the scope of the change — how much and how fast?

Gorey: We’re in the beginning stages where the hockey stick is ready to take off. Right now, we’re in a bad economy, where people are examining assets and looking for safe bets, efficiency and options. They’re more willing to accept input from resellers that can help their businesses survive or grow. Companies that understand the users’ needs and how business is changing are capitalizing on their knowledge and experiencing double-digit growth.

I expect to see a substantial amount of change within the next 24 months, enough that the world will look very different from today. Providing functionality, not a box, and delivering it through the Internet changes everything.


TomGoreyTom Gorey is vice president for channel development and strategy at XO Communications, a $1.48 billion facilities-based telecommunications services provider. Prior to joining XO Communications, he served three decades in technology companies including a CBS Broadcasting specialty division, Ingram Micro, GTE, Qwest Communications and MCI.

For the past five years, Gorey has been a key driver in XO’s indirect channel as the company turned a stagnant sales and revenue channel into annual double-digit growth in both areas, including very strong growth through the recent economic recession. He has a bachelor’s degree in architecture with a minor in physics from the University of Washington.