The Enterprise Software Market: It's the Channel, Stupid

Vendors, searching for new clients, see the small- and medium-sized market as a lucrative sector. Too bad many of their efforts are largely wasted.


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In the eternal quest to find the next orchard, the one replete with all that proverbial low-hanging fruit, the entire enterprise software market has focused its considerable energies on the small and medium-sized enterprise (SME) market. And that means marketing managers are consumed with the need to decipher the exigencies of the so-called mid-market customer (which doesn’t really exist anyway, rant on this here), and deliver the products that allegedly meet their needs.

Too bad many of those efforts are largely wasted. What’s needed is not a major effort to translate market requirements into product, but a more fundamental effort to change how big vendors reach small customers. That change has to do with what we call the “channel” – those third-party systems integrators, value-added resellers, consultants, and G-d knows what else that have been historically assigned the task of meeting the needs of customers too small to warrant the direct attention of vendors too busy hunting elephants to bother worrying about culling the lesser beasts.

If you sensed a little a little cynicism about large vendors, channel partners, and the needs of the SME market, read on. Because this column is about how messed up the channel approach to the SME market has become. And will remain, absent some sort of epiphany that I’m not sure is going to happen any time soon.

The problem with the channel is the following: the big enterprise software vendors think it’s impossible to make real money servicing a large number of small clients, so they create channel partnerships that off-load the burden, and the responsibility for success, to companies that theoretically have the right size, shape, and locality to meet the needs of a high-volume SME market.

Meanwhile, these vendors keep upping the ante for their channel partners, increasing the functionality of their offerings at the same time that they lower the complexity of the development and deployment effort needed to make the software actually usable to the customer.

This would normally be a great idea – lowering complexity while raising functionality – if it weren’t for the fact that complexity is what funds the boat payments for these channel partners. They get a few points for actually selling the software on behalf of MegaGiant Vendor, but the real gravy comes from selling the services that are needed to actually get the software to do something useful.

And herein lies the problem with the channel: more and more mid-market software is being delivered in a SaaS model, which translates into next to nothing in terms of implementation costs and services, particularly relative to the more classic, high-service on-premise models. This transforms cashing in on the complexity gravy train for the channel partners from “interesting” to “bloody hard.” That’s because, in a market where the high-profit services have been eliminated, channel partners have to content themselves with selling a large volume of low-margin deals. This means that deals that once upon a time would have netted a few hundred grand in services yield a few thousand in “points” for the partner, who now has to churn ten times as many deals in order to make their annual bacon.

And that’s not all. The greater functionality means that it takes more resources, and more time, to close a deal. The partner has to be adept at so-called solution selling, which means actually having to describe the real value of the product to real customers, as opposed to the more traditional technical sale that took as long as a handshake, relatively speaking, to be consummated. This makes the exercise of building, and maintaining, a thriving channel an increasingly laughable oxymoron that has gored more than one big vendor arrogant enough to think that all they need to do is “translate” their products to the SME market.

No wonder companies typically buy their way into an SME channel (as in Microsoft, which spent a tidy sum of Bill-bucks buying its SME channel products), or spend countless cycles announcing new “organic” SME channel strategy, only to have to press rewind and start over six months later (as in everyone else.) First they get the initial premise wrong – that there is something called an SME market that requires fundamentally different solutions than large enterprises – and then they think that all that’s needed is a channel program, a few hundred eager channel partners, and the gravy train has left the station.

The master of the channel in enterprise software is Microsoft, not just because it bought the 5000-strong Navision and Great Plains channel in order to form its underappreciated Dynamics business unit, but also because it actually puts more effort, and money, into its channel efforts than its top tier competitors. And while Microsoft’s business model is such that is has to be relatively nice to its partners – who earn the company 96 percent of its revenues, and in the process generate seven dollars of partner revenue for each dollar of Microsoft revenue they help create – even Microsoft is running into major channel problems.

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Tags: services, Microsoft, software, SaaS, marketing

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