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.
Problem one is the aforementioned functionality/complexity dichotomy, which is about to afflict the Microsoft channel in the form of an increasingly important series of online services that will, I predict, usher in the second coming of Microsoft, while potentially squashing the majority of channel partners who can’t keep up. When I went to Microsoft’s partner conference in July, I was struck by the fact that there were pitifully few partners ready to become high-volume, high-touch, low-margin partners any time soon. Of course, this isn’t just Microsoft’s problem, everyone is in this same leaky boat. It’s just all the more evident at a partner love-fest how forlorn these partners are going to become once Microsoft’s second coming arrives.
The other problem is that the best way out for Microsoft’s partners is one that relatively few understand. At a time when Microsoft is about to launch a complexity-killing cloud initiative, it’s also gearing up a major effort to turn Office into the preferred interface for all the functions currently buried in arcane user experiences, poorly designed interfaces, and overly complex enterprise software “solutions” that don’t (solve business problems, that is). This Office Business Applications (OBA) initiative has the promise of dramatically altering not just how users use enterprise software, but how partners earn their daily bread. The only problem is how few partners are actually going to be able to develop OBAs, as they are called. It turns out that the average Office partner can’t, being ignorant of all things enterprise that they are. And so on down the line of Microsoft partners, all technical as technical can be, and most unable to understand the fundamental needs of the business users that OBAs are meant for.
The one group that has the best chance of making OBAs work are those Dynamics partners who are enterprisey by nature, having been forced to evolve up the food chain from the primordial technical ooze that the rest of the channel is still mired in. Of course, these are the ones still trying to figure out how to make a dime doing what they thought was their birthright – earning big bucks implementing and servicing a now disappearing on-premise enterprise software opportunity.
How do I spell whipsaw? Let me count the ways.
The irony in relating this long-winded tale of channel dysfunction is that Microsoft, as stated above, is probably the best there is when it comes to offering opportunity to a broad-based channel that, despite the whipsaw, delivered $1 billion in revenues to Dynamics and a few dozen billion more to the rest of the Microsoft product family. So, if this is how things are in utopia, imagine the dystopias that typify the rest of the market. A market, as I mentioned about 1,200 words ago, that is out orchard hunting, and has settled on the SME market as its next great hope.
Well, good luck, is all I have to say. I’m afraid that the channel model is fracturing faster than it can mended, due mostly to legitimate market shifts that are inherently customer-friendly – like less complexity and more functionality – while being inherently partner unfriendly. Don’t get me wrong, the traditional SME channel will always be there, survival being its core value. But as on-demand business models and the need for enterprise-level functionality – and selling skills – begin to permeate the SME market, the old models for channel-driven sales are going to have to change. In its place I predict a return to selling direct, as painful as that would be for large vendors unused to the relatively low margins they’ll be able to command from the SME market.
If the fruit from this market is going to be plucked by the top tier vendors, they’re going to have to evolve their strategies to meet the new reality. With so much changing in terms of technology, service delivery, and functionality, a commensurate change is needed in how to reach out to the customer base. Or we’ll be back to square one, buying and building third party channels that will be obsolete as soon as they go to market. Again and again….