July 2010

"The greatest good we can do for others is not just to share our riches with them, but to reveal theirs."

Zig Ziglar

Technology companies have historically viewed partnerships through myopic, one-way lenses, asking only: "What can this partner do for me?" This type of thinking is even more pervasive with channel sales partnerships, where technology vendors limit the exploration of value to short term revenue contribution.

Vendors must broaden their scope and range of site when embarking on a path of partnership strategy. Ecosystem analysis, economic modeling, and creative go-to-market development are critical components of successful partnership strategies. This article discusses this critical business strategy through a real world example and an overview of best practice.

Partnership Overview

A partner is a third-party organization, association or individual who provides a vendor with a capability or advantage in the market. In the technology domain, there are many different types:

  • technology integration partners

  • joint ventures

  • original equipment manufacturers (OEM)

  • industry alliances such as associations and think tanks

  • distributors and resellers

  • consultants and agents

Each of these partner categories is different in nature but there is a key consideration that is common to all: core business alignment. The degree of alignment between two wholly separate organizations will have a significant impact on the success or failure of any partnership.

By their nature, open source businesses present what looks like an obvious opportunity for service-based partners. Open source vendors may naively assume that, because their software is open source and they have a service-based revenue model, partners will consider their product a prime opportunity for growth. While that may be true for service partners whose revenue is based, or growing, in the vendors domain, it may not be true for partners whose revenue is substantially diversified across many solution areas. The vendor’s job is to quickly identify whether or not a target partner has sufficient focus on their core market to justify investment by both parties.

Analyzing Core Business Alignment

How does a partnership help achieve both partner's primary objectives without distracting or impeding each partner’s focus on these objectives? Partnerships are complex and an upfront analysis of core business alignment is a key to success. At the highest level, this analysis is an evaluation of the economic model between the vendor and the partner. Economic analysis will tell the vendor what the chances are of building a successful and profitable partnership over time. Through this analysis, the vendor seeks answers to the following questions:

  • what is the partner’s focus?

  • how is their revenue segmented?

  • how are they organizationally structured to execute?

  • how much time and attention will the vendor receive?

  • how will that partner realistically contribute to the vendor’s revenue?

This type of evaluation applies to any partnership analysis, but with open source vendors, the analysis is more heavily weighted toward the partner’s service-based revenue model and technical ability to deliver.

A Real-World Example

A software as a service (SaaS) vendor with a license revenue model partners with consulting and resale organizations that are 100% focused on the same markets as the vendor. For confidentiality reasons, the company's name cannot be disclosed. Partners, on average, generate 30% of their revenue from this specific niche and see this contribution to revenue growing by 30 to 40% over the next two to three years. Partners generate the majority of their revenue from services. However, the vendor’s SaaS model does not produce as much service opportunity as the partner would see from traditional client server technology.

The vendor should see opportunity in this partnership because:

  • the target markets are aligned

  • a significant percentage of the partner’s existing revenue comes from the vendor's target market

  • the partner is projecting significant growth in the vendor's target market

  • sales representative's annual sales quotas are directly tied to vendor's products and services

  • the service and support teams are knowledgeable

The vendor must set realistic expectations of the partnership by:

  • recognizing that the partnership cannot be based on revenue from implementation services and product margin alone

  • working with the partner to develop services related to the technology that assist clients in achieving their business and technical objectives

  • enabling qualified partners to deliver support and training to their clients for increased opportunities for service revenues

The example provided above is not open source, but it is relevant to open source partnerships involving service-based revenue models. In the case above, services are limited because the solution is hosted and easily configured. For open source vendors whose revenue is based on services supporting the application, the challenge will be to develop partnership models that grow the business at a lower cost of sale, while making enough service opportunities available to the partner.

Best Practice

There are many things to consider in developing a partnership strategy. The following examples of best practice are relevant to any vendor.

Know your market data. Whether it is from Gartner, IDC, Aberdeen, or niche analyst organizations, look closely at how the market data can guide your partnership strategy. There is a direct relationship between the stage of market adoption and the success rates of various partner models. An example of this is Gartner’s Hype Cycle.

According to Gartner, the Hype Cycle is "a graphic representation of the maturity, adoption, and business application of specific technologies". Within this cycle, there are five phases:

  1. Technology Trigger: this phase coincides with the launch of a product or a technological breakthrough. This event triggers the initial media attention and market interest.

  2. Peak of Inflated Expectations: the hype generated by the technology trigger creates high expectations, which prove to be unrealistic in most cases.

  3. Trough of Disillusionment: interest plummets as the technology falls short of expectations and media attention moves elsewhere.

  4. Slope of Enlightenment: realistic expectations are developed as businesses come to understand the value of the technology.

  5. Plateau of Productivity: this final phase occurs after the technology has evolved to the point where its value is widely appreciated, even though its true potential still may not match the expections generated at the peak of the cycle.

This powerful tool is not just about market hype; of its five stages, two are measurable points of market adoption. Towards the end of the "Trough of Disillusionment", 5% of the potential audience has fully adopted the innovation. At the mid-point of the "Plateau of Productivity", 20-30% of the potential audience has adopted the innovation.

The adoption of an innovation directly relates to the type of partnership that will be effective and successful. As it relates to this model, the reality is that:

  1. Direct sales and strategic partners can be effective and successful at any of the five stages of market adoption. Direct sales can be effective for two obvious reasons. First, they provide a direct representation of the vendor within the market. Second, they can adjust quickly to changes in innovation positioning and the market. Strategic alliances are effective at any stage because they address very specific product functionality or market requirements.

  2. Solution providers are early adopters of third-party technology representation and are effective in stages three to five. They see potential in an early market and seek to become thought leaders as market adoption grows. They generally wrap services around technology and do not rely on margin alone in growing profitable partnerships. Solutions providers will resell, but that is not their primary motivation.

  3. Resellers are primarily motivated by the margin on technology and do not fully invest in a market before there is enough demand to produce consistent and repeatable opportunities for transactional revenue. Therefore, resellers are not effective until the latter end of the fourth and fifth stages. Their services are typically related to licensing options and basic installations.

Analyze your Market Ecosystem

Unless a vendor’s offering is mature with market adoption rates of 30% or higher, partnerships are primarily about influence first and secondarily about sell-through. As a result, influence can be found in areas that are not obvious in the context of traditional partnership.

In some cases, the most effective routes to market are based on influence and not direct sell-through. Influenced-based routes are more profitable because they do not demand the same level of compensation and, in some cases, prefer not to receive compensation in order to maintain autonomy and a role as a trusted advisor. ChannelGain’s Partner Ecosystem Analysis Tool (Figure 1) is intended to help vendors identify the best route to end-user decision makers.

In this example, the “Director of IT” is the target buyer who holds the technical requirement. The “Internal Circle of Influence” represents those individuals within the target account that will influence and be affected by the decision to go with a selected vendor’s technology. The “External Circle of Influence” contains any organization, individual, or associate that supplies to, educates, or legislates the Inner Circle and Buyer.

Every vendor must understand their circles of influence in order to map the best routes to the decision makers. This will give vendors a clear partnership target map so that all efforts are focused on the client.

Figure 1. ChannelGain’s Partner Ecosystem Analysis Tool

Image:channelgain.png

Further Recommendations

We also recommend the following best practices when analyzing partnerships.

Survey the install base to understand who the potential partner's typical customer is buying from, influenced by, and partnered with.

Establish a program to bring partners on board and take care of their needs on an ongoing basis. These programs should be customized to suit each partner type, but all must include training, guidance on primary market opportunities, business value propositions, and engagement processes guidelines.

Allocate resources to partner relationships and be capable business advisors who are able to work with partners to establish partner-level plans that take into account internal/external business dynamics, financial considerations, executive relationship management, long term partnership development, and short-term tactical engagement.

Create a partnership scorecard that includes validating the partnership in five key areas:

  1. Financial: can they afford to invest in this partnership? Do they generate enough revenue related to the vendor to maintain their focus and motivation?

  2. Technical skill: do they have the technical resources? Are these resources deep and broad enough to independently manage the sales cycle and post-sales implementation?

  3. Operations: does the vendor have the partner’s executive support for this partnership? Is there capacity across their sales, technical, marketing, finance, and administrative functions to deliver the plan?

  4. Market position: is the partner well known? Are they a respected leader who has influence?

  5. Partner's competitive position: are they representing a competitive product? What is their plan to manage competitive vendors? What investment and protection can the vendor expect? Are there any synergistic opportunities?

Finally, create individual partner plans with measurable business development activities and timelines. These plans should also identify key team contributors on each side (peers) and post-sales marketing activities, such case studies.

Conclusion

Partnerships are complex. Many vendors struggle with the decision to invest in partner strategies because when the don’t work, they are very expensive to manage and exit. Up front analysis is a vendors best defense. It takes most of the work and complexity out of developing successful partnerships because it helps target partners who will be dedicated due to a shared business alignment.

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