Vendors Bear Responsibility for Evolving the Channel

lecture

Vendors get frustrated about partners’ slow pace of evolution, but that doesn’t absolve them of their responsibility to show solution providers the way to future business models and opportunities.

By Larry Walsh

Everyone from vendors and industry advocates to solution providers themselves and customers agree that the channel needs to evolve its business models, capabilities, and value propositions to meet the growing demand for cloud, managed, and support services.

But who, exactly, bears the responsibility of educating, guiding, and nurturing solution providers when it comes to these new business models?

It’s easy to say that solution providers are responsible for their own evolution and professional development. After all, they’re the chief benefactors of their maturation to new models. Or, conversely, they’re the ultimate losers if they don’t change with the times.

Just how much responsibility falls on vendors in helping to foster this change among solution providers? That’s a debate that Axcient, a provider of cloud-based backup and data recovery solutions, may have started with its new compensation model for solution providers that sell its services.

Let’s face it; solution providers aren’t embracing cloud computing as quickly as the vendor community needs. Cloud computing continues to represent less than 15 percent of solution providers’ gross sales, which means the return to vendors is anywhere from a quarter to one-half lower. And while it’s easy to say smaller resellers and service providers aren’t evolving, the truth is that large integrators and direct-market resellers are equally slow to pick up the cloud model.

Conventional wisdom says vendors need to do more than just talk about new business models. They also need to help solution providers change their operational and financial practices. But Axcient founder and CEO Justin Moore sees things differently. “It’s not my job to change [partners],” he told me. “My job is to sell more of my product.”

He’s got a point. His job is to sell his product in a way the market will accept. And, ultimately, solution providers are responsible for their own well-being.

But the solution provider side of that equation is the problem.

By and large, solution providers recognize the potential of cloud computing, but the recurring-revenue model gives them fits. It’s completely different from their existing one-time sales capture, making it more than difficult to balance sales priorities, commissions, and incentives for their salespeople. Further, it wreaks havoc with their cash flow, as they have to wait for revenue spread out over time rather than collecting money upon delivery of product or completion of work. And, of course, there’s the whole concern of not having control over the customer relationship when the service is delivered by the vendor.

Axcient’s answer to this conundrum: Treat cloud sales through the channel as a legacy product.

Rather than paying partners a portion of the recurring revenue, Axcient is giving partners a lump-sum compensation payment for cloud services sales. The intent is to get more partners selling its cloud services by giving them a compensation plan to which they’re accustomed.

With the financial barriers removed, Axcient believes cloud sales will climb. In fact, this is largely the justification behind its latest $25 million funding round, which will be used as a bank for paying out partners in advance of recurring revenue from services.

Axcient is making a big bet, especially since it’s bucking conventional wisdom that solution providers need to evolve their business models to incorporate or fully adopt recurring-revenue models from services. A lot of things could go wrong. Solution providers could reject the compensation framework as a gimmick and Axcient sales will go nowhere. Or, on the other end of the spectrum, solution providers could race to embrace the model, spiking sales and draining the coffers before replacement revenue comes through.

Moore is confident the new model will work, as Axcient has a high renewal rate, which means customers will stick with the service for five years or more. And the model isn’t an all-or-nothing proposition; solution providers have a choice of picking the lump-sum payment or sharing in the revenue stream – the money is essentially equal.

The larger issue is whether this model is good for the channel.

For years, suppliers (vendor, distributors) and channel advocates (analysts, consultants such as 2112) have encouraged solution providers to move out of their comfort zones and adopt cloud-computing and other service models. The future is largely based on services paid on a recurring basis. While solution providers continue to make money on legacy product sales and project-based professional services, the future is clearly about cloud-based services.

Yet the channel resists because the transition is hard and, frankly, the future is uncertain. Better to stick with what you know and what’s still working.

Who can blame solution providers for resisting? High-profile vendors, including Cisco, IBM, and Microsoft, have struggled with their cloud transitions. Vendors spend billions of dollars setting up isolated business units and lose huge sums of money in the course of their cloud transitions. Only after years of money-losing investments are companies such as Microsoft and IBM seeing a positive return. In the end, the cloud pays off, but it requires resources that few solution providers have.

By catering to the legacy compensation model, Axcient may gain in the short term, but it’s slowing the channel’s evolution in the long run.

Axcient wants to say it’s the first to come up with this model. It’s not. Others have attempted to put similar models in place, with solution providers getting early balloon commissions when they sell cloud services to offset the lost cash flow resulting from extended recurring-revenue systems. If history is any judge, Axcient’s success – assuming it will be successful – will cause other vendors to follow suit. The net result is reinforcing solution providers’ fears and insecurities about investing in their future and evolving their revenue models.

Moore is right that his primary job is to sell more of his product. It’s also his job to create customers that will consume his product. Solution providers are just as much customers as end users, and that makes it the job of vendors to educate them on the benefits and virtues of new consumption and payment models. Failure to invest in evolution could ultimately result in the extinction of the channel that vendors rely upon to bring products to market.

Industrialist Henry Ford famously said, “If I had asked people what they wanted, they would have said faster horses.” Axcient and other vendors that follow suit are essentially playing into that mind-set, giving solution providers more of what they want and not what they need. All vendors need to invest in their partners or create new ones that meet the future needs of the market. Failure to do so will ultimately diminish the channel’s value and deplete value-producing resources.


Larry Walsh, The 2112 GroupLarry Walsh is the founder, CEO and chief analyst of The 2112 Group. You can reach him by email: [email protected]; or follow him on social media channels: Twitter, Facebook, LinkedIn.


 

* Editor’s Note: To clarify the Axcient partner compensation model, resellers of the cloud services receive the first five months of recurring revenue in one payment as compensation. This is the equivalent of what Axcient would pay Axcient would pay if compensation was spread out over the course of the year. Axcient’s new compensation model isn’t monolithic; resellers have the option of taking the one-time annual payment or a monthly recurring payment.