Combating Channel Blindness Through Substitution
Many vendors’ management and investors fail to see the value contributed by partners; taking partners out of the equation can help them see more clearly.
By Larry Walsh
Unless you’re buying rocks from an excavator in a quarry, chances are every product you purchased for yourself or your business passed through a channel.
In terms of logistics, channels exist to get raw materials to refiners who transform them into pliable materials that manufacturers transform into components and products that get sold through resellers and retailers.
In terms of sales, channels are force multipliers. Channel partners extend a vendor’s capacity to cover the total addressable market, deliver goods and services, and support customers at a lower cost. Subsequently, channel programs are how vendors organize and manage partners at scale.
According to Forrester Research, as much as 70% of all goods flow through a channel. If you include sourcing raw materials through the manufacturing and logistics process, more than 90% of goods pass through multiple channels before landing in the hands of users.
So why, then, do so many channel chiefs struggle to demonstrate the value of channel programs and partners to their management teams and investors?
According to the forthcoming 2020 Channel Chief Outlook Report – the annual survey of channel executives by The 2112 Group – nearly one-quarter of channel chiefs and managers say they have a difficult time explaining the value partners contribute to vendor revenue and success.
For much of 2019, channel chiefs expressed frustration that, despite all of their work to enable partners and drive sales through channels, their efforts and results were not just unrecognized but questioned by management and backers.
At 2112, we call this problem, “channel blindness,” or the inability of some managers to see channel value because they’re blinded by preconceived notions about the channel’s lack of contributions or the high expense of going to market with and through partners. From some senior management and sales executives’ perspective, channels are a drain on budget and resources because they require effort – regardless of the level – to produce results.
The private equity community, which is snapping up technology companies left and right, has a particularly low view of the channel. When a PE firm invests in a vendor, it often wants to maximize the valuation. On the surface, the cost of channels often looks excessive due to the resource required to enable, manage, and support partner activities.
Feeding these blinding perceptions is how channels operate. In 2019, 48% of channel partners only fulfilled sales generated and closed by a vendor’s direct-sales team. Some vendors report that their partner-initiated sales run as low as 10% to 15%, with the balance driven largely by direct and inside sales efforts. As the thinking of the “channel blind” goes, cutting out partners will save tremendous expense, as they’re getting paid to pick up only the last mile of fulfillment.
Channels provide so much more to vendors than they often realize. While partners are often thought of as sales extensions, they’re also a catalyst for customer engagement that can be costly for vendors to take on themselves.
During a channel roundtable discussion hosted by 2112 and 360insights in December, a channel chief offered this bit of advice for combating channel blindness: Remove revenue from the value equation to see the other contributions that partners provide.
At 2112, we call this “discovery by substitution” – removing partners from any process to see what investments a vendor must make to compensate for the lack of partners in the go-to-market equation. Non-channel executives are surprised when they see the cost of replacing channel partners in many go-to-market and support functions.
Without distributors and other channel partners, many vendors couldn’t afford to sell to or support customers in many parts of the world, many vendors would miss out on midmarket and SMB sales too expensive to cover with direct sales, vendors would have to maintain large professional service organizations to deliver support to customers, and vendors would have to maintain inventories and manage logistics to get products to end users.
And the list of substitutions and expenses keeps growing.
Channel value goes well beyond revenue generation. Channel partners get paid only when they do something for the vendor or the customer. Without channel partners, vendors would need to create infrastructure and human resources to address the diversity of needs for successfully getting products in the hands of customers.
Channel blindness is the epitome of an old cliché: “a penny wise, a pound foolish.”
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Larry Walsh is the CEO of The 2112 Group, a business strategy and research firm servicing the IT channel community. He’s also the publisher of Channelnomics, the leading source of channel news and trend analysis. Follow Larry on Twitter at @lmwalsh2112 and subscribe to his podcast, Pod2112, on iTunes, Google Play, Spotify, and other leading podcast sources. You can always e-mail Larry directly at firstname.lastname@example.org.