Call it a sign of changing times in the channel. Vendors have long talked about partner profitability, and how their programs and direction can impact profitability. But there’s a shift towards longer-term thinking, and in particular towards exit strategy thinking, at some vendors.
At last week’s Worldwide Partner Conference in Orlando, Microsoft became the latest vendor to talk about partners’ business with a close eye on the valuation of partners’ business. In a session at the event, global channel chief Phil Sorgen shared some of the “secrets” of Microsoft partners that end up with better-than-average returns when it comes to the valuation of their business. In fact, Sorgen said, partners who are more adapted to cloud and managed services can see their valuation spike to between five and 14 times their EBITDA, compared to two to four times EBITDA for the rest of the industry.
Sorgen offered four areas where the best partners excel.
Building Intellectual Property
Sorgen said it’s all about creating repeatable services, giving the example of a CRM Online SMB partner that decided to start building add-ons to the software, and then turned that business into its own “multi-million dollar revenue stream.” By including any or all of their own add-ons, which introduce functionality or vertical support to the CRM platform, the partner was able to boost revenues, and by offering the CRM license and the add-ons on a subscription basis, the partner was able to shift dramatically towards recurring revenues.
“Public cloud enhances this. Unique IP drives higher-than-average margins, and public cloud allows these companies to more efficiently distribute their apps and make those apps more discoverable to more customers than ever before,” Sorgen said.
Ah yes, the old channel bugaboo of a lack of marketing capacity and/or acumen. Still, in an era where customers have made much of their buying decision before ever reaching out to a vendor or solution provider, it’s more important than ever for solution providers to be on top of their game, Sorgen said. Of course, Microsoft offers its share of programs to help solution providers get ahead in marketing, from prepared collateral to a program where partners can get key advertising words on its Bing search engine.
Customer Acquisition and Retention
Sorgen told partners they need an “integrated sales and marketing process” that moves from leads through the sales funnel, and to think of customer retention as more important than ever in a world of recurring revenues. In fact, partners should think mostly in terms of total lifetime potential value of a customer, and should have teams in place to make sure that current customers stay customers and add more services over time.
“Once you’ve got them to the cloud, you have to keep them,” Sorgen said. “Upsell and cross-sell that innovation pipeline you’re creating.”
People and Measurement
Moving to recurring revenues and the cloud means a different compensation model, one that supports and encourages annuity and subscription sales, is necessary. Sorgen gave the example of one partner moving sales incentives form total quota to an incentive program heavy on rewarding growth, with an incentive for cloud uptake every month. As a result of making a compensation change plan, and tweaking the company’s management dashboard to keep a close eye on measurements that matter in a cloud world, Sorgen said partners can see a 3x to 4x margin jump on cloud customers compared to more traditional solution providers.
Making the Change
“These are the differentiators of those who are in the higher end of the valuation curve,” Sorgen said. “Benchmark against those, assess where you are today, and build a plan to move to the standards of the best-in-class.”
At WPC, Microsoft unveiled an assessment tool to help partners do just that. Called SureStep, the online tool is designed to help partners assess where they are in the cloud transformation, and suggests guidance for next steps.
In making the shift towards talking more about valuation, Microsoft joins Cisco, which has for three years been focusing its channel programs on what it calls “return on Cisco,” the valuation benefits partners see as a result of partnering with the vendor rather than simple profitability.
But it speaks to a bigger trend in the channel. CompTIA numbers suggest that there is a massive shift about to happen in the channel, as the “first generation” of solution provider owners are approaching the age at which they wish to figure out their own exit strategy, one that typically involves a selling the business, succession planning, or in some cases, deciding to close the business down. So the talk of building and boosting valuation, while always timely to business owners, comes at a particularly timely juncture.