Sales cycle influencer model reduces conflicts for most parties involved
Kenneth G. Beam, President & and Founder of The VAR-City, speaks with Tamara Halbritter of Expert Access
Relationships are tough. You give, you take, you fight. Sometimes it takes a while to find a compromise that will work for both parties. But once you do, the next time you have a conflict, you are better equipped to handle it effectively, from both sides.
In the same way, since the beginning of time (when computers came about), conflicts arose largely due to how complicated the high-tech sales cycle became. When manufacturers sold directly to consumers, conflicts were minimal. Then resellers entered the picture and shook things up. Strategic alliances, Independent independent Software software Vendorsvendors, and OEM niche markets added layers to the sales cycle and convoluted the process. The players learned to work together in certain ways, but old grudges never died.
Now, low-margin product sales give way to the delivery of higher margin services. Solution providers must constantly change approaches as a result of consumer expectations, and their vendor partners must react accordingly. As partner profiles change, some direct direct-sales people continue to do battle with resellers as the economy remains questionable and the competition becomes fierce for new markets.
Luckily there’s a peace--keeper near.
Another player has entered the mix to reduce conflict and simplify the sales process: the sales- cycle influencer. This creature can be any one of the many species out there: a system integrator, Value-Added Reseller or VAR (which becomes an oxymoron as you’ll read later), independent software resellers and all kinds of Original Equipment Manufacturers (OEMs).
"Back in the ‘old’ days, it was simple," says Kenneth G. Beam, President and& Founder of The VAR-City, in an interview with Expert Access. "Manufacturers sold directly to consumers. Now the sales cycle is quite complex. Fortunately, the way sales are now being influenced, and relationships are changing, the end user, the manufacturer and most of the players in between benefit."
In the following interview, Kenneth Beam shares with Expert Access his impression on the shifting partnership landscape.
EA: Please give us a little background. How has the high-tech sales cycle changed from 25 years ago?
Beam: The first big change was the formation of the indirect sales channel. This sales cycle went from vendor to reseller to end consumer. Over the years, other players were added in such as the OEM and the distributor. The middle players, the resellers, morphed into Authorized authorized Resellersresellers, Value-Added Resellers (VARs) and Systems Integrators (SIs). Today, there’s another player involved, the Sales sales Cycle cycle Influencerinfluencer.
Just to give you an idea of how this has all changed; here’s a list of the organizations that have been involved since the beginning:
Manufacturer (Vendor)
Reseller
Original Equipment Manufacturer
Authorized Reseller
Value-Added Reseller
Systems Integrator
Independent Software Vendor
Sales Agent
Sales Influencer.
When the indirect sales channel first appeared, resellers survived on profit margins from products. As they became Valuevalue-Added added Resellersresellers, they earned 65 to 70 percent of their profits from products and the balance from services. Over the last three to five years, Systems Integrators integrators have become less interested in selling products and more involved in connecting and servicing them. These resellers don’t have to concentrate on quantity of product sales; instead, they bundle and serve.
Now that computers are plug ‘n play, the manufacturer is back to directly pushing products out the door. This is forcing Valuevalue-Added added Resellers resellers and Systems systems Integrators integrators to rely on services to replace some of the revenue lost on products.
With hardware profits only in the single single-digit range and software about 25 to 35 percent (if not squeezed out somewhere down the food chain), these resellers have evolved to survive. Services provide a welcome refuge with profit margins from 50 to 65 percent.
Enter the Sales sales Cycle cycle Influencerinfluencer. This player comes from one of a variety of reseller-type organizations to influence the sales cycle by making product and service recommendations to a business. The influencer sometimes gets a direct cash fee (such as 10 percent) for recommending that a particular company buy a certain product (unlike Sales sales Agentsagents, who always make recommendations for the cash fee).
EA: What is the difference between a Sales sales Cycle cycle Influencer influencer and a Sales sales Agentagent?
Beam: There are a couple of big differences between sales cycle influencers and sales agents. Both are motivated differently to make their recommendations and earn percentages according to how involved in the sales cycle they get:
Sales cycle influencers remain actively involved in generating product sales (where they have the expertise to profit from the services components). Their driving force is to see that a given product / system is purchased by the end-user, with the appropriate services, and is installed correctly. They manage the entire process: the installation, setup, training and implementation for the project. They’re aggressive participants in demand generation and the sales cycle. Without taking possession of products or keeping track of inventory, they work with the buyer up to closing, and then the vendor actually closes the sale. They receive a pre-negotiated fee, or sometimes a percentage from the eventual sale of the product.
Sales agents generally hold positions in other industries, such as a certified public accountant or a healthcare professional or consultant, and perform the tasks related to their field on a regular basis. Sales agents "happen" across opportunities. They rarely, if ever, tie their revenues into post-sales product implementation (therefore, they don’t get involved in all the transactions or the delivery of products or services). They’re passive representatives of products and earn a percentage of the total transaction.
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The History of the High-Tech Food Chain
Approximately 25 years ago, manufacturers sold directly to consumers through their sales force. Today, sales occur in a variety of ways, with the sales cycle influencer currently emerging as a new force, and arguably becoming the predominate leader. How did we get from there to here?
See how the "food chain" has changed.
Manufacturers sell directly to consumers at retail storefronts.
The indirect sales channel appears as manufacturers sell to resellers (retail outlet) who sell to consumers.
Manufacturers sell to distributors who sell to resellers who sell to consumers.
Original Equipment Manufacturers (OEMs) appear and manufacture only particular components such as an embedded software line sold with a manufacturer’s product.
As products become more complex, resellers are trained and certified to be Authorized authorized Resellersresellers.
Authorized Resellers resellers begin to sell solutions rather than individual components and become Valuevalue-Added added Resellersresellers.
Value-Added added Resellers resellers become Systems systems Integratorsintegrators, and not only sell solutions from various manufacturers, butbut also imbed embed these hardware and software solutions into large businesses.
A hybrid of the Systems systems Integratorsintegrators, and Independent independent Software software Vendors vendors write original software, or bridge the gap between disparate software, and sell these products / services to businesses.
Sales Agents agents (usually in unrelated fields) recommend a product and receive a percentage of the total sale.
Sales Cycle cycle Influencers influencers (previously resellers / solution providers) recommend a product, oversee the product implementation and let the manufacturer’s direct sales force close the sale.
EA: What benefits does the sales cycle influencer provide for the end end-user?
Beam: The sales cycle influencer is a solution provider, whether a VAR or systems integrator, who takes on the role today that might best be described as a general technology contractor. When a business identifies it has a performance issue or a functional requirement, a solutions provider brings together a bundle of products and services they incorporate and integrate. This sales influencer does not purchase the products; his company coordinates and organizes all the functionality needed into a single cohesive package and solution. This way of working provides the following benefits for the end end-user:
Exceptional performance from disparate systems. The influencer who used to be yesterday's systems integrator is familiar with disparate environments (because he has worked with many types of systems rather than just one, like Oracle). This person is more skilled at taking the product out of box to exceptional performance, without running into connectivity issues. This improves the service situation for the consumer, who might have a hybrid solution with a lot of different products. The sales influencer’s knowledge becomes a source of comfort to the person making the buying decision.
One point of contact for failure or changes needed. The sales influencer acts as the single point of contact for many possible points of failure. Like any chain with links, the more you add, the more potential failure points there are. As another benefit to the end end-user, the sales influencer prevents the old "its not my problem" scenario. In the past, if one product didn't work, the blame was transferred to one of the other four manufacturers (if five products). Now the sales influencer manages the entire implementation and protects the customer from finger finger-pointing. Instead of the client having to go to eight or 40 different companies for a solution or changes to a solution, the client has one single point of contact.
Neutrality ensures the best recommendation. Because recommending a certain product or solution does not involve direct profitability on the sales cycle influencer’s part, the buyer can rest assured the product recommendation is for the best product solution for the buyer’s current needs — instead of the solution providing the most profit for the one recommending it. Think of the sales influencer as the mechanic rather than a manufacturer of Ford or Chevy automobiles. He’ll put together the best solution for a company’s particular business needs. In addition, he’ll have experience and expertise with all of the products and services recommended.
Local credibility garners professional respect. Most sales cycle influencers are local companies that know the field and the best solutions in the area. That garners more respect from the buyer than from the guy in the $2,000 suit that flies in from parts unknown to drop off a solution and leave. If a company has local roots and a well-known reputation, this gives them credibility and builds confidence.
Better price. Although the end end-user has to cut more checks, (the influencer gets his money up front and the individual components are paid for separately), since they are invoicing for each component and service, they see exactly what they are paying. The middleman is, in a sense, cut out and doesn’t make any hidden profits.
EA: What benefits does the sales cycle influencer provide for the manufacturer?
Beam: The manufacturer benefits in the following ways:
Penetration in other markets. In the same way the end end-user benefits from a local recommendation (say the agent is a local company employee, like a CPA, who recommends a local systems integrator as the sales influencer), the manufacturer also benefits. By having someone recommend products in a new area, the manufacturer can penetrate a particular market even if the manufacturer is not represented in that area. The local representative gets a better level of rapport with clients than the manufacturer "from somewhere else."
Credit line of reseller doesn’t impact product delivery. An extremely successful reseller constantly bumps up against her credit line and sometimes stalls on selling a particular manufacturer’s product due to her outstanding invoices. The reseller will play the accounts payable game and go to another manufacturer with a broader credit line. In the sales cycle influencer model, credit lines are not an issue with the manufacturer, because the client pays the manufacturer directly. The reseller’s credit limit does not impact delivery of a product or change the recommendation to another manufacturer, because the sales influencer is taken completely out of the equation.
More business opportunities. Besides earning more business by returning to the direct channel, thanks to the Internetinternet, the entrance of sales cycle influencers provides one more avenue for manufacturers to reach new customers.
EA: What benefits does the sales cycle influencer model provide for VARs (resellers) or system integrators?
Beam: Becoming a sales influencer, benefits VARs or SIs in the following ways:
Higher profitability. Being a sales cycle influencer reduces the costs associated with handling products, or anything that has a negative connotation due to possible failure. Instead of the VAR buying products for $500K, selling them for $600K, and waiting for six months on the customer’s payment, the VAR is not caught up in an accounts receivable cycle. The manufacturers deals with those types of issues. Also, when products fail, the sales influencer is not processing the return merchandize merchandise authorizations (RMAs),. nNor does the influencer have to worry about limited credit, aged receivables or rampant discounting to stay competitive.
Better IPO opportunities with a simple balance sheet. A lot of VARs, especially large ones that aspire to be industry leaders, want to go from privately owned to an IPO. In order to make this a reality, they need to show profitability above revenues. Making millions of dollars a year, with 10 percent profitability, is not as impressive to investors as making $500,000 with 40 percent profitability. Carrying products can disrupt the balance sheet and look bad to investors. Without handling products, the balance sheet can be simplified.
Expanded credit line. The sales cycle influencer does not have to spend money on products up front, or worry about limited lines of credit, which makes the money they receive more accessible. They can use those funds for other things such as adding employees.
Reduced channel conflict. One of the best characteristics of the sales influencer model is that it either totally eliminates or reduces "channel conflict." Any manufacturer or VAR can tell you horror stories about channel conflict. To give a brief example, let’s say an end end-user wants a product. The manufacturer has a sales rep with a large quota and his livelihood depends on selling products. The VAR knocks on a potential client’s door with the same product, but will sell it at a reduced cost so the VAR can get the services profit from the sale. These types of conflicts can give both parties a bad taste in their mouths. With the influencer model, that situation never exists. Now the direct guy loves the channel guy because the influencer says, "I went to ABC Company and they want your product. Go in and get the order."
EA: Do you have any tips for making this new type of relationship more successful?
Beam: To be effective, this new way of working is really as much philosophical as business case and infrastructure. Both the sales cycle influencers and the manufacturers want it. Once they see the benefits, they must be willing to make changes in their product delivery model to compleiment both parties. This whole new level of relationship may feel kind of like going from a messy divorce to being great friends afterwards. Companies need to change their expectations of each other.
Some companies are already becoming more successful at it than others, mainly, because they are holding onto old (proven) beliefs, and embracing the new concept.
We’re all in the middle of this changeover process, which makes it both scary and kind of exciting. It comes down to figuring out a way to make this new relationship work and be profitable.
The solutions providers are leading this effort, but some of the manufacturers are not making the compensation adjustments necessary to make the relationship work. One person greatly affected is the direct sales person. Is his compensation package in line with the new philosophy? If not compensated properly, he has no incentive to change his current way of working. Until the compensation plan is adjusted from both sides, the relationship will not be successful. The manufacturer needs to encourage the sales person to make the activity adjustment to be in synch with the philosophical concept, compensate him well, and he will be aligned with the reality of the influencer model.
No matter what ground rules you lay, one person will go to his grave saying, "Channel people always make a mess of things," regardless of how he is compensated. But for the most part, because the sales influencer model removes channel conflict, and reduces competition, most people involved should make the adjustment pretty easily.
EA: How do you see the future of the sales cycle?
Beam: I see the sales cycle influencer going beyond a trend to actually becoming a reality, especially during this economic squeeze. The process is evolutionary. Although we are going full circle to a certain extent, this new way of working is positive for all three parties involved. The sales cycle influencer model is the wave of the future.
Unfortunately, as with many influential changes, not everyone involved will be affected positively. The sales cycle influencer could diminish profits for the distributors whom have made their money by moving products. As the solution providers’ roles change, the distributors will stop investing millions of dollars in products and delivering them to the resellers (two-tier distribution). By removing the Valuevalue-Added added Reseller reseller as the reseller, distributors may go the way of the pterodactyl. Distributors will be forced to evolve, and shift their focus, just like the VARs and SIs are currently doing.
Ken Beam is President and Founder of The VAR-City, a Channel channel Consulting consulting group that blends proven techniques and "Best Channel Business Practices" with emerging technologies and external influences to deliver timely results-oriented Cchannel consulting consulting services. His 23 years of IT industry service have been dedicated to making the Vendorvendor-Reseller reseller community a better place to live and work.
Tamara Halbritter is a freelance writer for InternetVIZ, a custom publisher for companies wishing to find, acquire, and retain customers through Internet internet newsletters.