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Partners and the technology vendors they work with don't always see eye to eye. Nowhere is this more evident than in the cloud deployment and services business as vendors and their cloud channel partners transition to build out new offerings.
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In a recent PartnerPath webinar, Three Transformations to Manage Cloud Partners, Gavriella Schuster, general manager for the worldwide partner program at Microsoft, and Steve Mordue, CEO of Forceworks, an exclusive Microsoft cloud solution provider and a 2014 Microsoft Partner of the Year award winner, discussed their companies' respective journeys to the cloud and partnering perspectives.
In particular, the dialogue focused on the three areas in which vendors must make progress to better manage their cloud partners: developing metrics for measuring cloud success, organizing their channel teams and partner programs for a cloud model, and changing how field sales teams are compensated for cloud offerings.
Channel metrics for cloud channel partners
Mordue wasn't surprised that less than 1% of the 240 solution provider respondents to the PartnerPath survey measured cloud success by gross profit margin or customer feedback, while 70% of partners measured success by monthly recurring revenue. As the days of customers making large upfront IT investments dwindle and interest in as-a-service type models increases, partners are looking for new metrics to measure success, he said.
"I also think that as partners try to grow that [recurring revenue] number, gross margins may be suffering a bit; but we are in that chasm of partners making that transition from an older model to a new [business] model," he said.
Mordue also noted that Microsoft has done a lot of studies and development around the idea that potential investors currently value a partner's business based on recurring revenue.
Other metrics used by partners to measure cloud success: the number of new customers (46%); recurring revenue percentage (39%); lifetime customer value (30%); churn (12%); and gross profit margin and customer feedback (1% each).
Schuster wasn't surprised by partners' responses to the questions about metrics either, particularly the fact that acquiring new customers ranked high, while the percentage for lifetime customer value and churn was low. She believed this reflects business maturity and the need for partners to build up enough business that will, overtime, create more of a focus on lifetime customer value and churn.
Most vendor survey respondents measured their partners' cloud success by recurring revenue (50%), a metric that ties to cloud transformation.
Other popular metrics according to the PartnerPath study: net-new customers (45%); year-over-year sales growth (44%); resale revenue targets (37%); and influence revenue targets (27%). Krakora noted that these metrics were used for a traditional sales model. She also said that only about 3% of vendors measure success of cloud channel partners by lifetime customer value.
According to Schuster, Microsoft uses a different set of benchmarks that look beyond financials and toward the partner's business model, i.e. intellectual property or solution development partner such as an independent software vendor (ISV) or app builder; managed services provider (MSP) or hoster; project services or systems integrator; or traditional reseller. Those benchmarks look at a partner's level of maturity, considering factors such as:
- How unique is a partner's intellectual property, or how differentiated is its offering?
- Is it a repeatable offering, or is it a productized service priced per delivery?
- What's the partner's marketing maturity, i.e. is the partner using social and digital marketing and platforms to drive their business?
- What are a partner's practices around customer acquisition and retention? What is its focus on lifetime customer value across multiple product lines and services?
- How has a partner focused transforming its sales model and financials to support a cloud practice?
"For services-led partners, we evaluate their consumed revenue or the usage of the service they're delivering and how much they are trying to grow that revenue," Schuster explained. The consumed revenue reflects usage of the underlying platform and is tied to how much business value outcome the customer gets from the service and the technology.
"We also look at net-new customers over a 12-month period to see if the partner is growing and expanding in the market," Schuster added.
ISVs are measured on their application and uptake of the application by customers. MSPs are measured on their recurring revenue and customer churn, she said.
Channel partner management: Organizing for cloud
The next transformation area addressed was how vendors organize their channel team and partner program for cloud. The PartnerPath survey data revealed that 45% of vendor respondents have their partner program and channel team intermingled; about 30% created a separate partner program for cloud and separated their channel teams; and 25% have created a cloud specialization within their overall cloud program and channel team.
Schuster admitted that when it comes to how Microsoft is organized for cloud it's been a journey. About five years ago, Microsoft developed an incubation program with specific recruitment efforts and dedicated resources for cloud. "We needed to understand what would make a partner's business successful, how we would invest in them and set that up for success," she said.
Once Microsoft moved along the learning curve, it incorporated its cloud offerings into the overall Microsoft Partner Network in a way that could help more traditional partners to embrace cloud.
Gavriella Schustergeneral manager for the worldwide partner program, Microsoft
"Today, we have specializations or performance-based competencies for our cloud offerings that are mingled in with our traditional competencies. And we're shifting our focus to more narrowly define how to highlight partner differentiation so that it's in the language and measurement that our customers might have," said Schuster.
Microsoft is shifting the Microsoft Partner Network toward more of a customer-centric view, looking at how customers think about finding solutions, how they look for solutions, and the people to help them, she said.
At the same time, Microsoft is trying to better associate specific investments and benefits for partners based on the four partner types -- ISV, MSP, system integrator, or reseller. In the past, Microsoft had a more generic offering and program for partners.
"We're seeing that as partners differentiate, we have to differentiate the value we provide and the way we support them," said Schuster.
Mordue pointed out that his company aligned with Microsoft several years ago when Microsoft began offering Office 365 and Dynamics CRM in the cloud, and moved away from another cloud CRM vendor that wasn't channel driven.
The specific Microsoft cloud competencies around the cloud products in Forceworks' portfolio have helped differentiate the partner who focuses on the small and medium-sized business market. "It helps us stand out with customers and stand out internally with Microsoft," he said.
Mordue added that his company leverages every tool that Microsoft offers to build its cloud business.
Field team compensation
The third area of transformation, compensating sales teams, plays a critical role in how a vendor's sales team is incented to work with partners to help them build and manage a cloud practice and sell cloud offerings.
Oddly enough, PartnerPath research indicated that thirty-five percent of vendor respondents compensate their field sales teams for cloud offerings the same way they've compensated them traditionally, i.e. full contract value earned at the time of booking. Only 10% of vendor respondents created a compensation plan for their field sales teams that aligns with how the partners make money in the cloud, i.e. by monthly recurring revenue and/or for the life of the customer.
About 15% of survey respondents said they structured compensation based on current-year value of agreement, earned at the time of booking or renewal in subsequent years; about 13% said they structured compensation based on the full value of the first year plus reduced value for subsequent years, earned at the time of booking; and 12% said they had no plans to pay reps for cloud sales.
Moving to the cloud has been a smoother transition for Microsoft's sales team compared to other vendors, given changes that Microsoft made beginning in 2000, according to Schuster. At that time, the vendor moved from a more packaged product license approach to a site license enterprise agreement approach.
"At that time, we shifted everything in terms of field compensation to focus on the annual revenue, renewals, and customer churn," she said. "But we have a fairly complex sales compensation structure that depends on the segment of customers that the sales reps cover," she added.
Today, Microsoft field sales team compensation is rewarded on a combination of monthly recurring revenue and consumption or product utilization by customers. "That's similar to how we look at our partners," said Schuster.
The view of sales rep compensation from the partner side is different, according to Mordue. "There's no hunk of money upfront with a cloud sales," he said, and added that partners wouldn't be able to maintain a practice on the small payments customer's make or cloud revenue alone.
"You've got to wrap other things around it. We have IP for launching customers quickly around cloud which is a packaged service that has a price that our team can sell and earn a commission," he said.
Forceworks also augments sales compensation with a salary and makes commission a small portion of a sales rep's income.
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