By Lawrence M. Walsh, president and CEO of The 2112 Group
Vendors acknowledge channel conflict is a persistent challenge in their partner relations, but they don’t nearly believe the problem is as severe as solutions providers, according to a new study by The 2112 Group.
In The 2112 Group’s Channel Perception: Vendors vs. Partners report, produced with the support of Business Solutions Magazine, solutions providers gave channel conflict a moderate rating of 5.66 on a 10-point scale. However, vendors’ channel executives answering the same question gave a relatively low rating of 3.75.
When the numbers are broken down further, 55 percent of solutions providers say channel conflict is moderate to high, where 59 percent of vendors see no conflict at all.
These divergent channel conflict perceptions are easy to reconcile. Solutions providers are the recipient, often not the source, of channel conflict. On a basic level, vendors create channel conflict when direct sales either intrudes on a partner’s account or sales opportunity with a direct pitch, or when competitive partners are brought into an opportunity. Solutions providers don’t perceive conflict as being unmanaged or terribly severe, but even rare incidents leave indelible marks.
Why is there channel conflict in the first place, and why do vendors perceive conflict levels as being so low?
The answer is found in how the available reseller pool is perceived. Solutions providers are mixed on whether there are too many resellers in the channel. From their perspective, there’s a relatively healthy balance of solutions providers to cover the total addressable market. They run into peer-level competition, but it’s not persistent or taxing on their sales.
Vendors, on the other hand, are not as concerned about peer-level reseller competition. Their objective is selling more products as fast as possible in their assigned markets. Solutions providers, systems integrators, direct market resellers, managed services providers, and cloud service providers are conduits to market and customer relationship managers. And just like customers, vendors can’t have too many channel partners.
The arithmetic on vendor’s approach to market is simple: If the average channel partner has 25 customers, and the vendor recruits 1,000 reseller partners, it has a potential customer pool of 25,000. And if each of those customers spend $10,000, the gross sales top $250 million. In this equation, continual growth is driven by adding more partners to the channel network.
Not every vendor wants a thousand partners. In fact, many companies speak of wanting “the right partners,” which is code for dedicated resellers demonstrating alignment, loyalty, and productivity on a vendor’s behalf. Building and maintaining channels come with a high cost that goes beyond the margins surrendered to partners. Vendors must build support systems that provide partners with sales and marketing materials, logistics, sales and technical training, certifications, and accounting. And all this comes after the cost of recruitment, which can run into the tens of thousands of dollars.
By focusing on “the right partners,” or narrowcasting channels, vendors maximize their returns with a minimal cost of channel operations and support.
Unfortunately, narrowcasting channels doesn’t necessarily produce optimal results — and, neither do broad channels — which is why nearly all vendors maintain direct sales on some level. Even the most ardent channel-centric vendors that profess to have 100 percent indirect sales models and revenues will have direct relationships with customers on some level. The three main reasons: customer choice, coverage for the gaps the channel cannot address and, in many cases, to drive sales and fulfillment through the channel.
The vendor motivation is simple in all cases: to drive unit sales. And many vendors perceive they have more control and better return on investment through direct sales. Channels exist because direct sales come with fixed and indirect costs that prevent scalability.
The byproduct of this diverse go-to-market and sales strategy is conflict, as channel partners will almost always perceive direct sales as a competitive threat. Vendors and their direct sales organizations do themselves no favors by intruding on partner opportunities, demanding account registrations, restricting product sales through the channel, and imposing steep certification requirements.
Vendors aren’t oblivious to the channel conflict issue. Vendors that don’t perceive any channel conflict would attribute the absence of a problem to the measures taken to manage conflict issues. Vendors use various techniques for regulating conflict, such as rules of engagement that define the relationship and parameters of direct and indirect sales, teaming agreements and business plans.
The most popular channel conflict management tool is deal registration. Nearly every vendor with an established, sizable channel program uses deal registration, which protects sales opportunity logged by partners from encroachment by direct and peer-level competition. Vendors and solutions providers give nearly equal middling ratings to the effectiveness of deal registration programs. Slightly more than one-half of the vendors and solutions providers participating in the 2112 study say deal registration is effective in controlling channel conflict and protecting partner sales opportunities.
Deal registration is seen as a necessary evil. While only moderately effective at managing channel conflict, deal registration is necessary for protecting many of their opportunities, according to solutions providers. Moreover, vendors often offer incentives, such as increased margins and rebates, for registering sales opportunities.
Solutions providers are often suspicious of deal registration because many have experienced rejected applications that get flipped to direct sales or competing partners. Some solutions providers say deal registration gives vendors an opportunity to approach a customer for a secondary direct sale.
Vendors agree deal registration could be better, but don’t see another replacement system on the horizon. In the absence of a better means for controlling conflict, vendors say deal registration is the best mechanism.
Vendors and solutions providers equally agree the transparency of deal registration decision-making processes could be improved. Solutions providers say vendor communication on deal registration causes problems, and the reasons why deals get approved and rejected are poor. Vendors concur. Only 18 percent of vendors and solutions providers say deal registration communications are very transparent.
Deal registration transparency is a noble goal, but one for which vendors are reluctant to provide insights on approval and rejection processes out of concern for enabling partners to game the system.
It is clear in the findings of The 2112 Group’s Channel Perception: Vendors vs. Partners report that channel conflict remains a divisive and disruptive issue between solutions providers and vendors. The assessment of the problem’s severity is based entirely on the operational needs of vendors and the negative experiences of solutions providers.
Lawrence M. Walsh is the president and CEO of The 2112 Group, a business services firm focused on the strategy, growth and channel development of technology companies, where he serves as the chief analyst and researcher. Contact Larry at email@example.com. For a full and free copy of the Channel Perception: Vendors vs. Partners report, go to: http://the2112group.com/channel-perceptions-report-2013/.