When innovative technology vendors fail to innovate when it comes to managing their installed base.
I spend most of my time working with innovators inside IT vendors, distributors, and resellers across the globe. They are highly motivated and driven people whose products help end customers increase productivity or automate a business process. Often these leaders are also looking to upgrade their company’s internal business processes, reduce their costs of doing business, or increase productivity -- typically through channel sales. This can be an arduous journey given the many stakeholders, including executives, sales channels, operations, finance, and IT departments.
Yet when these innovative technology vendors discover a massive problem with their installed base through their global channels, they often fail to innovate.
Why Pushing Costs Down the Channel Won’t Work Long-Term [An Example]
Consider a large vendor that builds some of the best networking equipment available and is perceived as an innovative technology organization. This vendor realizes it is leaking huge amounts of renewal revenue and does not know which end customers have which products, or which channel partners they sold the products through. They also lack the mechanisms for systematic add-ons, upgrades or end-of-life campaigns.
After two years of extensive research into software solutions to this problem, the vendor chose instead to rely on Microsoft Excel spreadsheets to manage their channel renewals. The vendor’s channel partners will be required to fill in Excel spreadsheet requests and submit them to the vendor to get a renewal quote.
The productivity loss for the vendor to have a team receive, open and work manually on a spreadsheet is akin to using an abacus (ok, maybe a calculator) instead of an ERP system to run their accounting. This loss is compounded by the sheer size of the productivity loss from distributors and resellers across the globe.
The Opportunity Cost to a $1,000 Renewal
In the following scenario, let’s look at a renewal worth USD$1000.00 to the vendor, with margins of 60 percent for the vendor, 5 percent for the distributor, and 15 percent for the VAR. This simplified calculation demonstrates the impact on a single small renewal. (There are many other factors such as operating costs and different geographical markets with different salary bases and margins that can impact these figures, however, we've tried to be conservative based on our experience.)
You can see that the outcome of this decision comes at a great cost to this vendor’s own channel, and over time will either erode the vendor’s installed base, which is too costly for the channel to chase, or worse, the channel will move to a vendor who is profitable on the whole product’s lifecycle.
If the vendor had instead opted for a purpose-built platform such as iasset.com (with the caveats above) to automate many of their processes, we estimate the overall margin for all three companies would increase by 55%.
Many distributors and VARs have already implemented automated platforms internally, but they still have to fill in the vendor’s Excel sheet rather than use automation to get the requisite information. Every decision to increase productivity that simply ends up pushing costs downhill to the sales channel is destined to fail.
Do you know how well your renewals organization is functioning? Find out which metrics you should be tracking by downloading the “Renewal Program Metrics” ebook.