To Channel or Not To Channel

I'm often asked whether software company X should leverage channel partners or not.

It's a nuanced question without a one size fits all answer. However, the best short response I've seen is from Per Steen Pedersen:

"If you have enough money: go direct.

If you have enough time: go indirect"

When companies go direct - they have the advantage of owning all aspects of the value chain (from strategy definition through product development to sales and implementation.) This is advantageous because it give them full control and they can optimize the entire process for their target customer. HOWEVER - the cost of owning and scaling every element of the value chain can be significant.

Conversely, companies using indirect channels leverage third party sales / marketing / dev teams to sell the vendors' products alongside their own products and services. Vis-a-vis...they build a business off the back of selling your products. And since you aren't paying the salaries / benefits of their employees it can be an incredibly cost-effective way of scaling your business.

So going indirect sounds pretty good...and if that is the case then why does it so often fail? Forrester (2019) found that only about 30% of vendors successfully achieve their desired outcomes through their channel partnerships.

One major reason is the the software vendor assumption that the business models and value propositions of the vendor and the channel partner are naturally aligned whereas in reality this is rarely the case. Hans Peter Bech notes that:

"The indirect channel represents a third party business model within our own business model"

Leveraging channel partners successfully requires we understand their business models and align them with our own. This includes understanding their back office cost drivers, front office revenue drivers, target customer profiles, customer care approach and (most importantly) their value proposition.

Many software vendors make the mistake of assuming they "own" their channel partners and can control how they operate. This mindset makes a successful partnership highly unlikely. Vendors may be able to change short term behaviours via finaincial incentives (higher margin / SPIFS etc) but they cannot control how channel partners run their business. In fact most channel partners don't even consider themselves a channel partner. They are a distinct business in their own right with their own motivations, strategies and problems.

Aligning value propositions is the magic sauce for successful channel partnerships. If the software company nails the technical solution, what is the value add that the channel partner can provide in order to provide a truly compelling joint value proposition to customers?

Unsurprisingly there are more software vendors looking for channel partners to sell their product than their are channel partners looking to partner with software companies

Therefore the vendor must lead this business model and value proposition alignment process. As mentioned previously it takes time and effort to do this. But the results can be immense. 95% of Microsoft's revenue is reliant upon their ecosystem of partners. That's over $150bn. Probably worth spending the time to ensure true alignment with those channel partners.