The hidden costs of doing business with vendors

Over the years I have commiserated over a drink with many a reseller who complains about their treatment from their vendor partners.

They will be experts in some vertical market or other and, through years of hard won experience, know every challenge faced by retailers of banking or consumer goods or petrol. And they’ll enjoy complete mastery of the various types of technology provider that can solve the problems for customers.

However, there is one blockage. Each vendor has a channel manager who decides on the distribution of sales leads. Sometimes, for reasons that are difficult to fathom, that channel manager is often someone who has no understanding of what it entails to be a solution provider. They’ve rarely experienced the pain that resellers go through or the sleepless nights that self-employed people go through when they put their entire livelihood on the line to start a business. But they do enjoy the power of making people jump through fiery hoops. And consequently, possibly by accident rather than a deliberate policy, they make it incredibly expensive for their channel partners to do business with them.

Channel partners put in an incredible investment in time and money for vendors. Often, they are the ones who introduce the vendor to the UK. They pay to get accredited. They invest time in training courses and trade shows, manning stands and helping the vendor get established. Often, they end up having the rug pulled from underneath them when the vendor decides it wants to sell direct. Even when this doesn’t happen, the poor reseller has to faithfully turn up to endless meetings and events for which there is no guarantee on their investment.

The upshot is that there is cost of doing business with many companies. This is multiplied by each vendor that the reseller intends to support.

There hasn’t been any formal analysis of these hidden costs, as it’s been a subject people don’t want to talk about.

I experienced this myself when working for a large telecoms company that I won’t name. The market ‘wise’ person didn’t know the difference in business models between Cisco (which in those days made equipment) and Colt (a rival telco which comms dealer were showing great enthusiasm for as an alternative partner).

This is a problem that Vortex 6 can help the channel with.

Its CEO Peter Olive, says the channel has never been a tougher environment to operate in than it is today.

Margins are squeezed, rebate programs closely scrutinised and the reseller has to jump through hoops in order to maintain status quo and compliance with the vendors, he says.

In the last few years, there has also been an added challenge, bringing yet more disruption to resellers, as many of the large vendors restructure their business models, shifting away from hardware sales to focus more on software, cloud and annuity income.

Hang on though, isn’t all this cloud adoption great news for the reseller-cum-service provider? What about all those fabled continuous income streams? Isn’t life going to get easier?

Perhaps for the customer, but it’s hard for the reseller to restructure overnight, he warns.

While the channel grapples with this change in focus, the vendors are shifting their partner reward and support programs towards those resellers who are selling software over hardware and capital equipment.

Resellers have to change direction quickly, which is never as easy as they make it sound on those presentation at the open day.

The shift in channel rebate and compliance programs has caused many partners’ profits to drop significantly. “In some cases we’ve seen rebate programme income fall by half” says Olive.

Many vendors are now terming their software and services as ‘lifecycle practices’. In effect this covers the whole software annuity lifecycle with partner programs aligned or focused on making sure the reseller works with customers to land, adopt, expand and renew.

Yes, historical margins on hardware sales were around single figures whereas the margins on software and services are significantly higher.

This also means that not only are resellers working to redesign their sales strategies, but they need to fundamentally look under the covers at every part of the business.

A one-time big ticket licence sale has now been replaced with a two-year software annuity contract, which means that the revenue and support can be spread over three years.

Whilst longer term this might be more appealing to investors, it is hard to pay the bills on a monthly basis.  Resellers are being forced to evaluate every part of the business, to automate as much and wherever possible in order to channel resources towards higher value activities where staff can be more productive.

Now herein lies the problem.  Managing compliance with multiple vendor partner programs with vendor tools of varying functionality is challenging and risks resellers falling out of compliance at any time. The cost of falling out of compliance is significant and, as already stated, could mean a fall in profits, in some cases as much as 50%, at a time when the reseller can least afford it.

So why are these vendor programs so difficult to manage?

Vortex 6, which helps resellers to manage vendor partner programs has identified two major issues which they intend to solve. First, there’s the endless complexity. Second, there’s the methods that resellers use to manage the relationships. Amazingly many use spreadsheets, into which they pour the data from vendors about their fiddly compliance needs.

A reseller will have up to 12 vendor relationships to manage, which means taking in all the confusing prose of a dozen digital managers. What a nightmare!

Vortex’s V6 Fusion tools promises to bring in certifications, training, exams, costs, programme rules and rebate management into simple service.

The vendor shift isn’t all doom and gloom, says Olive. The potential upside is massive. “We’ve done the maths and if you stack all the rebates together you can earn significant margin, so the shift in vendor focus could bring really fantastic returns,” says Olive.

Let’s hope he’s right!