Episode 8: Channel Strategy with Harald Horgen from The York Group

The theme of our eighth podcast episode is Channel Strategy.

Joining our host Jeremy Balius to discuss all things channel strategy is Harald Horgen, Founder of The York Group.

Summary

In this conversation, Harald Horgen discusses his background in channel development and the evolution of the channel business model. He highlights the importance of cultural transformation in channel strategy and the challenges of navigating different business models in the channel. Horgen emphasizes the risk and reward of channel partnerships and the need for strategic alignment between vendors and partners. He also explores the concept of opportunity versus risk in channel relationships. He highlights the rapid and radical changes that can occur in the channel, as well as the importance of strategic partnerships.

Key Takeaways

• Channel partners are often reluctant to take on the risk of promoting new products, as it can disrupt their existing business models and relationships.
• Understanding the different business models in the channel is essential for vendors to identify the most suitable partners for their products.
• Opportunity and risk are inherent in channel partnerships, and vendors must provide support and value to their partners to mitigate risk and foster success. Channel partners are expected to create value for their vendors, but they are at risk of being replaced or marginalized.
• Recent events have shown that changes in the channel can be swift and radical, highlighting the risks that channel partners carry.
• ISVs should be cautious of opportunistic channel partners who may only be interested in a single opportunity.
• Analyzing partner performance is crucial for ISVs to identify and address non-performing partners.
• Developing strategic partnerships requires designated salespeople, activities-based marketing plans, and becoming an important part of the partner’s business.

About Harald Horgen

Harald Horgen is an acknowledged expert on the challenges of building a successful international channel for technology products.

As the President and founder of The York Group, an international business development organization with partners across all major geographies, Harald has been opening new markets for his clients since 1993.  He has been personally involved in setting up channels in Europe, Asia, Latin America and Africa.

He has worked with clients of all sizes, from small start-ups to industry giants such as Microsoft, Symantec, HP and Dell.  His clients have come from more than 20 countries, including the U.S., Europe, South Africa, Australia, New Zealand, Singapore and India.

A native and citizen of Norway, Harald attended high school in Canada, business school in Oslo and graduate school in Arizona.    Fluent in English, Norwegian and French, he lived in France for 14 years, which by itself makes him an expert on overcoming cultural challenges!

This is often a make-or-break strategy for companies as they expand beyond their domestic markets, and as is often the case, the difference between success and failure usually comes down to understanding a few basic principles that drive the business model.

Connect with Harald on LinkedIn.

Jeremy Balius: Hi, welcome to this episode of B2B Tech Marketing Talks podcast, where we engage with leading marketing and channel leaders to get fresh perspectives and practical advice on the latest trends, effective strategies, and best practices for B2B tech marketing. I’m your host, Jeremy Balius. Today’s theme is Channel Strategy.

I’m very excited because I’m joined by Harold Horgan today. Harold is an acknowledged expert on the challenges of building a successful international channel for technology products.

He’s the president and founder of The York Group, an international business development organization with partners across all major geographies.

He’s been opening new markets for clients since 1993, personally involved in setting up channels in Europe, Asia, Latin America, and Africa, working with clients of all sizes from small startup ISVs through to the multinational conglomerates and giants like Microsoft, Symantec, HP, and Dell.

What’s fascinating about today’s conversation is the ability to go deep on channel strategy and really unpacking how to make the channel more profitable, uh, into the future and how to grow together with your partners, with the right partners.

So let’s get into the conversation.

Hey, Harold, thanks so much for coming on the show today.

Harald Horgen: Thank you, Jeremy. I’ve been looking forward to this. I’ve looked at some of your other interviews podcast and you got some really good guests, a lot of good content.

And for those that are viewing this, I would really recommend two in particular, uh, the Canalys one with, with, uh, Jay McBain and the Schneider Electric on the MDF, uh, the content of both of those were outstanding.

Jeremy Balius: Thank you. So you’ve been working in the channel a really long time before we get into, the York group and, where your focuses are with channel. Could you give me a bit of a background? What’s your origin story? Where did you start and how did you get to where you are today?

Harald Horgen: Okay. Well, I’m from Norway originally, uh, moved to the US to finish a master’s degree and stayed in the US. Okay. And then started doing some international business development for companies from Arizona.

And one of those companies was and I’m going to give you a little bit of a history of channels and how channels have evolved.

One of those companies was one of the early franchise companies. So in the early days of PCs, there were companies that set up franchises because nobody knew what a PC was. Nobody knew what software was. So they had the McDonald’s concept. There were companies like Computerland, Indicom, and the one that I represented was Microwave Computer Centers.

And so everyone’s getting into the computer industry. Teachers, accountants, lawyers. This was the next big thing, but they didn’t know anything about it.

So they had this whole concept of this is how you set up your store. These are the brands that you carry. And it was a franchise model where they charged an upfront fee for territory and a royalty of 6%.

And that model worked for a while until these. Store operators got to know what they were doing. And I said, why are we paying 6%? And, there was a rebellion against these, these, uh, franchise operators on the fee structure, and they couldn’t sell new territories. And then it became a distribution business.

And the franchise operations all lost out to the specialty distributors, companies like, uh, uh, tech data and Ingram, and that knew how to move product.

And that became the value add for the channel, uh, from a distribution standpoint, they didn’t need to know how they didn’t need, they had the skills, they had the customers, uh, what they were looking for was someone that could distribute products to them, uh, very, uh, very cost-effectively and on time.

Uh, so then the model switched to distributors and these, these Franchise operators became resellers and in the early days. So we got into this, uh, so microwave, uh, I moved to France for an 18-month project with microwave and a European partner that we’re going to drive this franchise concept across Europe.

And, uh, they hit it right at the top when things were going down downhill. Uh, so it was very difficult to get the franchise operation set up. Um, but, um, moving from Phoenix to Paris. That’s quite an experience. And my wife said, Well, do we want to go back to Phoenix, live in the desert, or do we want to stay in the Paris area?

And she said, No, we want to stay in Paris. And so we kind of reconstituted the business from there, working with American software companies that were expanding into Europe, because I developed a really good contact network. And so we’re doing this in the nineties.

So it’s really one of the first channel development consultants, uh, one of the pioneers in this space because channels were just emerging client server software was emerging VC funded companies were emerging and channels were looking for new products to sell.

Everything was new. So building out a channel at the time when you were VC funded company from the US was quite easy. Uh, everyone’s looking to grow their business. Everything was in that new logo because. They had a limited customer base. They were all looking to expand their business. And so, so that’s when channels really became an important part of the business model.

And then the big companies like Microsoft and Adobe, uh, they all professionalize the, uh, the channels. So that’s, those are the early days. Um, and we’ll get into the conversation about how the channel has changed, but that’s how I got started.

Jeremy Balius: So you’re on the front end of channel consultation, you’re developing market entry, uh, I would imagine there’s a lot of cultural transformation required.

Is that something that you started getting into as your, uh, Norwegian background, American educated, uh, now Paris based you’re helping American software companies enter Europe.

I would imagine that there was a lot of change that’s happening within you as well, as you’re not just taking on this new beast of channel strategy in its infancy and growing wildly, but at the same time also helping, uh, helping organizations shift culturally as well, would you say?

Harald Horgen: So at its core, 90 percent of businesses is the same everywhere. Uh, somebody makes something, somebody sells something, somebody buys something. Um, but how that is executed varies by culture and there’s a huge cultural gap between European countries.

So a French company that’s a very poorly trying to sell into Germany. Okay. Uh, French companies don’t do well selling into the UK. UK companies don’t do well selling in Italy, uh, because it’s not a European market. And one of the things that we found out very early was that us companies thought that, well, we’ll, we’ll go to the UK or we’ll go to the Netherlands and we’ll set up our office and we’ll sell to Europe.

Uh, and it doesn’t work that way unless you set up local operations as well. The cultures are different. Um, the way they use language is different. The perception of contracts. So, uh, us companies are very. Driven by legal agreements, the legal agreements are very important because they define the relationship.

So very often you have a us company with a reseller agreement that is 20, 30, 40 pages long, because they want to anticipate every eventuality in the contract ahead of time, because if it’s not in the contract, it becomes a loophole and it becomes an opportunity for the partner that discovers the loophole to get around something and take advantage of their partner.

In France is much more. Well, we need two pages and we need a two page agreement saying that we’re going to work together to create this opportunity and achieve this objective. And if things don’t work out, we’ll sit down and figure it out. So, so a US company would go to France, a French reseller would like the product.

They would sign the contract without even reviewing it. They put it in the drawer. And then a week later, a question would come up. And they would call the US vendor and say, Hey, uh, Jack, we need to get this, this, uh, this, uh, result. And Jack was like, Philippe, look at paragraph 6. 1. 3. It’s addressed in there.

And the guy says, Well, I haven’t really read the contract. So there is a big cultural difference. Um, the, the way, French, the French and the southern Europeans referred to American and UK business practices have an angle Saxon way of doing business, very straightforward, make, make decisions, get things done.

And we, we were doing the channel development for a us company in France. And we’d set up, it was like six months process. And we had the perfect partner for them in France. It was a, uh, a fairly large French, uh, systems integrator. Uh, and this was going to be a strategic product for them. And, uh, we’re dealing with this at the CEO level.

The company had about 2,300 employees. So it’s a fairly sizable operation in France. The U S, uh, managing director or CEO went over to France to finalize the agreement. We had our business sessions. And then as a French do, they said, Hey, uh, we’ve arranged for a very nice table, a reservation at a nice restaurant.

Uh, we’ve got lunch scheduled from 12 o’clock to two o’clock. Let’s, let’s head over. And the American CEO said, you know, I think I’ll just go back to the hotel and work out. Right. And that was, and that was the end of it. There was, there was just no relationship.

So there are, there are, there are cultural differences that you have to be sensitive to.

But, uh, but people, people travel more, and I think they understand that things are going to be different. So as long as there’s a, some level of tolerance for differences, then it works out.

As long as the fundamentals are in place. It’s when people get really focused on the details. of a contract or the relationship and, uh, and they try to manage it based on those details that things don’t work out because those details will be different in Japan, in Singapore, Australia or France.

Jeremy Balius: I am fascinated by this background and, and, uh, I think really inspired by it as well. Being an American living in Australia, Raised in Germany and having this multicultural background as well. Um, and having the ability to navigate, uh, with humility and with empathy is really powerful and I think often under celebrated, in, in terms of how valuable it can be.

And so it’s, it’s amazing to hear that. that grew into this, but then thrived into it. Now, since since the nineties in the early days, you’ve expanded and worked across. I think you mentioned some 20 some odd countries at this point organically over time.

Harald Horgen: Yes. So what happened was in the nineties, we ended up with some products that were early, very early in the US. Been very early in Europe that became international successes. And so we started out working across EMEA and we built the channels and those products were generating millions of dollars of revenue. And then we took those products into Latin America, Asia pack, and built out a similar network in, in, uh, in those markets.

So that’s, that’s how it grew. And our business model has always been, uh, subcontractors and partners, uh, more, when we wanted to be fancy, we said it’s kind of the KPMG model where people work independently and there’s a revenue share, uh, sharing model with a percentage that sticks with the house.

So the people that have the client in one country get a percentage of the revenues, the people that are doing the work in another country get a percentage of the revenues.

And so it’s all very much based on performance and that works out well for our client because there are so many jurisdictions where you simply don’t want to have employees. If you can avoid it, you don’t want employees in Europe because of the, the, uh, the legislation there.

So, so then, um, that grew very quickly and then we hit the, uh, the, the tech bubble in 2000 to 2004 and the business model changed.

There was a huge shakeout both on the software side and the channel side and the channel companies that survived that survived because they had a strong customer base and the business model for channel partners stopped being.

Let’s take on new products and look for net new logos and grow our business became much more focused on how do we monetize and leverage the relationships that we have with our existing customers.

So where, where before, uh, a new ISV, a new software vendor could go international and expect even a small to midsize partner to invest in sales and marketing to grow the logos in the marketplace.

Now it’s very much, no, What can we sell to our existing customers? Is there an opportunity with those existing customers?

So the business model has been turned upside down. And for especially early stage software companies, it’s become very, very difficult for them to establish a meaningful relationship with what we call the traditional channel partners for a couple of reasons.

One is the channel partners are reluctant to take on the risk of a new product.

And it is a risk. And I’ll come back to that because it’s an important element as we were growing our business.

Things didn’t always work out and I couldn’t understand why we sat down and we analyzed all of the point to point relationships that we had set up for all the products and all the channel partners because we have a partner that was very successful in Denmark with with one product, for example, but that a partner in Brazil who had the same profile as the Danish partner and selling the same product wasn’t successful or from our perspective wasn’t doing well.

And, uh, so we sat down and analyzed everything that we had done and the, and the outcome. And we had some epiphanies. Uh, one of them was that, that, uh, what we found out was that we are with our channel partners, we are either strategic or we’re not.

When we started the business, we thought that there would be a linear progression of performance by partner, one partner, one market would sell one license, one, two, three, four, five.

And we find out, no, no, it’s either that they really adopted the product as part of their business. And if they didn’t, it becomes very opportunistic and reactive. And so the difference of performance between a partner that sells on a consistent basis and the opportunistic one is orders of magnitude.

And if you look at most channel programs today, people talk about the Parader rule, the 80/20.

It’s not. That’s aspirational. If you look at most partner communities today, if a vendor has 5-10 per cent of his partners performing on a consistent basis, that’s pretty good.

Very, very few have had 20%. Look at Microsoft. Microsoft has somewhere in the order of magnitude of about 400,000 partners worldwide.

10 per cent of them have silver and gold competencies have made that investment in Microsoft.

That’s 10 percent and Microsoft drives a really organized professional channel program with training and progression and really encouraging the partners to to build up their competencies within within Microsoft.

So, uh, so it’s just so that was one epiphany was that. Either we’re important or we’re not. And then we understood why we weren’t important and why we might be. And it was all around aligning the business model.

One of the things that we, again, in the early days misunderstood, uh, was how much risk we were asking the partners to take on.

And, and, uh, and we had the same attitude as our customers. We fell in love with the product. They had this great little solution. They were doing okay at home, wherever home was.

All the partners had to do was go out and sell it. And, uh, and the, the, the partners like that said, you know, we don’t look at you as an opportunity.

We look at you as a risk. We’re making money. We have a business. We have no two or three strategic products. We have a portfolio of another 20 or 30 products in case people ask, because, uh, the, the channel ended up specializing for the most part, the ones that survived.

They specialized in a vertical, became retail specialist, manufacturing, financial services, or they specialize in certain application areas, became security or collaboration, financial services.

They had special areas of specialization, and that specialization was very often driven by. The success of one or two products initially, and they were the ones that they just happened to be really good at, so they became really good at retail, and so they added more solutions, but their business is still driven by a core set of products that drive most of the revenues, the ones that are important to them.

So when we come in as a new vendor, we want to be strategic product number three, rather than portfolio product number 31. And what that means is that that channel partner has to change their internal processes because everything now is focused on those two or three products that drive 90 percent of the revenues.

Sales, marketing, admin, customer support, order processing, everything is built around those products. And so when we come in with a new vendor, we are going to disrupt what they’re doing today.

And the more of a disruption we are, the less likely it is that’s going to be successful. So we’re coming in and saying, Oh, you need to learn something.

You need a new competency. That’s a real disruption. Uh, you need to invest in marketing. That’s a real disruption. And so when, when, uh, an ISV goes and approaches the, the, uh, the channel partner, they’re often speaking in different languages.

They’re, they, the ISV is so proud of this product. They spent 20 man years sweating blood building this product and they put all their engineering skills into it and they underestimate what it takes to sell something.

So from the partner’s perspective, when the software vendor comes knocking on the door, they look at it as you’re asking me to take on a lot of risk. And you say, well, what risk are you taking on?

Well, first of all, sales and marketing risk. It’s the risk that we put some money into a sales and marketing program and it doesn’t work for whatever reason, wrong message, wrong product, wrong customers, wrong economy. It didn’t work out. But that’s part of the business model and the channel partners accept that.

That’s part of their role. If they, if they take on a new product, they’ll, they’ll do something to test it out. So that’s one level of risk. The second level of risk. Is that the, that they do quite well with it, and especially with the SAS, uh, SAS product.

So you have Johan in Germany that does really well with a new solution and he’s building up his revenues and it takes typically 12 to 18 to 24 months under recurring revenue model for the channel partner to get to a revenue level that’s sustainable and generating profits.

And, but not just Johan, but, but partners in three or four other markets are doing well and the ISV gets acquired. So Microsoft comes in and buys them. Or Oracle or Amazon or Google, someone buys them that has an existing infrastructure of partners. So Johan wakes up because now his vendor has been acquired the next morning.

There’s there are 600 other Microsoft partners in Germany. Better now certified and authorized to sell this product. So whatever preferential relationship Johan had with the ISV goes out the window.

So there’s a huge risk for the channel partner, making this investment up front in the sales and marketing, absorbing the losses while they’re building up the revenue stream.

That that revenue stream is going to disappear either because the ISV gets acquired, or in some cases, the ISV says, Oh, no, Johan is doing 3 million. We’re getting 3 million a year from Johan and he’s getting a 40 or 50 percent margin.

That means that his top line is six or 7 million. Now, why don’t we just set up our own office?

Cancel the contract with Johan and sell direct and keep all that money ourselves. We can set up an office with more people. And what the ISV doesn’t understand is that Johan has relationships with those customers.

And when Johan gets canceled and an American company or an Australian company or South African company comes in and tries to usurp that position, they don’t want to deal with that company because they feel that their vendor that they’ve had a relationship with has been, been poorly treated.

So that’s the second level of risk. The third level of risk is that, is that, uh, Johan takes this. Unknown product to Deutsche Bank, which has been a client for 15 years.

One of his, one of his strategic accounts, Deutsche Bank looks at this and yet we got a project that’s just really well, they take a look at it, they put it through testing and they come back with six pages of questions.

I guess that’s what Germans do. And so they had six pages of technical questions and Johan says that to the vendor in Dayton, Ohio, and, and, uh, and the vendor says, you know, we’re trying to close out our quarter, Johan. We don’t have time for this. Uh, and this pushes it aside.

So what does Johan put at risk here, his relationship and his reputation with Deutsche Bank on behalf of a brand that nobody knows in Germany?

Uh, so the quality of the vendor and their support for the channel partners becomes that third level of risk, and very often early stage software companies simply don’t know how to be good partners.

They know how to develop a good product, but they don’t know how to support a partner and make sure that they’re taking care of and their customers are taken care of.

So from the when you look at from that perspective, the channel partner is expected to take on an enormous amount of risk, and all the ISV is providing is the I P. So this is why, especially in today’s environment.

Channel partners are very, very reluctant to make a new product strategic. All the changes internally, uh, the targets, the expectations, the investment, but again, all the risk that they’re taking on with that new vendor.

So that was a, that was a big epiphany for us. And, and, and that, that became kind of the fundamental that. Okay. We need to understand that. So when we’re, when we’re now going out and recruiting a channel partner, we’re not having a product or technology discussion. We’re having a business discussion. We have to understand what the business model is for them.

And then we address this. So we have to understand that. And so that gets us to the next element of the channel is that. A lot of, a lot of early stage ISVs in particular, they think that channels are channels are channels. Partners are partners are partners.

They don’t make a distinction between different business models. And, uh, there are so many different types of channel partners now. So there are the traditional buyers, the value added resellers that we’ve talked about. There are systems integrators. There’s MSPs, managed service providers. There are, are LSPs, licensed solution partners.

Like, uh, in, in Australia, you have, uh, Data#3, you have, uh, Crayon, you have SoftwareOne. The companies that do the high volume licensing of enterprise agreements for the major global vendors. You have two tier distributors, you have consulting organizations, uh, and each one of them has a different business model.

And so, when a software company is going to a new market, they have to figure out, so what, what business model is best suited for their product? Do they have a product that is purely transactional or no services?

And the only revenue that the partner is going to make is from the margin on the product, then that’s one business model, or is it a very complex enterprise solution that is going to drive a ton of services, and that’s going to become an SI model.

Uh, is it so when you look, and there are a lot of products that simply don’t work with the distribution channel. The distributors are working with resellers. Resellers are working primarily with S. M. B. Customers. And so it’s a high volume business. And so how do you make it interesting for a distributor?

Well, the distribution business today is a, is a pay for play, typically. Uh, that you want to go to a distributor and want them to push you out to the, to their channel, then you’re going to write them a check to drive the marketing campaigns, to do the, the seller onboarding. Uh, and it’s just a pure pay for play.

And for most smaller companies, they don’t have the luxury of doing that. They don’t have the budget to do it. But, uh, so for each type of solution where we start off with this, so who’s going to buy the product and when they buy the product, what’s involved in the transaction, what does the transaction look like?

And based on that, what are the most suitable partners? And then what is the business model going to be? So that if we go and talk to an SI, we’re not going with the product that is just purely transactional and is that it’s transacted over the web. Zero interest for them.

Uh, we’re looking at a more complex solution that can drive hundreds of thousands or millions of dollars in services, but then it becomes a low volume play for the ISV because the system’s integrated.

It’s really just looking at the services component. Uh, the, the IP is just a way of driving a project or being included in a bigger project. Uh, and that’s why. For a lot of channel partners, there’s a mismatch between what it actually takes to sell and support the product and the profile of partners that they’re chasing.

Jeremy Balius: There are many points to unpack here. Uh, and I think some of the, some of the points you mentioned, we could dedicate a whole show to, to really go deep.

The concept of opportunity versus risk is illuminating for me, particularly because.

Working on both sides, both at partner, level, trying to deal and make sense of having a stack of, let’s say, upwards of 12 vendors that they partner with, that they’re, take, bundling solutions around and taking to their end users, but also being exposed to the vendor side and, how to enable partners and work with them and so forth.

Even today I see this real mismatch in the way you’re describing it as opportunity versus risk. I think paints language around, there’s a, there’s a, I don’t know whether it’s an institutional ego or a brand ego or something at the vendor side where There’s a seems to be a belief that if you just bolt onto us, that your profit margins will go through the roof, that you have all this opportunity, that if you get in with us, you have it made.

And that is a deep, deeply held belief. And this is while what you’re talking about seems so common sense. This belief goes deep at the ISV level that, that they are the enabler, that they are the, the, that they are the ultimate unlock for their partners and the reality couldn’t be further from it.

Harald Horgen: No, every ISV has that approach almost down the line and, and they all have the same pitch. They’re, they’re talking to a channel partner and say, You’ll love our product. It’s the best product. It’s the only product in the world that does blah, blah, blah, because they’ve all read Crossing the Chasm. Uh, so we’re, we’re unique.

And you can use our product to upsell to your existing customers, and you can use it to open up new accounts. What could be better? But when a channel partner hears that day in and day out from hundreds and hundreds and hundreds of thousands of ISVs that are contacted without having done any research into who they are, who their customer base is, and the services that they provide.

On the risk side of it, let me just tell you, I use anecdotes and stories to illustrate a lot of the points. That’s what people walk away with. That’s what they remember. And on the risk side, we use a story about the three legged pig. Farmer Bob goes to visit his friend Farmer John. He parks his car, jumps out, and he sees a little three legged pig limping around the barnyard.

And Bob says, Hey, John, what’s the deal with the pig? And John says, Oh, Bob, that is a, that’s a very special pig. That is no ordinary pig. A couple of weeks ago, in the middle of the night, our house started burning. That pig came in, oinking and squealing, woke us all up, saved our lives, and probably the house.

Two days ago, my little boy fell into the pond. That pig dove in and pulled him to safety. Now a pig like that, you don’t eat all at once. It’s

Yeah, that’s the fate of a channel partner. They’re expected to create all of this value for their vendors. And the business model for channel partner is that they are going to be consumed one way or another. They’re going to be replaced, but with other channel partners, they can be replaced by direct sales and replaced by marketplace.

The vendor will do whatever they can at some point to reduce the revenue stream and the margins that go to their channel partners.

Jeremy Balius: It’s interesting to think about that anecdote as well as this concept in light of recent reminders that change can be radical and swift and global. Uh, and the reality, has been shown recently, even with Broadcom making

Harald Horgen: Mm-Hmm, Oh, yeah, yeah.

Large scale

Jeremy Balius: changes in the VMware side of their channel. And, and that was, I mean, they gave them 30 days note. I mean, the, the, the, the radicality of these changes are swift and that that just highlights even more this risk that these, these guys carry.

Harald Horgen: Yep. Yep. Absolutely. So what they’re much more likely to do is just just kind of focused on the business that they have at hand and for them to add something new to the equation.

The only an exception to that, and this and this is a risk risk to ISVs is that a channel partner has just lost one of their two strategic vendors. So a big chunk of the revenues are gone. What do they do? Frantically search for a replacement product. Right.

And the way channel relationships are established is a very typical pattern, and it’s that the ISV gets an email or an outreach from a channel partner in some market.

The, the very often channels don’t develop because there’s a structured outreach, it’s because they’re getting inquiries. And so they get an inquiry from, from a, uh, a partner in Albania and uh, and the Albanian partners calls ’em up and says, I know that you are a Microsoft or an AWS partner and I’m an AWS or Microsoft partner, uh, found your solution and I have a customer that needs your solution.

We love your product and we’d like to be your partner. Now, what does an ISV do in a situation like that? The human nature is, oh wow, you found us, you love us, you want to work with us? Yes, here’s our agreement, and, and let’s get started, because they got that opportunity. Well, the minute the ISV sends that agreement to the partner, the partner knows that the ISV has no clue as to what they’re doing.

Why would they send and resell agreement without any qualification, no business discussion, no planning, uh, channel partners know when a vendor has a structured program and they don’t. So the channel partners contact them because they have an opportunity. They have a customer that is going through a bigger project.

They need several slices of technology. Uh, the, the channel partner didn’t have that particular slice. They do a search on, on, on the partner website. They find that ISV and they contact the company in Dayton, Ohio. Thank you. And it’s only to fulfill that one, that one customer. In the meantime, they sign a contract with a dating company and now they are an Albanian reseller for, for, for this company.

They’re getting a 30 percent margin. And then the ISV sits back and waits. Okay, now, now that you’ve done this, we’ve been through this process. We provide all the support, go out and fetch. And the partner doesn’t. Um, because number one, the, the ISV has just shown themselves that not have a clue as to what it means to, to, to have a channel program.

And they were just contacted for that one opportunity. And if they could get a 30 percent margin, they’re great. They’re happy to sign the contract. Now they have a whole drawer full of those types of contracts. The other, the other scenario is where, uh, the, the partner has lost one of their strategic accounts.

And now they’re frantically trying to make up for the revenue and they go out and they’ll sign up 20 or 30 or 40. And spray the market with, with an initial outreach and see if any of them land and get traction in all of those cases, they, one of the risks that the ISV does that they look at and ISV will look at that.

It’s like, well, it’s a found opportunity. If it works, it works. If it doesn’t, it doesn’t. But if they do that in an important market like France or Germany or Italy or Australia, and they didn’t really have a structure and a strategy around channels, but they’ve ended up with these random ad hoc relationships and have people that quote unquote represent them.

So now they’ve had, they’ve had Jean Pierre. In France, represent them, represent them for three years. You know, they had that one initial deal. And then a year later, they got an email from one of their sales reps saying, Oh, we have another opportunity, but it’s a different sales rep that went then went through the first deal.

So he doesn’t really know the product well enough to sell it. And they say, well, could you please get on a call with us and make the presentation and help us? So they, the vendor. Quite naturally to support the partner gets on, they go through all of these things and they, they really drive the sales process and maybe they do the POC and they do everything they need, they can do and they close the deal and the partner collects their 30 or 40%.

And then you sit back and say, well, I’ve got two of them go out and fetch and nothing happens. So two years later, uh, the, the, the same thing, rinse and repeat, because it’s all very random.

And for, for that was what’s happened for the ISV is that they’ve got two or three customers that they might. Or may not be able to support, but they’re relying on a partner who doesn’t know the technology well enough.

So they’re getting probably all of the support calls directly to them or through the partner back to them. Uh, so they’re absorbing all of the costs that are supposed to accrue to, to, to the, the channel partner. But then they’ve done well in the U. S. and they’ve been to Australia. They’ve done well in Australia.

They’ve done well in the UK. And now France is a strategic market. That’s it. We’re really going to focus on France because we have a couple of references. So they start going through the partner recruitment process, and they have some very qualified companies that they’re talking to. And then those companies come back and say, Hey, wait a minute, uh, Jean Pierre is your reseller in France.

Well, yeah, yeah, yeah, but he’s not a serious partner. It’s just very random. Yeah, but Jean Pierre’s had it for three years. Jean Pierre’s got these other products that he does really well with. So what’s the issue here? Is it, is it Jean Pierre? Is it the product isn’t suitable for France? Is it you as a vendor?

You’ve actually polluted the market. For your brand by having something just sit on the shelf because or the competition is going to use that so the your competition might be better established in France and now your new partner is going up against them and the other channel partner is going to say, you know, that product’s been in France for three years.

Only two customers use it. You really want to take the risk Mr customer of buying this product that nobody wants.

So there’s a, there’s a, there’s a, There’s an opportunity cost, a hidden cost reputationally that ISVs don’t necessarily appreciate when they have this network of opportunistic reactive ad hoc partners around the world.

Jeremy Balius: Let’s say, let’s, let’s say I’ve got a channel program and I’ve got, Uh, uh, and I, and I’m not deeply cognizant about which partners are profitable or which aren’t. I’m, I’ve just been growing my channel program and, and, and as you’ve been saying, I’ve therefore been attracting a lot of these opportunistic partners.

They’re individually not really growing, but I look really good because I’ve been growing. Uh, net new logos into our channel program, and therefore our business appears to be growing. I haven’t really needed to go deep into the metrics. If I were to start, what would I be doing and what would I be uncovering within the partner base?

Is, is this where you’re talking about if I, if 5 percent of my partners are transacting well, I’m actually. On par with most channel programs. And then what do I do about it? Where do I start?

Harald Horgen: The fact that you’re on par doesn’t mean that it’s acceptable. Uh, yeah, so you do get to the point where somebody says, you know, you’ve got, we’ve got 800 partners and why are only 40 of them actually producing revenues and we need to take a look at this and, uh, and because everyone talks about, okay, you’ve got your performing partners and then you have the long tail partners and what do you do with that, that long tail, uh, and what companies don’t always.

Really calculated. Well, what is the cost of support? Because they don’t look at it at all. If they, if they, if they throw us a deal every once in a while, it’s all additive. It doesn’t matter. So there’s no cost associated with it. But I went through, I’ve been through a number of scenarios like that. And, and, um, there’s a company up in Montreal.

They had, they had, uh, Hundreds and hundreds of partners. They were all, they only sold indirect and, uh, and the, the regional managers that managed the local partners were all copped on just the top line revenue. So they didn’t care if a partner produced five or six thousand. It’s all additive for them to help their cop.

And it’s not done with the CFO. And we went through a couple of different levels of analysis. I said, uh, that’s it. That’s the guy’s name. Um, Why don’t you, let’s, let’s calculate your, your partner break even points. And what do you mean partner break even point? I said, yeah, so take all of your direct costs that are associated with support of this entire network.

There were, there were 800 partners in that network. And so you’re the cost of the offices, your regional managers, marketing, SPFs, MDF, everything that, that is directly associated with the channel. Take that number divided by 800 and they did. And it was the number of $17,000. And he said, Oh, and I said, okay, but it’s worse than that.

That’s just a nominal break-even point. Now look at all of your support calls and break that down by revenue. And what they found was that 60 per cent 60 or 60 per cent of the calls came from partners that represented 6 percent of the revenues.

So the actual cost of the non-performing partners was much, much higher than the $17,000.

So, so I said, okay, We need to do something. Uh, and I said, yes. So let’s, what do you do about that long tail? And, um, and we, we went through an exercise of analyzing the partners and putting them in the kind of, you always have the four quadrants, right? Uh, the, the, the, the magic quadrants.

And so the, the top left where what we call, we call them the low performer, Uh, high potential and very often those are partners that weren’t selling a lot of your product because they were, they were married to a competitive product, but that’s, that’s what they’re of the business.

They wanted us as plan B or as a fallback as an option. And, uh, but if you can do a win back strategy with those companies, then the improvement in performance is orders of magnitude because they go from. Not selling much at all to selling a lot, either they go from being opportunistic to being strategic and the top right hand quadrant were.

Uh, high performers, high potential, and that’s a sweet spot. That’s a 5%. That’s a 5 per cent that is generating a lot of revenue, but also growing and investing and continuing to drive new new logos.

The bottom right is the most frustrating quadrant. Those are the high performers, low potential. Those are the partners that hit typically four or 500, 000 in revenues.

Cause that’s what one salesperson can generate if they’re dedicated to a product and they were generating four to 500, 000 and had absolutely no interest in moving from it. That’s, that was their, the part of the business that they allocated to this vendor and you can never go back and say, well, how do we get this to a million?

How do we grow it? They were just weren’t interested. And so for those partners, you say, okay, well, fine. We’ll just maintain. Me. Very happy to do with doing, uh, and we’ll just support you. The bottom left is the, the long tail. Those, those are the partners that don’t produce. And there you have to make a decision.

Do you move them up? Do you move them out? Uh, or do you change the compensation structure? A lot of times ISVs as they’re growing the program, they don’t manage or change the margin structure. Uh, and they’re overpaying the non performers because they, they got 30 per cent when they close the deal, they’re getting 30 per cent on renewals.

But why are you paying the 30%? Therefore, fraternity on on on renewals when they’re not putting any effort into it. And that’s where there’s a real potential to drive more growth. And so in that quadrant, the exercise is to go back to them with a kind of a new improved program. But you give them a decision.

Uh, are you in or are you out? And if you want to maintain your 30%, then you have to make an investment in marketing and you have to hit a certain revenue target or a net new logo target in order to maintain the 30 per cent and whatever that level of certification is.

And if you’re willing to buy into it, we will take some of that margin and Give it back to you in MDF, but, but co funded MDF, uh, and then, then you make it, but you have to give that opportunity to everybody.

You can’t just start slashing. There has to be a quid pro quo and an opportunity. And then you find out the ones that are willing to make an investment. If they’re not, if they’re not, then drop their margin. I went through this with, uh, with another, it’s a smaller company. Uh, they had 140 partners, but the partners had been with them forever.

And, uh, and they were all getting 40% on everything, 40% on net new upsells, renewals, maintenance. Everything was 40%. And when we went through that exercise and we slashed the, the non-performers from 40% to 10%, it freed up $1.8 million in annual cash flow for the vendor. Unreal. And I said, okay, so take half of that and put that into marketing.

Take, take, uh, of this. So now you have $900,000 in marketing. Take 300,000 of that and just give that. No strings attached to the top right quadrant. because they’re going to put it to good use. They want to grow their business and you’ll get a return on it. Just here’s here’s $50,000. Go spend it. Drive new business for us.

Uh, take, take, take, take another chunk and use that for a win back program uh, to, to get that top left-hand quadrant. Uh, and then whatever’s remaining goes to the bottom left that actually sign up and say, yep, we’ll sign up for $20,000 marketing campaign. Here’s our $10, 000. Here’s your $10,000. And we really want to make this work.

But you still have not $900,000 left over every year. So you have this real boost in activity in three of the four quadrants. That’s one that you can’t do anything with, uh, boosting activity. U

h, and you also then be, I can filter out the, the non-performance. And if you’re willing, if they’re, you know, the, the, the big pushback that I get from vendors when we go through that exercise.

Yeah, but they’re gonna be really upset with us. I said, so are you? You think they’re going to say no to 10%? Yeah, they’re going to be upset. That’s right. Yeah. And they say, yeah, but what if they sell the company? Well, they’re not selling you today.

So what’s the downside? You’re just freeing up cash. And sometimes you just have to take that brutal decision, a business decision to do what’s best for you.

Uh, when partners about live their usefulness. And in some cases, well, Below this level, if they never get beyond five or 10, 000 and there’s no hope for growth, let’s just get rid of them because we can cut down the overall infrastructure costs of maintaining channel partners that aren’t producing revenue.

Jeremy Balius: It must be so confronting for them to consider large scale change like this. Because there, there’s this paradox of not wanting to rock the boat too much and lose partners. But at the same time, that might be the best outcome, uh, uh, the bad fit partners.

Harald Horgen: Great. But once I see the numbers, that’s what, that’s, that’s okay. We were talking about millions of dollars here and, and, and really accelerating the growth of the performing partners and it becomes, okay, yeah, we just need to do this.

They don’t, they, they haven’t really gone through the calculation. So they don’t know what the carrying costs are.

Of the long tail and non performing partners. Uh, very often they have in these organizations, especially if they have a direct and an indirect sales channel, they’re both. Reporting up to the to the vice president of sales, which we never recommend.

I mean, there should be a different reporting structure.

Uh, then, then, uh, the, the, the partners are the second most important because the direct sales will always drive the bigger chunk of revenues. And so every two years, they’ll look at their channels and say, you know, this isn’t really working the way you expect it, and they just replace the channel manager, and they’ll assign a pre-sales person or somebody from the marketing department.

Hey, why don’t you go run channels for two years? It takes that person two years to really understand the things that we’re talking about now, the real dynamics of the, of the channel and what they need to do. And by that time there’s, you know, why, why haven’t you grown 10 or 20 percent we’ll just replace.

So as you get this, this cost of turnover in channel management, Uh, that, that makes it very difficult to have continuity and to build a strong foundation. And then nobody, ultimately nobody is really responsible for fixing the problem that’s accrued over many, many years.

Jeremy Balius: Yeah, and that’s that’s a that’s a killer right there.

Nobody owns any of this. I want to take you back to a point you were making earlier around Relationships that and you mentioned Jay McBain earlier And this is something that’s been core to his messaging over the past year and and beyond Um, around partnerships and what constitutes a real thriving partnership and the relationships therein.

He cites distributors like Pax8 as being the gold standard of developing relationships at grassroots level and it’s really taken a number of years of blind commitment to accelerate to being the fastest growing distributor. So I’m going to ask you a question, and I’m going to ask you a question globally now.

Why is it so hard for business leaders in the channel to think strategically and pragmatically around developing relationships when they don’t have the numbers to match up? If we develop relationship, we get X return. And how do we work through that to change the channel for an ASV going forward?

Harald Horgen: Yeah, it comes back to the different business models that different partner types have.

So a distributor, PAX 8, they do a really good job with SAS solutions. They provide a lot of enabling services, they have a lot of training programs. But at the end of the day, they’re still a volume based distributor. And for an ISV to get meaningful mindshare from a PAX 8, no, you’re going to go into the catalog.

PAX 8 will, will, will drive the initial campaigns of awareness, um, and they’ll get you exposure with their channel partners, but then either you get traction or you don’t. Or you come in and you provide a funded marketing program to drive awareness and be a little bit more selective of the partners that you work with.

So, uh, it’s still for an early stage, ISV is still a very difficult model to scale. Uh, and so when we look at partnerships, let me, let me back up a little bit and say, so what’s the definition of a strategic partner? Because that’s what you want when we’re talking about partnership. It’s really that partnership, uh, where, where both companies are working closely together.

And what we found was that there are three characteristics of a strategic partner, uh, in the, in the business model. Um, uh, the first is that there is a, at least a designated salesperson in the partner organization. Now that could be within a Paxator. This could be one person that is responsible for managing that ISV.

So they, they all have account managers for the global ISVs. Because of the volume, uh, and, and you can’t really get that in a Disney model if you’re, if you’re a low volume ISV, but you can get that with, with, uh, pretend with an SI or with a bar or other channel partners that are selling direct to the end user.

So the, the first thing is, is somebody getting compensated for the revenue on your product. And it’s something that a lot of ISVs overlook. They, they, they’re signing a contract with a company. And then the company could be the owner of the company that said, Oh, yeah, and here’s our revenue. Target is 300, 000 for the first year.

And now you sign a contract with a company, but a company doesn’t sell products. People sell products, and if you’re not getting down to the level of the salesperson in the organization, that is simply not going to work because there’s a disconnect between the owner of the management that signed the contract and the people that have to go out and sell the people that have to go out and sell.

They already have stuff they’re doing today. They’ve got their KPIs, they’ve got the comp structure, and just throwing another product at them doesn’t change. So, so what we want, so the first part of it is, are you important enough to them that they will at least designate, not necessarily dedicate, but at least designate somebody that goes through training, gets to know your product well enough that they can sell it on their own, and then gets directly compensated, not just get a commission structure, but also impacts their KPIs.

And so if they don’t have the KPIs, that comp mix. That’s, that’s, that’s one characteristic. The second is that the partner, whatever discipline is commits to an activities based marketing plan. So, you know, in a direct sales organization, salespeople don’t generate leads. They work on the leads that they get from the marketing department.

And it’s the same thing within a reseller organization. So if the reseller organization, Doesn’t do a regular cadence of marketing activity. Uh, then there won’t be any leads. Those leads won’t go to a reseller to the to the seller and the seller won’t bother. So as part of a contract, a contractual relationship with a strategic partner, we want to see a marketing plan that we call that activity space.

Do one thing every month to drive pipeline. That could be a seminar, a webinar, a email campaign, SEO campaign, direct sales, whatever. And each partner has different comfort levels with things that they know work for them. That’s fine. Just do whatever you do for these other products that you sell. Do that for us every single month.

Because then you can monitor that. You can see the activity and you can help them build a pipeline because the salespeople, once they have leads, they know what to do with it. They’ll follow the leads and they’ll pursue the leads, but they need to be fed those leads. And then the third element of the relationship is that, that you become part of their survival toolkit.

What we mean by that is that you become important enough to their business. That if you go away, it’s going to have a real negative impact. They’re going to feel the pain if you go away for whatever reason. And that means that when the economy turns, they don’t, when they start cutting back on the priorities, you’re not one of the things that they cut back on.

And, uh, so. And that’s the revenue impact that you have on the organization, not just from your product, but any pull through revenue. It could be pull through revenue from adjacent products. Uh, so you know, you’re selling a solution that always pulls through SharePoint or, or M 365 or, or, or, uh, a CRM system.

Uh, that, that because you have a point solution for specific industry, uh, and then the services, and this also becomes part of that. The business model planning. So if you as a as a vendor understand what’s involved in your transaction, you can go to a partner, say, Well, every time you sell our product and our product is 50, 000, it pulls through 100, 000 in services.

You’ll make the margin that it pulls through 50, 000 of adjacent technologies. So when you create a solution, you now have a 200, 000 solution. It’s not the margin you get from our 50, 000. It’s the margin you get from the 200, 000. That is a completely different business model for, but you have to connect the dots as the vendor.

It’s your responsibility to connect the dots. And so the more you can impact their overall revenues directly and indirectly from your product, the more important you become, then the more strategic you are as well. And you have a longer term relationship. So those are the three things that we look at.

Those are the three common characteristics. And this is also. For, for an ISV, it also defines the partners that they’re going after. Now, if you, if you potentially can generate half a million or a million dollars in revenue for a partner, well, for a partner that’s doing 10, 20, 30 million dollars, that’s significant.

But if it’s a Disney that’s doing a billion dollars, then it’s the drop in the bucket. They don’t care whether you go away and what happens to you. You don’t move the dial for them. So can you get the, but then there are also large organizations that are broken down into groups. So, uh, A telco, for example, might have different, uh, different teams for different verticals and different technologies.

So the telco might have a huge revenue stream that you’re not going to impact, but you could be very important to the healthcare, uh, part of their operations and the team that is running healthcare. And so you look at what the percentage of revenues that you can be for the people that make the decision about whether or not to invest in the sales and marketing to support your solution.

Jeremy Balius: Harold, the sheer amount of experience that you’ve accrued, I think is coming out in the clarity that you’re able to paint for this, and I’m very, very appreciative of the way that you were able to articulate this, uh, strategic intent in a way that makes sense for people. It’s just, I think business ISV side who are either taking channels to These are hyper intelligent people, but they believe that if they just build it, then they’ll thrive.

They just, they, they think the sprint is just to get the channel up and running and, and then hyper growth from there. And, and what you’re really painting is, the fact that the sprint, to develop the program was really the to sprint to the start line that the race is actually starting at the point of launching the program, and there’s a lot of work to be done from there.

Harald Horgen: Yeah, but when it works, when it works, the channels are the fastest, most cost effective way for a venture to expand into a new market. Very few vendors, even the large ones, are trying to push more and more of the stuff through the channel. Dell is doing that, I mean, Cisco, VMware, they’ve always had, up until recently maybe, had really strong channel programs.

Microsoft has had really strong, they’ve always been, in the past, prior to 95 percent of their sales go through channel partners. Now they are changing their business model, because so much of what they do is just transactional. Uh, you don’t have to provide services to, to process an enterprise agreement.

So, so why are you paying a margin to someone that’s just processing a license? Uh, and they’re also putting more and more emphasis on the marketplace. So these are all dynamics that impact the, the channel partners, uh, because they’re starting to lose what were traditional, reliable revenue sources.

Jeremy Balius: You’ve given us so much to reflect on. I’m deeply appreciative of you sharing your insights and, thanks for coming on the show.

Harald Horgen: No, thank you very much for having me on the show. But as you can tell, I love channels. It’s when the model works, it’s the thing of beauty. And it’s a way for small companies to really grow exponentially at relatively low cost if they put the time and effort into building the program properly, or if they’ve been out there for a while and they have a partner program that isn’t operating optimally, then there’s remedial action.

It all comes down to the very basic common sense. Things that they can do as long as they know what to do. One of the things that, that drives us crazy is that, that the companies over invest in the technology and the process side of the channel. Uh, and then a lot of the partners don’t care. They don’t want another, uh, partner portal.

They don’t want all the structure. They want a meaningful, direct relationship with someone that they can rely on to help them when they’re selling the product. And if they have a question that comes up, uh, it really just comes back to where we started off at the very beginning. And then the cultural differences between.

ISVs and channel partners. If you can bridge that cultural divide and speak the same language, then you will really be able to develop a strong partnership.

Jeremy Balius: It’s words of wisdom there. Thanks so much, Harold.

Harald Horgen: Jeremy, thank you very much.