Designing Effective Channel Partner

Programs in the Software Industry

Whitepaper from TBK Consult

Author
Hans Peter Bech, M.Sc. (econ)

 Hans Peter Bech 2014

First edition
Unless otherwise indicated, Hans Peter Bech copyrights all materials on these pages. All rights
reserved. No part of these pages, either text or image may be used for any purpose other than
personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission,
in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal
use, is strictly prohibited without prior written permission.
Published by TBK Publishing (a division of TBK Consult Holding ApS)
Strandvejen 724
2930 Klampenborg
Denmark
CVR: DK31935741
www.tbkpublishing.com
ISBN: 978-87-93116-02-3

Designing Effective Channel Partner Programs in the Software Industry

Table of contents:
Targeted audience

Abstract

Author

Acknowledgements

Introduction

Partner Program Design Criteria

What is your strategy?

What do you want the business partners to do?

Business Partner Program Objectives

The Business Partner Agreement versus the Business Partner Program

The Business Partner Agreement

The Business Partner Program

Recruitment
The business models of your business partner

The Business Partner Program Elements

Business Management
Training and Learning
Sales and Marketing
Customer Support
The Business Partner P&L
The Business Partner Community

www.tbkconsult.com

About the author

6
7

9
10

10
11

12
12
14
14
15
16
16

19

Designing Effective Channel Partner Programs in the Software Industry

Targeted audience

The target audience for this whitepaper is the board of directors,

the CEO and the sales and marketing executives of software
driven companies1 with ambitions for achieving global market
leadership. The whitepaper primarily addresses the challenges
of software companies with long value chains.

Abstract

The whitepaper discusses how to design effective business

partner programs in the software industry.
The whitepaper explains the design criteria for a business
partner program stressing the difference between the business
model of the software vendor and that of his channel business
partners. Effective business partner programs are based on
the best-practice approach for building and growing a business
around the software vendors product.
The whitepaper also briefly explains the difference between the
business partner agreement and the business partner program.
Finally, the whitepaper provides specific recommendations for
the content of the business partner program in the software
industry. In this context the whitepaper makes recommendations
for recruiting and starting partners as well as for managing the
portfolio of partners.

Author

Hans Peter Bech

Acknowledgements

Design and lay-out: Flier Disainistuudio, Tallinn, Estonia,

www.flier.ee

www.tbkconsult.com

Proof reading: Emma Crabtree

Independent Software Vendors (ISVs)

Designing Effective Channel Partner Programs in the Software Industry

Introduction

Using a channel of independent companies to resell, implement

and/or service customers has been a long tradition in the history
of the software industry.
For some software companies the channel has been
a major contributor to global success, but for most
software companies making it work is a depressing
and constant struggle.
The word channel is used in the software industry to
describe independent companies that assume various roles and
obligations in bringing a software product to the customer. The
definition is rather broad, since the roles and obligations can
vary substantially from simple reselling to systems integration,
solution development on top of the software, implementation in
terms of consulting, project management, customization, training
and support.
The common denominator is the fundamental condition that
the individual channel partner is an independent contractor
operating in his own name2, at his own expense and at his own
risk.
This whitepaper discuss and provides recommendations for how
to design and manage productive partner programs3.
In this whitepaper we will use the term business partner
irrespective of the specific role assigned to the 3rd party
company.

www.tbkconsult.com

You will notice that the whitepaper doesnt mention any

product. We assume that you already have a product, which
is and has proven very competitive in certain segments of the
market. Building a successful channel of business partners has
very little to do with your product per se, but is all about how to
do business with your product.

In channels designed as franchises however, this is not the case.

For a discussion of when "to partner" and when not "to partner"

please see "Growth Through Partners" (TBK-WIPA-006)

Designing Effective Channel Partner Programs in the Software Industry

Partner Program
Design Criteria

What are your ambitions for the future and what role do the
partners play in realizing these ambitions?
What do you want the business partners to do?
How will you motivate business partners to sign up with you and
invest in your business according to your business model?
Any software company embarking on the endeavour of building
a business partner channel must come to terms with the fact
that there are more software companies knocking on the doors
of potential business partners than there are potential business
partners knocking on the doors of software companies.
Unless you are already a recognized brand4 then building a
productive indirect channel of 3rd party business partners is a
long term and very difficult endeavour.

What is your strategy?

The first question you must be able to answer satisfactorily is:

What are your ambitions for the future and what
role do the business partners play in realizing these
ambitions?
One of the biggest mistakes software vendors make is considering
business partners as a cheap sales resource.

www.tbkconsult.com

Business partners are individual businesses making their

decisions based on the same investment and P&L5 considerations
as the software vendor himself.

SAP: "Our goal is to have 40% of our revenue come from partners by
2015." From the SAP web site in December 2013
4

P&L: Profit & Loss

Designing Effective Channel Partner Programs in the Software Industry

However, the investment horizon of the average business

partner is much shorter than yours and their business models
are very different. Business partners are looking for very fast
return on investment; they expect you to explain how thats
going to be achieved and how you will be there for them in the
long term.
Today's business partners are reluctant to deal with software
vendors who are out to make a quick buck and who demonstrates
a hit and run mentality. Most established business partners
have had bad experiences with unambitious software vendors
who are content with the 1% market share. Business partners
want to work with the market leaders simply because the
market pull is much stronger and the long-term profitability
more attractive.
As a newcomer to the party no one expects you to be the market
leader. However, you must have and demonstrate the ambitions
of becoming one. You must then have a convincing product and
partner program supporting the probability that you will actually
become the market leader.
You must be able to layout a strategy roadmap clearly
demonstrating how the business partners will become successful
in the slipstream of your ambitions, drive and efforts.
When you have passed the tipping point6 then the game changes
completely, but until then you have a mission and uphill job to
reach that point. An effective business partner program will
provide solid support for your efforts.

What do you want

the business partners
to do?

Taking a new product to the market through a channel of new

business partners is as indicated above - no trivial task.
Figure 1 illustrates the typical value chain in the software
industry. Which of the activities illustrated do you expect the
business partners to take care of?

www.tbkconsult.com

If you as the software vendor only want to assume responsibility

for the product (SPM), then your business partner program must
cover all the elements required supporting the business partners
The tipping point is around the 20% market share mark. When
passing the tipping point market dynamics change completely and the
market starts pulling your product. Potential partners start calling
you!

Designing Effective Channel Partner Programs in the Software Industry

Figure 1:
Sample Value Chain

activities in the rest of the value chain. Just leaving it to the

business partner to figure out what to do will not generate any
noticeable traction in the market.
Your business partner program must be based on supporting
those tasks in the value chain that you expect the business
partner should assume responsibility for.

Business
Partner
Program
Objectives

From the software vendors point of view the business partner

program should support the following objectives:
I Attract new business partners signing up and investing
in the business.
II Ensure new business partners are finding, winning
and making the right type of (happy) customers within
the shortest possible timeframe.
III Ensure that the business partners keep growing
their business with your product beyond the first initial
projects.
IV Stimulate the most successful business partners to
do even more.

www.tbkconsult.com

V Optimize the cost of business partner recruitment.

VI Optimize
the
management.

cost

of

business

partner

Designing Effective Channel Partner Programs in the Software Industry

Your business partner program will have to change over time.

When you have no or only very few partners then your focus will
be on partner recruitment and the activities supporting objective
1) and 2).
As you grow your business partner channel then your focus will
shift from to 3) to 6).

The Business Partner Agreement versus

the Business Partner Program
What is the difference between the business partner agreement
and the business partner program?

The Business Partner

Agreement

The business partner agreement is the legal and binding terms

and conditions, which you and the business partner have signed.
The business partner agreement is the home of all the formal
legalese and it is very difficult to change. To avoid expensive
administrative chaos you should keep all business partner
agreements identical.
Keep the business partner agreement as short as possible and
refer to the current business partner program as often as you
can.
You need a lawyer to help with your business partner agreement
and you should never make a change to the business partner
agreement without consulting your legal counsel.
In the early days of building your channel of business partners
there will be pressure from your prospective business partners to
include as much in the business partner agreement as possible.
Dont give in.

www.tbkconsult.com

Keep the business partner agreement and the business partner

program separate.

Designing Effective Channel Partner Programs in the Software Industry

The Business Partner

Program

The business partner program as discussed in this whitepaper is

much more flexible and can be changed as the situation changes.
The business partner program is made and changed unilaterally
by the software vendor.
Your business partners will not always like this, but you cannot
live with having all the details written into a business partner
agreement, which is difficult to change.
When you behave reasonably and do not change the business
partner program without due notice and logical justifications,
then business partners will accept the structure.

Recruitment

In the early days when you do not have many successful business
partners under your belt and your brand awareness is very low
then your business partner program is the main carrot for new
partners.
Just the fact that you have a business partner program will
differentiate you from most other software companies.
Together with your ambition and your strategy the business
partner program will help justify the resources a new business
partner must allocate and invest in the business venture with
you.
The clearer a picture of the future and of how to get there you
can paint the more effective your partner recruitment activities
will be.
There are four issues, which are critical for any business
partner:
1. Initial investments required
2. Impact on cash flow
3. Time to revenue

www.tbkconsult.com

4. Time to profit
Your business partner program should address exactly these
four issues for the new partners. We will dig into the details of
the business partner program addressing these four issues in the
next sections.

10

Designing Effective Channel Partner Programs in the Software Industry

The business models

of your business
partner

The business model of your business partner is very different

from your own business model. In many cases the 9 business
model building blocks are all different. In some situations you
may share the same customer segments, but more often you want
a partner channel exactly in order to serve many more customer
segments than you could ever cover yourself.

Where the software vendor runs a product based business model,

the business partner typically runs a project based business
model.
When you run different business models then you will also think
completely differently and your organizations will have different
skills and management priorities.

www.tbkconsult.com

As a software vendor you have invested and are continuously

investing heavily in product development. You see your product
as your key differentiator. The marginal cost (cost of sales and
cost of goods sold) of selling an additional copy of your software
is close to zero for you.
The business partner has the relationship with his customers as
the most important value element. Your software is just a single
element of the value he brings to his customers. His marginal cost
of selling an additional copy of your software is very high and he
has to pay cost of goods sold to you. He is also aware that he is
not your only business partner. In order to differentiate against
his competitors he must develop customer value propositions,
which are independent from your product.

11

Designing Effective Channel Partner Programs in the Software Industry

When you understand these fundamental differences and

understand the business model of your business partners,
then you will be much better positioned to design a productive
business partner program.

The Business
Partner
Program
Elements

The business partner program will have to cover the following

areas:
xx Business Management
xx Training and Learning
xx Sales and Marketing
xx Customer Support
xx The Partner P&L
xx The Business Partner Community

Business
Management

You and your partners are running a business together. Although

each of you is responsible for your own P&L the two of you must
sit down together from time to time and do the following:
xx Understand and align your market assumptions and insight
xx Set business objectives
xx Develop strategies to achieve these objectives
xx Detail the action plans required to execute the strategies
xx Define the budgets to support the implementation of the
plans
xx Follow up on the results and take corrective actions when
reality deviates from the plan (which it does all the time!)
The business management activities must be supported by facts
from the market and from the results of the business partners
activities.

www.tbkconsult.com

As you will not appreciate going through individual business

planning formats with each partner it makes sense to provide a
standard business management format.

12

Designing Effective Channel Partner Programs in the Software Industry

Getting started

The first iteration of the business management process is based

on very little information. As you do this activity with other
partners all the time, a new business partner will expect that
you know what is the best practice for getting started.
As you kick-start the relationship you will have to connect the
various organizational functions with each other answering the
following questions:
xx Who is responsible for the overall business relationship?
xx How do we get access to information?
xx Who takes care of support (sales, marketing, pre-sales, post
sales, sales admin. etc.)?
xx Who takes care of special bids7?
xx How do we escalate issues (sales, marketing, pre-sales, post
sales, sales admin. etc.)?
When signing the business partner agreement you will probably
sponsor a kick-off party taking the opportunity of raising the
awareness level within you business partners organization and
get acquainted with the operational people, who are going to
make the relationship work on a daily basis.

The Partner Portal

The software vendor must provide access to all relevant

marketing, sales, support and product documentation though a
web-based portal.
Serving a large number of business partners without an effective
self-service platform will obstruct the scalability of the software
vendors business.

Partner Management in
the long run

As your channel of business partners grows, the challenges facing

your partner management activities change fundamentally.
Any software vendors channel of business partners will gravitate
towards the situation illustrated in figure 2.

www.tbkconsult.com

5% of the business partners are stars capable of growing their

businesses and driving the demand for your product.
10% of the business partners can grow their businesses if
Reductions in the transfer price in situations where external
competition demands so.
7

13

Designing Effective Channel Partner Programs in the Software Industry

5%
10%

85%

Figure 2: The business partner

channel pyramid

Training and
Learning

supported
coaching.

with

business

development

and

management

85% of the business partners have no or only very limited growth

potential.
The software vendor will have to adapt the business partner
program accommodating the needs of the Stars and the Growth
Potential while reducing the cost of management of the large
group of partners with no growth potential.
The distribution into the three groups is mainly a function of the
management ambitions and skill-sets available in the business
partner channel. The software vendor will instigate mechanisms
to spot the partner talent and direct resources to help stimulate
the growth. If the talent is not present, then no program or
initiative will have any impact.

Although training and learning is particularly critical when

starting the relationship there will always be an on-going need
as partners grow and/or staff come and go.
Training should take place at all levels in the partners
organization. The better briefed the staff are, the more likely you
are to have a successful relationship with them.
Start with training the sales and marketing people so they
are able to do the business planning with you based on factual
insight. Then continue with pre-sales and post-sales as required.
Many software companies categorize their business partners
based on the type and volume of certified people they employ.
You may want to consider introducing a certification program as
your portfolio of business partners grows.

www.tbkconsult.com

Sales and Marketing

The top priority with new business partners is to get the first
revenue-generating projects as fast as possible.
Many business partners will be reluctant to introduce new
products to their existing customers. They are afraid of making
mistakes and jeopardizing an existing relationship. However,
selling a new product to a new customer is the most difficult

14

Designing Effective Channel Partner Programs in the Software Industry

scenario in any sales situation.

Unless there are certain specific circumstances speaking in
favour of the new/new scenario you should always insist on
getting your product sold to the business partners existing
customers.
Sales cycles longer than 3-6 months are difficult to manage for
most business partners. The business models of most business
partners do not generate a lot of cash, thus time to revenue and
time to a cash-positive situation is critical.
Your business partner program must include a dedicated section
on how to accelerate the time to revenue and the time to a
cash-positive situation. The investment must be shared between
you and the partner.

Customer Support

You must ensure that the customers are well supported.

www.tbkconsult.com

With customer support we are referring to all the professional

services elements required to find, win, make and keep happy
customers. The services include pre-sales demo resources,
proposal writing, price and cost estimation, project management,
integration services, customization, training and on-going
support.
In most business partner models the profit for the business
partner is exactly the delivery of these services. It is thus equally
important for you and your business partners that the quality of

15

Designing Effective Channel Partner Programs in the Software Industry

the customer support services is as high as possible. However,

the more comprehensive the software solution is the longer the
learning curve is for the business partner.
On site coaching is most likely required in addition to the
training until the business partner is self-supporting in all steps
in the value chain.

The Business Partner

P&L

Bringing together all the elements described above makes up the

business partner P&L scenario.
The more experience the software vendor has with setting up
new partners the more historical data is available for making a
realistic P&L scenario with a new business partner.
Some software vendors are reluctant to perform this exercise with
new business partners as it may turn out that the investments
are high and the time to a cash positive situation is very long.
However, today most business partners will ask to perform this
exercise. Even established software brands will have to perform
this exercise convincing (and contributing to) new partners to
migrate their solutions to new platforms.

The Business Partner

Community

Getting business partners together for conferences and events

has a tremendous motivational impact on the business partner
community. It is an outstanding opportunity for the executives
of the software company to meet up with their most important
partners and to make best partner announcements etc.
For software vendors creating eco-systems these physical
communities are critical in building relationships between
business partners supporting the growth of the eco-system.

www.tbkconsult.com

In the early days of building the channel there may be just an

annual partner conference, but as the business partner channel
grows the events will get more specialized and take place on the
various continents around the globe.

16

Designing Effective Channel Partner Programs in the Software Industry

Final Notes

Let me address two critical issues, which many software

companies get wrong when building a market through a channel
of independent business partners.

Exclusivity

Exclusivity is a situation you want to avoid at all cost when

building your business partner channel. Your business partner
agreement will most likely clearly state that the relationship is
bilaterally non-exclusive.
However, your business partner program must address the
issues facing the first business partners you recruit in a new
market.
If you leave brand awareness creation and lead generation to
the business partners, then the first business partners will be
reluctant to invest too much. Their reluctance is based on the
fact that they will be investing in building the market for your
other business partners. It is a simple version of the economic
externalities, which affects any software vendor building a new
market through a channel of independent business partners.
You have to take these concerns of the business partners
seriously and support their market creation initiatives. You
will most likely have to co-fund marketing and lead generation
activities in the early stages of market penetration. Alternatively
you can award the business partners investing in early market
penetration with a "some time-limited" exclusivity, helping them
to protect their investments.

Product Margins

Many software vendors try to attract business partners by

offering high margins (discounts) on the list prices. The software
vendors also use this incentive to make up for the initial
investments the business partners are making in learning,
building brand awareness and generating leads.

www.tbkconsult.com

If the software only makes up a small potion of the total project

price to the customer, then the impact of a higher discount is
small anyway.
In general high margins have very little motivational impact on
the business partners behaviour. Margins are like the salary to
employees. They are a hygiene factor. Changes in margin levels

17

Designing Effective Channel Partner Programs in the Software Industry

may have an impact, but in the early days of the business partner
relationship it is the cash flow that has the biggest impact on the
behaviour.

www.tbkconsult.com

Software vendors should also be extremely careful of giving away

margins on their products. In the long run even small variations
in the margin you pass on to the business partners will have a
substantial impact on your own P&L and valuation.

18

Designing Effective Channel Partner Programs in the Software Industry

About the author

Hans Peter Bech has been developing and managing global
partner channels in the software industry for more than 30
years.
Hans Peter built the partner channels for companies such as
Dataco (now Intel), Mercante, Dansk Data Elektronik (now
CSC), RE Technology (now Barco), and Damgaard/Navision (now
Microsoft).
As a management consultant Hans Peter has been providing
consulting on channel development and management issues
to companies such as Microsoft, Danfoss, Proekspert, Jeeves
Information Systems, eMailSignature, SoftScan (now Symatec),
Netop, EG A/S, CSC Scandihealth and Secunia.
Hans Peter is the author of several whitepapers on channel
development and management and he frequently writes articles
on the subject.
He started his career as a management consultant in 2003
and founded TBK Consult in 2007. Since then he has built the
company to its present position with 24 senior consultants in 16
countries.
Hans Peter oversees the development of TBK Consult as well
as performs management consulting assignments for selected
clients.
Hans Peter holds an M.Sc. in macroeconomics and political
science from the University of Copenhagen. He speaks
Danish, English and German and is a certified ValuePerform,
ValuePartner and Business Model Generation consultant.

www.tbkconsult.com

More about Hans Peter Bech

19

TBK-WIPA-012