In a rapidly changing IT environment, partners in the channel are fearful on how they will fit into the new world of cloud computing. Vendors are challenged with transitioning their partner channels to the cloud given the impact that these solutions have to their partner’s business models. Along with business transformation services, leading cloud vendors are leveraging the power of channel incentives to reduce partner fears and enable partner adoption of cloud offerings.
In 2012 the global IT cloud services market topped $40 billion. According to the latest research, the IDC1 predicts this number will reach almost $73 billion by 2015. This represents an annual growth rate of 27.6% – over four times the projected growth rate of the IT market as a whole.
For vendors of IT products and solutions, this represents great opportunity but also great challenge. The migration to cloud services will dramatically change the way vendors conduct business and go to market.
Vendors that rely on partner networks as their main go-to-market model will look to utilize this channel to distribute new cloud solutions. This will force vendors to rethink their channel strategy as they look to enable and motivate partners to adopt new service-based solutions.
One of the big levers vendors have to help their partner network make the transition is channel incentives. Consisting of up to 80% of channel marketing budgets, incentives are a powerful tool to change behavior and support partner adoption of cloud offerings.In this blog post, we will assess the role incentives should play in migrating the partner network to the cloud.
Incent your Channel to the Cloud
In terms of support, vendors will have to empathize, educate, and guide partners through this new landscape. In addition to business transformation services, vendors can use incentives to help remove partners’ fears and enable them to change.
Depending on their positions within the value chain, partners’ concerns will differ. Regardless, most partners will have some “fear” of how they will fit in this new world. This fear stems from two main places:
1. Fear of lost revenue
2. Fear of failure
1. Fear of Lost Revenue
Cloud services have low initial price points which could easily translate into lower partner SPIFs, rebates, discounts, etc.
The best approach for combating this fear is two-fold:
- Offer hybrid incentive structures so that partners can start incorporating cloud services without dramatically impacting their current revenue source
- Keep incentives proportionate by looking at the total contract value (TCV) of the sale
In situations where vendors have both traditional and cloud offerings for the same product, they will need to ensure they offer comparable incentives for both versions of the product. Vendors don’t want to alienate partners whose business model better supports the traditional offering but also do not want to prevent them from adding value to their customers with a broader offering. A hybrid incentive program will allow partners to be more stable as they look to integrate cloud into their core offerings.
Cloud vendor NetSuite is a great example of this. With their SP100 program vendors get 100% of the first year subscription margin upfront, just as with an on-premise solution. Even more, NetSuite offers 10% margin on annual renewals which aren’t offered with traditional solutions.3
Incentives based on TCV
Vendors are asking some partners to completely change their business models. One way to alleviate the pain of this change is to offer incentives that account for the total contract value. For instance, if a reseller sells a cloud service that incorporates a monthly subscription for a three year period, consider an incentive structure based on the full value of the deal and pay a portion of that incentive up front.
A software client of Lenati is currently using this model with partners that resell and deploy their cloud solutions. They give partners a commission for the TCV of the subscription (price*seats*term) plus a recurring fee to incent partners to actively manage and service the account.
2. Fear of Failure
Partners sell what they know. Cloud offerings shift business models from products and licenses to services and subscriptions. To adapt, partners need a new sales motion, new competencies and expanded networks of customer contacts. To build this muscle, they will need product education, sales training and enablement.
Incentive programs that reward individuals and companies for leveling up their sales skills and technical knowledge will help build confidence and promote sales readiness for cloud services.
Points Based Incentive Programs
Instead of cash-based programs consider instituting points that can be redeemed for benefits that bring value to both the partners and vendors. Redemption options could center on sales training and enablement and offer free training and certifications that would cost otherwise.
One company that has seen value in this approach is Cisco. They have one the largest partner points-based incentive programs in the industry
Partner Community Portals
Another way to incentivize skill development is to combine online social collaboration with game theory to create an online partner community that fosters both collaboration and competition. The result is a portal where individuals can obtain and share advice with other partners as well as be recognized for their developmental efforts.
Several IT vendors have already started creating partner portals. Notably VMware launched a social hub for partners this year called Partner Link.
Some partners might be perfectly happy with business as usual. The common approach to create change is to launch sales-based incentive programs. However, simply offering attractive sales incentives won’t create successful movement if partners aren’t confident on how to fill their cloud pipelines in the first place. In order to motivate partners to begin taking the right steps towards incorporating cloud offerings, incentives need to be heavily focused on activities toward the beginning of the sales cycle.
Focus on market development
As the cloud makes technology more accessible (particularly to the SMB market), partners will need help marketing these new service solutions to segments entering the market for the first time. Market development funds (MDFs) will need to be a critical component of the vendor’s incentive strategy moving forward. Vendors should create robust marketing collateral and enable activities that partners can take advantage of to help develop their cloud businesses. In addition, vendors should set aside budget specific to cloud-based, ‘through-partner’ marketing activities to ensure that business development opportunities are maximized.
HP is a good example of this. With their recent introduction of new cloud products, HP has rolled out a robust set of cloud incentives that include market development activities such as co-selling, access to collateral, and use of cloud trademarks.
Reward activities that build and accelerate the pipeline
At the beginning, vendors will need to find ways of motivating partners to promote cloud services in order to start filling the cloud pipeline. One way to do this is to incentivize and reward partners for qualifying opportunities. To gain pipeline velocity, vendors can establish rewards for activities that lead to closed deals (such as presenting proposals with decision makers).
One company that is betting big on this is IBM. In an effort to significantly increase revenue through their channel this year, IBM is setting aside significant dollars to reward partner-led lead generation activities.
Since incentives play a dominant role in shaping channel behavior, they can either work for or against vendors as they transition their partners to the cloud. Vendors should invest proper time and resources in formulating an incentive strategy that makes it both feasible and compelling for your partners to start promoting cloud solutions.
1: IDC Worldwide and Regional Public IT Cloud Services 2012-2016 Forecast – 2012
2: Forrester Research: Channel Partners’ Needs In The Era Of Cloud – 2011
3: NetSuite: The 3 Myths of Cloud Computing for VARs – 2012