Seriously Selling Services: Part 10 - The Challenge of the Channel
Organizations getting serious about selling services often must look to channel partners to help them accomplish their services objectives. However, under what circumstances is it a good idea to use channel partners for delivering services? How about selling services? How do you decide which types of services they should sell and/or deliver? As you build and broaden your services capabilities, what is the best way to deal with existing channel partners whose primary focus has been product sales? How do you minimize competition with existing channel partners who already offer the services you are building and planning to deploy? What are the appropriate criteria for selecting partners in situations where it makes no sense for you to go direct??
In this article you’ll learn the obstacles present in building services channel partnerships and understand ways to think about services and the channel strategically, based upon your core and distinct competencies. You’ll also find out more about the steps to establishing a strong services partnership model, and you’ll learn how to use a tool to screen potential partners to evaluate the business fit. Finally, you’ll discover the best practices in services channel partnership management.
Who Are Your Channel Partners?
Depending on your situation and the nomenclature used in your particular industry, your potential services channel partners might be called distributors, wholesalers, dealers, value-added resellers, manufacturer representatives, system integrators, consulting firms, independent services organizations, independent services providers, or in some cases, direct competitors. These channel partners may range from one-person shops to multinational corporations.
Furthermore, in some situations it makes sense to consider your customers as potential services channel partners if they have the capability and the desire to self-service your offerings themselves.
Traditional Use of Channel Partners
It is important to remember that in the majority of situations, companies first looked to channel partners to help them sell more products. Properly selected and managed, motivated channel partners helped companies sell more products cheaper and easier than they could do on their own. Your company’s emphasis was on getting your channel partners capable of selling your products the way you wanted them sold and keeping them motivated to sell your offerings, and not your competitors’ offerings.?
Services Channel Partners
Services executives frequently identify effectively finding and managing services channel partners as one of the more difficult aspects of running the services business. Research of mine, confirms this, revealing that services operations’ biggest critical issue is dealing with channel challenges (see figure below). This probably is not surprising to many of you. Research respondents specifically cited such concerns as two-tier distribution channel conflict, balancing disparate goals between partners and the services organization, and sales channels that do not know how to or do not want to sell services.
Challenges of Finding and Keeping Strong Services Channel Partners
In considering the right services channel partners for your needs, several issues must be addressed.
Complexity
In some situations, your organization will be responsible for selling services, and all you need is a competent, reliable provider of services in a specific geography or industry. In other situations, you may only be looking for someone to sell your services and you will deliver them. In still other situations you may want your services channel partner to both sell and deliver your services. Or you may want your channel partners to sell and/or deliver certain services but not others. Furthermore, you may prefer that the mix of services (start-up, uptime, or professional services) vary by geography, market, industry, or type of customer.
And, of course, your potential services channel partners will vary in their existing services capabilities, their desire to deliver services, and their motivation to sell services, depending upon their history, business strategy, goals, and opportunities. Furthermore, just like your organization, their capabilities, strategy, and motivation will also vary by industry and location.
GIST: Dozens of variables must be considered in your decision on how to sell and deliver services in different scenarios.
Reputation at Risk
In situations where you have a third party delivering your services, no matter what the name on the services provider’s shirt, your customers think of them as an extension of your organization. Hence, customers relate a good service experience with your services channel partner to your organization, but they also hold your organization responsible if they are dissatisfied by channel partner performance. A few bad experiences from a few channel partners can have a major impact on the reputation of your services organization, and can negatively impact your company’s overall brand.?
GIST: Like it or not, your image is directly tied to the performance of your channel partners.
Maintaining Quality Control
Getting people to do what you want, how you want, and when you want is never simple, but it is much easier when they work directly for you. Getting people from another organization to consistently deliver services up to your standards is tough. This becomes an even bigger issue when you are trying to deliver a global service quality standard everywhere around the world using multiple channel partners. For example, it may be next to impossible to find any services channel partners in certain remote locations such as Sahara Africa, let alone ensure the quality services performance of their actions. Furthermore, difficult terrain, extreme weather, and the customs and laws of some third-world countries add to unpredictability, high costs, and an increased probability of not achieving planned performance standards.
GIST: Maintaining consistent quality around the globe is the Achilles’ heel of the services executive.
Creating Competitors
When you introduce another organization to your business model, educate them on your products, and train them to effectively and efficiently sell and deliver your services offerings, you run the risk of creating a future competitor.?
GIST: Things change. Plan for the best, but prepare for the worst.?
Sometimes you may not know who the customers are. If your organization has relied upon distribution to sell products in the past, you may not know who your end users are. The emphasis at that time was getting the resellers to first buy, and then sell, your products, and not much else mattered. The only service concerns your organization might have had were keeping warranty costs to a minimum and making sure the resellers were meeting minimum levels of customer satisfaction. Hence, your organization may never have seen the need to develop a database of the end users of your products.?
GIST: Without an accurate database of your installed base, effectively selling and delivering services is almost impossible.
Existing Partners May Resist
Ponder Point: When you change the rules, expect lots of protest.
In finding services channel partners, you may first want to consider your existing channel partners as candidates because you already have a relationship with them, and your existing agreements may require involving them. In addition, you may get pressure from the sales organization to give this group the right of first refusal, as they want to do nothing that jeopardizes product sales.
Yet, remember that the focus of the majority of your existing channel partners was and is to sell products, period. The primary components of your agreements with them were all about product sales volume. This is what your organization has wanted and focused on, possibly for decades. Most of these partners have a product-centered culture (like your organization once had or currently has) and don’t want to deal with services, as they see it as a distraction and a detriment to running their business. Hence, they will resist your overtures or requests or demands that they now build services capabilities and/or selling services competencies, as it is not in their DNA.?
On the other extreme, though, within your existing channel partners you probably have a small number who have already recognized the value of services, and they currently sell and provide the services you are trying to expand into. In fact, in the past, your organization may have encouraged these channel partners to aggressively build and sell services independently, as your company had no interest in services at that time. Therefore, this select few of your existing channel partners will now see you as trying to compete with them for “their customers.” Of course they will resist your advances, as they perceive that you are now changing the rules and trying to move into their turf.
Here is an example: Back in the “good old days” a client of my organization sold, through resellers, a highly profitable proprietary product to the tune of roughly $300,000 per box. A few start-up services were “thrown in” to secure the sale and make sure the box performed as required. Since the product addressed mission-critical functions, uptime services were easily sold and delivered by our client, again at envious profit margins. If the customer had any other needs “beyond the box,” the reseller took care of them by providing professional services. Never mind that these “additional needs” often amounted to seven figures. Roles were clean and straightforward. Profitable growth was relatively easy and predictable. Life was good.
Over just a few years, however, the former $300,000 proprietary product evolved into a $30,000 open system box competing against a plethora of cheaper choices. The once-easy uptime services sale became not so easy, since products were more reliable, and similar, “just-as-good” uptime services were being offered at lower prices, putting pressure on profit margins. So, our client decided that its only hope of growing the business at acceptable levels of profitability, aside from acquiring or being acquired or dramatically altering the business focus, lies in expanding into professional services. It appeared to be a challenging, but doable task. But wait…professional services businesses are built upon strong client trust, and trust is centered upon relationships. In this case, the reseller still owned the client relationship. In order to advance the professional services initiative, our client had to invest the time to create new customer relationships, aggressively compete for account control, and manage conflict on several fronts, as former “partners” now viewed our client not only as a competitor, but as a two-faced, turncoat, back-stabbing competitor. This was a very difficult situation that never reached the hope-for goal.
GIST:?On the one hand, the majority of your existing partners flat out don’t want to sell services or provide services. On the other hand, you have a few existing partners (usually some of your best) that now see you as wanting to compete with them. Of course they will feel both protective and possibly frightened at your new services strategy. Getting their cooperation is a tough challenge.
To add fuel to the fire, some of your existing channel partners have been providing services for free, bringing to bear the special “free to fee” challenges brought out in my earlier article Seriously Selling Services Part 6 -Transitioning from Free to Fee
More on how to address these challenges a little later.
Using Services to Build Distinct Competencies
Ponder Point: You can only do a few things well.
In this section, you’ll learn how services can best support the organization strategy by expanding necessary core competencies and creating new, distinct competencies that can lead to competitive advantage. Understanding the model presented will help you make better choices in selecting the right channel partners.
Core Is Good
For years strategists have urged executives to “keep to your core,” “stick to your knitting,” define what you can do really well and try to outsource everything else. As long as the core is directed toward meeting key customer expectations, this is solid advice that has helped many organizations redirect their resources and fine-tune their focus to extract both efficiency and effectiveness internally.?
The lesson here for services is that as customers’ needs and wants expand (and they always do), services capabilities help support and enhance your technology and product core. Having some core services offerings is expected by your customers and is necessary to complete a portfolio of offerings. Properly managed, core services can provide an acceptable margin of profitability and are often seen as the table stakes in a competitive industry, required to help protect the business from competitors that may also be expanding their services offerings.?
This is all well and good, but it is not enough. The downside is that often your core competency is the same as your top competitor’s core competency. So, unless your core competency is seen as markedly better externally (in your customers’ eyes, not yours), you have no marketplace differentiation, zip advantage, zero uniqueness. In other words, your organization’s offerings will be seen as commodities.
Distinct Is Better
The key to marketplace uniqueness is not core competencies, but distinct competencies—capabilities or organizational attributes that make your company clearly superior to your competitors in things that customers care about (hence, they will pay for them). Distinct competencies are what strategy is all about. Ideally, distinct competencies are difficult and/or time-consuming to imitate (e.g., patents, proprietary industry benchmarks/best-practice data, exclusive agreements, powerful brands). Therefore, they build barriers to entry, dissuading potential newcomers from targeting your market and preventing existing competitors from copying your approach, as the potential value is outweighed by the high cost of time and effort. True distinct competencies yield more, better, and easier sales, as well as the profitable growth that results. From a big-picture perspective, business focus should strongly favor the development, growth, expansion, and protection of your distinct competency, as it is the secret sauce, the get-out-of-jail-free card, the force field that protects organization sustainability.
Depending on the maturity of your industry, the complexity of your customers’ issues, the sophistication, importance, and cost of your products, and the strategy of your competitors, different services capabilities offer opportunities for distinction. For example, in some product companies, just having a viable services capability that your competitors don’t offer can provide differentiation that is important to customers, thus greatly increasing the probability of more product sales and more services sales.
If your competitors offer services, they may not be able to provide those services regionally or nationally or globally. If you have the appropriate amount of density and ability to scale, you have an advantage. If you are able to ensure that customers receive levels of uptime higher than your competitors can provide through your robust services level agreements, this will get you more sales of both products and services. Having dedicated services account managers assigned to key accounts directly influences contract renewals and overall account sales, and creates reference accounts that help gain other new business. Having strong services horsepower as a part of a pre-sales team can add credibility to your company and help craft stronger recommendations that improve win rates. Offering remote monitoring, diagnosing, and fixing capabilities may help your customers avoid problems and give you a big cost savings over competitors who must rely on field services to fix the same problems.
Offering multivendor services, being willing and able to service competitor and, potentially, other non-competitive products, may also set you apart from others. It can simplify your customers’ lives while adding revenue and building an on-site presence that can lead to the removal of all competitive products over time. Because all solutions are services-led, in-depth professional services may allow a business to have a true solutions capability, gaining a larger share of customers’ wallets while building executive-level bonds that resist competitive inroads.
If you are able to teach and motivate your customers to do their own maintenance, troubleshooting, and repair, this might be a strong enticement for them to choose your organization over others. For many services organizations, however, the best chance for distinction is in creating a superior reputation for relentless reliability—doing it right the first time, every time. In a world where customers often describe solutions implementation as “hit or miss,” “always a gamble,” “geez, I hope they get it right,” a services brand of utter dependability offers incredible promise that is quite appealing to reluctant or downright scared customers.
On the flip side, if your organization does not have robust services capabilities, you are not only missing out on profitable growth and competitive differentiation, but you are also making yourself vulnerable to competitive threats.
The figure below expands on the distinctness of your capabilities by adding the importance of the capabilities of your organization to the mix. This model can provide your organization with a handy tool to identify and compare your capabilities and attributes by value, defined as the degree of uniqueness and organization importance; to simplify, the higher up and farther to the left, the greater the value. Furthermore, understanding where your services land on this model will have a direct bearing on when and where you want to use services channel partners.
The illustration below expands on the above figure, outlining the appropriate strategy based upon the uniqueness and distinctiveness of your organizational capabilities and the products and services that are spawned by them.?
Retain In-House
Capabilities that are mission-critical, and in which you have distinct competency, are your crown jewels. These capabilities should be retained, nurtured, kept in-house, and guarded under lock and key. For example, a distinct, mission-critical services offering that no one else can provide would be plotted up and to the left in the Deployment Strategy Based Upon Capabilities graph. Since the creation and delivery of these services are often dependent on a small number of brilliant people, it would be prudent to provide lots of incentives to keep them motivated, and golden handcuffs to keep them on board.?
Another example of a capability that should be retained in-house might be a unique, smart technology that your company owns outright that allows you to remotely fix software issues dramatically cheaper and faster than your competitors. Obviously, this software should not be licensed, and access to the source code and vital innards should be tightly controlled. Again, the really smart folks behind it should be retained at all costs. In these scenarios, you would never take the risk to depend on channel partners or anyone else to deliver these capabilities.
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Outsource
On the other extreme (down and to the right on the Deployment Strategy Based Upon Capabilities graph) are capabilities and services offerings that you don’t have today nor want to provide in the future (although you could easily do it). The appropriate strategy here is to create partnerships and outsource the task to companies that specialize in them. Since these tasks are low on the importance scale, your organization should not spend much time dealing with them. Contracts should be crafted outlining expectations, and then the day-to-day management should be left to the third party. All sorts of things fall into this arena, from outsourcing janitorial services to human resource benefit packages to IT departments. From a services-business perspective, examples of non-critical functions worthy of outsourcing consideration might include travel planning for your consultants and field engineers, depot repair for a low-priced commodity product, or website development and support for self-services.
Out-Task
The middle grouping is where consideration of services channel partners comes into play. Although you have the capabilities to sell and/or deliver these important services, your resources might provide higher value if used elsewhere. In this case, if you find a suitable match, you would out-task these services to a services channel partner, but manage them rigorously.?
For example, your organization might have the ability in-house, but decide for financial considerations to out-task field services operations in the Asia Pacific region to a services channel partner. Or in a similar situation, you may want to have direct field personnel in all the major metropolitan areas of North America, but choose to use services channel partners everywhere else. Another variation might be for your organization to sell and provide your entire services portfolio to enterprise accounts while using channel partners in the commercial space.
Another example is that, although you could do it very well, you may find that out-tasking all contact centers is the best choice for your situation. Again, these are important capabilities that you certainly could handle, but from a resource and focus perspective, your organization might be better served by targeting, building, and enhancing distinct services competencies that are vital to your organization’s success.
The concept of core and distinct competencies is a central tenet of organizational effectiveness. Services have the potential to significantly shift the balance from core to distinguished. Mission-critical, unique services capabilities should be kept in-house, financed, and nurtured. Strategic services capabilities that are not distinctive should be out-tasked to services channel partners and rigorously managed to deliver high-quality, consistent customer results. Non-critical, undifferentiated services should be farmed out to other partners to run under well-defined services level agreements.
Steps to Selecting, Building, and Maintaining Strong Services Channel Partners
Obviously, addressing the “challenge of the channel” requires a strong, well-thought-out approach. Following are 10 steps to help you find, motivate, and retain the right services channel partners.
STEP 1 - Use the capabilities strategy model to plot your existing services and solutions. I include solutions here, as services are a vital solutions component and are important to the business strategy according to your competence status and importance to your company. Voice of the customer findings, competitive intelligence reports, industry trends, and internal strategy documents are all potential inputs to accurately completing this model. Don’t be dismayed if you don’t have many offerings way up and way left on the chart.
STEP 2 - As part of your services business plan, create a “plan for distinction” outlining what is needed to maintain your status for those extremely important and highly unique services in place today, and what is needed (e.g., new skills and knowledge required, alliances created, systems developed) to develop more offerings that are unique and important that can help achieve competitive advantage in the future.
Examples might include recruiting and hiring top-notch services account managers with strong business acumen, or investing more in advancing remote technologies, or aggressively pursuing multivendor opportunities. Since this is the most important part of the services business, assign your best managers and top talent to lead and implement these innovative projects and key customer engagements. Of course, resources need to be reallocated from other less valuable projects to support this strategic initiative. And remember, capabilities and services that fall into the “retain in-house” category are not candidates for channel partners of any kind.
STEP 3 - At the other extreme, all tasks falling into the non-critical, non-core category should be outsourced as quickly as possible to external partners who can do these functions easier, faster, and cheaper. With guidelines from services management, a support function such as procurement should assume responsibility to find and regulate appropriate partners. Services should not get involved again unless core metrics are not being met that have a negative impact on the services organization. The talents of channel partners should not be required here either.
STEP 4 - Using all the projections, plans, and insights available, start to think through how you’ll deal with strategic services issues where you possess core services competencies but may need to consider out-tasking. The goal is to best focus your internal capabilities to gain the most leverage and then balance them off with help from select services channel partners.?
List the services capabilities needed to deliver on your current services commitments and probable future engagements. Then think through your existing capabilities and how well they align. Of course, cost, timeliness, and quality are always factors of consideration.
For example, if you are being required to provide professional services for all of Germany, you may desire to expand your internal capabilities to cover those needs by hiring people and adding necessary infrastructure. However, if you also need to provide uptime services in Latin America, you may feel that it makes the most sense to use services channel partners. Review needs by geographies, industries, market segments, and strategic accounts. Think through the three types of services—start-up, uptime, and professional services—that might come into play. Finally, analyze all the people, process, and technical requirements needed to deliver on each need.
STEP 5 - After best determining where services channel partners would be most beneficial, develop a criteria screen for prospective services channel partners to objectively determine the probability of success.?
The Services Channel Partner Criteria Screen shown below is an example of how my organization helped a client develop a criteria screen for searching for services channel partners. Our client was selling and servicing their products directly to all customers in the major metropolitan areas in North America, but wanted a partner or partners to deliver adequate-quality, low-cost field services coverage everywhere else. Here is a succinct explanation of each of the factors included in this criteria screen that we developed together:
This criteria screen proved invaluable in finding the best partners for this long-term engagement.
Determine the factors that are most important to your unique situation, define them, and weigh them accordingly. You will then have a common standard from which to objectively consider services channel partner choices.
STEP 6 - Do initial research to find possible prospects. Talk to industry people in the know to get initial information and disqualify poor fits. Follow this up with online research. Note that if it is important to keep your search confidential, use others to act as your representatives to front the search until it is appropriate for non-disclosures and serious face-to-face meetings.
STEP 7 - Romance your prospects. Just like dealing with a customer or prospect, when it looks like a potentially good fit, learn their issues and needs. Take the time to think about what it is you bring to the table that they would value. New, profitable revenue? Probably. A chance to work with an industry heavyweight? Possibly. If times are tough, a way to make their expensive resources sitting on the bench billable? Absolutely. Your goal is to get them excited enough to take your solicitation seriously.
STEP 8 - Schedule an initial face-to-face meeting early on to test business fit and relationship potential. Yes, initially conversations can be held over the phone, but forming a partnership is too important not to meet in person.?
Start by sharing the potential benefits to be gained by your chosen partner in terms they care about, and then confirm that these benefits are important to them. Next, share your criteria screen, clearly explaining the meaning behind each factor and stating what are “musts” and what are “wants.” Ask your prospective partner what defines a good partnership from their perspective. If things are positive at this point, share some potential low-hanging fruit that they will probably be able to take advantage of quickly. Nothing is better than bringing new business to a new partnership, as it demonstrates trust and commitment. This is especially important when you will be asking your partner to invest time and money.
At this point in the face-to-face meeting, address the potential stumbling blocks to the relationship and jointly determine how they should be handled. It is good to give this some thought and have these prepared ahead of time. Example issues to be addressed include:
STEP 9 - If the initial meetings go well, there is strong interest on both sides, and by all indications it looks like a good fit, then develop a draft agreement addressing all the issues listed in the previous steps, and any others that arise, in enough detail so that all is crystal-clear.
STEP 10 - While the agreement is being negotiated, develop an integrated marketing plan. First, determine what message will be communicated internally to the services organization, sales, and everyone else. Communicate what you’ve done, why you’ve done it, and the benefits to the organization. Be sure to let people whose jobs are impacted know their new expectations.
After the internal communication process is completed, a marketing campaign should be developed for all external organizations that might be impacted, including your current installed base, prospects, and other organizations. Again, following the simple model of stating what you’ve done, why you’ve done it, and the benefit to the specific stakeholder you are addressing will get the job done effectively.
Best Practices in Services Channel Management
1. Assign a senior person to manage all services channel partnerships, with specific measurable goals and metrics. Just as with any other important task, one individual needs to be both responsible and accountable.
2. Develop and consistently use clearly defined partnership criteria. This will help to quantify the intangible and qualify the organizations most likely to be successful.
3. Involve your key executives in the services channel partner selection process. The success of your services channel partners impacts the success of your entire company. Hence, to get and keep executives on board, involve them in the process.
4. Use an outside services industry expert to help craft and lead the confidential partnership search. The right person(s) will bring not only services and industry knowledge that will focus the search, but also a professional, non-biased approach to smooth and speed the selection process.
5. Give choices to your existing channel partners. As described earlier, many of them are mainly product-sales driven. Don’t demand that they change their spots, however, explain the growth and profit opportunities available to them if they are willing to invest and amend their business charter. If they choose not to, sharing your services story and giving them the chance to participate lessens their concerns when you become more involved in the services side of “their customers” or when you assign a new services channel partner to create and fill new services demands.
6. Require services providers to demonstrate their competence to you before turning them loose. Remember that from the customer’s standpoint, they are you, so don’t let them touch your customers or your prospects until they can do what you want them to do, the way you want it done. Charge them for the necessary training because it has value and is a requirement of the agreement. If your agreement with a services provider requires that they sell the services as well, their sellers need to demonstrate selling services proficiency before they visit the first customer.
7. Differentiate the level of your services channel partners’ expectations, and reward them accordingly. For example, services channel partners that make big investments in hiring new talent and create a new infrastructure to support your new joint-channel goals deserve to be treated better than their less-committed peers. This superior treatment might result in a “Gold” status rating and entitle them to receive your best pricing, access to internal experts, and the opportunity to work with more lucrative accounts. Partners committing less might be on a “Silver” level, and those providing minimum levels of services investment might be classified as “Bronze.”?
Furthermore, if the need is there, you might need to be creative and form a master services provider agreement with a uniquely qualified organization. For example, a reliable organization that takes on the entire realm of your services needs for you across Southern Europe or all of Latin America could be extremely valuable to you. Of course, that relationship might have a very different set of expectations and compensation plans. Be innovative when the situation demands.
8. Require an annual certification audit. Review all aspects of the services channel partner performance against standards, capability requirements, and goals. Use these findings to assign the classifications assigned above for the upcoming year. And, yes, you should charge for this as well. Or at least establish a value if you decide to do it for no charge.
9. Never give up ownership of the customer. Build alliances, create synergies, and capitalize on distinctive strengths, but judiciously nurture and jealously guard your customer relationships—they are the heart, and the primary asset, of any services business.
10. Treat your services channel partners as you would a key account. Put an emphasis on sustaining the relationship, and proactively work to build and maintain trust. In a partnership, absence does not make the heart grow fonder—it often creates mistrust. Meet frequently in person to review mutual performance and work out issues before they become problems.
Conclusion
In the complex world of services, no one can go it alone. It takes reliable, capable, trustworthy services channel partners to meet global demands. There are many challenges to be dealt with, but following a proven approach will greatly improve your probability of forming mutually beneficial relationships that will drive your services success.
Dialogue
If you have questions or comments or personal examples that support or challenge this content, please share, and I will address it before the next installment. Or, if you prefer a more personal conversation, drop me an email to discuss or we can set up a Zoom meeting.
My book Seriously Selling Services is the main source of this LinkedIn series.
"Alexander provides an unmatched, practical road map for senior executives who are ready to execute a serious services strategy." — R. Gary Bridge, Senior Vice President and Global Lead, Internet Business Solutions Group, Cisco Systems, Inc.
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