Strategic Alliances Fieldbook newsletter #10 – digital transformation business case

I was experimenting with a client on how to design their digital transformation programme to build a new revenue line for a novel data-as-a-service proposition.?Two things struck me about the conversation.?The first was the variations in the economic profile of the programme that pulling various levers created.?For example, how long the existing ‘as is’ system and the new ‘to be’ system are run in parallel before customers are cut over and the existing system turned off is much more material to the business case than the cost of the change project to build the new system.?In my experience the sensitivity of the business case to the parallel running duration is often forgotten in the excitement to talk about the new technology and the cost of the change project.?The second thing that struck me was the impact that a strong partnership between technology and GSI/professional services companies can have on the dimensions of the economic profile.?This does not appear in detail in the book, but fascinated me so much it’s the focus of this months newsletter!

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There are two economic profiles modelled below for comparison.?They are dummy data, and though they are exaggerated to show the variation the principle has held for all the transformation business cases we’ve worked on.?They show two scenarios for building a new ‘to be’ system and cutting over from the existing ‘as is’.?Even though the change project costs are higher in the second scenario, the accelerated transformation in scenario two gets us past break-even and into financial benefits about 2.5 years earlier than scenario one.

The ‘to be’, or Future Mode of Operation (FMO) is half the ‘as is’ Current Mode of Operation (CMO) cost, so the net saving comes from swapping from the CMO to the FMO as fast as possible.?There are reductions in cost for the technology in FMO assuming innovations have reduced the cost of the infrastructure and applications.?There are reductions in the cost of people in FMO as the new technology is more efficient to run, for example it takes fewer people doing cabling and admin in cloud technology compared to on-premise data centres.?In the first scenario the ‘as is’ tech and people costs overlap the ‘to be’ costs during year two and three whilst the new system is built.?In year four the ‘as is’ systems are ramped down.?In scenario 1 the project does not reach a saving by the end of year six, still being net $140M more expensive than not doing the project at all.?

Contrast that with scenario 2 where the faster pace of change produced by a larger (and therefore more expensive) change team results in a net saving of almost $100M by the end of year 6.

These two scenarios show the variance to the overall economic profile caused by pulling various levers to make changes in the assumptions on speed of cut over.?The key levers are the duration of parallel running which is determined in part by the size and shape of the change project and how fast the team can move from CMO to FMO.

The second of the observations I made was how a strong alliance with the technology vendor can influence the economic profile.?Deft use of the various incentive’s and resources that comes with a typical technology partner programme can increase the net saving dramatically.?Client incentive funding can compress both the transformation ‘bubble’ for the change team and the ‘to be’ technology costs.?Access to the technology product teams to share best practice configurations can help speed up the implementation.?Solutions funding can create project assets like integration accelerators and configuration best practices that reduce the project cost and timelines.?Solutions funding can also create run assets like operational accelerators and incident management process that reduce the ‘to be’ people costs.?Combinations of referral fees, resale margin and rebates can also be deployed in various ways to increase the net saving on the technology costs.?If we take each one of these vehicles in turn we will see how each can have a beneficial effect on the economic profile for the end customer.?Marketing funding is relevant if the system being built is to support a product which has revenue – for example if an automotive company is offering subscriptions for over-the-air satnav updates for a fee using the ‘to be’ system.?Where the companies share the cost of marketing and that attracts new customers faster, it will bring forwards income.?The revenue increase of a new product line is another dimension that is not shown in the economic profile above, and another big lever in the overall business case.?Client incentive funding for PoCs will probably have taken place before the project starts in earnest.?The intended effect will have been to demonstrate that the technology can perform to the desired standard and therefore de-risked the delivery of the project.?Using the PoC phase to create industrialised implementation patterns tuned for the specific client environment will also have the effect of reducing the duration of the project and hence increase the net saving.?Solutions funding could have been drawndown before the project starts and should also have the effect of reducing the duration by pre-building and testing delivery assets.?Client incentive funding for the project could also reduce the ‘transformation bubble’ at the beginning of the project by subsidising the change project costs.?It could also create increased discounts for the running costs of the technology so that the ‘to be’ costs becomes lower.?Both of these points will increase the net saving.?Referral fees are generally offered instead of the other incentives for professional services partners who have influenced the project but for some reason don’t do the full implementation.?Resale margin will give the PS company the ability to discount the technology costs if they choose to, once again reducing the FMO costs.?Finally if the PS firm receives rebates, which are typically a percentage of the billed revenue for the technology they can choose to re-invest that in the client or retain it as margin at the end of the project.?

The following is an edited except from the book.

If funding from the technology company materially accelerates a go-to-market (GTM) initiative together or boosts margins in a way that gets the flywheel spinning faster, then it is a force multiplier for the PS firm’s own investment. In some cases, we’ve seen these fees can cover much of the cost of the PS firm’s alliances team payroll, so they can also be a significant way to defray costs. The different mechanisms of typical partner programmes provide other funding vehicles. As a short refresher, it is common to find that the technology firm’s partner programme will provide some or all of the following;

? Marketing funding to share cost of demand generation.

? Client incentive funding to subsidise proof of concepts.

? Solutions funding to subsidise joint offering build.

? Client incentive funding to subsidise projects and/or discount the technology costs

? Referral fees for introducing clients and influencing product spend.

? Resale margin for acting as a product channel to market.

? Rebates to reward for acting as a product channel.

Marketing funding is used for joint market development .?The authors have seen budget pots range from a few thousand a year to quarter of a million dollars for a single event.?Typically, the spectrum ranges from 10% contribution from the technology partner through to 50/50 match funded where it is a priority initiative.?All marketing funding from technology companies we have seen comes with KPIs designed to track outcomes for leads, pipeline value and other leading metrics for sales.?

Client incentive and proof of concept funding.?This type of funding is designed for technology to subsidize a PS engagement in order to prove technical features or test a business case for a product.?The PS firm either takes it as margin upside, or more commonly uses it to cut the price to the client without diluting their margin.?Clients love it as its a good way to get more ‘bang for their buck’ and de-risk testing out something new without using existing budgets.?Typically this funding has a ratio as one of its parameters.?For example, 5-10% of the total size of the potential deal might be made available for the initial PoC (proof of concept).?The ratio ensures an appropriate return on investment is possible if it has the desired effect of securing the clients commitment for a larger project??

Solution funding.?Most technology companies have a programme to co-fund joint solutions, and these can be material, typically ranging a few tens of ?thousand dollars to a number of millions depending on the perceived strength of the PS firms IP, market share and the likely sales volume that will result for the technology firm.?The funding is used to embed a product inside of the PS partners proposition so that it is pulled through with every sale with very small or no sales effort from the technology firm, turning the PS firm into an efficient sales channel.??

Technical partner / ISV funding.?Many technology companies also have funding programmes with the same objective as the solutions funding mentioned above, but specifically designed for other technology companies to provide integrations.?For example, two companies with software and infrastructure offerings respectively may invest to pre-integrate and pre-test parts of their software running on the infrastructure.?These kinds of initiatives between technology companies typically de-risk clients projects for complementary parts of a solution by providing reference architectures, tested configurations and defined integration points with proven performance characteristics instead of the client having to figure out how to get two pieces of technology working together themselves.??

Resale margin.?Typically, a technology provider will have an end customer list price, and then tiered pricing for a reseller to purchase from them based on the commitment and qualifications of the partner which is lower than the end customer price.?The difference between them can be used by the reseller as combination of margin and client incentive to choose them.?A highly qualified reselling partner may get a few percent more discount than the ‘standard’ reseller.?Consider the margin gearing implications of changing the discount level for the reseller; assume that the list price is $100, and they buy at 10% off list.?They make $10 margin when they sell to the end client.?Imagine now the reseller invests in certifying more staff to achieve ‘premium’ status and gets an extra 10% off list.?Their buy price is now $80, and now they make $20 for the sale.?An extra 10% discount doubles their profits.??

Referral fees.?For PS firms that are not reselling the product, the technology companies might offer schemes to incentivize them to advocate for their product.?The measurement of amount of ‘influence’ that leads to a sale is much more subjective than the measurement of the number on a resellers purchase order for the sale itself.?This means most referral schemes need combination of remarkably high discipline from the PS firm for flagging early where they are advising a client, and great relationships to ensure their influence is acknowledged and logged in the technology providers CRM system.?In situations where the client has a formal procurement process running with multiple PS firms bidding for work, this process of attributing influence is particularly tricky for the technology firm to decide how much influence each PS firm is bringing.?If the PS firm survives the clients perception of conflict of interest and the technology firms process for measuring influence, they might enjoy a referral fee once the sale is transacted of a percentage of the sale value if it’s a fixed license or hardware price, or of the first years fees if its subscription based.?A large PS firm could influence hundreds of millions of dollars of technology firms product sales a year, so these referral fees can be material as they have no cost of sales for the PS firm.????

Rebates.?Many technology companies offer rebate schemes to their channel partners who are reselling the product.?The rebate is payable after the order has been placed, so it acts as a reward to incentivise the partner to sell more.?Some companies take it directly to their margin as a part of their core economics.?Some companies might choose to re-invest either in the client project by reducing their fees or doing some extra scope without additional charges or re-invest in their practice in the form of training or marketing.?

Subcontracting.?The PS firm working for the technology firms internal professional services team may also be a programme in the same way as the other funding vehicles discussed.?It can be a material value stream for PS firms and comes in two forms, direct business and accelerated experience that helps win future projects.?If the technology company wins a services project and is short of delivery resources they subcontract a well-qualified PS firm to augment their team.?For PS firms this is a great way to turbo charge the initial build of a practice as it gets revenue spinning quickly and builds consultants with live delivery experience without the long sales cycle and business development investment of winning a project for themselves.?The amount of subcontracting that takes place is normally a function of the technology firms’ strategy for delivering its products itself, and the amount of capacity they have on their own PS bench.?