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Channel Partners – Shifting the focus to adoption

incentive-resized-600-jpgCisco owns the enterprise technology industry’s biggest partner channel ($45 billion). So it knows a thing or two about the challenges of moving to an OPEX style of subscription pricing and away from the traditional perpetual licensing models of CapEx style pricing.

This past week I was fortunate to spend time listening and talking with the Cisco leadership team of Chuck Robbins CEO and Wendy Bahr SVP Global Channels on this and other topics. One thing that really struck a chord in the conversations we had was the challenge Cisco is facing in getting channel partners to think beyond the install phase.

From Perpetual To Subscription Licensing

Think of the revenue lifecycle of a piece of software or IT hardware as consisting of five stages:

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In the traditional perpetual licensing model, the focus is almost entirely on the Install stage. The motivation to engage with a customer falls off a cliff once the service is installed. After the completion of this stage, the channel partner has done their job (implement) and the vendor has been paid large up-front fees and is guaranteed maintenance fees for the next five plus years.  To be blunt about it, whether the customer ever ends up actually using the new technology is of little concern to either the customer’s vendor or channel “partner” as they make good money regardless. A move to subscription pricing throws that logic out of the window.

Subscription pricing is far more profitable in the long term for an IT vendor. The twist is that in the short term it is loss making, since profits are predicated entirely on keeping a customer engaged over an extended period of time. This results (or should) in an about-face from the vendors and channel partner from having little to no concern over whether the customer ever realized any value from the system purchased, to having an intense dedication to ensuring that they do.

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That means a vendor with subscription pricing needs to get beyond stages one and two (Land and Install). They need to act accordingly to ensure that the customer fully ‘Adopts’ the service. Otherwise, there will be serious financial pain and customer churn ahead. To make a long story short, an unhappy customer can quickly become an expensive customer and push the horizon for profit way off in the distance.

Changing the Channel Focus To Adoption

If the licensing model has changed, then so too must the way that vendors and their partners engage with customers. For many, if not most, IT vendors, that change has not happened.  Technology vendors have spent the last several years fixated on changing their licensing model to subscription and moving technology to the cloud. Yet have they have ignored the way in which they initially engage with customers and work through their channel partners.

For vendors that have changed the way they monetize their business, the monetization model needs to change for their partners as well. And that is what Cisco is now doing: incentivizing the partner to build greater customer adoption of the technology. Initially, Cisco gave the financial incentives directly to its customers but recently has shifted to giving the financial incentive directly to the partner. In theory, the partner knows the full potential of the technology that the customer has bought and so with only limited effort can guide the customer to make the most of their investment. By making this change, Cisco is seeing a significant uptick in customer adoption, and presumably, satisfaction as well. Making the move, as disruptive as it may be, is a win for all involved. Customers are happier, the channel partner is rewarded, and the risk of churn is reduced.

Realigning Incentives

Like many good ideas this one is pretty simple – if your profit point moves along the timeline then so should your focus and effort. Simple or not, Cisco remains an outlier in recognizing the importance of shifting the channel’s focus. At Digital Clarity Group we know for sure that vendors are deeply concerned about the move to subscription pricing with some now wondering if it was such a good idea after all. Channel partners are feeling shortchanged by the vendors changing the business model without changing the model or terms of their engagement, and customers (as usual) are left dealing with the fall-out of the situation.

So to sum it all up in classic economic terms, when moving to a new business model, companies (in this case technology vendors) also need to take care to realign the incentives for those (like  channel partners) who are also affected by the shift. Because without their buy-in to the new model, it could be a very rocky ride down the new path.

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