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Partner Profitability, Are Your Partners Performing To Their Potential?

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Dave Brock

Many organizations pride themselves on the number of partners they can list in their company marketing materials or web sites.  Manufacturers and resellers,[1] alike, seem to race in acquiring partners, often with quantity overwhelming quality.  We believe many companies have too many partners and would become more effective by reducing the number of partners, developing relationships that drive the highest levels of performance and profitability for each organization. 

Sometimes criteria for partner selection seems to be the ability to “fog a mirror.”  Often, the ultimate objective of the partnership seems to be the press release.  Too many times, we’ve seen manufacturers and resellers alike, seek partners not for their commitment to sell and drive business growth but to add prestigious brands and logos to their partner list. 

We have long counseled our clients to develop “just enough” quality partnerships.  What does this mean?  How do we build strong partner channels that maximize the profitability for each party? 

How Does The Partnership Create and Deliver Value? 

Partnerships, whether channel, strategic, technology or other forms are about creating value.  If they don’t create value, then they are driving costs.  In determining the value of the partnership, it is useful to look at the value delivery chain. 

First, what value does each partner contribute to the final customer solution?  The key reason for any partnership is that each partner contributes value in addressing customer needs, providing justified solutions and driving revenue.  Product manufacturers may provide products which are complemented by the services provided by distributors and resellers  (i.e. industry knowledge/expertise, implementation and support, etc.)  Together they create a solution to the customer business problem.  If each partner does not add value in delivering the ultimate solution to the partner, then they are only adding cost and inefficiency.

Second, each partner must create value for the other partners.  Without this, it is impossible to deliver differentiated value to the customers.  Manufacturers provide products, partner programs, marketing, support, and other capabilities designed to help the channel partners be more effective and efficient in selling their products.

Distributors provide a broad catalog of products, single point of order, invoicing, and many other services that reduce the costs for manufacturers and resellers.  Resellers provide customer access, knowledge, industry and applications expertise, geographic presence, a portfolio of products and services that enable them to efficiently and effectively reach the customers. Each organization involved in the value delivery chain must create value for the other partners in the chain.  Without this, they are creating cost and will be lose in the competitive markets. 

In developing and executing the channel or partnering strategies, each party must carefully understand their role in creating and delivering value—for each other and for the ultimate customer.  If the value cannot be articulated in a compelling manner, if it cannot be quantified, then the relationship is not likely to be profitable or sustainable over time. 

Size Matters, But It’s Performance Counts!

Traditionally, resellers and integrators used to focus on developing relationships with the “800 pound gorilla’s,” establishing partnerships with the Microsoft’s, Cisco’s, HP’s and other leaders.  Likewise, manufacturers focused on establishing relationships with the “heavy hitters” in the channel, often seeking relationships with the Accenture’s, PWC’s, IBM Global Services’, and other big names in the channel. 

It would be naïve to suggest size is not important.  The big players can bring resources to bear, leverage powerful brands, reputations, and other factors that make them important in many circumstances.  However, we believe there several other factors that drive greater levels of profitability and productivity. 

Partnerships should be evaluated based on performance versus their potential.  Effective partners perform in a manner consistent with their potential.  While larger organizations may have raw numbers are very high, their potential may be far higher.  Sometimes smaller organizations are making a greater commitment and performing, relatively, at a much higher level, but are receive less attention and focus. 

There are many ways to “level the playing field” in comparing performance to potential of large and small players alike.  Simple techniques might be percentage of sales or support people certified in products, compared to total population of sales and support people.  Another might be average sales/partner employee or profit/partner employee.   

We believe one of the most important areas of partner improvement is in the area of achieving alignment between realized performance and potential.  Our research indicates partners performing to their potential drive the greatest profitability, for themselves and their partners. 

Traditionally, many partner programs have favored the largest organizations producing the greatest raw performance.  Smaller organizations with greater levels of commitment and investment in the partnership are often disadvantaged in discount levels, incentive programs, support, MDF and other areas because their size precludes them from being able to perform at the same raw dollar levels of the giants. 

Many leading manufacturers, using channels, are recognizing this by measuring their partners differently, so that raw size and raw revenue performance is no longer the only factor used in evaluating partner performance. 

We believe manufacturers are best served by prioritizing their investments in developing the channel first to those partners who are performing close to their potential, second to invest in programs that help lower performers reach their potential.  For those partners that are at the bottom of the performance/potential balance and are not improving, we believe those partnerships bring little value to either party or their mutual customers and should be eliminated. 

Likewise, resellers should look at the performance and potential of their manufacturer partners.  Simple measures include product line profitability and share growth (within the reseller’s customer base.).  There are a number of other measures including channel program effectiveness, product line fit (with other products, services, target markets, and reseller capabilities.), and other criteria.   

One reseller client encapsulated their evaluation of their manufacturers in a metric they labeled the “hassle factor.”  Loosely, this was a rough profitability measure weighted by the “ease of doing business” with the manufacturer.  This organization actually ended up terminating the relationship with one of their larger manufacturers because of a very high “hassle factor.”  They found they produced better results by shifting their focus and resources to partners with lower hassle factors. 

The Importance Of Being Important.

For partnerships to work, each party should be important to the other.  Simply put, unimportant partners  will never get sufficient attention or support to be effective and will probably not achieve their goals in the partnership.  This doesn’t mean a reseller must have personal relationships with Bill Gates, John Chambers, or Carly Fiorina, you have no chance of developing good partnerships with their organizations.  Likewise with manufacturers, you don’t necessarily have to have relationships with the top executives of the reseller organizations to have effective partnerships with their organizations. 

It is critical to be important within parts of the organization.  For example, resellers want to be important to the key product managers and sales managers for the manufacturers they represent.  Small manufacturers want to be important to the part of the reseller organization directly responsible for their target customers and markets.  For example, we worked with a small software company, focusing on telecommunications software solutions.  We sought to develop relationships with the practice leaders of key systems integrators in a few geographic regions.  For example, they would never be important or a significant contributor to business for one of the largest integrators, globally, but they could become a very big contributor to the “next generation communications practice” in North America and Europe.  We sought to develop strong and important partnerships with the key people in those organizations.   

Likewise, we worked with a very small systems integrator in developing a strategic partnership with a large enterprise software developer.  This integrator had a unique relationship with key companies in the automotive industry, giving the software developer better access to this niche than they could achieve with other partners. 

Nothing Is Free, Every Partnership Has Real Costs, Make Sure You Achieve The Return You Expect On The Relationship!

I’m surprised by the number of business people who don’t understand the costs involved in developing and maintaining partnerships.  This usually comes from people who have a “sign ‘em and forget ‘em” approach to partner programs.   

There is no fat in any organization’s budget.  Every dollar/euro/yen invested in developing, managing, and supporting the partnership must produce the highest possible return.  Supporting relationships that don’t produce results are a drain on the organization. 

Every relationship established creates new costs—opportunity costs, expense, management time and resource.  The opportunity cost in developing, managing and supporting a relationship prevent you from taking advantage of other opportunities.  There are direct expenses for all partnerships, costs of implementing programs, training, materials and other items.  There are indirect expenses in terms of management time and resource consumed.  There also may be reputation costs.  A bad partner can adversely impact the brand or company. 

Every relationship must be evaluated in terms of its cost and the return.  ROI on partnership criteria need to be established.  Those partnerships that do not produce the desired return should be terminated. 

How Many Is “Just Enough?” 

Like every consultant, I’ll give a definitive answer to this question:  It Depends! 

The ideal number of partnerships will vary by company and will vary over time.  Manufacturers will want enough partnerships to effectively, efficiently, and profitably reach their end customers and target markets.  Too many partners addressing the same markets and customers produces disastrous results.   

We worked with one software company that was terribly over distributed.  Their partners competed against each other for business, more than they competed with the competitors.  Margins plummeted, customer and partner satisfaction declined, costs skyrocketed, and they started losing significant share to their competition.  Once our client reduced the number of resellers by over 60%, producing dramatic recoveries in all of the areas highlighted above. 

For resellers, too many partners also produces terrible results.  The focus of the people becomes diluted.  Their knowledge, expertise, and ability to create real value to their customers can decrease.  Costs in supporting too many suppliers skyrocket.   

For some reason, manufacturers and resellers still seem focused on quantity of partnerships.  I still see companies having many 1000’s of resellers and wonder if they might be more effective and more profitable in focusing their efforts through a much smaller number.  For some organizations this may be appropriate, but my suspicion is that for a large number of manufacturers a smaller number of reseller partners may produce better results. 

Likewise, I get concerned when I see resellers (other than retailers and distribution) that have dozens to hundreds of product lines to sell.  How can they train their people and adequately support that number of products?  How can they be knowledgeable enough about all the products to produce real value for their customers and for their manufacturer partners?  Perhaps the very large resellers and integrators with 1000’s of people can support product lines of this breadth, but I believe most B2B resellers need to dramatically reduce their portfolios, focusing on a small number of product lines in each major category and focusing their solution capability into a small number of categories. 

The Terminator? 

No, Arnold Schwarzenegger is busy as governor of California, he’s not doing another movie.  I’m advocating thoughtful termination of many relationships, by both manufacturers and resellers. 

In the past, there has been a tendency for organizations not to terminate partnerships.  The tendency has been to let them whither through inattention and neglect.  Yet, somehow the partnerships are still maintained. 

We think it is time for serious pruning.  Stop wasting time, ink, resources and energy on partnerships that don’t produce the desired return.  If they are not producing good return for you, they probably are not producing good return for the partner, as well. 

Focus your attention and resources on assuring each remaining partner is performing to their full potential and that each investment made by you and your partner is creating the greatest possible return. 

Partner Profitability, What Counts. 

Partner profitability is one of the hot topics in channel management and partner development.  To some degree, it’s surprising to me this is getting so much play, it’s been an implicit part of channel and partnership development forever.  I think the attention to partner profitability has risen as the tools to measure profitability have improved. 

Partner profitability is critical to developing high performance relationships.  As mentioned earlier, nothing is free.  Any partnership relationship requires investment on both sides, each partner is investing time, resources, money, management talent in establishing and building the relationship.  Profitability can be measured in quantitative ways and qualitative means. 

Developing and implementing programs that help your partners maximize profitability is and important element of the partner profitability model.  Analyzing each investment in partners and partner programs that you make and maximizing the return on those investments will improve your own profitability. 

It is critical that each partner establishes metrics and goals by which to evaluate their own business and that of their partner.  If the partnership fails to achieve the goals, and cannot be corrected by investments by both parties, then the relationship should be terminated. 

We believe that this investment or profitability orientation will drive greater customization of the relationships and programs between each partner.  Companies will make program investment decisions based on specific capabilities and anticipated results of the partner, not a category of partners.  “One size fits all” approaches, or even tiered approaches will evolve into “one-to-one” relationships.  Through one-to-one partner management, each partner will drive higher levels of performance. 


Building and maintaining effective partnerships are investments.  It is important that each party protects those investments, building and improving those that produce superior results or the greatest return and eliminating those that do not provide adequate return.   

For more information on managing your partners for their and your profitability, contact Partners In EXCELLENCE for support.  Our channel profitability assessments and related programs have produced dramatic results for many organizations, they can produce tremendous results for you. 


Copyright 2004, Partners In EXCELLENCE, All Rights Reserved.   Please do not duplicate or distribute without the prior written permission of Partners In EXCELLENCE. 

Partners In EXCELLENCE is a leading consulting company in partner development, channel development and management.  We have developed and implemented partnership assessment programs for clients in technology, consumer products, retail, telecommunications, basic materials, industrial products, and other areas.  For more information, contact Partners In EXCELLENCE at partners@excellenc.com, visit the website at www.excellenc.com, or call at 949-305-7146.


[1] We use the term reseller in its broadest definition, including VAR’s, systems integrators, manufacturer’s representatives, VAD’s, distributors, retailers, outsourcers, and other types of organizations that sell products to end users or others in the distribution chain.


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