Cost Is the Missing Element in Partner Assessment

Vendors seek more data about partners to determine their relative value. What’s often overlooked in this equation is the cost of working with a partner and how it impacts profitability.

By Larry Walsh

I’ve been asked by several vendors for guidance on how to best evaluate partners’ value in channel programs. The underlying question from vendors: Am I looking at a good partner or a bad partner?

The 2112 Group provides channel and partner assessment services. We have something we call our 3C’s Methodology – an evaluation of capabilities (what a partner can do, or its raw skills), competencies (what a partner is especially good at, or its specific area(s) of expertise), and capacities (what else a partner can do, or its potential to grow).

The 3C’s analysis isn’t a three-dimensional measure of a partner’s worth; rather, it’s a multi-dimensional approach to understanding the full breadth of a partner’s value and contributions to a vendor’s mission. We look at several variables, including revenue productivity, resale and purchasing frequency, certifications, marketing, business planning, rates of growth, and our own homegrown indexes for ambition.

Many vendors and consulting firms have their own approaches to assessing partners’ current and future value. Many channel programs are highly reliant upon revenue generation as the underlying measure of partner value. If a partner generates X revenue this year, and it generated Y revenue the year before, the probability of it generating Z revenue next year is high.

The missing element in partner assessment and overall channel program management is cost. Few vendors understand or have the means of tracking or measuring the cost to serve their distributors and partners. Many equate costs to budget allocations and industry best practices for funding allocations. These best practices say vendors should invest 5 percent of revenue in marketing, invest 5 percent of indirect revenue in partner incentives, have one channel account manager per 25 to 50 partners, and offer progressive product discounts of 5 to 25 percent.

These benchmarks aren’t unreasonable, but they don’t add up to the total cost to serve. Channel program managers don’t have true insights into how much one partner costs over another because they have too many variables and not enough information.

Case in point is this question we received at 2112: How valuable are these three partners that serve the same market but have vastly different levels of revenue productivity? One partner produces $1 billion in sales annually; the second partner generates $100 million in sales; and the third partner generates $25 million in sales.

On paper, all three partners look the same in terms of standard channel qualification measures. They all sell at the same frequency. They all hold the same certifications. They all participate in channel development activities, such as submitting joint business and marketing plans. The only difference is revenue productivity.

Getting real cost-to-serve numbers proved difficult, as there are several variables and undefined costs. In addition, there are hard costs such as staffing, incentive payouts, and discrete marketing programs. Best estimate: The cost to serve the billion-dollar partner is substantially higher than the cost to serve the $25 million partner.

Vendors are increasingly seeking more quantitative and qualitative data about their partners to place value on their indirect relationships. Vendors correctly believe that more data will help them make better investment choices and forecast more accurate ROI estimates. What vendors can’t afford to overlook is the data within their domain related to the cost of generating business through individual partners. Having a real sense of cost to serve gives vendors a sense of a partner’s true profitability – or a better sense of how much a partner contributes to the vendor’s profitability.

The 2112 Group can help vendors identify the variables and sources of the “cost to serve” partners and distributors. For more information about 2112 assessment services, e-mail me at [email protected].

Larry Walsh, The 2112 Group

Larry Walsh is the founder, CEO and chief analyst of The 2112 Group. Follow him on social media channels: Twitter, Facebook, LinkedIn.