Is the 80/20 rule still applicable to the channel?
Larry Walsh of 2112 Group suggests that a smaller group of partners are now taking a greater chunk of the business going through the channel
The Pareto Principle - that 80 per cent of effects come from 20 percent of causes - is not lost on the channel. It's generally said that 80 percent of indirect sales revenue is generated by 20 per cent of channel partners - something that has held true for decades. But according to some, these percentages are increasing and decreasing respectively.
In a recent blog post, The 2112 Group's CEO and chief analyst, Larry Walsh, says the 80/20 rule is more accurately 90/5 - under five percent of channel partners generating 90 per cent of indirect sales revenue.
Walsh notes that while the industry "generally accepts" the 80/20 rule - with the 20 being described as "top-performing partners" - if we take a closer look, it is not quite accurate.
"In reality...that ratio is far more skewed, with five per cent or less generating 90 per cent of the revenue," Walsh writes. "Even in smaller, more focused channel programs, vendors find a great disparity between the high performers and the laggards."
Walsh is not alone in thinking that the 80/20 rule for the channel is shifting. John DeSarbo, principal and head of the sales, channel strategy and management practice at ZS Associates, says the channel currently adheres to a 90/10 rule and that if anything, the issue is growing.
"The vendors have created this problem of concentration and they're perpetuating it," DeSarbo said. "It's not just chance or happenstance, it's something that's been a consequence of the way vendors have been managing their channels for years."
He explains that vendors with non-traditional partner types, such as professional service providers (also known as "shadow partners"), display a more balanced distribution of channel sales, while vendors focused on traditional partners demonstrate larger gaps.
As vendors continue to allocate valuable resources, like channel account managers, MDF and better pricing, to their more profitable partners, smaller partners lack the human touch, resources and incentive to sell a vendor's products.
Further, vendors continue investing in top-performing partners as they are able to acquire more information on these partners, DeSarbo notes, pointing to profile data from registration and partner program participation and point of sale information.
Meanwhile, smaller partners are not as well understood and tend to get neglected.
"It's a scenario where the rich are getting richer essentially," DeSarbo said.
Thinning the herd
One approach vendors can take to address this issue is dropping partners that fail to engage in business.
In a 2017 blog, Walsh notes that the reality is that smaller partners - even those who are not underperforming or failing to engage in business - make up the vendor's long tail, which, he argues, is simply not as interesting a proposition for vendors, who want (and need) to be focused on the big money-makers in their channel.
"While the long tail does have intrinsic value, it's not nearly as valuable as the upper echelons of vendors' partner networks," Walsh writes. "Vendors need to make this clear to partners to dispel any illusions about relative value to programs. In doing so, partners will understand they aren't entitled to the same programs, resources, benefits and rewards as those partners that are investing in training, joint business planning, sales expansion and growth."
Lee House, partner at Sikich, a national VAR and SI, agrees this is a wise approach, pointing to the costs vendors face in managing partners that don't engage.
"If those vendors have to continue to invest...to manage those relationships, that's potentially going to be an expense where they're never going to realise any value," he said.
The channel partner adds it's important for vendors to prioritise investment of money and time into both top-performing partners and those investing in building business with the vendor.
Walsh notes that while the long tail is generally more profitable - because it costs less to serve those players, plus they they buy from distributors at higher prices, are not eligible for rewards and other incentives and typically don't have access to sales support - 'profitable' doesn't actually mean much.
"The long tail is entirely transactional and opportunistic," Walsh says. "On an individual basis, no long-tail partner looks interesting unless they're serving a strategic purpose, such as providing coverage in a niche or remote market. For example, I've been to [a] partner's shop in Ketchikan, Alaska, and he's never going to top a vendor's partner performance list, but he serves a useful purpose in this remote community."
On the other hand, some channel players aren't sure if thinning the herd is the right approach.
"That's a [mindset of] 'what have you done for me lately?… And if you haven't done anything for me lately, then you're not somebody I want to spend time with'," Peter Thomas, CEO of channel marketing automation software firm Averetek, says.
"My perspective is that you should make an investment in even the partners that haven't [done business] with you in a while to try to get them to do something meaningful with you.
"[Vendors] should give first because the natural order of the universe is people will give back to you when you do that. That's what partnering means. Otherwise, your channel is transactional, and if your channel is transactional, there's no loyalty and if there's no loyalty, then [partners will] pick someone else's product to sell to their customer…"
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Is the 80/20 rule still applicable to the channel?
Larry Walsh of 2112 Group suggests that a smaller group of partners are now taking a greater chunk of the business going through the channel
DeSarbo agrees that chopping off the long tail of partners isn't necessarily the answer, saying that this is like solving a problem with a meat cleaver when you need a scalpel.
"It's assuming that this long tail of partners does not include the diamonds in the rough. That's the easy way out. There needs to be a much better job of combing through their…partners to find those that really do have growth potential and engaging them differently," he says.
"There are partners that you can pull back from and look to reduce your cost of serving them through e-coverage and so forth, but there's a lot of risk in just dropping off the [portion] that represents a very small percentage of your revenue, because some of those may be more important in the future."
By Walsh's measures, few vendors are actually mining for diamonds in the rough. He says vendors say things like, "If we can get the long tail to buy one more product, we'll double our business", which he refers to as 'The Long Tail Trap'.
"The minute a vendor touches the [long tail] with the intent of increasing sales, it starts to cost real money," Walsh notes. "And, typically, driving sales through the long tail will cost more because the deals are smaller and you have to do more to equal the fewer sales on the enterprise level."
Further, he claims the risk of losing diamond-in-the-rough partners is minimal because such partners are self-identifying, seek resources, support and guidance and typically grow faster than their peers.
How the 80 per cent suffers
While a solution to the 80/20 rule is up for debate, it seems channel partners failing to engage in business with vendor partners suffer in the meantime.
According to Sikich's House, channel partners who fall in the so-called 80 percent category suffer because they're not as informed as they should be about the different offerings available, which can impede their ability to broaden their reach.
He points out that Sikich is a top-tier partner for Microsoft and Oracle NetSuite and notes vendors bringing Sikich into sales opportunities and vice versa.
"The people that are not investing in those relationships are not going to see that same level of value that a company like ours is going to realise," House says. "There are absolutely some cons to it that are all tied directly to visibility, which at the end of the day is probably going to inhibit their ability to go out and create new customer relationships."
Averetek's Thomas also points to a 95/5 breakdown and says channel partners who don't engage hurt in the form of "missed opportunity".
The problem, according to the exec, is while vendors offer better deals and resources to top-tier partners, some other channel partners prioritise products that give them the most favorable economic outcome, rather than what's best for the customer's unique needs.
"These vendors are getting chosen opportunistically," Thomas says , noting implications this has for a solution provider's ability to serve customers.
Ultimately, channel partners in the long tail end up feeling "disenchanted" as vendors continue placing attention on better-performing channel partners and, often, push other solution providers to distribution partners that may treat them with a "mass market approach", DeSarbo says.
"Most vendors don't have a very scientific way of finding the smaller partners…of their partner base that have high growth potential because of the capabilities they've developed, where they're focusing and their service offerings, so [the smaller partners] get lost," he says.
Tipping the scales
When it comes to seeing more balanced channel sales, DeSarbo says channel partners can shift vendor resources by highlighting their service capabilities, industry expertise and technical expertise, especially through customer case studies.
Thomas adds it's incumbent on channel partners to set expectations with vendors. He says they can get vendors to modernise how they approach partner business by informing them of reasons - such as better marketing, configure, price and quote, or demo support - you sell competitors' products at higher volume than theirs.
"Vendors…typically look at their channel partners as a customer segment, [so] when they have a sufficient number of channel partners that are unhappy with something about their partner program they tend to address it," he says.
On the vendor side, channel firms need to focus less on what their partners have done in the past and more on where their partners' businesses are heading.
"The vendors that seem to be doing a better job are those that are…proactively monitoring partner websites and social media to identify partners that are focusing in the right areas and have a lot of influence over their target customers," DeSarbo says.
"They're looking at how the partners are presenting themselves to the partners' customers in a more scientific way by gathering a lot of data and using some more advanced analytics."