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Practical Sales Outsourcing

18.10.2009

When you have a great idea, but the world will not come to you…

I was recently invited as a guest speaker and panelists for an entrepreneur development group.  My fellow panelist, Charles Leadbeater (a recognized proponent of innovation and Web2.0 thinking) started with a call for more collaboration and cited amazing successes and fantastic creativity.  While I agreed with his thesis, I could not help but recount the many initial business (tech initiatives) failures caused by an improper reliance on collaborators for their sales channel.  Charles was right to highlight a new paradigm of collaboration as a significant opportunity for small entrepreneurs, but for the sake of the technical entrepreneurs in the audience, I found myself taking a contrary position and highlighting the limitations of collaboration.

Author Charles Leadbeater

Engineers have a serious defect– they cannot resist solving a problem.  The reason I call this a defect is that it keeps getting in the way of sensible business.  For the most naive, they normally worry about things like manufacturing, on-line order taking systems, and future developments, but dismiss the challenges of path to market by either assuming customers will come on their own (once they recognize the brilliance) or they assume that they will outsource sales through resellers.  The truth is that many people have very successful businesses using resellers and OEM relationships, but this will not be possible at the same time as you are just entering the market. (See earlier, related blog post “Production vs Prototype Sales“).  I wish it were possible to simply outsource initial sales the same way you can outsource initial manufacturing– in truth, I am a “recovering engineer” (an addictive and life long disease) and would likely have stayed a happy engineer if it were not for this unfortunate truth.

First, let’s put outsourced sales into a few categories.  System Integrators, Value Added Resellers, and Resellers/Retailers/Distributors represent the spectrum of how many services the selling company sells of themselves in the IT industry (other industries would have different terminology, but the segmentation is effectively equivalent).  This is important, because a real system integrator is likely interested in selling products that drive service work and not really motivated to sell the product only.  This means you need to give them opportunities to sell consulting, customization, support etc.  At the opposite end of the spectrum, resellers want to make their margin on selling volume and generally are not interested in dealing with services.  The next dimension of distinction is Broker, Reseller, OEMs, Licensee.  Brokers get paid a fee for selling, but the contractual relationship is directly between the maker and the buyer.  OEMs actually put their brand name on the product and sell it as their own product while Licensee create their own products (as their own) that include some of your product’s design.  Finally, the last major dimension is Tier 1 (Global, recognized, biggest) and Tier2 and Regional sales channels.  In the IT sales world, these three dimensions effectively map all possible “outsourced” sales channels (aka selling partners).

The first rule is that none of these “partners” will likely invest much effort selling your product unless you already have a successful sales record already.  This means, YOU must sell on your own first.  Alternative sales channels can multiply sales results, but 3 times zero is still zero….  This is THE most important rule.   This creates a strange paradox in that you can stop selling direct only after you have already been successful selling direct.   If your product has not already had some direct sales success, you can stop reading now, because all the following rules will not have a foundation.

Let’s take another deviation into the inner workings of a front line, professional salesman.  Most successful salesmen have good sales and listening skills and have a good set of relationships that are willing to listen to ideas that they bring.  Should they change companies, these relationships continue to be valuable; consequently, they are very careful about what they present to them.  Just because their corporate bosses want to sell XXX does not mean that they are willing to present XXX to their customers.  Next fact is that most salesmen sell less than 10% of the total available offering– they simply do not have confidence in the other 90% in terms of their knowledge, customer demand, or value to the customer.  This then results in the reality that most salesmen will likely only add one new significant offering each year despite being presented with dozens of new product offerings.  This explains why ‘cross selling’ synergy rarely materializes as expected after an acquisition.  This leads to the second rule of partnering for customer access, treat each salesman as an individual channel that must be won over: man by man sequentially.  Salesmen are NOT eager to hear about new things that they COULD sell to their customer– they are eager to hear about new things that DO actually get bought by customers.  Within a reseller, put all your energy with one man and make him successful.  Then, get the others to replicate.

Another useful insight into front line salesmen is that they are paid for successful removal of artificial obstacles that ordinarily keep buyers and sellers from transacting business.  This means that they are not likely to be impressed with your wonderful product benefits, the partnership program you just negotiated with the corporate partnering manager, or with the lead reporting form you created.  “Real” (successful) salesmen are trained and selected to ignore such “distractions”.  Instead, the better strategy is to look for a single customer opportunity and deal directly with the salesman– lightweight teaming agreements are useful tools for deal-by-deal agreements.  If you are trying to be this year’s ‘one’ additional product that this salesman will add to his repertoire, then it works best if you bring the lead and if you close the first deal or two with the salesman watching.  If you can’t bring the lead, then try to identify the profile of the perfect target customer and give the salesman 2 questions they can use to qualify their existing customers.  Two questions will also tests the salesman to see if they have access to the right people within the potential customers.  Salesmen want to achieve commission targets and they want to expand their personal contact lists with end customers– focus on their needs first and then together you can focus on the customer’s needs.  This leads to the third rule— avoid early talks with partner managers, supply chain, or marketing managers if you do not already have salesmen on your side.  Similarly, you will also find that Tier2 partner salesmen will be far more accessible and more stable than most Tier1 front line salesmen and thus better to start with.  [If marketing and other non-front-line sales people want your products for strategic reasons other than selling volume, then better you charge them a high upfront fee and consider an ODM (where you make semi-custom products that they sell without your ongoing payments) relationships]

Let’s assume you have closed a few deals with a partner salesmen using teaming agreements and it is time to formalize the relationship beyond the deal-by-deal.  As a general rule, resellers will get between 25% and 80% of the revenue from your product.  As you negotiate this, make sure that: 1) You can have access to salesmen directly (see rule 3 above), 2) There is motivation to actively sell or drop your product (avoid collecting zombe sales channels), 3) That salesman will get commission compensation for the product as if it were their own product (fourth rule), and 4) Success will not encourage your partner to replace you with another product.

Point 4 above is not so obvious.  Let’s assume that you spent $1M to develop a product,  it costs you $1K to make each one, and the end customer pays $3K each, and you get paid 1.5K of this 3K per unit (50%).  If your partner sells 10000/year, then you would make $5M/year of margin.  Unfortunately, your partner is likely to also make similar ROI calculations and see that pushing you out is far better than investing in his other potential business areas.  In this case, you need the contract to lower the fee to you as the units per year increase.  This means that you will never make $5M/year, but you should be able to make $1M each and every year.  This is also a good reason to have multiple, independent channels (also see “Business Relationship By Design“such that the same 10000 units are not from a single partner.  Thus rule five: never create an incentive for your sales channel to cut you out.

Finally, where can you find real channel partners?  i) Ask potential customers who they use as preferred partners.  Few larger customers want to add yet another company to their supplier list and will be happy to see you work with their regular supplier.  ii) Go to events as a visitor.  Most of the people at the exhibitor booths are salesman.  If they sell directly to end customers, ask them about cooperation.  If they use resellers themselves (and are not direct competition) see if they can recommend some of their better partners.  Strong channel partners sell your product and other good products, so most are not worried about you distracting them.

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