Channel Partner Recruitment Criteria: Objective vs. Subjective Analysis

Channel Partner Recruitment Criteria: Objective vs. Subjective Analysis

Is your partner recruitment disappointing? Your objective and subjective decision criteria may be the culprit.

I am halfway through Masha Gessen's recent book, "The Future is History". The title sort of says it all with the age-old premise that history repeats itself and thus one should better understand it for all the obvious reasons.

Recurring Problems with Channel Partners

Last month, after my business partner Carrie Maslen and I completed a number of strategic consulting engagements, primarily focused on channels, we began to discuss that while the technology is ever advancing, history in the channel indeed repeats itself again and again.

When I write that channel history repeats itself, I refer to the good, the bad, and the ugly. Whether it was the launch an HP 8086 based PC thirty-five years ago when I was a novice sales rep, to today's complex cloud-based offerings, we continually see our clients’ ongoing frustration with the low percentage of successful product and solution launches, and even deeper frustration with the recruitment and successful launches of new partners.

Further, we continue to see executive leadership (particularly CFO types) quite disappointed in the ROI associated with these expensive channel-based programs. The net result is a frustrated channel team that is under performing and under pressure, with a damaged brand.

In the worst cases, these "failures to launch" results lead to a retrenchment into "direct" Go to Market motions.

While there are many facets that go into a successful launch, I will focus on two areas that I believe are both under-developed and often flat out missed. While all suppliers to the channel have their own measurement system, from intuitive to more systemic, the two areas that I believe need attention are the objective and subjective criteria for choosing which partners to recruit or invest in.

Before you email me, I know I know that your legal team will hate the subjective component of the decision-making process, but history tells us it's necessary for a successful future.

Objective Criteria to Choose a Channel Partner

All suppliers to the channel have some sort of objective criteria when sizing up whether a channel partner can be wildly successful. Geographic location, number of sales reps, technical prowess, and a channel partner’s installed base are all valid and critically important components in the selection process.

However, it’s rare that we see deep analysis of the financial statements as objective indicators of a partner’s success with a manufacturer. Let’s start with the P&L.

Many years ago while at HP, a Printer Division leader was quite upset with my channel team for the lack of growth of a particular distributor. The distributor was a “value distributor” with an SG&A at that time of about 7.5%. Printer margins in the market at the distributor level were 7-8% at best.

It was pretty obvious why their sales of printers were pitiful, and that even with spectacular marketing investments this relationship was doomed. The margins would never cover the cost of sales.

So the question is: does the channel partner you want to grow fast have the appropriate SG&A model for your product?

For high-velocity, low-margin products, an SG&A that’s too high will result in dilutive economics at the bottom line. For high value products, a too low of an SG&A will not support your company’s products and corresponding support, possibly resulting in poor customer satisfaction.

Net-net, a lack of SG&A alignment and awareness could be the root cause problem of an under-performing channel partner.

The balance sheet can be equally telling as a future indicator. Does the channel partner have the working capital to grow at a fast rate or are they cash challenged?

With a standard 45-day term, a partner will need working capital of about $1.25 for every dollar of growth. On cloud-based subscription model, the working capital and free cash flow are even more critical. Could working capital be slowing sales? If so, are there programmatic ways of mitigating this issue or should the supplier shut the relationship down?

Few channel reps, channel recruiters, and even channel managers understand the critical dynamic that a partner’s financial play in meeting desired results. While mastering channel economics and financial statement analysis isn’t easy, it is critical it becomes a key component to a supplier’s evaluation criteria.

The bottom line (no pun intended) is if you are not vetting your channel partners’ financials for scalability and velocity, you may be wasting precious time and scarce resources including time and funding.

Have these financial discussions with your partners up front to ensure the economics are fully understood and will work in your favor.

Subjective Criteria to Choose a Channel Partner

On the subjective side, we get more into the art than the science. While an advanced degree in psychology would be helpful, it’s not necessary.

Let’s start with a “risk profile” of the partner executive team. We all know picking up a new line of products or refocusing a sales force is challenging for a partner. Will the refocus result in short-term revenue drop? Will the partner’s other suppliers react negatively and withhold precious leads? How much cash will the partner have the nerve to invest ahead of revenue? Does the partner have the foresight and the guts to make this move, or are they just playing the “opportunistic” game where a deal from you may just fall in their laps? All of these questions and more require an assessment of the partner’s risk profile.

Another subjective area is how much control the partner leadership team has over their company. We often see owner/managers that have little, if any, control over what their sales teams focus on.

They promise the supplier that their company will focus on the supplier’s line, but in this scenario, the owner/manager is reticent to demand and assure a course change or supplier focus due to fear of key revenue producers’ possible revolt or departure. Does the owner/manager have the respect of the technical side of the company, who intimately knows and loves their current suppliers, and have no interest or energy to learn a new line?

Finally, is there fire in the belly of the partner, or is the leadership team in the “lifestyle partner” category? Is the leadership team content with their current playbook? Is the dynamic that they are rich, successful, and possibly really don’t want to work too hard to make your launch or plan highly successful?

Subjective analysis, in our opinion, is an underdeveloped skill. We also believe it’s a major cause for so much “failure to launch” in the channel.  

So, do you have partners whose growth has flattened out? Perhaps newly recruited partners whose results have been disappointing? Partners who sell one of your lines, but have failed at picking up your full product line? Low or non-existent ROI on expense marketing investments?

This may be due to a lack of a profound and effective measurement system or algorithm that takes in both the subjective and objective, creating a predictive “Partner Growth Index (PGI)”.

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