The Software Partner Channel and the

Customer Value Propositions

Whitepaper from TBK Consult

Author
Hans Peter Bech, M.Sc. (econ)

 Hans Peter Bech 2013

First edition
Unless otherwise indicated, Hans Peter Bech copyrights all materials on these pages. All rights
reserved. No part of these pages, either text or image may be used for any purpose other than
personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission,
in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal
use, is strictly prohibited without prior written permission.
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ISBN: 978-87-93116-03-0

The Software Partner Channel and the Customer Value Propositions

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Table of contents:

Targeted audience

Abstract

Author

Acknowledgements

Introduction

When to partner or not

The rule of thumb

5
7

Channel Value Adding Requirements

The fundamental principles of competitive value creation

The relationship between value proposition and management areas

10

Changing the Customer Value Proposition

The value proposition and the management challenges
Changing a software company from a direct to an indirect channel approach

12
12
13

About the author

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10

The Software Partner Channel and the Customer Value Propositions

Targeted audience

The target audience for this whitepaper is the board of directors,

the CEO and the sales and marketing executives of software
driven companies1 with ambitions for achieving global market
dominance.
The whitepaper is primarily addressing the challenges of
software companies with long value chains.

Abstract

The whitepaper discusses why the Customer Value Propositions

of software vendors and their resellers by definition must be very
different and what the consequences of these differences are.
The whitepaper lists the typical reasons why software vendors
choose an indirect channel of resellers to reach the customers
and the typical reason why software vendors choose not to go
though resellers, but sell their software directly.
The whitepaper explains why the change of channel strategy
requires a change in the software companys Customer Value
Proposition and therefore also requires fundamental changes to
the way the company operates.
The whitepaper recommends that the software company
changing from a direct to an indirect channel approach consider
splitting the company in two separate business units with
separate P&L responsibility.

Author

Hans Peter Bech

Acknowledgements

Design and lay-out: Flier Disainistuudio, Tallinn, Estonia,

www.flier.ee

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Proof
reading:
ecr@tbkconsult.com

Emma

Crabtree,

Independent Software Vendors (ISVs)

TBK

Consult,

The Software Partner Channel and the Customer Value Propositions

Introduction

Software companies have historically had a very strong

preference for selling their software indirectly through a channel
of resellers2.
The word channel is used in the software industry to
describe independent companies that assume various roles and
obligations in bringing a software product to the customers. The
definition is rather broad, since the roles and obligations can
vary substantially from simple reselling to system integration,
solution development on top of the software, implementation in
terms of consulting, project management, customization, training
and support.
The common denominator is the fundamental condition that
the individual channel Partner is an independent contractor
operating in his own name3, at his own expense and at his own
risk.

When to
partner or not

What decides if a software vendor shall or can sell his software

through an indirect channel of resellers or if he is better off
growing his company by selling the software directly to his
customers?
A software vendor will typically choose an indirect channel for
scalability purposes and for one or more of the following reasons:
There already is an established channel of resellers for this
type of software.
He believes he can achieve faster access to the market
through the resellers with established customer relationships
as opposed to building these relationships though his own
organization.
H
e believes he will get access to domain knowledge and skills
required for vertical and/or horizontal market coverage,
which will be very cumbersome and expensive to achieve
though his own organization.

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H
e believes he can motivate resellers to enhance the software
enlarging the reachable market (eco-system effects).
The term reseller is here used for any type of 3rd party company
engaged in selling a software brand to his customers irrespective of the
degree of value add.
3
In channels designed as franchises however, this is not the case.
2

The Software Partner Channel and the Customer Value Propositions

He believes he can overcome language and cultural barriers

in foreign countries faster than though his own organization.
H
e believes that the indirect approach requires less
investment, less people and less management attention.

Software vendors will typically refrain from using an indirect

channel of resellers for scalability purposes for one or more of
the following reasons:
There is no established channel for this type of software
The business opportunity provided by the software is not
interesting for resellers (unknown brand, too little value add,
cost of sales too high, too few deals etc.)
Customers will not accept delivery through resellers
Partners do not add any value to the customers
Higher risk of customer dissatisfaction due to poor performing
partners
Having to give away gross margin on the software
Having to give away major portions of gross margin on the
auxiliary revenue elements of the total solution
Slower access to the market because of loss of control over
sales and implementation resources
Slower access to the market because the learning curve of the
resellers are too steep and too long
Risk of damaging market reputation due to unprofessional
resellers
Risk of not learning directly from the market, but having to
rely on information filtered by the resellers

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Lack of reseller channel operational know-how with the

software vendor

The Software Partner Channel and the Customer Value Propositions

The rule of thumb

The rule of thumb in the software industry for when to partner

or not is illustrated in fig. 1.

Figure 1:
When to partner or not in the software industry

Well-known and simple products requiring little implementation

services are normally sold directly to the customer through
ecommerce portals and call centres.
Very complex solutions with long sales cycles, requiring
substantial implementation services are normally sold directly
to the customer through the software vendors own direct sales
force and implemented by the software vendors own professional
services organization.
Anything in between may be served through a two or three tier
indirect channel of resellers.

The customer value

proposition

The decision to go through an indirect channel of independent

partners has a profound impact on the software vendors
customer value proposition.

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In generic terms any customer value proposition always has

three value elements:4

Please see the section: The fundamental principles of competitive

value creation on page 10

The Software Partner Channel and the Customer Value Propositions

Software requiring customization and implementation services

to work properly for the customer must be delivered through a
value proposition where the Customer Intimacy value element is
dominating.
Software consumed without any associated services must be
dominated by the Product Leadership value element.
Operational Excellence is a value element with very little impact
in the software industry. Without the need for manufacturing,
warehousing and physical logistics there is very little optimization
and competitive advantage potential in the operational processes
in the software industry. Operational excellence is mainly
required in project and customer relationship management5.

Channel
Value Adding
Requirements

Lets assume that a software vendor has a very competitive

product that doesnt require any implementation services to be
used effectively.
The vendor can choose to sell the product directly to the
customers.
Lets assume that the software vendor considers that channel
partners can extend his market reach. What types of customer
value propositions should these resellers have?
For software delivered as a cloud based service there may be a
substantial operational excellence element. Availability, price and the
quality of the Service Level Agreement are important elements for the
customers.

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The Software Partner Channel and the Customer Value Propositions

The software vendor could be interested in resellers with very

strong customer relationships, through which the software could
be recommended and sold. However these types of partners will
not be very interested, as the products require little professional
services. They may make a little margin on the products
themselves, but without a need for associated services the
products will not improve their relationship with the customers
and the customers could easily acquire the products elsewhere.

Figure 2: The software vendor's

Customer Value Proposition

He could also be interested in resellers offering easy access for

customers to buy the software. Such resellers would have a
strong Operational Excellence value component.
Such resellers would typically provide value to their customers
by having a large assortment of products and would provide
instant and easy access to purchase and download the products.
These types of resellers live off small margins on large volumes
of products and would be very interested in products for which
there is a high demand.

Figure 3: Resellers with Operational

Excellence as the dominating value
element are interested in products in
high demand.

Lets consider that the software vendors product requires

substantial implementation services to become functional for
the customer. He is then clearly interested in a reseller with
Customer Intimacy as the dominating value element and
Operational Excellence as the second priority, while Product
Leadership doesnt play any role at all.
The software vendor and his resellers never share customer
value propositions!

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In the last example the software vendor must improve his

Operational Excellence value element otherwise he will not
be able to recruit and manage his resellers. He is looking for
partners with strong Customer Intimacy value elements and
some Operational Excellence (project and delivery management).
However, resellers with a strong Product Excellence value
component are of no interest to the software vendor.

Figure 4: Resellers with a strong

Customer Intimacy value element are
not interested in standard products

The Software Partner Channel and the Customer Value Propositions

The fundamental principles of

competitive
value creation

With the book The Discipline of Market Leader published

in 1995 - Michael Treacy and Fred Wiersema introduced
the principles behind the three value elements. The book
also introduced the relationship between the customer value
proposition and the operating processes, the management
systems, the business structure and the culture required to
deliver on the value proposition.

The relationship
between value
proposition and
management areas

TBK Consult considers that any company has 15 management

areas divided into 5 perspectives6:

The Financial perspective

xx

Financial performance

The Management Perspective

xx

Setting objectives

xx

Defining strategy

xx

Taking action

xx

Management skills and competencies

The Customer Perspective

xx

The Product/service

xx

The Customer Relationship

xx

The Image

The Internal Processes Perspective

xx

Operations

xx

Regulatory & Environment

xx

Customer Management

xx

Innovation

The Learning/growth Perspective

xx

Organization Capital

xx

Information Capital

xx

Human Capital

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Delivering a specific customer value proposition to the market

and growing it to the position of market leader requires a specific
combination of the management areas, which each company
must engineer for itself.
The TBK Consult principles are based on an extension of the Balanced
Scorecard principles.
6

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The Software Partner Channel and the Customer Value Propositions

Ideal curve

Importance average

Figure 5:
Sample management ratings for company charting the changes required for supporting its' Customer Value
Proposition more effectively

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Building and maintaining the internal infrastructure to deliver

a certain customer value proposition and outperform the market
is a long-term project.

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The Software Partner Channel and the Customer Value Propositions

Changing the
Customer Value
Proposition

The Customer Value Proposition analysis above also explains

why it is extremely difficult for software vendors who are serving
their customers directly to move to an indirect reseller based
business model.

Figure 6:
Customer Value Proposition of a software vendor serving customers directly

The Customer Value Proposition in Figure 5 is strategically

unfocused, which is required for serving customers directly with
a Customer Intimacy driven value proposition.
The software vendors Customer Intimacy and Operational
Excellence value elements are developed to serve customers
directly and are of no value to the resellers.
The resellers want a software vendor with a strong focus on
Product Leadership enabling the resellers to add value through
their own services associated with the product.

The value
proposition and
the management
challenges

Changing the Customer Value Proposition is a risky, expensive

and long-term project.
Why?

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Mastering each element in the value proposition requires

completely different management focus, organizational skill sets,
financial KPIs, customer relationships and internal procedures.
Product Leadership requires the ability to innovate faster
than your competitors. You have a strong product focus, because
your innovation strategy requires being three steps ahead of the
market. You must produce blockbusters from time to time that
can provide return on your investments is innovation and product
development. You will most likely have a product serving a very
large market and you are obsessed with global market share.

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The Software Partner Channel and the Customer Value Propositions

Customer Intimacy requires deep and long lasting customer

relationships. Cost of sales is high and professional services
are your key delivery. You most likely have few, but very large
customers. You are obsessed with utilization and customer
lifetime value. You must take one market at a time, thus local
market share is more important than global market share.

Operational Excellence requires focus on processes and

metrics. You must be capable of continuously squeezing waste
out of your operational processes. You will most likely have a
product serving a very large market and you are obsessed with
global market share.

Changing a software
company from a
direct to an indirect
channel approach

The software industry gives birth to many software companies

that take a direct channel approach to their local market in the
early days of the companys life cycle. When the time comes for
scaling, the opportunity for taking an indirect channel approach
is considered. Especially when moving into new (geographic)
markets the indirect channel approach seems attractive for the
reasons mentioned above.
However, a software company cannot move from a direct channel
to an indirect channel approach without making fundamental
changes to the management focus, the organizational skill sets,
financial KPIs, customer relationships and internal procedures.
The fastest solution is probably splitting the software company
into two units with separate P&L7 responsibilities:
xx

A software house with no customer projects

xx

A reseller serving customers, but with no core software

development responsibility

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The software house will now focus on product development and

channel recruitment and management. They will no longer serve
customers directly.
The reseller will focus on winning and serving customers. They
may do some product development to enrich the product for
their customers and reuse certain features across their customer
base, but their primary focus is the individual customer and the
lifetime value of this relationship.

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P&L: Profit & Loss

The Software Partner Channel and the Customer Value Propositions

About the author

Hans Peter Bech has been developing and managing global
partner channels in the software industry for more than 30
years.
Hans Peter built the partner channels for companies such as
Dataco (now Intel), Mercante, Dansk Data Elektronik (now
CSC), RE Technology (now Barco), and Damgaard/Navision (now
Microsoft).
As a management consultant Hans Peter has been providing
consulting on channel development and management issues
to companies such as Microsoft, Danfoss, Proekspert, Jeeves
Information Systems, eMailSignature, SoftScan (now Symatec),
Netop, EG A/S, CSC Scandihealth and Secunia.
Hans Peter is the author of several whitepapers on channel
development and management and he frequently writes articles
on the subject.
He started his career as a management consultant in 2003
and founded TBK Consult in 2007. Since then he has built the
company to its present position with 24 senior consultants in 16
countries.
Hans Peter oversees the development of TBK Consult as well
as performs management consulting assignments for selected
clients.
Hans Peter holds a M.Sc. in macroeconomics and political science
from the University of Copenhagen. He speaks Danish, English
and German and is a certified ValuePerform, ValuePartner and
Business Model Generation consultant.

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More about Hans Peter Bech

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