The modern VAR - it's time to transition from professional services to a 21st century business model

Geoff Ashley Profile picture for user Geoff.Ashley April 10, 2018
Every professional services firm will tell you they are modern and built for digital. But the data tells a different story. Acumatica's Geoff Ashley shares eight issues to overcome if you want to be a modern VAR.

Acumatica invited a group of practice owners to a post-Summit 2018 workshop in early February, 2018.

For two and a half days, the practice owners had a passionate discussion around how they can transition from organizations that were born in a professional services world, to organizations that understand the needs and requirements of an ever-changing world.

All partners agree: “the way they buy has changed dramatically since 2007, but the way we sell has not." And therein lies the issue:

The Traditional VAR Practice

In a 2016 global survey by Geoff Ashley & Associates, 254 midmarket Microsoft partners were asked to provide significant data and information about their current practice, and their goals, impressions and plans around moving to a subscription-based organization (a subset of these partners also sold Salesforce CRM). Survey respondents had a revenue range of $2 million to more than $80 million in Microsoft revenue. The survey results were striking: they were almost the polar opposite of the ERP software vendors.

Eight issues a modern VAR must overcome

The survey produced eight key takeaways which, when brought together, give a key insight into just how hard it is for current VAR organizations to elegantly transition into a “modern VAR” organization.

#1: Of the 254 partners interviewed, 99% stated that their primary business model was that of a professional services organization. They focus on delivering services, and services is the primary driver of their business planning. For example, they forecast six new customer adds next year, not sixteen. Why? Because they can’t implement sixteen. So their new customer acquisition, sales revenue, marketing initiatives, and even their investments in people are all driven by the past-tense and reactive nature of delivering. All services follow a sale. No sale, no services!

#2: The vast majority of existing partner revenue is being driven by on-premise license sales, or on-premise customer renewal contacts. Less than 5% of partners surveyed have a prospect or customer profile that is based on someone looking for a subscription model. None of the partners had a formal script designed to lead with a subscription sale. Only one partner actually incented new customer acquisition in their sales compensation model.

Most interesting of all was the fact that 100% of partners surveyed stated that 100% of their sales engagements included a discussion around or about the cloud. They did not discourage the discussion, but they also did not push subscription contracts as their preferred business model.

#3: All of the partners surveyed track projects as the primary method of driving the customer experience. Every project has a beginning date and an estimated ending date (even though more than 72% exceed the projected end date). Every project is driven by a statement of work (SOW). As a result, 100% of partners surveyed measured, compensated, rewarded and incented employees based on project success. In one case, an $80-million cloud partner did not track any deferred revenue best practices by customer! Everything was project-based.

When asked how they determined what a customer spent with them; their answer was that their software vendor told them. It was simply too much of a hassle for them to track all of the transactions by customer. And since no one makes managing partner based on customer adds, or monthly recurring revenue, or lifetime value of a customer, there was no incentive to change their current practices to track any of the most important deferred revenue numbers.

#4: Because everything is based on a project, everything is measured based on a billable hour. This is a culture that runs counter to everything that the prospect/customer wants to experience. The billable hour drives behavior. The determination to bill for any part of a project drives animosity between the (now) customer and the partner. Customers end up undertrained on their solution.

Employee turnover becomes a huge issue as replacement employees are almost never trained (another SOW or change order). The consultants do not act as “trusted business advisor” because they are not taking the time to educate or offer valuable insights. If they did that, they would have to charge for it!

#5. Every single partner in the survey tracked “utilization rate” as the primary measurement of success, effectiveness and ultimately reward criteria. Finding ways to bill two customers for the same service is something that is promoted and rewarded. Not a single partner in the survey rewarded their consultants for packaging their expertise. Even though every partner understands that the primary method of researching a solution in the 21st century is to go to the internet and research. As much as 70% or more of the research has been done before the prospect even reaches out to a human being. If the “self-service” material is not on your web site or portal, you are incenting your prospects and customers to go to your competitor’s web site or portal.

#6: The current professional services model incents larger, more complex sales and implementation projects. It is the nature of the model. But the larger and more complex implementations have an abysmal success record (see Standish Group - Chaos Study). The company culture incents, rewards and praises the “big sale." The subscription model incents volume and velocity – 180 degree difference between the professional services model and the Modern VAR model.

#7: The existing model does not drive a real “customer service” culture or orientation. The vast majority of partners surveyed agreed that their current model is reactive. Customers are, in general, placed into a single grouping instead of breaking customers out by their stage in a customer lifecycle (for example). The partners typically address one level in their customer service communications. Most partners average less than four “proactive” communications with their customer in a year! Partners do not drive, nor do they even understand, the value of a high transaction model. But in a subscription model, where the renewal is everything – high transaction models are a requirement.

#8: Finally, 100% of the partners surveyed admit that their internal culture is professional services – even within the sales team. They use their knowledge and experience to drive more hours, rather than a way to package their differentiation. They have little to no self-service for customers or prospects. Self-service is contrary to the model. Not only is it non-billable, but it decreases the value of the individual. It is no longer about what is in my head – it is about information that anyone can get access to. And finally, partners create IP based on the project – defined by the SOW. They do not create IP that can be sold 1,000 times – on a subscription.

So how does a VAR modernize?

To effectively and profitably transition to a Modern VAR, partners must understand that the very model itself must be changed. The culture must change. The approach to what constitutes value must change. To succeed, you must give your prospects and customers a stellar experience. Anything other than that and your prospects and customers will tell the world. It will take them about six seconds to do so. And it will be in a format and in a forum that never expires! And maybe the worst part of all is that they can inform the world of their bad experience without any regard for truth or reality.

Not a single partner in the survey had people checking social media on a regular basis to see what their prospects or customer said about them! The world has changed… it's time the VARs change as well.

Editor's note: Acumatica has more to say on their VAR and partner programs, and the Acumatica YouTube channel has educational sessions for ISVs, partner marketing, and becoming an Acumatica partner.

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