Cisco's Rising Tide

Speaking at the annual Cisco Partner Summit in Honolulu, Cisco's senior vice president of worldwide channels outlined several new partner programs aimed at spurring channel profitability and driving growth, just in time to capitalize on a swelling economy on the verge of recovery.

At the summit, Mountford disclosed a new strategy to reward partners in three key areas: hunting for new business, growing sales of Cisco's advanced technologies, and adapting their businesses to become solutions-focused.

Drawing an analogy to a surfer riding the ocean's rollers, Mountford said partners' success comes down to two things: positioning and timing.

"We know the timing is right because the economy is with us. It comes down to you to actually position yourself," Mountford said.

The new programs come as part of an ongoing effort to improve margins and provide the biggest rewards to the partners that add the most value, all to help them become solutions sellers rather than product pushers.

"Partner profitability still remains the No. 1 issue," Mountford said, echoing the theme of last year's conference.

While recent Cisco surveys have shown increases in both solution providers' profitability and their overall satisfaction with the vendor as a partner, he said neither metric is yet at the level he would like.

To fix that, Cisco is rolling out the Opportunity Incentive Program, a global deal-registration strategy that provides financial rewards to certified partners that add value and close qualified new accounts or new business within existing accounts.

Details of the program vary within different geographies. The U.S. version will provide partners with 3 percent to 8 percent up-front discounts on deals in yet-to-be determined vertical markets and technology segments, said Chuck Robbins, vice president of U.S. channels at Cisco, San Jose, Calif.

While the primary goal of the program is to grow new business, a secondary aim is to protect partners' investments in costly presales activities. Partners now have a six-month window in which to close a registered deal.

"To be able to register a deal and get some sort of recognition and protection is huge because today sometimes three-quarters of the way in a service provider or another partner jumps in and makes it a commodity event," said John Freres, president of Meridian IT Solutions, a solution provider in Schaumburg, Ill.

In addition, partners said the program should help them fend off price wars launched by other Cisco partners, especially service providers such as BellSouth, SBC Communications and Verizon. Price gouging by service providers,which sometimes sell Cisco equipment and its SmartNet maintenance contracts at or below cost in order to close circuit sales,continues to plague Cisco's channel, albeit to a lesser degree than a few years ago, partners said.

"I have a strong desire for Cisco to attempt to police it, but I understand also that it's probably impossible for them to completely eliminate it," said Mark Hilz, president and CEO of InterNetwork Experts, a solution provider in Addison, Texas.

Cisco also unveiled updates to its Value Incentive Program (VIP), a rolling six-month program that provides back-end rebates to partners around IP communications and security sales when they maintain specified levels of customer satisfaction on the deals.

With the launch of the year-old program's third phase, retroactive to Feb. 1, Cisco is doubling the rebate it offers partners on IP telephony deals to 20 percent. Partners can also achieve an additional 2 percent margin for meeting the program's sequential sales growth goals.

Besides boosting some of the rebates offered through VIP, Cisco is also taking steps to make it easier for partners to join the program. For example, partners that carry the Cisco Security Fast Start specialization are now eligible to participate. Previously, only partners with the VPN/Security specialization were eligible. The vendor also capped the number of customer satisfaction surveys required from IP communications partners at 25 per six-month period.

Due in large part to VIP, some solution providers said Cisco margins have been creeping upward. Several partners participating in the program said they expect to receive six- or seven-figure rebates for the year, money that goes directly to their bottom line.

Cisco paid out about $26 million in VIP rebates in the United States over the past year, Robbins said.

One reason the program has been successful is that the rebates are neither automatic nor predictable,partners have to maintain their customer satisfaction ratings in order to receive their rewards. As a result, Cisco has been able to keep the rebates from filtering down to impact street pricing, solution providers said.

Some partners said they are reinvesting the money received through VIP back into their businesses to support their transition to solutions selling.

"We grew up with traditional switching and routing, and VoIP has forced us to reposition our engineering force," said Paul Shain, president of Berbee, a solution provider in Madison, Wis. "I find it valuable to have the VIP dollars to use for training," Shain said.

Global Data Systems, meanwhile, has used its VIP rebates to bolster its internal infrastructure, including the buildout of its XML-based e-business exchange that gives customers the ability to track and manage orders from its vendor and distribution partners, said Chris Vincent, vice president of sales and marketing at the Lafayette, La.-based solution provider.

"It has resulted in higher customer satisfaction and increased efficiency on both sides," Vincent said. "We're becoming more of that trusted adviser."

Solution providers said one of the most impressive elements of the new programs is the impact Cisco expects them to have on margins. Since partners can participate in both programs simultaneously, the solution pro-

viders that benefit the most are those that find new opportunities around IP telephony and security.

Based on data gathered through its own Return on Invested Capital studies of 110 U.S. partners, Cisco determined that partners with solutions practices make average weighted margins of about 18 percent.

If those partners are able to adopt a conservative business mix that includes 10 percent new business, 15 percent IP telephony and 10 percent security, their margins would climb to 23 percent (up 26 percent) as a result of the new programs, Mountford said.

If those partners take a more aggressive approach, adopting a mix that includes 20 percent new business, 25 percent IP telephony and 15 percent security, margins would increase to more than 26 percent (up 44 percent), he said.

"This is probably the most aggressive thing we've ever done in the channel," Mountford said.

Another potentially aggressive strategy is Cisco's plan to help its partners morph their services business away from maintenance, where margins are eroding, toward professional and operational services.

Through its forthcoming Solutions Incentive Program, still under development, Cisco plans to reward partners for building solutions practices that include a full complement of life-cycle services.

During his keynote address, Cisco President and CEO John Chambers preached the value of building services that help customers improve their business processes. "If you don't change the process, no matter how much money you throw at it, you're going to get a fraction of the productivity improvement," Chambers said.

Customer productivity gains are vastly improved when IT solutions are implemented in support of business process changes rather than starting with technology and updating business processes after the fact, which can actually lead to a loss of productivity, he said. "The vast majority of customers, when they understand the value you bring, will pay a premium for this," Chambers said.

Several partners attending the conference said they have already transitioned their businesses to the solutions model.

One such partner, Brian Gilbert, CEO of Akron, Ohio-based solution provider NeTeam, shared the stage with Mountford.

Gilbert described how his firm has used its focus on Cisco wireless and security technologies to target the health-care, higher-education and financial services markets.

NeTeam makes margins of 40 percent to 60 percent on presales readiness assessments for its customers. The solution provider then proposes implementations that are tied to its customers' business issues and follows up with its own help-desk and on-site services bundled with Cisco's SmartNet services.

Since October, the solution provider has maintained a 14 percent month-over-month revenue growth rate, Gilbert said.

With so much emphasis being placed on solutions selling, partners said Cisco needs to ensure that the message gets down to the field level of its Enterprise Sales Organization.

Solution providers said they have seen results from Cisco's efforts to educate its sales force on how to help partners sell solutions services, but there is still work to be done.

"There's still a ways to go, but it's 180 degrees from where it was," said Christine Holloway, managing partner of customer contact solutions at Norstan Communications, a solution provider in Minneapolis. "They trust partners more and bring us into deals earlier," she said.

Robbins said Cisco in its third quarter will refresh regional planning, a strategy for building go-to-market plans that identify top channel partners according to technology and vertical market expertise.

He also said the company intends to implement a bonus for the Enterprise Sales Organization that is tied to channel partner satisfaction with Cisco in the next fiscal year.

If all of these elements fuse together, Mountford said both partners and Cisco will be successful in their efforts to grow business and maintain profitability.

"If you all hunt, grow and adapt, we together can go ride the perfect wave," he said.