XSPs and VARs: An Effective Channel Partnership?

Can XSPs and traditional VARs create an effective partnership channel? One MSP, TriActive, believes they can. And CEO Glyn Meek says the onus for creating opportunity lies with the XSP. In an interview with VARBusiness associate editor E.B. Flanagan, Meek explains his vision for the future of the channel and describes how TriActive's newly launched partner program is a must-see for VARs.

VARBusiness: How can the traditional VAR channel benefit from partnering with an XSP?
Meek: Let me start off by listing the advantages that engaging the traditional VAR channel have for us, as an MSP. Part of our philosophy is this: The type of product that we sell is ideal for the middle market. That is primarily between 200 and 3,000 end points--an end point is a desktop, laptop, server or a network device. We like to say that we serve Middle America. This has traditionally been a very difficult market to reach when using a direct-sales model on a national basis. It is an expensive market, and an awful lot of that market is situated in second-tier cities. The St. Louises, Memphises and Denvers of the world have traditionally been harder to reach than the larger cities like New York and Los Angeles. The approach we decided to take was to start with a direct-sales force and to place them in the traditional big cities. But for us to get to the vast sea of customers that are out there, the VAR channel is necessary. They provide a great outlet for the harder-to-find customers, and we recognize that value. The strength of the VAR channel is the relationships they build with their customers.

VB: You seem to have a good handle on the VAR space. Have you been involved in VAR partnerships with prior companies?
Meek: Having been a VAR myself in my earlier years with a number of different companies I know the inside of that business. I became very close with a good number of my customers. They would come to me for more than the traditional services I offered. Beyond our immediate relationship, I was an asset for them that they looked to whenever they had general IT questions or concerns.

Back then I was the model of a traditional VAR. I sold hardware and I sold software products to small companies. My relationship with my customers was very tight. I leveraged this experience into our current company, TriActive. Our offering is aimed towards the small and midsize customer, and we're hoping that our VAR relationships can leverage those types of contacts to present new and different solutions. We see no reason why a VAR can only resell hardware--if the products are changing, then it is up to us to work together and bring all aspects of the channel up to speed.

VB: How can you use this knowledge now that you're offering an MSP product?
Meek: The interesting thing about all the XSPs is that they have no value to add in the traditional sense of what a VAR adds. Most of them don't require hardware installation, the nature of their delivery mechanism dictates that no software needs to be installed, and a good XSP service doesn't require any additional training. Those were the ways traditional VARs made their money--by adding those services on top of a product.

Now those services are not required, so where we see their greatest asset is in their sales contacts and business relationships. And for their benefit, we enable them to offer a service outside of the traditional sphere.

VB: Let's get back to your VAR channel. How is TriActive's partner program set up?
Meek: The formal kick-off of our partner program included an initial sign-up of seven VARs. We split our VAR channel into three different categories. I think this strategy plays well for us in a number of ways. We split our partner program with the VAR channel into three different categories. Above the three partner categories, we offer a simple introductory relationship that basically pays a VAR a finder fee for bringing a customer to us. In this relationship, the VAR does not consult, install or support. They simply offer us one of their contacts. We're not particularly interested in this type of relationship, because it doesn't buy me a lot. I'm interested in using the relationship that the VARs have with the customers. That's where the value is for the XSPs.

The Consulting Partner
There are some VARs who simply want to promote our product and execute the introduction of the product to the customer. At this point, they want to hand over control of the sale to us, and we will handle the installation and support for the customer. That's the lowest level of our joint participation where we leverage the VAR's sale contact. For this service we pay them a percentage of whatever monthly revenue we get from that particular customer--between approximately 10 and 15 percent. This category we have broadly termed our consulting partners, because they fill a consulting role [for] their existing customers and introduce them to our services.

The Solution Partner
Another category is when the VARs bring some technical skills to the table. I think with any XSP there is some level of installation that is necessary. In our case, we put a VPN router in, and we put a small gateway box behind the customer's firewall. Normally, we will do that as part of our installation and we charge a fee for that, but we have a category of VAR partners that want to do that step for us. We let them take the revenue from doing the installation.

We require some unique skill for this category. We expect a decent knowledge of firewalls and in Internet links between VPNs. We pay our solution partner a larger percentage of revenue because they are doing a fair amount of the installation work for us. We will pay them somewhere between 20 and 25 percent. We give them that percentage of recurring revenue, and in some cases our solution partners will act as the first line of support when any issues may arise. They are familiar with our product, and they do a good amount of work for us so they deserve a larger percentage of the revenue.

The Private-Label Partner
We signed up a number of the consulting and solution partners already, and we are in discussions with some possible private-label partners currently. [Private-label partners] will take the product and have us customize it to look like their offering. This is the closest you can come to traditional reselling of a service.

We will change the screen so that it says the name of the company without any TriActive marketing. This way our partners can claim the product as theirs and sell it on their own. This type of partner needs to be able to sell the product, handle the full installation and be able to support the service. They do enjoy joint promotional and marketing efforts with TriActive. We give them nearly 50 percent.

VB: What type of secondary support do you provide your partners to ensure their success?
Meek: We have a joint marketing effort but we don't have any lead generation. What we are seeing from those partners is that they already have the leads. That's what we are paying them for. We need their leads, so for right now we don't offer any of our own. That may change down the road, but the XSPs are attracted to the VAR channel in an effort to leverage the VARs' contacts.

From a joint marketing perspective, we include VARs on our Web site and post cross-references to their Web sites. We support their sales with promotional literature and through the business press. Somewhere between 40 and 50 percent of our sales are coming from our VAR partners.

VB: What are your visions for the future of TriActive's VAR channel? How will it develop?
Meek: We have plans in place to put together more aspects and benefits of our VAR program. We already have our training program in place to educate and familiarize VARs with our product. We have formed a dedicated internal group to support our VARs. We have participated in joint seminars with our VARs, and geography is no issue. I just got back from Canada [where I hosted] a seminar with one of our VARs. There is a serious commitment on our side to develop and support the VAR channel.

VB: So let's get back to the original question: How can VARs benefit from partnering with an XSP?
Meek: The traditional value-add is not there for the VARs when they deal with the XSP space, so it is up to us, the solution providers, to get creative in our offerings. We need to figure out how to attract the VAR channel to our services. We need them, and we need to demonstrate to them a clear revenue path in partnering with XSPs. Obviously, the way to do that is to include VARs in the continuing revenue.

VB: Why should a VAR partner with an XSP, as opposed to building his or her own XSP service?
Meek: For VARs that want to get involved in the XSP revenue stream, they should not look to build out their own service. It is not their fundamental skillset, and the learning curve for the technology is not a rapid one. It would take enormous investment in money, time and labor to get up to speed in the XSP space. Partnering, however, is a core skillset of VARs, and it allows them an immediate opening into a new revenue model.

Developing an XSP product from scratch is not a trivial thing, and neither is taking an existing product and trying to slap some duct tape on it and call it a hosted solution. It requires programmers, development skills and everything associated with developing a set of software--not just selling it and installing it. The VARs are experts at selling and implementing products, not in creating them. They can do it if they want, but they will substantially change their business.

When we started this two years ago, I never envisioned we would have as many developers as we do now. In fact, we will probably increase the development end of our labor force. If a VAR wants to build this from the ground up, they better be prepared to overhaul their entire business.

If you are comfortable in your business as a VAR--that means having a good relationship with your customers--and you know your strengths as a sales outlet and in professional services, then leverage those strengths in a partnership rather than turn your entire organization upside down.

A VAR's strength is the ability to sell, relationships with customers, and the ability to install and train when necessary. If you are strong in those areas, then you're already in a strong position. Why would you abandon your strengths to start over?

VB: Lastly, why do you believe a VAR needs to get involved with the XSP business model?
Meek: One of the interesting things about the XSP marketplace is that it is a monthly rental business. Consequently, the money an IT organization spends doesn't have to come out of the capital request through the CFO. You don't need hundreds of thousands, or even millions, of dollars up front to get started. This alleviates the weeks of justifying the decision, arguing internally over costs and weighing the enormous risks of IT implementations. This changes everything for an IT organization.

In our particular business, 80 percent of the systems-management software ends up as shelfware. That's millions of dollars being spent on something that is never used. The beauty of an XSP is that the IT organization gets what they pay for. The risk is minimal in paying as you go. This makes the CFO very happy. Ours is a much more palatable model for a customer to buy into both emotionally and fiscally.

From a VAR perspective, they get the advantage of a continuous revenue stream. One of the hardest parts of any business is the peaks and troughs of a sales model. The advantage of the XSP model is that you can build up a revenue base that will sustain a company through the harder times. Knowing that revenue is coming in is a very secure feeling. The revenue-sharing model of our partner program allows the VARs to enjoy the same security.

VB: Besides skillsets, how else does a VAR need to grow in order to engage with an XSP model?
Meek: They don't. It's a perfect match as is. The VARs need to stay focused on their space, and it is up to us, the XSP players, to leverage their strengths.