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More Of The Sale
To MegaPath’s Foster, cloud computing is the common thread driving a lot of the convergence and a lot of what’s driving VARs to seek out carrier services options. The lines between partners that traditionally would have done one type of implementation vs. another are blurring as more customers adopt as-a-service solutions.
“Let’s say you’re a Microsoft ISV,” Foster said. “If you’re doing applications, there’s absolutely a compelling [reason] to say, ‘As we’re putting this in the cloud, let’s talk about VoIP.’ Five years ago that wasn’t the case. A normal customer wasn’t saying then, ‘I’ll just put everything in the cloud.’ The technology specialist in the form of a VAR is ideally suited to support that customer, as opposed to folks who might have a single focus around a voice system.”
Foster advises first-time carrier services VARs to partner with master agents, who have the experience with carrier agreements, payment structures and customer relationships. It’s not a glove-fit model for every VAR, he said, but the incremental opportunities for solution providers who do make the residual compensation model work for them can see some big paydays.
“If you’re racking and stacking stuff in a data center, this can be very compelling from a financial perspective,” Foster said.
“You’re looking at midteens margins on a recurring basis for the life of a contract. I mean, look at it: You put in a WAN op solution up front, you get a nice kicker up front. But if you’re able to put that box in a data center and wrap an MPLS network around it, you’re ‘a,’ minimizing the customer’s need to shop for that; ‘b,’ a trusted adviser; and ‘c,’ going to see years of residual compensation for the life of the contract.”
Clear About Compensation
Other longtime carrier channel observers are more pragmatic.
“I think there’s a lot of talk about it, but I don’t know too many VARs who have built a program and made it successful and sustained it over a period of time,” said Shane McNamara, vice president of indirect sales at XO Communications, Herndon, Va.
McNamara, who recently joined XO after several years as general manager of carrier services for CDW, said more VARs will take up the mantle of carrier services now that they understand why recurring revenue streams are so important. The changing op-ex/cap-ex conversation around cloud computing is also forcing them to re-evaluate their businesses.
That said, it will be a slow take-up for many VARs because the residual compensation model just isn’t part of their DNA.
“It’s still a little bit foreign to them -- the carrier commissions are aggressive, but it takes a long time to build up that annuity even for a $100 million VAR,” he said. “To get the mind share, it has to be from top down in the organization, and it may take a few years to see the benefits. But the long-term benefits -- the way it supplements the core business -- eventually come in the bottom line of the P&L.”
The race among service providers may be to see who can hook VARs best with programs that appeal to the compensation they’re most used to. Cloud networking specialist 8x8, for example, earlier this year went live with a new channel program designed specifically to shepherd VARs uncomfortable with residual compensation.
VARs that sell 8x8’s suite of cloud networking services can make money with 8x8 in three ways: a one-time bounty paid as a fixed dollar amount per service sold, a residual revenue stream of 12 percent of total master resale rights (MRR) for 8x8 services sold under term contracts, and a commission of 5 percent on equipment sold at or above 8x8’s stated floor price for gear. Taken together, those three methods can bring a VAR’s margin up to 29 percent in the first year on a high-end deal, with 18 percent maintained in the third year based on ongoing residuals.
Offering an “up-front” return -- i.e., the bounty -- as well as residuals and commissions helps VARs get used to the more carrier agent-centric residual model while making some of their money in the format they’re used to, according to 8x8, Sunnyvale, Calif.
“The whole mentality of a VAR is getting something at the time of sale,” said Don Trimble, 8x8’s vice president of channel sales. “I wanted to make sure we baked that in because I think that’s how we’re going to hook them and get them to understand how to shift to a residual-based model going forward.”
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