How Do You Measure Up?

The idea comes from Paul Mountford, vice president of worldwide channels for Cisco. He wonders what you'd find if you took the amount of business a vendor does through channels and divided it by the number of partners the company has in its active partner database.

Curious to see what the results would be, I did a little math. Here's what I discovered.

The world's most successful software company, Microsoft, generates a whopping $908,000 worth of revenue per partner. That's right,$908,000. How did I come up with that figure? Take Microsoft's 2002 revenue of $28.4 billion. Multiply that by the amount of business the company does through partners, which in this case is 96 percent. Then take that figure,$27,264,000,000,and divide it by the number of active partners Microsoft engages. You wind up with $908,000.

Make no mistake, a real statistician could rip the figure apart, digit by digit, given all the real-world variables that contribute to this actual number. Obviously, some Microsoft partners are more active than others and generate more revenue for the company than most. But for the sake of discussion, these raw numbers provide a unique snapshot of who is doing what with the channel.

In the case of Microsoft, that figure sounds like a significant number. But is it? It is when you look at hardware companies.

Consider IBM, for example. It generates roughly $25 billion worth of business with the channel each year. But because IBM has 30,000 partners worldwide, the company, as a whole, does roughly the same with each partner that Microsoft does. (In IBM's case, the figure is actually $833,333 each.)

But drill down into IBM's various business units, and you get a very different picture. Take PCs and entry-level servers, for instance. Longtime IBM PC division channel chief Frank Vitagliano estimates that IBM's PC division generates $2.5 billion per year through some 7,000 partners. The average sales figure for each is around $357,142.

Then there's Cisco, which generates approximately 85 percent of its sales through 40,000 or so partners each year. So let's do the math: Last year, Cisco's sales totaled $18.9 billion. Multiply that by the percent of its business done through partners, 85 percent, and then divide that by the number of partners the company has, and you get a sales-per-partner figure of roughly $401,625. Not bad compared with IBM's PC business, but it's not in the same class as Microsoft's business.

Who'd have thought that Microsoft's massive channel would actually have such a yield? Surely, it defies conventional wisdom. And so does what Cisco partners are able to generate on the vendors' behalf.

For example, Lotus, at its zenith, when its revenue was nearly $1 billion, was generating roughly $400 million through 7,000 partners. The sales-per-partner figure: just $57,142.

Paltry, right? Well consider Novell, which generates approximately $150 million through the sale of 25,000 partners. The sales per each: an even more paltry $6,000.

What this simple study reveals is the wide disparity between the amount of sales per partner a hardware company achieves vs. the same figure for a software company.

The raw numbers also suggest a disparity between what different software companies achieve through partners. The same is true of different hardware companies, too.

As we all know, reality can be a funny thing. As our own VARBusiness 2003 State of the Market reveals, the bulk of partners in the partner community are rushing to embrace software, while simultaneously getting out of the hardware-reselling business. The latter, of course, has proved to be extremely challenging to many.

As interesting as this is, we need to consider service-attachment rates. My gut says service-attachment rates of hardware sales must be a fraction of what they are in software sales. Otherwise, every single company in the channel would be jumping into hardware reselling. But as we all know, there's little money to be made in that market today. If ever there were a greater justification for adopting a more service-oriented business, I haven't seen it.