Channel Chiefs: How To Do The Math On Recurring Revenue

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Solution providers should be looking to transition their businesses to include more recurring revenue, but many don't fully comprehend the model or how to compensate employees for sales that are billed over a prolonged contract, say top channel executives.

Recurring revenue is still a minority of the total percentage of sales for most solution providers, said Frank Rauch, vice president of VMware's Americas Partner Organization. The mix of recurring revenue is "very, very slim," but the number of people starting to embrace that model is becoming a bigger story, Rauch said.

"I don't think you have a lot of maturity right now in our base in terms of the recurring revenue. A lot of them are selling more toward traditional models. The SMB guys seem to be picking it up a little bit faster just simply because they're selling software to service and they have those types of offerings that are scalable. The large guys are getting there," Rauch said.


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Rauch's comments came during the CRN Channel Chief Roundtable, held at the XChange Solution Provider 2013 conference in Orlando, Fla., in March. In addition to VMware's Rausch, the roundtable featured top channel executives from Cisco, Comcast, Hewlett-Packard, SAP and Verizon.

Solution providers may need to make big changes to accommodate a recurring revenue model, but they are necessary to position themselves for the future and for what customers want in the cloud, the executives said.

Tony Anderson, director of indirect marketing for HP's Enterprise Group Americas, estimated that 20 percent of solution providers understand recurring revenue and are successful.

"I think there is a very small amount that really is occurring. I think there's some education that needs to happen and then they need to try to get the offerings that we've got out there, and engage with us to make sure that they can take it to the next level," Anderson said. "I think that transition is happening. And there are a few leaders out there for sure, and I think we want to try to get the broader base a little more engaged and moved up the stack."

Anderson added that HP isn't forcing solution providers into more services -- partners are pushing that way on their own.

"I think we're providing a vision, and it's up to them. They've got to engage, right? They have to get their business model aligned," he said.

Verizon's Janet Schijns and Comcast's Craig Schlagbaum work for companies that make their living off recurring services revenue and agreed that some solution providers struggle to get to that model.

"When I talk to the VARs, they [have] a couple things they need to work on. Most VARs, even the billion-dollar ones, don't have a pricing expert in their business," said Schijns, vice president of medium business and channels at Verizon Enterprise Solutions. "They don't have someone in their business that understands how to do real pricing strategies ... gross margin-plus as opposed to discount off hardware."

NEXT: Managing Sales Force Compensation

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