Tuesday, December 16, 2003

ISSUE: Optimism, the Channel’s Secret Ingredient
By Scott Karren

Scott Karren is the CEO of Channel Ventures, a consulting firm that develops profitable channels.

People are beginning to feel optimistic again. Forbes columnist, Rich Karlgaard, commented in the 22 December issue that optimism is back in Silicon Valley. He went on to talk about two kinds of optimism: the good kind – product development optimism and the bad kind – IPO boom optimism. After 3 years in a morose, inward-looking economy, businesses are starting to dream again.

I see signs of this optimism not only in Silicon Valley, but almost everywhere I look. The DOW is above 10,0000, corporate profits are up, the malls are crowded with record Christmas sales, stretch sales goals are being accepted, inventories are low, contract manufacturing in Asia is booming, and channel providers in mature markets are returning to profitability. Heck, we even caught Saddam.

All I can say is that it's about time! I for one miss the dot com era. I miss the new ideas, I miss the fat budgets, I miss the cool advertisements. But what I miss most about the dot com boom is the optimism. I am not as picky as Karlgaard about the kinds of optimism. Either kind will do. In fact, I think the belief is more important than the reality. So what that startups in Silicon Valley naively hope for an unrealistic IPO boom? What's wrong with a little naïveté? Almost every entrepreneur’s story ends with the comment “If we had known what we were up against, we would not have started it.”

Greenspan was irresponsible in trashing optimism (he called it irrational exuberance) in the late 90s. Similar to panicking depositors into a run on the bank, he created a run on the economy. That is not what we need from the chief financial officer of the government. Yes there were excesses. Yes, there was outright fraud. Yes, some of the businesses had no solid foundation. Yes, huge sums of money were wasted. However, a responsible fiduciary would have busted Enron without killing the spirit of optimism.

With Greenspan as the most visible party pooper, the web party ended with Napster’s demise. With its CEO stripped of his glory and its web site shut down, the Napster generation learned that the business world was governed by established business, not by irreverent, Gen-X whippersnappers. The rest of us lost out too as trillions in market equity was vaporized. Even worse, the economy overcorrected and destroyed not just immature web businesses but millions of real jobs.

Even my 7 year old son knew something had changed when he asked me one morning “Remember when we were rich, Dad?” My son has no real concept of money or my net worth, but he could tell that things had changed. We postponed purchases of big ticket items, eliminated discretionary expenses and hunkered down for a long, cold winter. He could sense that our attitude was no longer open and forward looking but closed and cautious. It no longer felt okay to go spend money. Like the business world, our family, rather than investing in new ventures became more interested in preserving our remaining assets.

My brother, Tom Karren, started his web services business, Wingate Web, in the teeth of the dot com crash. Despite a bad economy, a tech stock crash and no obvious exit strategy, he has managed to create products and a growing business. He did not need people to tell him it was impossible, the market was doing a fine job of that if he had cared to listen. His optimism was stronger than all of the negativity. I had a business professor who frequently said “Every business needs a realist, but only one.”

Leaders like FDR, JFK, Reagan, Giuliani and Clinton see opportunities in what others overlook. In a speech at the Microsoft Office System Launch last October 2003, Bill Gates said the following:

"…our optimism about the rest of this decade, productivity growth and economic results, comes because we think that people are now underestimating these advances. In the '90s, there was a lot of hype, people in some ways over estimated how quickly information technology could drive the economy forward. Today, we see the opposite of that.”

You cannot protect your way to new markets and you cannot cut your way to growth. I used to tell my employees at MSI Consulting Group that we had an imaginary company and that as soon as we stopped believing, the company would disappear. Within a year of my departure, the company was dead. I value optimism in the face of overwhelming odds and channel people are some of the most optimistic people I have met. We have to be, otherwise we would have chosen a different business.

Scott Karren, The Channel Pro 

Tuesday, December 09, 2003

ISSUE: Objectively Review Program's Continued Fitness

Like government programs, some channel programs continue long after their usefulness has expired. While almost all companies have a blind spot when it come to the utility of cherished programs, companies with near monopolies or protected channels frequently are the last to notice. Sales may not have peaked for the channel as a whole, but ominous signals begin to appear. In fact, in the outward, CRN interview or press release, the program may still appear to be performing.

Channels, like people have distinct personalities and failure scripts. Paraphrasing Hedges Capers, a principal at behavioral consultants Spencer, Shenk, Capers and Associates, “Don’t worry if you miss the early warnings people display when their needs are not being met. You will get more obvious signals soon.”

However, upon closer observation, early warning signs are not hard to notice.

Some of the most obvious are when 1) the fundamental purpose for the program no longer exist, 2) the technology life cycle advances, 3) channel providers expectations differ sharply from the vendor party line, 4) channel morale sags, 5) promotional dollars are considered entitlements by the channel providers, and 6) responsibility for the program is delegated to junior-level personnel.

As the economy starts to heat up and promotional budgets again start to appear, it would be a breach of fiduciary responsibility to fund past programs without first evaluating the market conditions, channel requirements and corporate objectives that are the program’s strategic underpinning.

Scott Karren, The Channel Pro

COMMENT: Dec 16, 3:14 PM

I think your comments are right on. I had the opportunity to revamp some of the key channel programs for a large networking software company. The programs had been in place for many years, but the environment had completely shifted. As I presented my preliminary findings to my boss, who by the way was one of the original architects of the programs, I was a little negative. His only comment was, "It was a good idea when we originally created it" - And he was right. At the time the programs were created they were state of the art, innovative and vital. Unfortunately, overtime the objectives, the competitive landscape, and the key players had all evolved and the programs were no longer adding any value.

Bryan Johanson
Vice President, Channel Ventures 

Thursday, December 04, 2003

ISSUE: Finding the Real Channel Metrics

I loved Michael Lewis’s latest book Moneyball, The Art of Winning An Unfair Game!

Since I hate baseball, this is not a book I would have read except it was recommended to me by Elliot Levine of The Sales Factor. This book is now among my favorites for management and business development. Right up there with Lawrence’s Seven Pillars of Wisdom (strategy on how to win against impossible odds) and Rhodes’ Making of the Atomic Bomb (management of complex, diverse organizations in product development and product launch.)

This book has everything: Organizational politics, performance metrics, recruitment, management, PR, and sales. In this book, Lewis answers the question “How did one of the poorest teams in baseball win so many games?” What was the secret? Billy Beane of the Oakland A’s changed the way baseball is managed because he realized the historical benchmarks of baseball were misleading. (Click on Ernie the Attorney for a concise book review.)

Why do I love this book? Because it made me think about how I approach channels in a new way. A few of the thoughts I had while reading Moneyball are as follows: For decades, people said that you could not measure outfield performance. Similarly, I am repeatedly told that CAM performance cannot be measured because of poor POS. The ever popular RBI is irrelevant because it attributes success to luck. Simple sales quotas mask true individual contributions. On-base percentages correlate to scoring. Sales management correlates to channel sell through. Offense is more important than defense. Business development skills trump account support skills.

I want to do with channels what Billy Beane did with baseball. I am looking for the Billy Beane in IT channels. Microsoft, the Yankees of high tech, sit on billions in cash and will always be in the channel world series. However, since your budget is a fraction of theirs, how can you change the competitive landscape?

I want to work with the CEO, COO or SVP who wins in the channel is spite of the fact that the budget is a fraction of Microsoft’s.

Scott Karren, The Channel Pro 

TACTIC: SMB Marketing Has to Be Noticably Effective

Marketing in a small company is very closely related to sales. In fact much of the budget (if there is one) is put into the creation of collateral and the development of a web site. If vendor coop is available, some also may choose to advertise. But as with everything else in a small business, if the activity does not produce concrete results, it is quickly eliminated. Small companies have no ability to tolerate unproductive activites.

This frugal behavior often causes small companies to make two common mistakes. The first is to do everything in house. This is a mistake because the employees often have no marketing experience. Unprofessional materials increase sales costs and lower productivity. However, the second mistake is just as bad: abdicating marketing responsibilities to outsiders. Without appropriate management, agencies will deliver great marcom while exhausting the entire budget. No start up or small business can survive long when it lives beyond its means.

The solution is for a principal at the small business to take responsibility for sales and marketing. P&L responsibility and ownership in the business force careful budgeting and accountability. Hiring outsiders for either strategic advice or tactical implementation then can be used effectively under active management.

Remember, it is the results from the markeitng activity that count, not the number of activities run.

How does your channel program measurable impact the channel provider's business?

Scott Karren, The Channel Pro 

Wednesday, December 03, 2003

ISSUE: Bad Retailing Hurts The Whole Industry

In my mid October post, A Tale of Two Retailers, I contrasted the self-serve buffet retail model with the made-to-order deli. Both models can work, but too often the experience is abysmal regardless of which venue you choose. When customers opt for no interaction, it is an indictment of the retail experience. I agree with Robert Scoble, “The retail industry seems to be giving up the fight. …you're gonna buy a Dell anyway” Just as a VAR with bad service loses business to the low cost retailer, the ineffective retailer will lose business to less painful direct or on-line providers.

So what, you say. Doesn’t Microsoft get its cut anyway?

Well, for starters, not all channels are equal in their contribution to profits. The massive shift from VARs to SPs cost Cisco several hundred million. But the reason Microsoft and Intel and HP and IBM and the rest of the industry should care is that bad experiences reduce demand. Scoble’s anecdote of shopping in Silicon Valley is very, very telling. When the Dave Winers' of the world walk out without spending the $3,000 in their pockets, the whole industry loses out! Dave Winer is not the only customer sitting on discretionary cash.

How can Microsoft address this issue?

Recognize that good service alone is not enough. Retail also needs good merchandising. Last month in Changsha China we visited a multi story computer product mall. Each store had 3 to 5 employees and 4 tables to sit down, discuss user needs and design a BTO computer. Service was attentive; as we entered each store, someone immediately asked us how they could help us. (The fact that my associates did not speak Chinese did not deter them in the least.) Problem was that all 40 stores in the mall were exactly the same. Worse yet, all of them were uninviting.

Change the status quo. A Intel Premier Provider in Turkey told me last month that when he visits his channel partners, he beats them up if they have poorly executed branding or merchandising. He sits down with the executives and together they decide how to improve productivity and profitability. I saw him do it with other Intel Premier Providers. That is channel management.

Get to know your customers business model better. We have been working with channel providers to benchmark and evaluate their businesses. We identify the metrics that drive business by business model segment. An article in December's FSB stated that every business has a core metric. When you ask a channel provider to do unnatural acts, contrary to their business model, you destroy trust.

Expect more from your CAMs. Task them with improving the viability of their accounts. Evaluate their ability to interact with executives. Require them to live and breathe business models and issues. Measure their ability to identify opportunities and drive past traditional channel support issues of price and availability. Document their successes and failures to manage their accounts. Drill them on skills until they succeed or wash out.

Scott Karren, The Channel Pro 

Tuesday, December 02, 2003

STRATEGY: Channel-Only Models Such As Acer's Fail to Eliminate Conflict

According to CRN, Acer has discovered that only a fanatical devotion to the channel can work and is advising its competitors on the gospel of channels. (Acer Launches New Channel Business Model: Acer executives say competitors are making big mistake with direct initiatives) Is the great Satan Dell listening? Will they and other direct selling evil doers see the folly of their ways and wake up to the truth of channels?

Channel conflict is real, but cannot be addressed by CRN's one-sided, pro-channel propaganda. How long have they been advising vendors that the channel was the only way to compete and resolve conflict? Contempt for large retailers (bastards who unfairly use their purchasing clout to discount prices) is only slightly lower than it is for those direct selling whores. And don't get me started on distributors and channels that only fulfill products.

All sarcasm aside, the truth is that conflict between direct and indirect channels and between volume retailers and specialists will always exist. For most vendors, the issues are 1) how to balance the benefits of sales volume with the costs of coverage and 2) how to obtain the highest productivity out of the channels selected.

Unmanaged, conflict can destroy even the best channels. Lora Heiny identifies the risk Acer faces in balancing its channel incentives. Unfortunately, by the time an executive like Acer's CEO, Schmidleithner, takes to the air to assure his channels about conflict it is too late. They already have it. Channel partners response to such pronouncements is contempt. "How dumb do they think we are?" Only results, not press releases will counter the inevitable decline.

Channel strategy is not about making an even playing field. It is about positioning your resources effectively on an uneven field. It is about unequally rewarding the channels that deliver the best results in spite of uneven market conditions. Each channel has to differentiate and deliver on a core value proposition. Consider my unofficial slogans for each of these channels:

Dell: "Our great products at rock bottom prices"
IKEA: "Make a trip and get a bargain on our products"
CDW: "Everyone's hot products at low prices"
Walmart: "Our prices on the products you need make the trip worthwhile"
Fry's: "Drop in today to see our huge product displays"
VAR/SI: "Customized solutions and advice for a price."

When a channel fails on its proposition to the user, it also fails in its promise of coverage to the vendor. As one retailer quipped: "If your VAR gives you bad service, come to retail: we will give you bad service at a low price." Aggravated by competitors (e.g. Dell), new channels (e.g. the internet) and the technology life cycle (e.g. WAN), conflict is the result of the vendors own actions (or inaction) in response to market conditions. Like stress in your personal life, conflict is the markets' way of motivating you to make change.

Scott Karren, The Channel Pro

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