One of the more popular goals of channel partner recruitment for traditional telecom company agent programs is the lure of adding large numbers of the estimated 150,000 VARs to the ranks of an industry dominated by somewhere between 5,000 to 10,000 telecom broker agents. With the potential enlargement of the recruitment pool by that large a factor, conventional wisdom says those channel programs and their channel managers will all retire in tropical waterfront mansions and luxury yachts.
But a decade after many have tried, penetration into this group is largely by informal “parking lot programs”, where leads are shared between telecom agents and VARs, mostly as an agent rep to VAR rep level. The VAR business ownership and business itself is not directly engaged. A quick look at most VAR website validates that reality. There are few traditional VARs in the 150,000 who feature relationships with telecommunications service providers on their websites “about” pages where they position their business, or in their “strategic partners” pages.
We know from years of research that indirect channels now account for over 70% of technology purchases, with Hewlett Packard noting earlier this year that 80-85% of their revenue is done with or through the channel, and they claim the involvement of 250,000 channel partners in their extended ecosystem. 1
If anything resembling that penetration shifts to the direct sales dominated telecom services segment, the growth in channel programs would be immense.
Here are a few of the challenges that VARs are concerned about:
- If I recommend a telecom company to my client and things go badly, it will reflect negatively on my business. I need to remain neutral.
- The suppliers are unfamiliar. It takes time to develop the right relationships.
- Telecom company infrastructure footprints have large gaps, making multiple suppliers a virtual necessity to maintain costs and service quality.
- The acronyms and technology are new things to learn, with an already full plate.
- Channel conflict, a norm in IT channels, has a far more conflicted impact when the supplier sets the price for the partner and direct sales is not coordinated at parity.
- The economic benefits are not obvious.
The first four items can be addressed with effective channel program support, and VAR outreach by trained channel partner recruiters. The fifth one is tricky, and could be another entire blog entry.
The sixth one is where we will focus today. The economic benefit is a challenge.
Various studies have been conducted over the last few years about what it takes to make the transition to add a telecom services component to a business. The prevailing research suggests it takes anywhere from a year to two years to break even on the investment. Let’s look at some of the numbers.
A typical telecom channel distributor, or “master agent”, receives about 20% in residual compensation. This is split with their sub agents with varying splits based on how much work the sub does, versus how much support the master agent needs to provide. A common split may be 75% to the sub agent and 25% to the master.
Let’s take that as a baseline for the discussion. The following is a steady state business, once all clients are fully up and running. This is at the end of the first year’s production. (Chart 1 )
The VAR can assume to earn somewhere between $27k to $54k going forward from the first year’s selling efforts. There is also a lag from installation, varying for over the top services that may be added quickly, to more complex networks that may take 90 days. Telecom commissions are normally paid following install and Customer billing. That adds another month.
Recurring Revenue runs on the Rule of 78s, so taking the above example’s best case, of 5 Customers converted @ $9k billing for each is an average of $3750/month. To keep the math simple, if the 1st sale and install were to take place in January, and each month thereafter loaded the same, the finances look like this:
After three years, this VAR can expect to gross $137k per year from adding a telecom agency component. If they decide to learn and contribute more to the sales process, they could expect to increase this with a better commission split to a day one adjusted $206k. If they have to add just one telecom dedicated staff, after taking out their sales rep compensation and benefits, there’s less than $100k coming into the VAR’s business that they get to keep on this three year journey. The business owner would be upside down over $45k at the end of the 2nd year, and only hit break even half way through year three.
There are ways to accelerate the process, but it’s clear that the telecom program’s dream is far from an obvious choice to jump in now with both feet from a straight up financial perspective.