Beneath the best partner programs for managed service providers is a little-known but powerful algorithm – the ‘Rule of 78’.
Moheb Moses, founder of consultancy Channel Dynamics, says his company distinguishes classic reseller programs and their MSP equivalent – whose implications are still being absorbed by the channel.
“A value-added reseller would [traditionally] sell the product and then sell professional services, but the MSP sells the service that includes the product,” Moses says. “It’s the difference between me selling you a car and providing a car lease.”
Moses says classic partner programs are geared to big and lumpy sales. But resellers transitioning to MSPs have different needs caused by initially smaller monthly revenues. Hence the ‘Rule of 78’ – a quick calculation to estimate recurring revenue over a year.
It suggests that for an MSP, there are 78 billing events in a year. Assuming the MSP sells $120 of services to a client in January, the MSP gets $10 a month for a year (12 payments). In February, the MSP signs another client and gets $10 a month over 11 payments (and $10 from the first client). In March, same again ($10 x 10 payments + $20 from the first two clients) and so on.
And as seen in the table, this means $780 in billing of $10 a client a month or 78 payments. This method is preferred over an annualised run rate because it more accurately compares an MSP to a reseller.
The move to annuity revenue challenges the infrastructure and software vendors in particular, because a $100,000 sale in a month “is a big number”, while $5,000 is not. But the MSP model has its advantages.
“Like a car lease, the customer never sees what the vendor’s product is worth, they just see the service,” Moses says.
“It’s very easy to compare prices; but it’s difficult to compare car leases because you can include other things.”
Ticking the boxes
It typically takes 18 months of 'financial pain' for the IT provider to get back to an even keel after swapping from transactional deals to recurring sales, he says. This transition is no joke – it is often called the 'valley of death' – which is why the best partner programs acknowledge that MSPs contend with different requirements for working capital, cash flow, financial reporting and business valuation.
“The vendor must recognise that a partner who closes a $5,000-a-month deal is, over time, equally or more valuable than one that closes a one-off $100,000 deal,” says Moses.
In terms of incentives, he says “rebates are very important to VARs but not to MSPs. What’s far more important is invoicing the partner on a monthly basis so they can manage their cash flow.”
A top MSP program should have dedicated training and technical staff. And this leads to the second 'fundamental shift' in attitude.
Vendors also must enable MSPs to talk to line-of-business management and help them enhance their bundles to limit customer churn.
Paul Izbicki is chief executive of Total Inter Action, which specialises in training and consultancy for IT companies. Previous clients include NetApp, Microsoft and Adobe. He says that Total Inter Action is seeing significant demand from vendors to help train sales and pre-sales staff to better engage with line-of-business buyers, outside of the IT department – such as sales, marketing or HR.
These vendors are investing in training both for their own sales forces and as part of their channel programs. “The more they can enable those partners to be successful, the more benefit it will bring. The smart vendors are investing time and effort into those channel partners to help them to address this problem,” says Izbicki. When selling IT as a service, he says it is all about “conversations moving away from transactional, moving away from the speeds and feeds, and understanding what outcomes the clients want to achieve for the business”.
Total Inter Action is currently working with a major global vendor around its partner program, which will include developing an elite tier of partner who gets special training to sell services to business buyers.
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