Contributors: Mark Micheletti and Sanjay Shitole.
Organizations looking for a competitive advantage and financial gains extensively utilize Partner networks to increase their selling reach of products and services. Why Partners? Partners can provide immediate access to new markets – geographical, vertical or additional reseller networks who sell to end-customers. In addition, these partner arrangements can have lower cost per dollar of revenue generated versus selling through the Organizations direct sales force.
Partners have various roles in reaching the end customers. This combination or network of partners make up the channel network. For the purpose of simplicity the following picture depicts a commonly found channel structure:
Routes to Market (Products and Services) – Direct and Indirect Channels
Direct – Sales to end customers is achieved by the organization’s sales force
1-Tier partners procure products and services directly from organization and sell them to end customers
2-Tier partners or resellers source products and services from distributors and sells to end customers.
This blog focuses on measuring the performance of partners in selling services to end customers within high tech organizations.
Before going into the measurement aspects of this blog I want to highlight that the amount of sales delivered through the channel network needs to be determined as part of a thorough analysis of the business objectives, financial capabilities/performance, market pressures, product complexities, and more. In some cases a low utilization of a partner network is optimal, however the trend is moving to utilizing partners more and more. As the outsourcing of the sales activities increase the more an organization needs to build robust performance management systems. Measuring channels services sales performance is a two way street – it is important to both the organization and partners: Organizations want to make sure the maximum amount of revenue is captured/delivered by the channels and the channels want to make sure there is clarity and accuracy on the measurements that determine their compensation and selling effectiveness.
Channel Service Sales performance metrics:
Organizations need to measure what matters to assure partners perform well in selling services. There are two metrics that are most commonly utilized in high tech industries: The first measures the ability of the partner to attach services to the products being sold, i.e. Attach Rate. The second one measures the ability of the partner to renew expiring service contracts, i.e. Renewal Rate.
The following section discusses the metric calculation details:
- 1. Attach Rate metric: Measures the partner’s ability to attach service on the products sold in a measurement period. The measurement period depends on the organizations need to look back into past for measuring performance, typically 12 months.
Example, If Partner sells $1,000,000 worth of products in a measurement period and Partner has attached services on products worth of $900,000 value then the partner’s Attach Rate is 90%.
Another related metric to maximize revenue is the Install Base Coverage Rate. This metric provides visibility into how much of the install base is covered with a service contract. This enables an organization to tap previously “invisible” revenue opportunities and thus place goals and rewards on partners to capture this incremental revenue in their forecast.
Note: The number of units included in the install base should be adjusted for products that have reached their End of Service Life – i.e. not eligible for coverage under a service contract.
- 2. Renewal Rate metric: Measures partner’s ability to renew service contracts which are about to expire in a defined measurement period. The measurement period is typically a quarter.
Example, if the partner has $500,000 normalized dollar value worth of services expiring in the measurement period and partner has renewed services worth of $450,000 normalized dollar value then the partner’s Renewal Rate is 90%.
There are a few additional renewal rate related metrics which measure partner’s effectiveness in renewing service contacts:
On-time Renewal Rate: measures the partner’s ability to renew service contracts prior to actual expiration of the contract. Renewal Rate metrics will only include the contracts which are renewed on or before the expiration date of old contract.
Renewal Rate with Gap: measures the partner’s ability to renew service contracts after it has expired. Renewal Rate metric will only include the contracts which are renewed after the expiration date of old contract
90 Days Report: measures the timeliness of the partner in sending out the first service renewal quote (and/or first contact with the customer) 90 days prior to the earliest expiration. This metric is a ratio of the ‘Total dollar value of all quotes that included the first contact with the customer at least 90 days prior to the contract expiration during the measurement period’ to that of ‘Total dollar value of all contracts expiring within 90 days during the measurement period’
The above are a few of the key metrics utilized by organizations to monitor the effectiveness of their partners in optimizing service revenue. Now let’s look at the criticality of “accuracy”.
Organizations establish performance goals and compensate partners with discounts, rebates, or sales commissions based on performance. Accuracy of performance metrics depend on the ability to design metrics that take into account the complexities of a service business. It is important to identify the viable business scenarios and exception rules and include them in the metrics design. Here are some of the guidelines for designing accurate metrics based on industry practices:
Identify the products or services which should be excluded for metrics calculation
|o Products which are de-installed from end customers site or the products which are decommissioned by organization|
|o Service contracts post End of Service Life date|
|o Products post End of Life date|
Variations around length of the service contracts and overlapping contracts should be handled as per organizations business policies.
End customers receive services from various partners, any services business takeover from one partner to another needs to be identified and the right partner should be compensated as per the rules established by the organization
After determining the suite of metrics to manage and measure the performance of the channel partners, an organization needs to focus on building an efficient reporting tool on metrics data for managing the partner’s performance, driving compensations, and forecasting of services sale opportunities. As the trend is moving to utilize the channels network, it is important for organizations to manage channels service sales performance and drive partner’s to achieve their performance goals for receiving maximum incentives. Measure what matters!