If you are a traditional independent software vendor (ISV), you might be surprised when talking to channel partners that are looking for Office 365 solutions. The reality is that margins that most ISVs offer to its channel partners do not carry the cost that channel partners take on to build its cloud practice. Channel partners are assumed to have a portfolio of solutions that the represent to build an offering. This is very obvious can clear especially in the SharePoint ecosystem.
I have participated in six (6) SharePoint conferences the past 8 months and had discussions with tens of channel partners and their business models and hardly ever the discussion turns into the margins that ISVs are willing to pay. The reality is that the margins are much less than in the traditional software channel model as the ISV takes over a huge amount of overhead to keep the cloud platform humming, providing second level support for the channel partners and also providing support in marketing and sales. There is a real change of roles and responsibilities whereby ISVs can’t give as much margin as before and most channel partners have realized this.
Instead of focusing on software margins, some channel partners are building managed services and some are building reusable assets (IP). This enables a recurring revenue stream that is more predictable in the long run than oneoff deals that most channel partners used to have. Some channel partners are also more focused on how the ISV can help in building the brand of the solution and help in generating leads. This of course leads to many other interesting discussions such as how the ISV distributes its leads and whether the ISV has a mechanism to handle channel conflicts.
ISVs should really help the channel partners to “build the story” how their solution will help the end user customers to become more productive and efficient in what they do. We have to remember that channel partners typically carry a bunch of other ISV solutions as part of their portfolio and the ISV should not assume that the partner puts all of the attention on its solutions. That is where we can see a difference in good and bad ISVs. The good ISVs will help its channel partners and their business model by helping to position the solution in their existing solution portfolio. The ISV is also assume to help to create “the story” how the solution or solution combination helps to solve a customer problem and fulfill the customer jobs that have to be done.
Just based on my discussions with Microsoft channel partners, most of them carry a few well-known software solutions that provides the additional functionality that SharePoint needs to be able to provide a complete solution. The players in the SharePoint space are pretty limited and you get to know them quickly and you also see what kind of solution types ISVs are focused on. If you are an ISV, you need to figure out where your solution fits, how it provides value-add to the other solutions that exist on the market. Do not think for a second that your solution will be the only one that channel partners and end user organizations will be focusing on. You will be one of many. Your job is to paint the picture why you exist on the marketplace and how your “story” will complete the story of other solutions. If you are just a “point solution” without a story you really are nothing to nobody.