Last month, CRN hosted an exclusive roundtable under the banner ‘Secrets to Channel Success’. The guest list included members of the CRN Channel Elite – past CRN Fast50 winners who measure their revenues in the tens of millions of dollars and prove that smart operators can combine size with speed.
We were hoping for a straight-shooting discussion that would offer advice for the next crop of Fast50 winners as well as caution against any classic missteps. We were not disappointed.
ATTENDEES
Nick Verykios, Distribution Central
Sydney Borg, PCS Australia
Paul Hendry, Fujitsu
Jamie Warner, eNerds
Chris Young, UberGlobal
Craig Somerville, Somerville Group
Tim Gentry, Avaya
Ian Poole, UXC
Gary Marshall, Bulletproof
Mark Rook, Huawei
Craig Nielsen, McAfee
Andrew McHenry, Bridge Point
CRN Nick, Distribution Central must have a lot of conversations with resellers and system integrators of all sizes about strategies, technology road maps and business advice. What are your customers asking and what kind of advice are you giving them, especially in terms of growth?
Nick Verykios, Distribution Central
The advice that most resellers are looking for is how to run a business as an entrepreneur and how to fund it. You’ve got small resellers with significant expertise – enough expertise to win a significant deal. So how does a two-man shop with the smartest guys in the world when it comes to, say, ‘cluster storage’ – I don’t know if that’s even a real thing – that wins a $5 million deal get it funded? No distributor or vendor would give them that line of credit.
But there might four or five other instruments available to the reseller to allow them to do that deal that they don’t even know about. That’s key – how to fund big deals.
Also, be really careful who you listen to in terms of advice. If you are a fast-growing reseller, the only people you should be getting advice from is somebody who owns their own business. Resellers will constantly be serviced by really good vendor reps or distribution reps who work for someone. They have an agenda and that is to sell as much of their product as they possibly can.
CRN Syd, you have built up a business and must’ve had all sorts of people offering you advice. What’s the best and worst advice you’ve had during your career?
Syd Borg, PCS Australia
It’s probably the other way around for me. I’m usually giving the vendor and distributor advice, having been in the game too long.
They all want to tell you where the market’s moving. I listen – then I do the opposite. I guess that’s why I’m still successful.
Funding has never been an issue. Financing’s never been an issue. If you run a good organisation, you shouldn’t have a funding issue.
CRN What about financing support and leasing support and other ways vendors can work with resellers to try and foster that growth?
Paul Hendry, Fujitsu
It depends on the vendor. Fujitsu is in a strange position. We are very old but we are relatively new in the channel. Our process is to try and develop resellers rather than just find them and try to sell them kit.
So we’re trying to work on things like training them or sponsoring them. Sometimes very small amounts of sponsorship will help – $1500 in a niche market might be just what they need to get their website up and running.
Finance is a difficult one because the finance guys will ask a lot of awkward questions and then say ‘no’. The smaller you are, the harder it is.
So we’ve looked at how we can help them. Can we do that using MDF? Can we do that using some sort of promotion? Can we do some training for them? Can we work with them and their customers to build the business?
So those are the sort of issues we are trying to. We need to make sure that the people we are dealing with actually have a business. There’s no point selling stuff to people who are not going to be able to sell it on.
CRN Jamie, eNerds has been in the Fast50 four years in a row. How have you funded that growth?
Jamie Warner, eNerds
We have actually grown through cashflow. We haven’t had to take any external funding to enhance that growth, although in the future we might do. Where resellers and MSPs can grow is new business, so any new tactic or advice or strategy that a vendor can provide in terms of new business is always welcome. There was one we had a really great experience with years ago. That was Express Data.
They went down a road of doing telemarketing. The challenge for sustained growth is having a marketing engine that can generate sustained new business opportunities. If you are an annuity-based business, it’s obviously a little bit easier. But if you’re a transactional business only, finding new clients is of paramount importance.
CRN Craig, almost all your growth was funded out of working capital. Some say it is a better model to use some working capital and some finance. What’s the right mix?
Craig Somerville, Somerville Group
It depends where you are in the growth cycle. But why do we assess growth as success? We do it as an economy, as global economies. Vendors tell us to grow because they have to grow, because that’s how they assess their business. But in the last 30 odd years, we as a business have sat back and gone, ‘You know what, it’s not about growth, it’s about margins, it’s about profit.’
I think we need to focus on what’s profitable for our businesses. That doesn’t mean growth is the criteria to focus on. Vendors are into a different position, they need growth.
CRN One measure of success centres on acquisition. A lot of entrepreneurs want to be acquired. Tim, you work with NSC, which was recently acquired by Telstra. How can companies get themselves in the right shape to be acquired?
Tim Gentry, Avaya
Companies that we’ve worked with have put themselves in acquisition mode. That’s it: you can put yourself in acquisition mode.
Not to talk about any specific company, but when I’ve had these conversations with my partners, it’s usually their biggest growth year. They’re focused, they’re absolutely driven, and for me I benefit as a vendor, because I’m helping to build that momentum.
CRN How can resellers stay on top of their vendors and make sure they’re delivering on targets?
Tim Gentry We have quarterly business reviews, annual business reviews – whatever term you want. It’s an amazing powerful presentation of show and tell. You need to hold people accountable. When you walk out of a meeting, what are the four action items that I’m going to give to you, what are the four action items you’re going to give to me?
Syd Borg I’ve always tended to look at my disties and suppliers as partners in my business. I’ve always classified it as a marriage and the only argument is who’s on top and who’s underneath. But that’s becoming less of the case now.
I find that the vendors are getting more desperate and frustrated. They need more business. They need volume. The old saying is, ‘desperate men do desperate things’.
Craig Somerville Tim made a very important point earlier. You run a business completely differently in ‘running-a-business’ mode than you do in acquisition mode. If we were in acquisition mode, our business model would be vastly different to running it as a sustainable lifestyle business.
CRN What would you be doing differently?
Craig Somerville If you are going into acquisition, top line growth suddenly becomes God. If we were packaging to sell, the cost structure would change dramatically. Our remuneration packages as directors would probably change.
CRN Ian, can you offer some insight into what a business should do to get acquired?
Ian Poole, UXC Connect
I can give a couple of instances. Altogether UXC has made 50 or 60 acquisitions and I personally have done five or six. It really depends on how you construct the acquisition.
We tend to look at buying organisations that have reached, if you like, one chapter and want to continue into the next chapter. It could be a chapter of growth, where they need synergy and scale with somebody like UXC.
When people are in sell mode, there’s far more focus. It makes you think, ‘Well if they’re focusing so much during an earn-out period, why didn’t they focus more when they are running the business themselves?’ We typically structure deals around earn-outs, because we like to keep the management when we buy companies. During the earn-out period, we usually pay a multiple of profit, so organisations tend to be very focused on their profitability.
Does that mean it’s not sustainable? We work with them to make sure that it is sustainable, because they want to walk away in some cases and it’s our responsibility to make sure that it is sustainable.
Nick Verykios I don’t see a need to separate acquisition mode versus operating mode. You should always be for sale and that means that you should be making as much money as you possibly can.
I’ve sold two businesses, and I’m sure I’ll sell this one and it’s always been that case, make as much money as we possibly can.
Craig Somerville Of course we always run our business to make as much money as we can, but when you’re packaging for sale, you may make sales decisions that are not long-term sales decisions.
We’ve seen sales guys who have made sales decisions that as a business we sat back and said, “You know what, that’s not good for our long-term business.”
CRN Can you be specific?
Craig Somerville Good sales guys can sell an air conditioner to an Eskimo. So you could sell a SAN that is too big to a guy and justify it, until a competitor comes along who says, “You’ve been taken to the cleaners.” We see that all the time.
Ethical sales are really important for our business. We focus on saying, “Fit for purpose, guys, don’t gouge.” Every sales guy can gouge, but if we make smart decisions as a business, we will be long-term.
Syd Borg We are fortunate enough that we continue to grow off the back of our own client base. The reason is, exactly as Craig is saying, we don’t take them to the cleaners. While we are all entitled to make a profit you have to try and get that medium. Keep the client happy, and if can retain them for 10, 20, 30 years, then you milk it.
A good salesperson will go into that account, and once they’ve got it, they’ll will milk it for all it’s worth – you sell them the toilet rolls.
You’ll maximise every opportunity out of it and that gives you natural growth from within your own client base.
CRN Andrew, has it all been organic growth for your company?
Andrew McHenry, Bridge Point
We actually acquired a company two years ago – Servers Central – to increase our depth and breadth across data and augment our network business.
CRN What sort of things were you looking for in the business?
Andrew McHenry Something that didn’t duplicate what we already had, but also didn’t have a separate core entity. Infrastructure is all about data: you have to store it somewhere, you have to manage it, you have to put it on the network and you have to secure it. So it’s pretty simple. We just keep a very simple business model, and that’s really the reason we added that [acquisition].
Ian Poole Something overlooked sometimes is the cultural fit – the people. You start looking at things like strategic fit, solution sets, growing geographically and is it fundable. All of these are great things from a shareholder perspective, but then you think, “Are the people going to work?”
I work very hard with the management and people of the organisation we are buying to ensure they’re comfortable. If you want to buy them to strip them out, that might be a strategy, but it’s certainly not my strategy. We identify who the key people are, we give them share options, we give performance rights, and all the sort of things that are going to engage them a lot more.
Chris Young, UberGlobal
We are actually going through an integration at the moment. We purchased the main hosting business from MYOB. It’s a very different culture from ours. I’m the CFO of UberGlobal, the bean counter, so I know the numbers backwards, but what has been very clear in the past three months is that the culture is the most important thing.
There is good and bad in that. Obviously, there are cultural clashes. But if you make a good acquisition, you gain something from the organisation.
I tell my colleagues all the time, the numbers are the most important thing. But in fact, culture is. They’re going to be a fantastic addition to our company because of that. And the numbers as well of course.
Jamie Warner The elephant in the room is that in any professional services industry, generally there are technicians running businesses. They’re great at what they do, but their entire focus is on, “How we can deliver this technical solution amazingly well” as opposed to spending energy on the business.
If the whole industry is going to improve, the entrepreneur running the business must seek learning and growth in their own business and I often feel they don’t.
I’ll give you an example. We direct debit our customers for managed services. I think we’re probably one of five percent who do that. Why don’t others do things like that? Why aren’t they looking at all the different systems and processes?
I think that’s will affect the success of M&As, because you want to buy businesses that have operational excellence.
Gary Marshall, Bulletproof
We have actually have a metric now on how many customers are on direct debit, because it’s such a basic thing. You’re right: many people don’t do it.
CRN There have been some comments here around vendor relationships. Mark, how do vendors know the best way to help resellers do business?
Mark Rook, Huawei
We are trying to work this out, as a behemoth of a vendor, but very new in the channel. We are an extremely large organisation with a breadth of portfolio, but we wanted to find a way to address the needs of the Australian reseller channel.
What I’m hearing is it’s not necessarily all about growth, but looking for opportunities to be different and for looking for opportunities to put the profitability back in.
It’s about not dictating to your partner. It’s about collaboration and communication. I’m here to listen to the entrepreneurs who have built these successful businesses and find out what we can do as a vendor.
CRN Craig, what do you hear from your channel partners in terms of helping them be successful?
Craig Nielsen, McAfee
It’s clear that for us to be successful, we have got to pay a lot of attention to the ‘services attach’ our partners are able to generate through working with us and selling our products. We are working very hard on that. I think vendors who get that right will have long-term success with their channel and if you don’t get it right, it’s a brutal market out there in terms of relying on resale margins.
Some of our resellers are successful in making that transition to managed services and cloud and some are struggling. From a vendor point of view, some of the challenges are things like how we compensate our own sales teams. We are used to two-, three- and four-year sales cycles and we are actually transitioning to annuity business models.
Craig Somerville A lot of what we sell is software-based. We can virtualise everything. So while hardware vendors have virtualised their product, I’ve got to buy a perpetual licence. I’ve got to buy one, three or five years of maintenance with that, and that’s not what the world is asking us to do, they’re asking us for something completely different.
How does my rep get a client onto a monthly annuity-based deal? A few vendors are getting it. In the past six months, I’ve had vendors come through the door – it’s refreshing to have a discussion when they get it. It’s a completely different model than we’ve ever had before.
Ian Poole I see there being a major conflict in the channel from what the vendors are telling us to do and what our customers want and what we need to do as businesses.
Look at how we’re rebated. How we get money is all wrong. The vendors are rebating us on selling product, but they’re saying, “No, no you don’t want to sell the product, we want you to sell the service, the solutions and the business outcomes”. That is what we want to do but the cost of sale is massive.
I’ve got 28 salespeople and 35 solution architects – non-billable. That’s $15, $20, $30 million of expense yet you know the vendors will say, “We’re going to rebate you on how much hardware and software you sell.”
There’s nothing to do with how much I’m investing in my solutions architecture to get an outcome.
Craig Somerville Channel conflict has become one of our biggest challenges. We used to have five named vendors that all had a discipline, which suited our business model beautifully. But now every vendor sells everything. So now I have conflict at my vendor level. I go into a customer and three vendors I represent do everything.
Nick Verykios Let’s not lose sight of the true purpose of conflict. Conflict is an opportunity for correction. Vendors create the most incredible technology that they possibly can, otherwise they would never survive. They also have to sell truckloads of it that. So there’s a notion of a commodity sell on a highly complex technology.
We all started as resellers or distributors because there was an opportunity to translate a technology from a commodity sell to a highly considered buy. We didn’t need leads, we knew our customers. The most successful businesses I’ve seen in this industry are the ones who never lost sight of that.
They started as a $1 million business and they might be a half a billion dollar business today, but they never lost sight of the fact that they don’t need the leads and they don’t need the vendors to tell them what to do.
The best advice you could give a reseller is that if it was given to you as a lead or by someone else, it’s not your customer. It’s your customer if you have a contractual or transactional rela-tion-ship with based on something other than technology.
Craig Somerville The bigger the customers get, suddenly every vendor is in there anyway, so it’s very rare that you get a bigger customer that can really commit a lot of long-term annuity and revenue streams. That is a challenge as you bigger. There are more players in there attacking us.
CRN Shifting to the issue of cloud, what do people see as best practice?
Ian Poole We like to work with the business, not just technology people. We try and steer away from CIOs where we can, because the deeper you can understand what the business outcome is, the better chance you’ve got of engaging with a solution.
Chris Young For the smaller customers, it is about making all of this ‘weird technical’ stuff simple.
It’s the simplification and automation of technology. We spend a lot of effort and investment in automating simple tasks, so you can go on the website, press a button put in your credit card details and get your server up and running.
I’m not suggesting the trusted advisor role will go; I think it will become even more important and that’s why we have decided to invest very heavily in the reseller side.
CRN Bringing the conversation back to the Fast 50, what are the differences as companies grows from small to medium to large?
Nick Verykios When you are a smaller company, you know who your customers are and you build a skillset that is appropriate. When you are a medium company, that skillset is also appropriate to many more companies beyond your customer base, so you have to start to become a more marketing-driven company rather than just a technically superior company.
Craig Somerville There are glass ceilings and there are a different set of challenges as you break through each glass ceiling. First you’re four guys doing $800,000 a year and business is really good and then suddenly you are highly geared and you’ve got rent and leases and you hit tough times and revenue goes down and you need funding, so there’s a funding challenge.
Then you get more staff and then you have to manage more people. It’s really easy to manage 10 people. Try managing 400 in four states. It’s a whole different metric.
Then along will come your first million-dollar deal. You will ring up your distie and say, “We’ve got an order for you – a million bucks”.
The distie goes, “But your account is $200,000.”
And you go, “Oh, then just give me some more credit.”’
And the distie says, “Why am I going to give you more credit?”
There are all these glass ceilings when you grow a business. Then there’s the CFO. Until 1999, we had contracted accountant who worked for us. We could have gone broke any time. As a business, financial management is very important.
We now have a management accountant. At the end of every month, we get a 30-page report that tells us every moving piece of our business. If I had anything to say to those growing resellers out there, it’s go get yourself a great financial guy. But don’t let him run your business.
Ian Poole The biggest challenge moving through those glass ceilings is you can lose the flexibility and speed and adaptability and innovation if you’re not careful. The bigger you get, you start to become more material. You have governance processes. You’ve got external auditors watching over you every minute of the day.
The governance process becomes so strict you automatically refocus on the wrong things. You can lose touch with customers and lose touch with your market. You’ve got to grow without losing that great stuff about being a small company.
Andrew McHenry, Bridge Point
One of positive things about being smaller is selling by stealth. Because you are unknown, you can actually come in through the back door. You’re not on the radar. Competitors don’t know who you are.
CRN Many channel partners are facing the question of harnessing cloud services. Gary, how is Bulletproof responding?
Gary Marshall Over the past 12 months, we have gone through a massive shift. Since 2006, we have been doing managed cloud services on a VMware-based cloud entirely based on our infrastructure. As of less than 12 months ago, we are now providing that same level of service on a managed Amazon service.
For us, there has been a massive shift. We’ve been assessing the market. Where is it going? How do you access finance?
Craig Somerville We’re going through a process right now, looking at a technology where the vendors have got it from an opex model.
As a business, it’s really attractive, because I can put it in my data centres and I can deliver it and I’ve got no cost until I turn it on. Problem is, if I was to pool a couple of hundred thousand dollars and amortise it and take the risk, I could do it for 40 percent cheaper.
So do I man up and take the risk?
CRN How can suppliers help partners navigate these challenges?
Paul Hendry There are a lot of resellers who are struggling. They used to sell hardware and now there’s no margin. They want to do something else. We try and produce products for them, but is it the right product? We need a feedback loop, and we don’t seem to have that. Everybody says, “Oh the vendors just want more revenue” – but it’s not true. What we want to know is, what does the channel want from us as a vendor?
Craig Nielsen We’ve spoken a bit about the challenge between vendors and the channel, but we are responsible for innovations. The channel is responsible for innovation and creating value-added services. One of the good things about being in the channel is that you can swap us out. We vendors live or die by our success. We’ve got nowhere else to go.
Syd Borg If the question is, “What does a reseller expect from vendors”, it’s being loyal and being honest. Stick with the partner and don’t stab him in the back. It’s as simple as that.
The dangerous thing that I’ve seen vendors do is judge a partner organisation’s ability to sell your product based on the amount of money they’re spending with you now. If they were doing five million with you last year and then all of a sudden they’re doing half a million, it’s not because they’ve shrunk or their business is going bad. It’s about having a look at yourself in the mirror and finding out what went wrong.
Andrew McHenry What I’m looking for from you as a vendor is to help sell my brand. We sell your products, we sell your technology, but we don’t sell your brand – we sell our brand. That’s the business card I give. So how do you as a vendor help me take my name to the market and represent me correctly? Don’t bring in deal registration programs and rebate programs because they kill the market.
Mark Rook That’s incredibly refreshing because that’s not what we want to do.
Andrew McHenry I actually tell vendors, bring in a rebate program and I won’t look at your product. Because then the competition goes out and says, “I’ll sell those negative three points as margin.
Paul Hendry So what then?
Andrew McHenry I would say the vendors around the table spend a shitload of money on deal registration and rebate programs. I would kill those and instead put your money into business generation programs for the resellers.
CRN Let’s bring this back to the Fast50. What advice can the people around the table offer to small, fast-growing resellers?
Nick Verykios Pick the right person who’s backing you. I challenge anyone to audit my accounts. We’re in the 10th year of our business and our bad debts are a rounding error. Why? Because we back our resellers.
Syd Borg For us, diversification was the key to it. When NEC was around in those days, we had best-of-breed products in the ’80s, and we were with them for 26 years. But I saw the writing on the wall and made a move fairly quickly. It’s about being able to read the market.
I was able to read it – luckily. But I suppose luck comes with hard work. We were able to survive those hard times, but if we didn’t diversify and we didn’t have a broad range of products that was outside of IT, I don’t think we would have survived. And remain debt free, I might add – that’s critical.
Ian Poole It’s the school of hard knocks. The best way to learn is to stuff up. When you really stuff up and you lose money, you focus on it the next time around.
The second point is, you’ve got to have a good CFO. It’s essential. Good entrepreneurs are not the best with numbers. I often talk about the accelerator-brake effect. You need someone with an accelerator and somebody with a brake. If you run your business with an accelerator and no brake, you’ll get into trouble.
The third thing is to manage your risk. You’ve always got to be saying, ‘What if?’
Syd Borg I’ve never taken a risk that I couldn’t survive if it went bad. I’ve never borrowed so much I wouldn’t be able to pay it back. The trick was, “If I’ve got this wrong and it falls over, is it going to bring me down? Will it bring PCS down? Will it bring my family down?”
If it won’t and if I could sustain that bit of pain, it’s worth doing.
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