Commonly used definitions in the software industry front office

Commonly Used Definitions in the Software Industry Front Office

Whitepaper from TBK Consult

AuthorHans Peter Bech, M.Sc. (econ)

© Hans Peter Bech 2014

First edition

Unless otherwise indicated, Hans Peter Bech copyrights all materials on these pages. All rights reserved. No part of these pages, either text or image may be used for any purpose other than personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission, in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal use, is strictly prohibited without prior written permission.

Published by TBK Publishing® (a division of TBK Consult Holding ApS)

Strandvejen 724 2930 KlampenborgDenmark CVR: DK31935741www.tbkpublishing.com

ISBN: 978-87-93116-04-7

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Targeted audience 4

Abstract 4

Author 4

Acknowledgements 4

Channel 5

Business Partner 5

ISV 6

VAR 6

Reseller 7

VAD 7

Distributor 7

OEM 8

White Labelling 8

Sales Agent 8

System Integrator 9

Subsidiary 9

Joint Venture 10

Franchise 10

Master Franchise 11

About the author 15

Table of contents:

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The target audience for this whitepaper is the board of directors, the CEO and the sales and marketing executives of software driven companies1 with ambitions for achieving global market dominance. The whitepaper primarily addresses the challenges of software companies with long value chains.

This whitepaper provides a definition for the most commonly used abbreviations and terms used in the software industry front office.

None of the definitions are “scientific” and authorized by anybody. They are used by the software industry in many variations and do not always have the same meaning to everyone.

The definitions provided in this document are the ones used by TBK Consult worldwide.

Hans Peter Bech

Design and lay-out: Flier Disainistuudio, Tallinn, Estonia, www.flier.ee

Proof reading: Emma Crabtree, [email protected]

1 Independent Software Vendors (ISVs)

Targeted audience

Abstract

Acknowledgements

Author

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In a business model2 context the Channel is the way you take (sell) your products and services to your customers.

In the software industry the term Channel is often used to describe the situation where independent 3rd party companies resell the software vendor's products to the final customer.

In order to comply with the business model definition the Channel must promote your brand to the customers. The customers must perceive the software vendor as their “supplier” even though the delivery, the invoice and the support comes through an independent 3rd party company.

If your brand is not visible to the reseller’s customer, then the reseller is not your channel, but rather your final customer.

Although the term “Business Partner” indicates some kind of partnership3 this is almost never the case when the term is used in the software industry.

In the software industry the term Business Partner is used casually for any relationship where you work together as 3rd parties each responsible for your own activities and your own P&L.

2 As defined by Alexander Osterwalder & Yves Pigneur in their book ”Business Model Generation,” John Wiley & Sons 2010. 3 In a real partnership the partners will somehow share at least the profit and the loss of their joint activities.

What is a Channel Partner?

Business Partner

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Independent Software Vendor is a term used in the software industry for companies developing their own software, which they take to the market under their own brand.

ISVs will typically use software components from other ISVs (or open source components) and thus become target customer segments for these ISVs.

When ISVs are small and less known they may promote that their software runs on the components of more recognized ISV (powered by Microsoft SQL). However, as ISVs grow and gain more market awareness they will suppress the presence of third party components in their promotion.

ISVs can also grow from within the large Value Added Reseller ecosystems. A Value Added Reseller of Microsoft Dynamics AX may have developed a vertical add-on solution, which he produces and sells to other Value Added Resellers. This is an ISV activity, which is often co-branded with the software platform on which it depends.

Because Independent Software Vendors have a strong interest in promoting their own brands and suppress the brands of their suppliers they are not considered a “channel,” but rather a customer segment in their own right.

A Value Added Reseller combines the software products from ISV’s with other products and services providing solutions for his customers.

The VAR has a clear interest promoting the brand of his ISV partners. As a VAR grows his business he may represent several competing ISVs and the ISV brand promotion may receive less attention compared to the promotion of the VAR’s own brand. However, the VAR will always clearly communicate the support of his ISV brands.

Value Added Resellers is a beloved Channel in the software industry.

ISV

VAR

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The reseller is typically “just” reselling the products of the ISVs to the customers.

As the software industry is providing millions of products the value of the reseller can be in marketing and sales making it easy for the customer to find the most appropriate product matching his needs and making it easy for the customer performing the purchase transactions.

Smaller ISVs, especially, with standard products go though resellers leaving them all the sales and marketing “hassle.”

A Value Added Distributor is an independent 3rd part company serving the Reseller, VAR and Systems Integrator community with products from ISVs and the associated services required for successful market management.

The large ISVs such as Oracle, SAP, Microsoft, Adobe etc. all have subsidiaries in most countries in the world. They directly provide the services required to recruit and manage the partner channel and to manage the market in general.

Smaller ISVs may not have the financial capacity to open their own subsidiaries fast enough and will therefore assign the market development and management responsibilities to a VAD. Some markets may be too small to set up dedicated subsidiaries and it then makes sense for the ISV to assign his representation responsibilities to a local VAD.

A Distributor traditionally takes care of order fulfillment for ISVs.

As software is no longer delivered as physical products requiring warehouses and physical logistics, the role of the Distributor in the software industry has changed in the direction of Value Added Distributors.

Reseller

VAD

Distributor

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An Original Equipment Manufacturer will source components from ISVs embed them in his own products and take them to market under his own brand.

Suppliers to an OEM are literally invisible to customers of the OEM. Only very powerful suppliers such as Intel and Microsoft can enforce an “xx inside” branding policy. Most other suppliers will have to live with the anonymity in the final product.

OEMs are clearly not a Channel, but customer segments in their own right.

White Labelling is a variation of the OEM arrangement where the software from an ISV in taken to market under another brand name.

White Labelling occurs where the OEM considers his own brand more valuable than that of the ISV.

White Labelling is not a Channel, but an OEM activity and thus a customer segment in its’ own right.

A Sales Agent is an independent 3rd party company (often just a single person) representing the ISV in the sales activities aimed at winning customers for the ISV’s products.

Very often the Sales Agent is already well established in the market segment in question with good connections to potential customers. In this respect the Sales Agent is acting more as an intermediary or a broker as his main interest is in maintaining his good relationships with the potential customers rather than with the ISVs who come and go.

The Sales Agent typically works on a non-exclusive basis with a fixed monthly retainer and a commission on sales accomplished.

The Sales Agent will serve several ISVs at the same time and allocate his time based on his own assessment of the best opportunities for securing his business.

White Labelling

OEM

Sales Agent

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Being represented by a Sales Agent is not considered appropriate in some markets and can damage the reputation of an ISV. Exceptions are situations of extreme niche markets where the customer cannot expect the ISV to establish a more permanent representation before the first customer has been secured.

A Systems Integrator works on behalf of customers helping them implement and manage IT systems.

There is no formal relationship between ISVs and System Integrators. The software used by the customers is not acquired though the Systems Integrators, but through other sources.

If a Systems Integrator delivers products to his customers then he becomes a Value Added Reseller and is no longer a System Integrator.

This definition may seem tortuous, but there is a substantial difference between being a Value Added Reseller and being a Systems Integrator.

The Systems Integrator is supposed to be working exclusively for the customer. The customer expects that the Systems Integrator is independent of economic interests with third parties. The Systems Integrator cannot maintain his independent status if he has a vested interest in selling software on which he receives a margin.

Systems Integrators are not channel partners, but rather a group of companies that have an indirect influence on the decision making of certain customer segments.

A subsidiary is a fully owned (by the mother company) operation responsible for certain business activities.

All the large ISVs have subsidiaries all over the world taking care of their business interests irrespective of they have a direct or an indirect channel approach to the market.

System Integrator

Subsidiary

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Large VARs, System Integrators, VADs etc. also have a headquarter/subsidiary format for their global operations.

Any company in the software industry affected by local representation must be prepared to establish a headquarter/subsidiary infrastructure if they have ambitions for assuming positions as global market leaders.

A Joint Venture is a business setup with two or more parties sharing the investments and P&L of an operation.

In the software industry front office Joint Ventures are often an intermediate step when moving into a new territory where the incoming party brings the product and the local party brings the infrastructure needed to accelerate market penetration and management.

Joint Ventures are not very popular in the software industry. Although Joint Ventures in theory offer many benefits, they are difficult to operate when the timing of the results are hard to predict. As the outcome of the penetration of new markets is very hard to predict, most companies prefer to appoint an exclusive distributor in a new market and then acquire this distributor when the time is right for a direct representation.

The Franchise format so popular in many businesses has never made any substantial inroad in the software industry.

The format operates with the Franchisee who faces the customers and the Franchisor holding the intellectual property rights to the products and business processes. The Franchisee acquires a license allowing him access to a Franchisor’s proprietary knowledge, processes and trademarks in order to allow him to sell a product or provide a service under the Franchisor’s brand name. In exchange for gaining the franchise, the Franchisee usually pays the franchisor initial start-up and annual licensing fees.

Joint Venture

Franchise

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The main reason for the lack of success in the software industry is the traditional focus on the products and much less on the processes required to find, win and make happy customers (the value chain). ISVs have typically not been able to or have expressed little interested in productizing the business processes required to drive the full value chain.

A Master Franchise represents the Franchisor and is responsible for recruiting and managing Franchisees in a specific geography.

Master Franchise

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About the authorHans Peter Bech has been developing and managing global partner channels in the software industry for more than 30 years.

Hans Peter built the partner channels for companies such as Dataco (now Intel), Mercante, Dansk Data Elektronik (now CSC), RE Technology (now Barco), and Damgaard/Navision (now Microsoft).

As a management consultant Hans Peter has been providing consulting on channel development and management issues to companies such as Microsoft, Danfoss, Proekspert, Jeeves Information Systems, eMailSignature, SoftScan (now Symatec), Netop, EG A/S, CSC Scandihealth and Secunia.

Hans Peter is the author of several whitepapers on channel development and management and he frequently writes articles on the subject.

He started his career as a management consultant in 2003 and founded TBK Consult in 2007. Since then he has built the company to its present position with 24 senior consultants in 16 countries.

Hans Peter oversees the development of TBK Consult as well as performs management consulting assignments for selected clients.

Hans Peter holds an M.Sc. in macroeconomics and political science from the University of Copenhagen. He speaks Danish, English and German and is a certified ValuePerform, ValuePartner and Business Model Generation consultant.

More about Hans Peter Bech

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