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Developing the subscription model

Customers and channel partners are moving to a world where flexible monthly payments are the norm, but that has meant distribution has had to take steps to support that shift

With impetus growing for channel partners to move more fully to a subscription model, distributors are busy thrashing out ways to make the process easier. But how can they provide the flexibility partners desire and what are they offering to help partners manage their subscription business?

In recent months, a number of distributors, including Arrow Enterprise Computing, Westcon-Comstor and Nuvias, have unveiled initiatives aimed at making the adoption of subscription models smoother.

Commenting on the launch of its Smart Terms programme in the summer, Nick Bannister, Arrow enterprise computing solutions (Arrow ECS) vice-president for sales in the UK and Ireland, told MicroScope: “Partners need non-standard terms to secure deals and manage their working capital. Arrow Smart Terms aims to support the channel by allowing customers to order from partners under a periodic billing methodology and then mirroring that up into the supply chain.”

A few weeks earlier, Westcon-Comstor CEO David Grant described the distributor’s Flex programme as “the most successful initiative” it has launched, adding: “We’ve got lots of interest, lots of enquiries. It is interesting to the vendors and to the partners, so it’s been very successful.”

To start with the basics. Simon Bennett, director, enterprise software and cloud, UK and Ireland at Tech Data, says the starting point for any reseller partner has to be an assessment of what you are trying to achieve as a business and how that aligns with your company strategy. It’s the first question the distributor asks when it starts talking to partners about their cloud and subscription plans.

“It’s important to understand where partners are now, and where they want to get to,” he states. “To know what percentage of their business today is classed as software licensing and/or licensing in a subscription model. How much of a focus do they want to put on annuity-driven business and/or cloud consumption through hyperscalers? Are they looking at a true IaaS [infrastructure-as-a-service] play or looking to build a new solution/managed service to take to market?”

Overcoming cash flow issues

Arrow ECS’s Bannister acknowledges that “the transition to subscription-based transactions can create challenges for channel partners, particularly around cash management and payment terms”. Smart Terms has been created, he says, “to help manage cash flow and provide the flexibility needed to negotiate and close sales opportunities”.

The objective is to enable partners and their customers to “take advantage of the bigger discounts and fixed support prices available for subscription, support and hardware, providing the opportunity to match the deferred payment terms covering the period beyond standard terms for periods of up to five years”.

Dirk De Wolf, director for customer solutions – services Europe at Tech Data, proffers a ringing endorsement of distributors, arguing they offer “unmatched, unique expertise and specialised services with their operational and logistical strength to make trading easier”. They allow partners to scale up or down throughout the course of their subscription term – enabling them to adjust to changing business conditions.

He argues the subscription model provides channel partners with a number of benefits. These include “expedited cash flow relief – up-front, in-full payments significantly reducing the amount of cash days – and an accelerated refresh cycle, which enhances and extends customer loyalty through automatic re-engagement upon subscription end to refresh devices or renew subscription”. It also helps them to expand their capabilities by delivering specialised services that help drive productivity and decrease costs.

“[Distributors offer] unmatched, unique expertise and specialised services with their operational and logistical strength to make trading easier”

Dirk De Wolf, Tech Data

John Nolan, managing director at Westcon UK and Ireland, accepts that subscription models can cause cash flow issues for partners because there is often a disconnect between how the vendor likes to bill and how the user likes to be billed. “Many vendors don’t offer their products on a subscription basis, or at least not their whole portfolio, so partners bear the financial risk because they must cover the upfront cost of the solution and reclaim the charge by billing the end user over time,” he says.

Nolan believes distributors “hold unique value because they can alleviate these pressures”. They can finance the purchase and align the billing cycle with the customer’s, allowing partners to take solutions a vendor isn’t offering as a subscription and offer them to a user via a subscription model. “This gives partners more flexibility with the technology that they have on offer and the purchasing options available to users,” he adds.

“Many vendors don’t offer their products on a subscription basis so partners bear the financial risk because they must cover the upfront cost of the solution and reclaim the charge by billing the end user over time”
John Nolan, Westcon UK&I

Simplifying and educating

Offering a vendor perspective, Robin van Stroe, European partner sales director at Canon EMEA, argues that “simplification and education are the two most valuable things distributors and vendors can offer partners looking to adopt a subscription model”. More and more customers are keen to adopt as-a-service propositions, he adds, but “they are looking for true value in what they consume”.

Van Stroe says vendors need to “work closely with partners to deliver the most up-to-date technology in an easy and convenient way”, adding that “by integrating with partner back-office processes and offering end-to-end subscription automation, vendors can simplify delivery of services, empowering partners to meet customer needs at every subscription term”.

Providing training and incentives is another way to engage partners. Vendor-run education and incentive programmes can help partners “to truly understand the subscription model and empower them to leverage it effectively to meet customer demand and gain a competitive edge”, van Stroe claims.

According to Rob Tomlin, vice-president of channel sales UK at Dell Technologies, as-a-service “offers a huge opportunity for partners and customers to simplify IT management and accelerate business results”.

“It empowers partners with a new way to sell and contract technology, and technology vendors and distributors are helping partners meet customers where they are with their digital transformation and acquisition options,” he says, adding that as-a-service offerings provide partners and customers “with a robust level of options around infrastructure, services and consumption choices, which can help customers streamline their transformational initiatives”.

For its part, Dell is trying to help partners “sell and integrate new as-a-service offerings with confidence by providing distributors with dedicated pre-sales learning paths for their product portfolios, arming them with the knowledge needed to educate partners and drive as-a-service to the masses”. Dell also offers partners training, marketing and sales tools to help drive as-a-service revenue. This includes marketing campaigns and collateral, conversation guides and training on how to sell and manage annuity-based services.

Popularity and pricing

Tony Craythorne, chief revenue officer at Zadara, makes the salient point that the popularity of as-a-service is likely to increase when the going gets tough. “A subscription model is one of the most popular models in the industry – it has been for some time. But in times of economic uncertainty, it gains in popularity as partners can buy the services they need – and as they go along, they can easily increase, reduce or even pause their services at any time,” he notes.

But for a subscription model to make sense, Craythorne says “partners need insight into the menu of services offered by the distributor”, along with “transparent, clear pricing, so they know what they are paying for at all times”.

Aslam Jamal, vice-president of worldwide channels at Informatica, acknowledges that the shift to subscription-based models has “meant an overhaul in pricing structures and the sales cycle all the way to the back-end billing processes” for partners.

He argues that “the key to remaining profitable, and indeed increasing the average spend, is remaining close to the customer”. It’s no longer an annual transaction “but rather a consistent dialogue”. This links to the “exceptional value that partners bring as they nurture and maintain strong customer relationships”.

“The new model creates significant opportunities for the channel to develop new service lines, tailor service offerings to customers and create new, regular revenue streams,” he adds.

Juggling costs

From a channel perspective, Michael O’Hara, managing director at DataSolutions, is not convinced that subscription models cause a significant cash flow issue for resellers. They typically only have to purchase from the distributor and sell on a monthly subscription, including their margin, to customers. “In these cases, there are no upfront costs for the reseller as the costs are borne by the vendor,” he notes.

Where it can cause issues is when resellers offer their own subscription service, such as via a desktop- or device-as-a-service to corporate customers, because they “have the upfront costs of building the infrastructure, but their revenue streams come in monthly, spread over multiple years”.

The challenge for resellers is that ideally all the cost layers and capital outlay of their subscription offering should “be billed to them monthly in line with the income streams they receive from selling their service”. One possible solution, he suggests, is to lease the costs of the infrastructure.

O’Hara believes one area where distributors can offer real value to their reseller partners is by building “cloud success teams” to support the cloud subscription products they distribute. “These teams work with reseller partners to ensure the activation and utilisation of subscriptions by end user corporates to ultimately reduce the level of churn at renewal time,” he says.

In a bid to help improve reseller profitability as they move to a subscription model, O’Hara says several vendors have changed how partners get margins from upfront to back-end rebates aligned to activation and utilisation of licences. Rebates are often based on achieving sales and technical accreditations so distributors can work to ensure resellers are properly certified to maximise their revenues. Also, where vendors might only offer a monthly billing model, distributors can offer 12-month contracts to resellers if required.

Building in payment flexibility

Payment can be a concern for partners, and distributors are working on ways to address it. Arrow ECS’s Bannister says the Smart Terms programme has been designed to accommodate flexible payment terms. “It isn’t a lease or loan agreement, but a contractual obligation between Arrow and its channel partner to make payments at specific intervals for an order – this could be annually, quarterly, monthly, or a single short-term delay,” he says.

Matching customer cash flows with Arrow billing allows channel partners to reconcile by customer, ensuring customer expectations are met and margins are maintained, he claims.

Westcon-Comstor’s Nolan argues that flexible payment solutions are one of the principal ways distributors can help channel partners when it comes to subscription services. “These solutions allow customers to maximise their capital, unlock vendor discounts and get the best value for their money, giving them faster access to the latest technology for the best price,” he states.

“The first partners to embrace the subscription model are already reaping its benefits while becoming the new leaders in the market”
Simon Pearce, Netwrix

Partners also need more support on how they manage and grow their subscription services. Distributors are well placed to help them in this process by taking advantage of sales analytics, trends and insights through partner services. “They can be supported by a suite of tools that can help them identify what subscriptions their customers are using and leverage data to identify new opportunities based on where their customers are in the lifecycle,” adds Nolan.

Playing the long game

Simon Pearce, vice-president of EMEA sales at Netwrix, observes that the subscription model benefits partners that play the long game. The change can cause some cash flow pain in the short term, for the first year, he says, adding that: “Ultimately, it pays dividends starting from the second year and onwards where the partner has a larger recurring business. The first partners to embrace the subscription model are already reaping its benefits while becoming the new leaders in the market.”

Pearce suggests vendors should give increased margins to partners that bring deal registrations. If a customer agrees to a multi-year commitment, the vendor should give additional discount incentives to help a partner get the deal over the line. “Generally, these deals can be paid annually with a multi-year commitment that can help the partner to create a predictable cash flow,” he says. “We also want the partner to get more lines of revenue around training and consulting, which is why some vendors have built online training programmes to support their partners.”

Consistent collaboration between the partner and vendor is key to ensure that once a prospect becomes a customer, it will become a long-term relationship. “It is crucial for vendors to be fair on margins and deal registration, and to support the partner to ensure the ‘trusted advisor’ partner can take advantage of additional lines of business with the customer, such as professional services,” Pearce concludes.

Earlier this year, Westcon-Comstor’s Grant neatly summed up the important role distributors will play in a world that is increasingly software and subscription-based, with “complete management of subscriptions [and] utilisation of consumption analytics, allowing the partners to look at the end-user customer subscriptions by the vendor or account [and] work out whether they want to upgrade”.

As he told MicroScope in July: “That’s the whole subscription management and the ability for the partners to order hardware, software and cloud all in one place, all in one transaction.”

In other words, even as the IT landscape evolves towards as-a-service and subscription-based models, distributors are still being called on to fulfil the same function they’ve always done.

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