Resellers: Cloud is BIG, but it's a sales commission minefield
Maybe that's why market has been slow to pick up?
We’ve all read about how cloud computing is "more than just a buzzword" or a passing phase. And we’re all well-versed in selling the benefits of cloud and managed services in terms of cost-savings, flexibility, managing complex tasks and only paying for what you use.
There have also been plenty of wise words written about how the cloud brings a predictable revenue stream and therefore some degree of stability to resellers’ businesses that can help with cash-flow management and business planning. So when it comes to building a financial case for cloud, it’s good news all round for businesses, particularly those with no prior experience in selling rolling contracts.
But is it? The one thing that no one seems to be talking about is what the cloud means for the hardy channel salespeople at the front line. I don’t mean the difference between margin on tin versus services – that’s been well documented and resellers have long recognised the benefits of support contracts and other value-added services. What I’m talking about is the six-ton grey beast with a long trunk sitting in the corner: commission payments on cloud and managed services contracts.
Think about it. If you have the choice of renewing a whole bunch of on-premise licences and earning a big fat 15 per cent on the deal, would you want to swap it for 36 very regular, very predictable, very small payments? Of course, multiplied up when you’re selling dozens of contracts, these payments could be quite substantial, but in the early days of selling cloud, ringing the bell on the sales floor becomes more of a tinkle on a triangle.
To find out if selling cloud did present any issues in terms of motivation and sales performance, I asked a handful of resellers – all of whom are actively selling either their own cloud or managed services, third-party solutions, or a combination of the two. What was interesting was just how diverse the response was. Irrespective of size, some favour a lump sum commission at the start of the contract, others pay commission quarterly and some pay monthly over the course of the contract.
One size doesn’t fit all
For some resellers, including some of the larger, established players who have developed their own managed services rather than offering third-party solutions, the up-front commission approach appears to be popular. The advantage to the sales person is obvious – a big incentive to seal the deal rewarded by immediate recognition and remuneration. So no change there. The downside, however, is felt by the employer rather than by the employee. While the revenue associated with the contract may be guaranteed for several years, it is significantly lower month on month than a single deal would be, therefore creating a short-term loss for the business. For the larger, established players, this may not pose a problem. For smaller, boutique resellers, this approach can create short-term cash-flow issues and therefore may be less attractive.
Long-term deals and additional incentives
Mark Evans, director at IT services provider Imerja, says its approach to sales incentives reflects the industries it serves: “As much of our business relates to managed, multi-year contracts for public sector organisations, our sales teams are encouraged to not only secure long-term deals that are beneficial to our clients, but also payment terms that favour the business,” says Evans.
In addition to a commission scheme that favours contracts that are billed annually in advance, the company periodically offers capacity-related incentives to raise the use of its data centres.
Recurring revenue vs short-term book loss
Despite running a smaller, specialist security consultancy, Tim Chambers of Primosec subscribes to a similar view. “I’m a big fan of the ‘recurring revenue’ model because as a business owner knowing there is a regular margin stream for a period of time allows me to apportion this directly against certain recurring business expenditures," he says. "I think of it very simply. For example, if a deal brings in £250 a month margin for three years, that may cover the cost of the office postage and stationery for the next three years. It’s easy to look at business this way when you’re small.”
When it comes to sales commissions, however, Chambers bases these on contract margin values, irrespective of when the business receives the income. While this may lead to a short-term book loss, it doesn’t appear to provide any disincentive to sell a solution, as commissions are still paid out in the same way as before. “I don’t think there is any other way of this working,“ he says, “as it ensures full commitment from sales and – as cloud contracts can often be a longer term than annually maintained solutions – there could actually be a greater incentive to sell these from a commission perspective.”
Initially I thought that the need to review commission and remuneration schemes might be one of the reasons why some resellers have been slow to adopt cloud-based solutions into their businesses. It appears this isn’t always the case. David Lannin, managing director of IT security outfit Assurix, doesn’t believe that smaller, regular payments are an obstacle to selling cloud. “At the end of the day it’s better to sell something than nothing at all,” he says. “Each sales person has their particular strengths and weaknesses: some have stronger quarters than others, which means that having predictable income is a good thing.” It certainly doesn’t appear to be a de-motivator, especially in a company where the sales force are close to the business and are aware of operational costs and overall profitability.
So, despite the fact that we’re all happy talking about the benefits of the cloud for the channel and our clients’ businesses, it does appear we’re quite reserved when it comes to revealing what it means to the people who have to sell it, even though the outlook for sales is very promising.
I’ve yet to explore the wider HR implications – for example when salespeople leave an organisation after receiving their commission up front. Some have suggested that contracts are auctioned off to the highest bidder. Also, what happens if the cloud doesn’t work out for a client and they terminate a contract early – should the commission be paid back or the reseller take the hit? “Some organisations have just been too hasty and have rushed moving their business into the cloud, and on occasions they then need help to unravel themselves,” explained Mark Evans. “This is where it pays to have a roll-back plan to minimise disruption – not only for the client, but also for your own business.”
I believe there’s plenty more to be said on this subject – what do you think? ®