How Salesforce Convinced The Channel That No Software Licensing Margins Are No Problem

Back in the early days of the cloud, a little startup called Salesforce came along that saw the new software-delivery paradigm as justification for breaking the conventional rules of doing business.

Among its many departures from industry orthodoxy was a channel program that eschewed software licensing resale margins, a partner compensation structure that on its face appeared hostile to the time-honored VAR business model.

But emphasizing the "value-add" and downplaying the "reseller" turned out not to be a death knell for the CRM vendor's channel ambitions; the nontraditional model in no way impeded Salesforce from building what today is a thriving ecosystem with hundreds of dedicated implementation partners.

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Instead, Salesforce earned partner loyalty by promoting a services-based compensation model fueled by frequent releases of its Software-as-a-Service products, opportunities to build highly customized solutions by extending its platform and an early app store for distributing unique IP.

Chris Heineken, chief operating officer at Appirio, a systems integrator that was incubated inside Salesforce headquarters in San Francisco, told CRN that Salesforce extended the disruptive nature of the cloud into the channel, changing the game of how partners developed and delivered services.

"A lot of the innovation they've done in the channel is directly related to the innovation they've done in the software space," Heineken said.

As someone who spent years working with other vendors, Heineken found the model refreshing when he first encountered it more than a decade ago.

"As a systems integrator in the Oracle space I was always less interested in reselling because it was distracting," Heineken told CRN. When trying to get his teams focused on integration projects delivering business outcomes, "reselling software was just kind of noise."

Salesforce, in its startup phase, appealed to such like-minded channel pros and presented ’a very open on-boarding environment’ for companies like Appirio, he said, spawning an entire class of solution providers that scaled with the CRM vendor.

That first wave of successful partners realized early on that to win market share, differentiate their businesses and become profitable, they had to deliver solutions more advanced than simply selling licenses by developing unique offerings and packaging service elements, Heineken said.

The Early Days

Glen Stoffel, vice president at Bluewolf, a Salesforce integrator recently purchased by IBM, started working around the Salesforce ecosystem in 2001, when the vendor only had about 150 employees.

The dynamic was a total break from the legacy approach, Stoffel told CRN, and small, nimble integrators experimented with every engagement.

’Because of the platform, and the cloud, it was so much easier and faster to go and execute. The size of the engagement was just smaller,’ Stoffel said. ’That's great for the consumer, but not great for a business model predicated [on the fact] that a partner won't get out of bed for a less than $5 million deal.’

And because Salesforce-derived resale margins never existed, those vanguard partners never felt like they were missing out on anything -- not unless they were trying to convert a Microsoft practice into a Salesforce one, Stoffel said.

"Several of us grew up in the space, worked our way upmarket to bigger and more-complex deals," he said. "We figured out how to make money on small deals and continued to keep that discipline as we got into larger and larger engagements.’

The key was implementing sophisticated behind-the-scenes operations.

"The block and tackle of professional services is all about managing them and keeping them billable. Driving value so there's a repeatability. Getting into ongoing, renewable, annualized contracts for a portion of the business,’ he told CRN.

Neeracha Taychakhoonavudh, Salesforce's senior vice president for its partner program, told CRN she's seen the larger channel trend toward the Salesforce model over the past two years in which she's held her current position as channel chief.

The Salesforce model — when first introduced and still to this day — requires a change from an on-premises to cloud mind-set, Taychakhoonavudh said, and "it's hard for a lot of companies to do that."

"It's not margin on moving units of stuff," Taychakhoonavudh said. "It's advisory service, integration service, change management service."

If the first question from a potential partner is about referral fees, "that's kind of a sure sign that they're thinking in a very different way than we expect our partners to work," Taychakhoonavudh said.

But modern IT consultancies, in tune with the latest computing trends and absent of legacy baggage, care about the long-term play of offering services, integration and ongoing customer relationships more than the one-and-done gains from a large capital expenditure for standing up a single project.

"You may not get your up-front bump, but [with Salesforce] you get this ongoing annuity with the customer," Taychakhoonavudh said.

Innovating With AppExchange

To prove the efficacy of its channel model, Salesforce recruited nontraditional VARs who weren't geared to reselling software, but instead were looking for opportunities to drive integration and consulting revenue.

’It was certainly very innovative compared to typical on-premises sales remuneration,’ Marilyn Carr, director of software channels and ecosystems research at IDC, told CRN. ’But of course SaaS is a different game and, as a non-legacy software vendor player, Salesforce could write its own rules.’

An important innovation that spurred that burgeoning channel was the AppExchange, an online marketplace for third-party software the vendor introduced a decade ago, said Carr.

AppExchange added a potential revenue source by enabling partners of all types to sell unique solutions they developed on the platform that could be bolted onto the core Salesforce products, Carr said.

IDC estimates that 70 percent of Salesforce customers have installed at least one app from the software marketplace, she said.

Appirio's Heineken said the AppExchange immediately buttressed Salesforce's ecosystem with another means to take advantage of the cloud model and the development platform. Many systems integrators also became ISVs, embracing the chance to sell to a larger market the reusable IP they created for earlier clients.

The AppExchange ’opened the entrepreneurial environment’ and boosted many of the practices that now stand out among Salesforce's partner landscape, Heineken said.

Avanish Sahai, currently the channel chief at Salesforce technology partner InsideSales, from 2009 to 2014 held the position of global vice president of ISV and channel alliances at Salesforce, running the AppExchange in those years.

The goal, he told CRN, was to foster a channel where partners would create tools, services and custom integrations on top of the Salesforce platform.

"In the on-prem world, you had resellers, distributors, a multitier channel," Sahai told CRN. "The cloud completely changed that."

When implementing solutions where all of the infrastructure ran in the cloud, ISVs, services providers and systems integrators had to think differently about structuring their relationships with clients, Sahai told CRN.

Eventually, the world's largest IT consultants — companies like Deloitte, Accenture and Cognizant — all substantially invested in building cloud and CRM practices embracing those engagement strategies and ’a pretty fundamental change in the delivery model and economic model,’ Sahai said.

Those global giants, just like the Salesforce-aligned channel startups, had to master faster cycles, creating solution packs in weeks or months rather than quarters and years.

’The role of the partner is to define how the pieces sit together, how data flows between various clouds, how security is addressed,’ he said. ’But fundamentally it's a re-architecting of enterprise architecture.’

Essentially, partners need to innovative.

Which might not be easy for some, Sahai conceded. But when considering lifetime proceeds, moving to a value-driven model instead of collecting a percentage as a middleman is more lucrative for the channel.

The ’resale model is starting to take a back seat as more of an innovation and integration model starts to kick in,’ Sahai told CRN.

A Different Mentality

Bluewolf's Stoffel said he sees many customers turned off by the legacy channel model, which they believe biases IT consultants to specific technologies, unduly influencing the advice they deliver.

It's ultimately better for customers when their solution providers don't have direct financial ties to selling software licenses, Stoffel said.

"It's a different mentality,’ he told CRN. One that ’puts, in the long run, a firm like us more in control of our own destiny.’

For Bluewolf and many of its peers, that destiny has proven, by channel standards, uncommonly lucrative.

IBM reportedly paid more than $200 million for the systems integrator earlier this year. Late last year, Accenture shelled out somewhere close to $400 million for another Salesforce channel powerhouse, Cloud Sherpas, which itself had acquired early Salesforce partner GlobalOne.

The growing list of financial triumphs in the Salesforce channel doesn't mean, by any stretch, the model has been uniformly embraced by the industry — the vast majority of vendors still pay their partners front-end commissions, and most partners wouldn't have it any other way.

But the approach the cloud-software vendor pioneered more than 15 years ago has influenced a new generation of born-in-the-cloud solution providers, including many adopting emerging strategic service provider or cloud broker models.

Those companies are abandoning calcified vendor allegiances for more flexible practices delivering technical and managed services bolstered by their own industry expertise and intellectual property.

Carr told CRN that IDC has seen an overall trend in the channel away from reliance on resale revenue and toward selling services and packaged IP.

It's important to remember, however, that rival vendors can have very different sales dynamics that influence their partner compensation models.

Salesforce derives a small fraction of revenue from indirect sales, whereas a company like Microsoft sees most of its business go through partners.

’We wouldn't expect any vendor that relies heavily on indirect sales to stop compensating their partners for resale,’ Carr said. ’In general, the Salesforce model is uniquely suited to their circumstance and ecosystem.’

Taychakhoonavudh told CRN that the celebration of the 10th anniversary of AppExchange earlier this year got Salesforce's channel leaders reminiscing.

"We had almost a blank slate in the beginning," Salesforce's channel chief said. "Most other programs measured partners based only on the revenue they bring.’

But Salesforce opted for giving criteria like the number of engagements, bookings and revenue touched by a consulting partner equal weight to the expertise that partner brought to customers, she told CRN.

That might be a familiar metric for global integrators like Appirio and Bluewolf, companies founded under the Salesforce umbrella, Taychakhoonavudh said. But many longstanding IT practices aligned with other vendors are just now coming to terms with being evaluated by the value they can add to a deal.

And some of those solution providers are also gaining comfort with the idea of abandoning front-end commissions, realizing there's greater profit in selling higher-level services while maintaining technological neutrality, with less paperwork and contracts bogging them down to boot.

While Salesforce certainly deserves credit for ushering in that model, "it wasn't some grand plan we had," Taychakhoonavudh told CRN.

"With the early partners, as the business evolved, we kind of just organically grew to where we are now,’ she said.