Remarks by Phil Sorgen, Corporate Vice President, Worldwide Partner Channel, in Orlando, Florida, July 15, 2015.
PHIL SORGEN: All right. So the topic we’re going to cover now I’m really looking forward to covering with you, because candidly it is the most common question I get from so many of you as I travel and meet with you around the world. And that question is, when you talk about transformation you’re seeing many partners realizing success in that transformation and what are the attributes of those successful partners?
And then I’m going to invite Pip Marlow, our managing director for Microsoft Australia, and Gavriella Schuster, our general manager for the Microsoft Partner Network, to tell you how we’re helping against the attributes I’m going to share with you.
Now to talk about a successful partner I’m a firm believer in starting with the data. And with the help of IDC, we worked across our partner ecosystem and we kind of grouped the partner ecosystem into two buckets. The first bucket was those partners doing more than 50 percent of their business in the cloud. And the other bucket was those doing less than 50 percent of their business in the cloud.
And it showed some interesting data. It showed that those doing more than 50 percent of their business in the cloud were acquiring new customers at 1.3 times, realizing revenue growth of 1.4 times, and profit growth of 1.5 times the rest of the industry.
And while that was interesting, we decided to take the analysis further. We decided to look at a more forward-looking indicator which is valuation. And that really showed another interesting data point. Again, those partners with more than 50 percent of their business in the cloud were realizing a company valuation of 5 to 14 times EBITDA or earnings before interest, tax, depreciation and amortization, versus the rest of the industry at 2 to 4 times.
Now I shared this data with a few partners just over the last month or so and they said to me, five times EBITDA versus 2 to 4 is interesting, but 14 times, wow, what is driving that? So we decided to look at the partners at the top end of the valuation curve and identify what they were doing. And I want to share with you what we learned.
There were really four characteristics that stood out that were differentiated on a consistent level from the rest of the industry, and those were IP differentiation, digital marketing, how they had tuned their customer acquisition and retention strategies, and how they had adjusted their internal measurement. And I want to drill down into each of these for just a few moments.
So let’s start with IP differentiation. We see today’s successful partners building an annuity business that is based on multi-period or multi-year contracts. But more importantly, this annuity business is rooted in their first-party IP. Their own capability is a key component of the solution. They’re developing an innovation culture. They know that it sets them apart from their competitors. And it’s a key driver of profitability.
Now the number of partners that we see building their own IP is steadily increasing. They’re realizing new revenue streams out of this. Now I want to also be clear that there are multiple ways to monetize your own IP. It could be a SaaS extension that you package and sell as a subscription service. It could be your IP integrated into a managed service. It could be developed into repeatable methodologies that extend your project services work.
As I’ve traveled I’ve seen great examples of all of these through partners and I want to share one example of a partner in our ecosystem, and that’s Power Objects. They’re a partner that has historically sold CRM Online to small businesses, but they decided to build add-ons that extended the value for their customer base. And because these add-ons extended a product that was already flourishing in their portfolio, they were able to turn this new business into a multi-million dollar revenue stream within two years by packaging it as a subscription service that included the Microsoft license or entitlement, training, support, and any mixture of the 21 add-ons that they had created. They called this package Power Success, and since introducing it they’ve grown their business 370 percent.
Now the last point I want to make about the value of building an IP-oriented business is related to how the public cloud enhances this opportunity. Our industry has always rewarded companies that created unique IP that customers valued with higher than average margins. But the public cloud has enabled these same companies to develop and distribute their applications and their IP even more efficiently and cost-effectively, and it’s made these solutions more discoverable to more customers than ever before.
So the bottom line is, if you’re establishing an annuity business with longer-term contracts, with more of your own first-party IP to extend the Microsoft Cloud Platform, these partners are realizing greater valuation.
So let’s talk about the second one. The second one is in the area of digital marketing. And when I say digital marketing, I’m talking about beyond SCO and SCM, I’m talking about establishing a digital profile. I’m talking about using assets like social to build your business. I’m talking about using reputation engines and peer reviews to establish your credibility. And to understand why this is such a differentiator, it’s important to look at how customers have changed with the growth of cloud solutions.
First, we know the buyer is changing. Now we all know that IT investments are not only coming from IT departments from a decision-making perspective. As a matter of fact, IDC predicts by 2016 line of business executives will play a direct role in 80 percent of all net new IT investments.
The second area of change is how companies are finding solutions. They’re more likely to search online and use peer review and reputation engines and do research before they’ve even been involved with a partner or vendor.
It’s for these reasons that it’s so important that your digital profile connects you to potential buyers that you don’t have a relationship with, whether it’s actually an existing customer or a new customer, or it’s one in your local geography or one in another part of the world that you could potentially do business in.
I want to share another example of a partner that has invested heavily in digital marketing, and that’s Palmetto Technology. They realized back in 2010 that the old ways of marketing were not going to meet their needs for growing their cloud business, so they invested in digital marketing across multiple methodologies and multiple medias.
I want to talk about one in particular, though. As part of their SCO strategy, they funneled their traffic into an Office 365 microsite that they had developed. And when users went to this site, they could consume their own information around the product. They could learn about customer success stories. But they had an added benefit of being greeted by a Palmetto team member. And that team member engaged the customer and tried to develop them into a prospect, and then routed that prospect into their lead and sales engine. It was a great example of digital meeting live connection and ultimately fueling their sales funnel. Within 12 months of introducing this strategy, they saw a 1,300 percent ROI on this digital marketing investment.
We see Palmetto Technologies as part of a growing group of digital savvy partners who recognize that this new way that customers are seeking solutions exposes them to more competitors, but at the same time expands their total addressable market exponentially.
Now, let’s move to customer acquisition and retention. The ability to span multiple markets and exploit first-party IP through online scale is a forcing function to change how to go after your new customers. You have to move customers from marketing or Web interest to capturing the lead to very quick, rapid, immediate connection to velocity through the sales funnel. It has to be an integrated sales and marketing engine.
And a partner example I want to use now is CCB Technology. They saw the opportunity with the introduction of a new managed service that was being delivered as a shared service. And it gave them the opportunity to centralize their engineering resources. And they decided to route their traffic through their marketing efforts to a virtual help desk that engaged their engineering resources to create a really positive trusted first touch. And then those engineering resources provided a warm handoff to a centralized group of sellers who sold over the phone.
Since introducing this approach to selling their managed services their overall services business has grown in 18 months over 150 percent. Now CCB technology views customer acquisition from a standpoint of connecting their marketing efforts to a centralized focus to span the markets they could pursue. But, they’re also part of a group of partners that recognize that the greatest value in cloud economics is actually the lifetime customer value of the customers that you secure. And that retention is critical and you have to retool your processes to ensure that you have a strategy around retention. Every one of the partners in this category that we were evaluating had great retention programs, because once you’ve got them to the Web, or to the cloud you have to keep them and then you get an opportunity to up-sell and cross-sell, not only our solutions but that innovation pipeline that you’re creating.
So when you’ve transformed your product you’ve transformed your marketing and you’ve adjusted your customer acquisition and retention strategy, you have to look at your internal measurement. And partners who have been successful have realigned these measurements to the future business that they’re trying to secure. And I’ll touch on one thing in particular. Changing the compensation models for sellers to support an annuity or recurring business from what might have been historically a one-time initial product or project sale is critical.
The initial sale in a subscription or managed service is sometimes less revenue, but it’s significantly more revenue over time. If your leadership or your frontline sellers are not compensated for this opportunity, it’s quite likely your transformation could stall. One of our partners Crayon shared with us how they felt it was critically important to incentivize their sellers on cloud services, which they wanted to be a growing part of their portfolio. So they looked at their approach and went from a total quota-based model to a portfolio percentage growth model, and this really accomplished two things for them.
One it ensured that max earnings were achieved through the right mix of solutions that they were trying to sell. But, second it ensured that they were putting a cloud incentive with their sellers every single month given the revenue recognition realities of a subscription model. They also tuned their leadership team’s dashboard and by doing these two things it made an impact on their bottom line. As a matter of fact, they saw three to four times increase in margins when they were moving their traditional business to cloud businesses.
So the bottom line is when you build first-party IP and extend Microsoft’s public cloud platform, when you establish a digital marketing strategy that exposes you to more customers and different buyers that you may not have a relationship with, when you’ve tuned your customer acquisition and retention strategy, and when you’ve built your internal measurement, you have a great opportunity for success and that’s what we saw as the differentiators in those that were at the highest end of that valuation curve.
So when you leave here I encourage you to start benchmarking yourself against those four things. Determine what you think is best in class. Assess where you think you are today, and build the plan that moves you to the standards of best in class. Stay in touch with us, because we’re here to help. And on that note I’m happy to announce that we’re offering a new tool to accelerate your transformation. It’s called the Sure Step Profitability Benchmark tool, and it will allow you to self-assess what stage of the cloud transformation journey you’re at and point you to business practices that will help you at each stage of the journey.
This is available today on the MPN portal, and I encourage you to go take a look. So I hope what I’ve shared today motivates you to think about the opportunity and the things you can do with your leadership team to make an impact in your business immediately.
So next we’re going to talk about how we’re going to help you every step of the way. And to do that Pip Marlow is going to start by discussing how we’re building on your success at the local level. But, first I want to share a short video that shares a couple of moments that we spent with the partners I just talked about. It’s been great spending time with you. I look forward to seeing you all at the partner celebration tonight so we can celebrate your achievements and enjoy the rest of the day.
Thank you. (Applause.)