Peter Radizeski is Founder and President of RAD-INFO INC. He is an accomplished blogalyst, speaker, author and consultant. He has helped many service providers with sales training, marketing, channel development and business strategy. He is a trusted source of knowledge about the telecom sector. His honest and direct approach make him a refreshing speaker.

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Growth Amid the Music

Atos CEO exits after 5 months. Zendesk CEO exits after failing to sell the company.

Cyber-security firms are laying off. Why? I thought it was a hot solution.

Many service providers do not operate at a profit (just check the financial statements). Some free cash flow, but they lose money every quarter as the SG&A line item keeps expanding. If they are publicly traded, they have access to capital. If they are private, it is more challenging. Right now, it seems that the wide open flow of capital into companies is slowing down due to the economy, rising interest rates, the crypto crash and the stock market slump.

Likely, we will still see layoffs for months to come. Analysts are saying CAGR for UCaaS will be 11-13%. That isn’t enough growth for most of these companies. It will cause more stock price depression and layoffs. Companies with easy access to cash can find great buys right now for inorganic growth. [Cisco, now is the time to buy some UCaaS & CCaaS business!]

I don’t see how any company can have organic growth. The massive amount of musical chairs means that no one is in place long enough to execute on any strategy. When the C-Suite is constantly changing, there isn’t a way to establish strategy, let alone execute on it.

Training of salespeople is non-existent. Salespeople need to know the company (values and mission), the products, the target market, the value proposition and much more to have the confidence to talk to Buyers. This might be a reason so many companies look to the channel. They don’t have to hire and train salespeople.

In the MSP space, both vendors and MSPs have been in a four year cycle of M&A. The latest round has many MSPs uncertain as Datto was acquired by its competitor. [The DOJ is really doing a great job! /sarcasm ]  MSPs were busy with M&A transactions – exiting, merging, buying – which distracts from growth. The vendor M&A adds uncertainty, too.

In the Agent channel, the M&A has also disrupted normal business. Even TSBs are playing musical chairs. I have yet to figure out how these TSBs can handle the growing payroll that they have taken on in the last two years. (Back to the SG&A line items.)

Some programs keep looking for more partners and some are looking for different partners. How about a Profile of a Good Partner? How about aligning a good partner to the segment of the SME that would be a good fit for your services? You probably don’t know that stuff, but it is worth finding out.

You want partners and salespeople to know the Buyer Persona, the Target market, what that target buys from you and why, and the value proposition. This is what any representative of your business needs to know to effectively sell.

With all the moving pieces, organic growth is tough. Companies need to get back to basics in order to set a foundation for a solid sales experience.

These are just a few of the things I am seeing and needed to get it down on a page out of my head. Hence, this blog post. Thanks for reading.

 

The TSB Dilemma

With $650M in private equity money pouring into TSBs and “Super-Agencies”, the question every partner needs to ask: Where is the ROI for the investor coming from?

Most partners won’t think to ask that because they want an M&A transaction and the thought of equity and a new title are more than enough to ink the agreement without the aid of a good lawyer.

Remember TNCI’s Equity Plan? Granted that was 2008 (14 years ago), but it ended in Bankruptcy and unpaid partners.

Another question I would ask: What Value to you bring? Because often the Value explanation is yoga-babble as Prof. Galloway says.

The TSB and the Super-Agency have just three streams for revenue: (1) commissions which they collect and split with you, but they hold the paper; (2) MDF from vendors, which is millions per year at this point with 200-500 vendors in the space; and (3) revenue from resale, like off a marketplace where they resell Microsoft or if they start rebilling services from a vendor, like many CLECs do on the AT&T APEX program.

The ROI on $650M is about one billion dollars. Where exactly is that ROI money coming from within the window that most PE firms operate in (3 years)? Think about that.

No one is building a better mousetrap. There is no Amazon-esque marketplace out there — yes, there are at least 4 firms working to build one – Upstack, AppSmart, Cloudscene and Lightyear. This will eat up hundreds of millions of dollars to build, maintain, secure and transact – and right now, as Lightyear explained to me at EC22, there is a lot of swivel chair and humans to make it work for the customer.

These firms will compete against existing cloud marketplaces like Pax8 and Ingram Blue.  Now if 4 more marketplaces spring up and start getting traction, the next competitor will be Amazon. They already took a swipe at selling broadband about 10 years ago. Amazon also sells Chime and CCaaS. So why isn’t Chime as popular as Zoom if 60% of buyers like to buy off a marketplace?

One big hurdle with a marketplace is that not every vendor wants its prices public. As I wrote earlier, AT&T’s Legal department would call me any time I published AT&T pricing on my blog. This works well for SaaS software sales because it is just ecommerce of licenses. Telecom, data center, security and other managed services are different due to pricing, promotions, ordering from legacy systems, and more. Despite being the largest ISPs in America, Comcast and Charter still need to do a site survey on a spreadsheet before any order is accepted. Voice is easy with new numbers; notsomuch with porting numbers.  There are hurdles every where in the sale of most of the services partners sell. If ecommerce was easy, 8×8, RingCentral and the ISPs would have cut out the indirect channel a while ago.

The final question: Where does the Partner fit in the marketplace? Like a Referral or an Affiliate? Or is it profit share for equity partners?

I left Partners with some good Questions:

  • Where is the ROI on the $650M in PE money coming from?
  • What new revenue stream will the PE powered broker add to help with the ROI?
  • What Value does the broker bring?
  • Is there a commission guarantee?
  • What is the marketplace strategy and where do I as a Partner fit?
  • What vendors are on-board with public pricing?

Partners aren’t dead yet, but don’t make any rash moves – and think these things through. They only have 3 possible income streams — and your commissions are the top one!

 

 

 

As the Channel Turns part 293

In some ways, the major vendors – Lumen, Comcast, AT&T and Spectrum – created the current TSB problem. The TSBs are now too big. They cost millions in MDF. But the vendors wanted to work with just a handful of brokers. Those brokers morphed into what we have today. Now powered by private equity investment and all that entails.

Upstack was going to be a selling agency with a software app to make procuring telecom and cloud easy for businesses. Then they started signing up vendors, like the new “next-gen” agreement with Lumen. (What is next-gen about this agreement?) Upstack is buying partners and now signing direct agreements — and still whistling about the software that is going to amaze buyers.

Upstack doesn’t explain how the partners fit into that software play. They haven’t built out that software yet. We haven’t seen any major vendor allow public display of pricing yet. When I used to blog about AT&T specials, AT&T Legal would track me down and say take it down. Maybe it is different 10+ years later.

My biggest issue with Upstack is commissions. Since they acquired GCN, it has been a nightmare. No on-boarding. Do I have a Channel Manager to help with quotes, orders, commissions? Not that I know of. How do I request quotes? No idea. Commissions? They haven’t gotten them right all year. My personal experience is a laissez faire attitude towards commission questions. Not been a good partner experience (PX).

While the TSBs take on debt and PE money – and try to figure out the mouse trap – vendors are looking elsewhere for growth. More vendors, including Cisco, 8×8 and Masergy, are turning to additional distribution routes to widen their partner bases. Vendors are weighing the pros and cons of joining a marketplace, because they don’t know what partner type works best for them now (or will in the future).

GoTo is a typical vendor looking at the channel. Five years ago, 5% of bookings were coming in from Partners. They were a direct first company. In 2021, 35% of bookings were from Partners. GoTo is aiming for 50% in 2 more years. That is what many vendors are hoping for to get to 50% of sales through an indirect sales avenue – marketplace, ISV, selling partner, affiliate, referral, they don’t care. Just sell my shit!!!! That’s what it all boils down to. Just sell my shit!

Vendors are playing a guessing game on where sales will come from. The big bet was always direct, but in the last three or so years, less companies are making that bet.

Several people have asked me if the solopreneur selling Agent is dead. I don’t think so. Telecom is the one decision that every business puts off for as long as possible. The very thought of dealing with changes, migrations and ports gives many people hives. The smart folks work with a partner – even a solopreneur.

Don’t forget that all kinds of partners are busy with M&A. MSPs and Agencies are busy with selling their company more than selling vendors’ services. It takes months to sell and to on-board/merge and then get down to business. This isn’t growing the pie either. It just moves some of the pie.

There isn’t any growth in the pie. There are less selling partners today than there was two years ago. There will be less two years from now. That is most sectors: MSPs, Agencies, VARs, inter-connects. M&A and retirement are shrinking those numbers.

Without TSBs recruiting new selling partners, all of this M&A means little. The feet on the street are where the sales are. The brokers and Distributors have to recruit new partners, unless they think that the online marketplace will actually replace humans.

There is $650 Million betting on a new mouse trap. A way to capture more business sales of software and telecom. Now if a marketplace did work, why did Amazon stop selling Comcast in just 6 months of trying? Why hasn’t Chime misplaced Zoom? Why did Tech Data or Ingram turn their online portal to direct selling? So many reasons for all of this. Complicated reasons.

Look at CD, which is like a value added distributor plus. CDW is a $20B company with a catalogue, ecommerce, a huge government sales force, an MSP, professional services department and a telecom agency. Why hasn’t CDW gone direct with a marketplace for cloud, data center and networking? Probably because they know that humans are required in the sales of these services.

It boils down to what Buyer is going to procure directly through a marketplace something as complicated as cyber-security, SASE,  or SD-WAN? Aryaka just put a SKU up on AppSmart. Aryaka sells SD-WAN, but it is a flavor of SD-WAN akin to Network as a Service. How would a Buyer know that they wanted Aryaka instead of Cato or Verizon? I don’t know. I wonder how it will play out. I wonder how partners will work with marketplaces. I have a feeling that this all comes tumbling down and partners get screwed and have to start over.

 

Broker Value: What is it?

On the TSB State of the Channel webinar yesterday hosted by AireSpring and moderated by Josh Anderson of Acuity, the panel of brokers must have said Value a hundred times.

This was what they said about adding Value: lines of code, financial backing with low interest, demand generation, tool sets, catalog expansion and sales support.

If they are automating everything, what sales support? And how does a Channel Manager handle over 100 partners? That support does NOT scale!

These all smell to me like trying to hide the fact that deep down you know that you are just commission brokers holding the vendor contract and living off of MDF.

Here’s how: why do they keep adding vendors to the portfolio? Isn’t 200 enough? Or 300? You get into Long Tail vendors and regional players (like Logix or Callis who only have network in one or two states).

Well, here’s the reality of it: The TSB holds an event with 10 vendors paying at least $1000 a piece and -oops! — only 15 partners attend. The cost of the event is maybe $3K and the TSB pockets $7K! They pay 1% to the events person and use the rest to add that Value. They need to keep recruiting vendors because (1) you can only burn vendors so many times with the $1K before they stop paying; and (2) you need to keep the MDF coming in or the business model fails.

AppSmart said on the webinar that they have 450 engineers. That’s easily $30M in annual payroll. Then there are the commission teams, channel managers, sales engineers, sales support people and so on. That is a lot of payroll!

The commissions team doesn’t scale. The more companies in the portfolio, the more humans are needed to track and collect commissions. And this is the PRIMARY VALUE that a broker brings to the Partner.

The Self-Service options will improve things for the Partner. “Use the people & tech  order to better serve the customers,” said one panelist. Providing certain tools to the partner, like fiber locator, so the partner doesn’t need to get a user license, is the value?

Again, the value lies in the commissions. It is also one of the main contracted sources of revenue for the brokers, since the MDF is not contracted or guaranteed.

On LinkedIn, there was a discussion about the Value of TSBs amid the merger between PlanetOne and Avant. Comcast’s channel head thinks they add more value than commissions, but wouldn’t articulate what. But since Drew at Avant said in the webinar that a Partner just selling Blue Chips (Comcast, Verizon, AT&T) is doing something wrong, what does that say?

I would agree with Adam that marketplace is a buzz word.

And I agree with Drew when he said, “Due to complexity Partners exist.”

From this panel I also get the impression that we aren’t seeing too many new recruits as selling partners. Yes, ISVs are growing. Adam said that Commercial real estate agents are going to be selling cybersec. Renee said CPAs are becoming influencers in this space too. That employees of Delloitte and Accenture are becoming selling partners instead of their six figure salary with benefits. Renee says that the Buyers changed, so the Sellers will as well. I shake my head at this, but I could be wrong.

This also explains why PE backed firms are buying the selling partners and locking them up. The sales growth is due to international expansion, the move up from small businesses to enterprise sales, and cross-sales.

What is the hot tech being sold?  It Depends! Much of it is Rip and Replace – oh boy!  However, panelists said that there is no emerging tech that is hot, but that if you are not selling cyber-security it is malpractice.

What resources do new partners get from their TSB? The software system like Pathfinder or Nautilus or SolutionVue; reports and analysis; support; business enablement conversations; and yet none said Training!

Sandlers suggested that those systems are table stakes. Telarus mentioned that an extra point here and there might be necessary. People, Tech, Tools, Process and yes commissions are what Avant bring to the table.  AppSmart said that the tools help the Partners provide value to the customers.

As I replied to Ted @ PlanetOne on LinkedIn, miss a commission check and see where that partner relationship goes.

A couple of partners texted me about my comments. When I say be wary about PE backed TSBs, I am not saying they suck. I am saying that TSBs have only two income streams – MDF and commissions. When the PE firms want the money back, those are the only two ways to get the money back.

Personally, I am not Powered By a TSB.

 

More Master Merger Mania

Avant bought PlanetOne today. I didn’t see this coming, but from a culture it fits: Beer Pong meets Jaeger machine. The march to Bigness continues.

It leaves just three major independent brokers: TBI, TCG and Sandler. There are also a host of smaller brokers like COLOTRAQ and the members of TSX.

As a partner still feeling the ripple effects of three of my brokers being acquired, I hope the PlanetOne partners don’t have to go through this mess. Yet I am pretty certain they will. This is the first merger for anyone at either company. They have no idea what is coming.

Synergies make these things possible, but that usually means RIF people that are redundant or won’t play ball or are expensive. I figure Ted will be there 12 months (unless the terms state longer).

Scansource released quarterly numbers this week.

Intelisys revenue was $19M for the quarter, $55M for 9 months of fiscal year; compare with 1 year ago it was $16M and $47.7M.  That’s about 16% year over year growth for the only public broker (TSB).

[Aside: in the SEC filing for the quarter, with all of the notes, it was a challenge to tell if growth was 15% or 18%.]

Let’s say that Intelisys is below average and the others are doing 25%. I know a few have said 30+% of growth but I find that unlikely as pricing has dropped for network and connectivity as well as for UCaaS. So if prices depress, the number of transactions would need to increase substantially in order for 30% growth.

Let’s say 25% growth in top line. They pay out 80% of that top line. For that $19M for Intelisys this quarter, they keep $3.8M.

What is shocking is that Intelisys “had 2015 gross commissions of $120 million” when it was acquired by ScanSource. In 6 years, it dropped to less than $80M?

Intelisys has over 200 employees on LinkedIn. No idea how many of those are 1099, since a common practice for TSBs is to “Hire” people on as 1099 not W-2. 1099 means as a contractor – and usually that means that a big chunk of the pay is commission. Even marketing people come on as 1099, getting a piece (1-4%) of the MDF from vendors.

The top TSBs make upwards of $3M in MDF**. That money helps to make payroll, rent and events.

At 200 employees making an average of $50K is $10M per year in payroll, not including benefits, bonuses, etc. That is a hefty payroll on $3.8M per quarter!

Back to the growth. Avant said that their organic growth was great but they needed the boost from an acquisition. So that 30% YoY was NOT enough for Pamlico Capital. They needed more lift to get a healthy return on their investment (my guess was $90M for 55% of Avant, but I heard today it was $200M*).

Let’s go back to one more thing: since Intelisys was acquired, their top line decreased!!!

As partners are making M&A decisions, they are not producing for at least 4 months (and as long as 9 months). That isn’t a lift in top line either.

All of this is a march to Bigger, not Better – just Bigger.

These mergers only work with Synergies, which is banker speak for getting rid of people. There will be too many VPs, National This and National That. There will be too many Channel Managers, so people will be let go. This will cause some Partners to go elsewhere because this is a Relationship business.

There was likely an overlap in partners so this isn’t 1+1=3 — but more like 1+1=1.5 because partners don’t want all their eggs in one basket. Also, partners don’t like risk in commissions or hiccups in business. I just don’t know where the safe haven is.

Where does a Partner go to find a commissions safe haven in a broker who is NOT PE owned??

What will be the next deal? My wild card is Bridgepointe and Sandler merge. (5/11/2022)

One partner thinks that Ingram or Tech Data will buy a TSB.  TBI is working to put its SKUs into the Ingram database now. Years ago, both XO and Microcorp tried to work with Tech Data but it so much harder than you think. It is so much more than just putting SKUs into the catalogue.

**MDF of $25K x 40 vendors is $1M; but they all have 200+ vendors AND $25K is the minimum. Platinum can be $250K per year.

*** Upstack got $50M plus $100M in debt equity. Bridgepointe got $100M+. Telarus got VC money (guess $50M). Lightyear.ai raised $13M in series A. Bluewave grabbed $75M. AppDirect, parent of AppSmart, raised $465M including $185M for App Invest. Avant $200M. ~$750M so far invested in brokers.

**** Intelisys had $120M in top line revenue and was acquired for $83.6M upfront and earn out of $100M to $150M – max of $233.6M.  PlanetOne is around $50-60M in top line, so about $100M for acquisition. Agree?

I stuff a lot of data in these posts.