Emerging Canadian software companies struggle with channel strategy

The good news is that emerging software companies in Canada understand and value the role the channel can play in growing their sales and brining their products to a wider market. The bad news is that most of these emerging companies still primarily sell direct, lacking the resources to properly implement an indirect channel sales strategy.

A new report from PricewaterhouseCoopers LLP on emerging Canadian software companies surveyed the CEOs of software companies across Canada, most with revenues under $25 million. Half were profitable, and most were in the enterprise applications, application development or digital media application spaces.

In a section dealing with channels and partnering, the study found that respondents do recognize the value of partnering, with 60 per cent engaging in some sort of partnering. The most popular form of partnering was sales, engaged in by 64 per cent of respondents. Of these, 31 per cent worked with value-added resellers (VARs), 26 per cent with original equipment manufacturers (OEMs) and 18 per cent with systems integrators.

While most respondents were engaged in some form of partnering, most of their sales mixes remain primarily direct. In 2009, 73 per cent of respondent sales were direct, despite their stated desire last year to see this decline to 65 per cent. This year, CEO respondents again said they want to increase their channel sales, hoping to reach 40 per cent indirect.

Report author Peter Matutat, partner and national emerging company practice leader with PricewaterhouseCoopers LLP. Said he has been preparing this report for seven years and the trend has stayed consistent: CEOs in this space struggle with channel strategies.

“The profile of someone who starts an emerging software company is often an engineer at a bigger company that has an idea and decides to launch a start-up,” said Matutat. “Nearly 80 per cent of these CEOs are founders, not business professionals, and setting up a channel strategy can be really difficult to accomplish.”

Every year, said Matutat, the CEOs say they want to build a channel and are looking at it for next year, but every year the ratios may stay the same. For some, if they’re doing Web sales or high-dollar, low volume enterprise sales, an indirect model may be best, but for many the indirect channel is the way to go.

“We try to let them know what the channel is all about, what people fact, and that they can be successful if they stick with it and invest the resources,” said Matutat.

The problem, he said, is that too many emerging company CEOs see the channel as something they can just start and then leave alone, after signing a few partners. They need to realize that’s just the beginning, and they’ll need to work with partners, invest in the program, incentivize partners, and educate them on the product and the market opportunity.

“A lot of these guys think they can just sit back, but the battle has really just begun,” said Matutat.

The problem for many of these companies is resources. With the majority in the pre-revenue to $1 million stage, a channel program is seen as a luxury that will have to wait until revenues grow. But Matutat said these companies need to realize that investing in the channel is actually the best way to grow their revenues. Instead of hiring another direct sales professional, he recommends hiring an experienced channel sales manager.

“If you have a funding problem you can only hire so many direct sales guys, but if you hire a channel sales manager that can interact with a number of partner, they have the potential to generate a lot more revenue than another direct sales person,” said Matutat. “It’s a real multiplier strategy.”

While resources are the barrier to implementation, respondents do value strategic partnering. They’re seen as the way to enter new markets by 43 per cent, with 27 per cent said partnering allows them to focus on core competencies and 24 per cent said it allowed them to be more cost effective.

“The awareness is definitely there, they can understand and see the benefits,” said Matutat. “The gap is being able to execute and have an understanding of how to make that happen.”

Follow Jeff Jedras on Twitter: @JeffJedrasCDN.

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Jeff Jedras
Jeff Jedras
A veteran technology and business journalist, Jeff Jedras began his career in technology journalism in the late 1990s, covering the booming (and later busting) Ottawa technology sector for Silicon Valley North and the Ottawa Business Journal, as well as everything from municipal politics to real estate. He later covered the technology scene in Vancouver before joining IT World Canada in Toronto in 2005, covering enterprise IT for ComputerWorld Canada. He would go on to cover the channel as an assistant editor with CDN. His writing has appeared in the Vancouver Sun, the Ottawa Citizen and a wide range of industry trade publications.

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