November 10, 2005

The Double-Edged Sword in Channel Partnerships

Working with channel partners is a double-edged sword. They often are much larger than startups, which need them to grow an early-stage company’s sales efforts. Larger companies have their sense of time. They will get to things when they get to it, while a startup is all about urgency and moving quickly.

Young companies don’t have the resources to waste months of sales efforts. They need sales and they need is in the shortest sales cycle possible. One large channel partner can trip up a startup, especially if a sales process was launched without a final master agreement in place. Before you realize it, the startup’s sales pipeline is dominated by the channel partner opportunities, and then channel partner can stop the startup up in its tracks.

Here’s the situation: things have gotten ugly with our Channel Partner or Value-Added Reseller (VAR) for my CEO’s company. Right when we think the lawyers are the only ones holding things up, like a contract for our mutual customers to sign, the real agenda is to renegotiate the payment terms in the final agreement that was signed in September. My CEO is close to brinkmanship. He’s made some concessions in the renegotiation process; however, he doesn’t want to relent on the payment terms.

Brinkmanship in Contract Negotiations?

We had six potential customers who wanted a contract. But, they couldn’t get one because of the VAR’s lawyers. We have a huge, huge sale pending. This prospect wants the contract, so they can sign it, but we’re unable to get it to them because we’re still negotiating the final terms of our VAR agreement.

Back in the summer when this VAR relationship was being built, my CEO used up 90% of his sales resources to support this relationship. Our sales cycle is long, often taking up to six months. Those six months have delivered people wanting to be our customers. Despite having a signed legal agreement between us, the VAR has changed positions. They don’t want to pay us based on the original agreement. My CEO is surprised by this move, but doing his best to keep negotiations open. We’re on the edge, ready to show a brinkmanship approach, close to delivering this message:

“If VAR is unwilling or unable to honor the terms previously negotiated then the resolution of the issue will require two things: (1) Returning to the bargaining table to reopen and renegotiate terms of the agreement, and (2) Disengaging in all VAR sales and marketing activities until an agreement is reached. This includes asking VAR not to represent our product as part of VAR offerings.”

I’ve had a bad feeling about this VAR from the beginning. First, they’re old school, not Internet savvy. They’re a publicly traded company. They just released their earnings, underperforming so their stock took a hit. No doubt, this is causing some of the push back. Our tradeshow strategy is tied to them. We made a decision have our own booth because we were planning on to be in theirs. Not good for us.

The upside? The second VAR that we signed just turned “on” all of a sudden. We have our first sales meeting with them on Monday, rolling our sales and marketing materials. They too, are publicly traded, but are an Internet-based as well. In fact, a company I’ve long admired just acquired them. This second VAR wants to expand our VAR relationship into development. It sounds like they want our product to be their standard and license ours rather than try to play catch up and build one.

What will we really do?

He’s call a meeting with his partner, CTO, and Controller. If he’s calling in his partner, then things have gotten serious. I think we could do well without the first VAR. We’re starting to build up or direct sales efforts. We’d have to alter our trade show strategy, but that’s doable. If this VAR is willing to leave potential customers hanging like that, this causes great anxiety for our company. My CEO’s company is deeply rooted in customer service. The thought of leaving customers wanting a contract and not delivering one and angering the potential customer is hard for our company to comes to terms with. The situation is bad, but hopefully a cooling off period will help.

The Smart Lemming Diary is a series that chronicles a journey of laid-off worker, who becomes a Vice President of Sales Operations & Marketing for a small entrepreneurial healthcare technology company. For previous entries in this series, click here. For the first diary entry, click here.

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