Is an OEM Channel Strategy the Right Strategy for Your Company?
Kevin Meldorf, Director of OEM and Partner Programs • Visual Mining, Inc.
Michael Brooks, President • Checkmate Advisors LLC.
As software companies strive for new ways to expand their revenues and market reach, they eventually look to a channel strategy that enables other companies to embed and distribute their technology as part of a broader offering. This lucrative, highly risky and least understood channel is often referred to as the Original Equipment Manufacturer (OEM) arrangement. While annual royalty revenues in the software market could easily surpass $50 billion, a failure rate of corporate alliances of 60 percent to 70 percent[1] indicates that such a strategy is not for the fainthearted. This article examines three key areas that represent the foundation for a successful OEM strategy.
Management Expectations and Commitment
A successfully managed OEM program requires a fundamentally different approach than any other type of alliance as it has even greater implications in sales, marketing, product development, support and finance. Key questions that must be answered by senior management include:
What are the strategic objectives of the OEM strategy and what are the expectations in terms of timing and return on investment? Examples include access to new market opportunities, incremental revenue streams, expanding a relationship with a strategic partner, or positioning the company or its technology for a liquidity event. By clearly defining objectives, executives provide the necessary focus to allocate scarce resources.
Who is the target market and what is the go-to-market strategy? Although you may have proven end-user adoption and delighted customers, the OEM buyer’s process, requirements, and value proposition differ significantly from those of your enterprise customers. In an age of shrinking resources and product life cycles, it is critical that the right opportunities be judiciously selected and pursued. In fact, only those OEM opportunities that are vetted to provide long term annuities and growth potential should be considered.
Is your technology easily integrated with the features that would significantly enhance another vendor’s solutions? Software products that emphasize thought leadership and intellectual capital and are not easily replicated via competitors, open source or in-house development efforts are the best candidates for an OEM channel. Additionally, solutions that leverage and add value to a prospective OEM’s larger technology alliances will have a higher likelihood of adoption.
The ability of senior management to develop realistic expectations and perceptions around these questions is critical to developing a solid foundation for success. There must be a clear commitment to providing adequate resources, expertise and support. If senior management is not prepared to make the commitment, then serious consideration should be given regarding whether an OEM strategy is the right direction for the company at this point in time.
Product Strategy Alignment Due to the potentially wide range of deployment scenarios, it is important that channel executives work closely with sales, product development and product support teams. Since OEM deals tend to be driven by their counterparts responsible for the company’s product strategy and development roadmaps, your product managers can complement the sales force’s efforts in winning the OEM’s confidence and be extremely helpful in addressing the following concerns:
What are the distinguishing capabilities that would motivate an independent software vendor (ISV) to use your solution rather than building it themselves? Your potential OEM partner’s product managers are constantly evaluating strategies that would enable them to bring new features to market while maintaining control over timing, development cost and product roadmaps. The classic buy vs. build spreadsheet exercise used to justify ROI for a direct sale or a Value Added Reseller (VAR) partnership are often ill-fitted for OEM arrangements. This is due in part to the lack of information and the conflicting motivations that limit full disclosure of pricing models, customer demands and other factors. Clearly articulate the value proposition from the OEM customer’s point of view and you will create an attractive offering that addresses risk, total cost of ownership, return on investment and speed to market.
What support resources and processes will be required to enable and support OEM partners after the deal is done? Prior to completion of the deal it is important to provide enabling tools that streamline your partner’s route to revenue. At a minimum, developer documentation (APIs), integration toolkits, and implementation guides are just a few examples of enablers that you must provide to your OEM customers. Many top performing programs provide targeted onsite training/consulting that speed time to market and guarantee success.
How will you provide a well-defined roadmap that emphasizes thought leadership while demonstrating a willingness to engage customer feedback? As an ISV, your potential OEM partner is constantly evaluating feedback from their customers, partners and other parties regarding new features and their competitive position. As a result their roadmap and development timetable are usually not aligned with yours. A clear understanding of each other’s product roadmap and effective communication channels can often help avoid unnecessary frustration with the relationship. It is important to have the processes in place that solicit and evaluate requests from all of your OEM partners to determine (a) when a request represents a general market requirement vs. a one-off, (b) who funds the development effort and (c) what implementation options exist.
Many companies in the short term interest of generating revenue have gone to market too quickly in the OEM channel and have derailed product development in order to deliver functionality for OEM partners that is not properly abstracted and exposed. While a few companies may succeed with this approach in large direct sale implementations, the opportunity cost, time and risk of integrating into an OEM are exponentially higher due to the complexities of product engineering.
OEM Revenue Generation
OEM sales are generally more complex by nature due to the innate differences in each party’s business model, technology, age of maturity, and competitive position. As a result, the sales lifecycle is often longer as both parties strive to mitigate risk. Companies who successfully develop and execute such programs have found targeting the following areas to be extremely helpful in shortening the sales cycle, reducing cost of sales and maximizing revenue streams.
What is the optimal sales process? Given the unique aspects of an OEM business relationship, the optimal sales process is geared to developing a strategic relationship that can, and often does outlast the individuals who are initially involved in the deal. The timing of the sales cycle will be more dependent on the OEM’s product roadmap and customer demands than how quickly they can get budget approval and process the transaction. Some degree of relationship building, technical vetting, and education is often an important part of the sales cycle. Once the evaluation process has begun, proven alliance management techniques such as creating a Memorandum of Understanding can streamline contract negotiations, minimize legal fees. The memorandum, written in layman’s terms vs. legalese, outlines the key components of the relationship that will ultimately be incorporated into a final agreement such as:
Term length
Annual fees and/or royalty fees
Definition of application distribution
Reporting requirements
Names and descriptions of the applications that will include the licensed technology
High-level Go-to-Market Strategy
Roles and responsibilities within the alliance
Continuity within your OEM sales team alleviates concerns over risk and moving the sales process forward in a timely manner. Therefore, it is important that the people responsible for managing the relationship be closely involved from the beginning to facilitate knowledge transfer and establish rapport with OEM executives. It is often the interpersonal relationships rather than the agreement that are the keys to achieving success, especially in challenging economic times.
What is the most appropriate licensing model? The first step to a successful licensing model is to allow for the flexibility to map to your OEM Customers’ model. Today, software companies license and distribute their software in many different models: On-premise vs. SaaS, Term vs. Perpetual, Named vs. Unique User, Server vs. CPU vs. Core, or similar model. Licensing agreements need flexibility to work within the variety of business models that your customers operate under. Without understanding the different models you could potentially cannibalize other channels and risk competing against your own OEMs. The best OEM licensing models have a limited functionality for the OEM license which can then be unlocked with an upgrade key to allow for the full functioning end user product. This strategy not only provides your OEM with other potential revenue opportunities as a reseller, it can also allow for your direct sales team to potentially approach other (non-competing) departments within the customer with a built-in referral.
In order to shorten the sales lifecycle, minimize cost of sales, and generate revenue quickly, predictably and consistently, it is important to keep in mind that simply executing a contract does not guarantee success. The OEM channel and its relationships must be effectively planned, monitored, managed and incented. In other words, won and neverdone.
Positioning For Success
Your OEM customers are making a big bet and taking on a lot of risk in selecting a vendor. They want a business partner that they and their customers can depend on who brings a total solution and a strategic relationship mentality. The right OEM strategy can be the path towards exponential growth and potentially a high revenue multiple acquisition; the wrong OEM strategy can destroy a company through skyrocketing cost of sales, compromising intellectual capital, tying up product development resources and cannibalizing other channels.
Kevin Meldorf is the director of OEM and Partner Programs at Visual Mining, Inc. where he is responsible for developing technology alliances and OEM sales channel strategies for the company's NetCharts brand. Kevin has a strong background in technology and sales. He has developed and managed dozens of strategic alliances and OEM relationships from Fortune 500 to start ups that have achieved significant revenue growth, brand awareness and profitability. Kevin is a member of the Association of Strategic Alliance Professionals Maryland Chapter.
Michael Brooks is president of Checkmate Advisors LLC. Michael has assisted many software and consulting companies in accelerating revenue growth, accessing new market opportunities and realizing their exit strategy through the use of strategic alliance programs and effective channel strategies. Michael is member of the Association of Strategic Alliance Professionals Colorado Chapter.
References
[1] Hughes, Jonathon and Jeff Weiss. “Simple Rules for Making Alliances Work”. Harvard Business Review, November 2007
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