TAG: THE BOTTOM LINE on Partner Compensation

Posted: 12/2002

THE
BOTTOM LINE on Partner Compensation

By Tara Seals

IT’S DOUBTFUL ANOTHER SUBJECT takes
as much precedence in channel partners’ business lives as compensation. But
these days the money on the table is made up of changing revenue streams —
consulting fees, commission and margin all pay their part. To take stock of the
current situation, PHONE+ carried out an informal online survey of our channel
partner readers. More than 50 responded. Here are the results.

Business Models

There’s much talk about the
converged partner, who brings customers value-added solutions made up of
products and services in a variety of communications arenas. In other words, he
or she may be a source for long-distance service, hardware, enhanced telecom
services and systems integration or other professional services. Revenue streams
are coming in from consulting fees, commission, margin on hardware and
maintenance contracts. This diversified base helps the channel partner steady
his operation in shaky times. The evolution to this higher order of selling is
slowly happening, and the transition can be seen in the survey responses.

Forty-one percent of those surveyed
said they are primarily agents making commission on telecom services. But 4
percent said they are integrators, 6 percent said they are value-added resellers
(VARs), 20 percent characterize themselves as consultants and 29 percent placed
themselves in the "other" category.

It’s this catchall "other"
designation that contained the best illustrations of how the channel partner is
transitioning, including people like Karin Willingham, president of A New
Outlook for the Future. She said she’s a reseller, but 85 percent of her revenue
comes from commission on services, 10 percent from consulting fees and 5 percent
from maintenance contracts. Another respondent, an interconnect who declined to
be identified, said he receives 75 percent of his income from hardware, and a
full 25 percent from commission on services. Another interconnect who spoke on
background said he makes 60 percent of his income in hardware, 20 percent in
consulting, 15 percent in commission and 5 percent in maintenance contracts —
truly a diversified revenue base.

As for selling more services, he
said, "Some aggressive carriers are offering per-line bonuses as well as
higher percentages to attract business — and it works!"

Of the agents that participated in
the survey, many noted new revenue sources despite their continued focus on
commissions. One master agent said his company brings in cash from hardware and
maintenance contracts, for a total of 5 percent from sources other than
commissions. That’s developing into a growing business for the agent.

"Our equipment division is
projected to bring in 10 percent [of the business] next year," he said. The
compensation model across the board is shifting as more agents start offering
equipment, he added.

Master agent Greg Praske, CEO of
Association Resource Group, said 5 percent of his income is from margin on
hardware. Professional services may soon be a part of his portfolio as well.
"Currently [other areas besides services commission] are not growing
revenue streams for us," said Praske. "However, we are in development
of disaster avoidance and recovery services for small- to medium-sized
businesses, which we believe may become an important part of our business."

Integrator and VAR Bob Foster of
Telcom Inc. said changing provider policies could make his space a more
lucrative market. "Minimum dollar (greater than $1 million) amount
requirements for large vendor direct sales may provide more referral business to
us, provided the direct sales and channel managers set up proper guidelines to
promote proper overall accounts management," he said.

Vendors often give their direct
salespeople large quarterly quotas of $10 million or more, he said, so they
should provide an "effective, smooth channel referral system" that
allows them to pursue larger opportunities.

"There are not enough hours in
a day, week or quarter for one person to manage $10 million dollars of inventory
spread across more than 10 different accounts with more than 10 different
network projects, while at the same time loading up the major account pipeline
with $10 million in potential business every 90 days," he said.
"Introduction and delegation of smaller accounts to VARs can provide these
customers with a more focused point of contact."

The Consultative Landscape

Consulting and professional
services, billed on either a contract basis or as an upfront service fee, are
welcome value-adds to customers, and help strengthen existing end user
relationships. But like every other model in the communications space, revenue
mix diversity is the secret to winning the game. Some agent respondents have
gone in the direction of consulting, while integrators have beefed up their
contract bread and butter with residual commissions (Click
Here).

For example, Stan Best, COO of
agency WinTel Communications Corp., said consulting on IT security is a
"significant growth direction." And David Roberts, president and CEO
of Teligistics Inc., said he is a consultant/agent, with 35 percent of his
income from consulting. The rest is from commission. The consultative services
of billing management and auditing are growing pieces of his business puzzle.

Consulting can be tricky, however.
"As a result of layoffs at large firms, there are more independent
communications consultants on the street," explained Anthony Adams,
president and CEO of TA Telecommunications Corp. "This competition is
driving the pricing of consulting services down. The good news is, enterprise
customers and carriers alike will have access to an inexpensive contract
consultant workforce."

That could be the reason one
consultant said he’s looking for more residual income. Sixty percent of his
revenue is from fees. "We’ve had a higher-than-I-would-like percentage come
from consulting in the past," he said. "While that is important, I
want the percentage to come from residual-type revenue, as opposed to
consulting."

The More Things Change…

Despite some changes, an
overwhelming majority of agents still say their income is 100 percent
commission-based, and the most lucrative services are still voice services, with
commission percentages ranging from 10 percent to 20 percent, and in one case,
30 percent.

As expected, data and enhanced
services (such as IP VPNs, conferencing and IP PBXs) also make up a portion of
most agents’ portfolios these days. One agent said conferencing offers
"HUGE margins."

Good service continues to be a
differentiator in choosing vendors. "Great rates are good," said one
channel partner, "but from experience, the back office with good billing,
customer service [and] on-time commissions are our top priorities."

A majority of respondents also said
that commissions are getting lower. "We find that suppliers are trying to
reduce costs by lowering commissions across the board," said Rick Sheldon,
co-founder of master agency Intelisys Inc. Suppliers overpaid poor producers in
"better economic times," he said, and now successful agents are paying
the price. "Cutting commissions is ‘demotivating’ and does affect new
sales, as well as cuts into the ability to afford to support new business,"
he said.

Economic stability among the
carriers is also a major concern for most agents. When asked about new forms of
payment, such as bonuses or upfront commission structures, many respondents said
they looked for carriers with proven track records rather than the opportunity
for fast cash.

"Perhaps some carriers are
hungry for business and are offering enhanced compensation packages," said
one agent. "We are cautious of dealing with carriers that are on shaky
ground."

Said another, "I look for solid
companies, not ones that flash cash and are bankrupt shortly thereafter."

Still, bonuses and spiffs from
reputable sources are welcome. For instance, Teligistics’ Roberts said Sprint
Corp. pays six months in advanced commission, in some cases.

"Upfront, per-line commissions
and spiffs for circuits are becoming a significant part of our mix," said
one master agent. "At least 20 percent."

The various transformations PHONE+
sees in the survey responses may continue for some time. "[The compensation
landscape is changing,] almost monthly," said Roberts.

CONSULTING
FEES = HIGHER EARNINGS

By Jay Lewis

Are
you tired of seeing your residuals decline because of a drop in rates? Visioncom
Inc. got into the telecommunications business in the early 1990s, when our
clients were paying 20 cents per minute. Today, those same clients are saving
money by paying five cents per minute, but our commissions continue to head
south. At this rate, how are we going to survive in this business? Early on, we
realized that we could provide an invaluable service to our clients. We would
not only be their telecom broker, but also their personal consultant.

Consulting services work well with
voice services; however, they work even better with Internet, private line and
frame relay services. There are several ways to offer and bill them, depending
on some variables.

First, there are two avenues to
consider when providing consulting services: Are these existing clients, or are
you working with new prospects?

For existing clients, you can either
obtain lower rates or attempt to renegotiate a new contract with the current
carrier. In either case, you can charge your client a percentage of proposed
savings or you can charge a monthly fee to service the account.

For new prospects, you will have to
examine their existing contract and review telecom invoices. If there are
billing errors, you may be able to secure a client a credit or refund from the
carrier, and then make a percentage of that payable to you for your services.
You can also charge a one-time flat fee, based on total billings, to review the
bills/contracts and make recommendations.

The key to selling your services to
both existing and potential clients is to stress what you bring to the table as
a telecom consultant.

• First and foremost, you bring an
  unbiased knowledge of the industry to the client. Unlike a direct carrier
  representative who is only interested in selling his company’s products, you
  do not have a vested interest in any one carrier, thus your clients’
  interests are considered most important. You could work through a master
  agent that represents several different carriers. Chances are, you will
  secure new business or retain existing clients if you are able to provide
  them with several possible options.

• You also can provide your client
  with the security in knowing that you are behind them for the long haul. A
  direct rep may leave his company or lose his job, leaving your client
  stranded. You, on the other hand, will always be there.

• You also can make your client’s
  life easier by being their one-stop resource for any telecom question, so he
  or she won’t waste time searching for answers.

• Lastly, in most cases you can
  save your client money by eliminating their need to employ telecom personnel
  — a consideration many companies are making in today’s suffering economy.

It is still possible to thrive in
this industry, and we strongly feel that in order to do so you will have to look
into offering your services as a paid consultant. It not only gives you real
cash today, but it will help insulate you if carrier commissions ever dry up.
You may lose money as a broker as the rates drop and your commission stream
declines, but as long as you continue building relationships as a consultant,
you will insure a cash flow for the future.

Jay Lewis is vice president at
Visioncom Inc., a Finland, Minn.-based telecommunications consulting firm and
master agency. He can be reached at +1 248 661 8290, or e-mail: jlewis@callVCI.com.