The Partner P&L A Key to Building

Successful Channel Partners in the

Software Industry

Whitepaper from TBK Consult

Author
Hans Peter Bech, M.Sc. (econ)

 Hans Peter Bech 2014

First edition
Unless otherwise indicated, Hans Peter Bech copyrights all materials on these pages. All rights
reserved. No part of these pages, either text or image may be used for any purpose other than
personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission,
in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal
use, is strictly prohibited without prior written permission.
The Business Model Canvas Framework is made available by Business Model Foundry GmbH,
Kalkbreitestrasse 71, 8003 Zrich, Switzerland
Published by TBK Publishing (a division of TBK Consult Holding ApS)
Denmark
CVR: DK31935741
www.tbkpublishing.com
ISBN: 978-87-93116-09-2

The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

Table of contents:
Targeted audience

Abstract

Author

Acknowledgements

Introduction

The Business Model Framework

Defining the Partner P&L

The Business Model and the Value Chain

What do we want the business partners to do?

Revenue
Cash Flow from Revenue
Cost of Goods Sold

Operational Expenses

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Sales and Marketing Expenses

Services
General & Administration
Leadership & Business Management
Capital Expenditure
Cash Flow from Operations

8
9
10

10
10
11
11
11
11
11

The Bottom Line

12

Helping Accelerating Time to Cash

12

The Partner Program

13

Partner Recruitment
Partner Management

13
13

A Note on Margins

14

About the author

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The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

Targeted audience

The target audience for this whitepaper is the board of directors,

the CEO and the sales and marketing executives of software
driven companies1 with ambitions for achieving global market
leadership. The whitepaper primarily addresses the challenges
of B2B software companies with long value chains.

Abstract

Most software companies approaching the market through

independent channel partners fail. How come that software
companies, who are successful selling directly fail when they try
to approach the market through independent channel partners?
Alexander Osterwalders business model approach is the
underlying framework for understanding that the software
vendor and his independent channel partners are running very
different businesses. They have different value propositions and
their cost and revenue flows are completely different.
This whitepaper introduces the Partner P&L as the most critical
framework for building and managing independent channel
partners in the software industry.
The whitepaper explains what the Partner P&L is and ties
it to the partner program, partner recruitment and partner
management.
Software companies that fully understand their independent
channel partners business models and associated P&L are much
more likely being successful with the indirect channel approach.

Author

Hans Peter Bech, M.Sc. (econ.)

Acknowledgements

Design and lay-out: Flier Disainistuudio, Tallinn, Estonia,

www.flier.ee

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Proof reading: Emma Crabtree

Independent Software Vendors (ISVs)

The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

Introduction

Using independent channel partners to resell, implement and/

or service customers has a long tradition in the history of the
software industry.
For some software companies the channel has
been a major contributor to global success, but
for most software companies making it work is
a depressing and constant struggle.
The word channel is used in the software industry to
describe independent companies that assume various roles and
obligations in bringing a software product to the customers. The
definition is rather broad, since the roles and obligations can
vary substantially from simple reselling to systems integration,
solution development on top of the software, implementation in
terms of consulting, project management, customization, training
and support.
The common denominator is the fundamental condition that
the individual channel partner is an independent contractor
operating in his own name2, at his own expense and at his own
risk.
This whitepaper explains why fully understanding the details of
independent channel partners business models and especially
the partners P&L are the critical paths to building a successful
indirect channel3.
In this whitepaper we will use the term business partner
irrespective of the specific role assigned to the 3rd party
company.

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You will notice that the whitepaper doesnt mention any

product. We assume that we already have a product, which is and
has proven capable of driving very competitive value propositions
in certain segments of the market. Building a successful channel
of business partners has very little to do with our product per se,
but is all about how to do business with our product.

In channels designed as franchises however, this is not the case.

For a discussion of when "to partner" and when not "to partner" please
see the whitepaper "Growth Through Partners" (TBK-WIPA-006)
2
3

The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

The Business
Model
Framework

In 2010 Alexander Osterwalder gave us the business model

framework4. To fully understand the difference between the
business of software vendors and that of their independent
channel partners I will urge you to get acquainted with the
business model framework. TBK Consult has published the
whitepaper The Software Partner Channel in a Business Model
Context5 which may be helpful.

Defining the
Partner P&L

A P&L is the global standard abbreviation for the Profit & Loss
statement. How much revenue do we generate in any period of
time, what are the expenses and the resulting profit. To fully
comprehend an investment scenario, we also need to understand
the balance sheet and the cash flow.
The P&L is the result of how we organize and drive the other 7
elements of the business model. We may set objectives for what
the P&L should be in a certain future period6, but we can only
impact the P&L through the other 7 building blocks.
A normal high level P&L will look like this:

Million EUR

Q1

Q3

Q4

Full Year

Revenue
- Cost of Goods Sold (COGS)
Gross Margin

2,56
0,56
1,99

3,68
0,92
2,76

2,35
0,42
1,92

5,13
1,69
3,43

13,70
3,59
10,11

Sales and Marketing

Other Operational Activities
G&A
Operating Expenses (OPEX)
Profit (EBITA)

0,64
0,35
0,50
1,49
0,50

0,85
0,38
0,51
1,74
1,02

0,56
0,42
0,48
1,46
0,46

1,28
0,50
0,53
2,31
1,12

3,33
1,65
2,02
7,00
3,11

-0,10

-0,22

0,10

-0,60

-0,82

0,40

0,80

0,56

0,52

2,29

Financial items
Net profit before tax (EBT)

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Q2

The big question when recruiting independent channel partners

is: How will the business with our product impact the partners
P&L?

http://www.businessmodelgeneration.com
TBK-WIPA-009
6
Often called "the budget"
4

The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

Behind this high level question are a series of sub questions:

1. What business potential do I have in a 3-5 year
perspective?
2. How much do I have to invest to bootstrap the business?
3. What is the cash requirement for these investments?
4. What is the time to first revenue?
5. What is the time to profit?
6. What are the critical success factors?
7. What are the most important risk factors that I have to
manage?
8. What will you recommend me to do?
9. How will you help me become successful?
Independent channel partners are extremely sensitive to the
impact on their P&L and are in general much more reluctant to
make investments than software vendors are7.
To help our potential partners review the impact of building
a business with our products we must break down the P&L in
more detail.

The Business
Model and the
Value Chain

Business partners are individual businesses making their

decisions based on the same investment and P&L principles as
another independent businesses. However their business models8
and their value chains are typically completely different from
that of a software vendor.

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The investment horizon of the average business partner is

much shorter than ours (the software vendor). Business partners
are looking for very fast return on investment; they expect us to
explain how thats going to be achieved and how we will be there
for them in the short as well as in the long term.
Today's business partners are reluctant to deal with software
vendors who are out to make a quick buck and who demonstrates
a hit and run mentality. Most established business partners
have had bad experiences with unambitious software vendors
who are content with the 1% market share. Business partners
Please see the whitepaper Designing Effective Channel Partner
Programs in the Software Industry TBK-WIPA-012
8
Please see the whitepaper: The Software Partner Channel in Business
Model Context. TBK-WIPA-009
7

The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

want to work with the market leaders simply because the market
pull is much stronger and the long-term profitability is perceived
as more attractive despite the competitive scenario9.

What do we want the

business partners to
do?

Taking a new product to a new market through a channel of new

business partners is no trivial task; neither for us nor for our
independent channel partners.

Figure 1: The Software Industry Value Chain

Figure 1 illustrates the typical value chain in the software

industry. Which of the activities illustrated do we expect our
independent channel partners to take care of?
For each activity we want the independent channel partner to
assume responsibility for there is a corresponding investment in
learning and an associated cost of running the operation. Thus
there is a deterministic relationship to the Partner P&L.

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Revenue

The independent channel partner will obviously make a margin

on reselling our products. In the software industry it is not
unusual that software is sold in a package combining various
software products and associated services. The more auxiliary
revenue our products can generate for the independent channel
partner the more attractive and sticky is the business in the
long run and the harder it is to bootstrap the business in the
short term.
As the independent channel partner builds an installed base of

Please see the whitepaper: The Software Partner Channel in Business

Model Context. TBK-WIPA-009
9

The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

customers he will experience revenue streams from add-on sales,

software maintenance subscriptions10, professional services and
support services.
The detailed revenue part of the partner P&L will then look like
this:
Year 1

EUR

Year 2

Year 3

Year 4

Year 5

Revenue:
New licenses (our software)
Complementary licenses
Professional services
Other revenue
New Business Revenue
Add on license revenue
Add on complementary licenses
Software maintenance subscriptions
Add on professional services
Support
Other add on revenue
Revenue from the installed base
Total Revenue

Cash Flow from

Revenue

With the proliferation of cloud-based software as a service type

business models it is worth emphasizing that revenue and cash
flow is not the same.

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We still have the traditional delay from date of invoice (revenue

recognition) to the day when we receive the payment. However,
in the world of software as a service it is not unusual that we
invoice for subscriptions into the future receiving all the cash
today. In this scenario we have a much faster cash flow than
revenue recognition as our auditors will require us to record the
revenue as we deliver the service.
Unfortunately the situation for most software businesses is
a genuine delay in the cash flow compared to the revenue
recognition. As independent channel partners are seldom rich in
cash we need to help them shorten the time to receiving income
as much as possible.

Software as a Service has a different revenue profile, but the P&L

principles are the same.

10

The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

Cost of Goods Sold

Most revenue items have directly related cost components. We

call these cost components Cost of Goods Sold or COGS.
The price we charge our independent channel partners for
our software and services is revenue for us and COGS for our
partners.
Thus for each revenue line we will have a corresponding COGS
line.
The cost of producing professional services is sometimes
considered fixed operational cost or only the cost of utilization11
is included as COGS. Professional services staff may also have
shared responsibilities and participate in pre-sales, product
management, R&D and other activities which do not produce
professional services revenue.
We will have to work with each independent channel partner to
understand how he accounts for revenue and the corresponding
COGS.

Operational
Expenses

Expenses12 that are not directly related to the individual revenue

streams (in the shot term) are called Operational Expenses or
OPEX.

Sales and Marketing

Expenses

In most businesses it makes sense to also record the sales and

marketing expenses separately even though they cannot be
related to the individual sale13.
The introduction of new products will require either additional
or the reallocation of sales and marketing budget and personnel.
Assuming that the introduction of a new product can be done
effectively within a current budget and by just adding more work
to current staff is usually unrealistic.

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Therefore it is highly recommended that we specify the activities

and the budget we believe is required to produce the revenue
numbers we have estimated.
Utilization is the hours actually billed to customers.
Except financial and extra ordinary items
13
Companies in general spend more sales cost on projects that they lose
than on projects they win. Allocating this cost to projects you win will
be meaningless.
11
12

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The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

Services

If our products require associated services then we must estimate

the head count and the expected cost of hiring, training and
keeping these resources.

General &
Administration

There is usually an administrative component of any business

relationship. I recommend reviewing the requirements for
smooth order management releasing sales and management
resources from having to extinguish fires as the business starts
flowing and growing.

Leadership & Business

Management

No business runs all by itself for very long. Starting a new

business requires extraordinary leadership and business
management. Frequent reviews are required to monitor the
impact of initiatives and activities and making corrective actions
as we climb the learning curve.

Capital Expenditure

Businesses recognize investments differently from operational

expenses. Investments are activated on the balance sheet
and written off (depreciated) over the expected lifetime of the
investment. Thus investments will have a substantial impact on
the cash flow at the start of the project and show up as capital
expenditure on the P&L over the lifetime of the investment
project.
As our independent channel partners are investing in the
business with our products and with us, it is worthwhile
investigating if some of the expenses can be activated therefore
relieving the impact on the P&L.

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Cash Flow from

Operations

11

In the software industry the P&L of most business activities are

dominated by the salary component. Salaries have to be paid
every month and are usually non-negotiable. An investment
scenario where the time between revenue (time of invoice)
and the cash from revenue is long requires much more cash
than the P&L will indicate. It is therefore recommendede that
any investment scenario is accompanied by a sober cash flow
analysis.

The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

The Bottom
Line

When we have developed the P&L for the investment in our

relationship with the independent channel partner we will
typically look at a scenario as illustrated in fig. 2.

Figure 2: Typical independent channel partner P&L scenario

In the scenario illustrated there is a loss from operations in the

first 18 months. The accumulated loss in Q3 of the first year is
128.250 while the cash requirement is 208.25014. The scenario
is profitable in Q2 of the second year while we will not have
recovered our cash flow before Q4 in the second year.

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I can assure you that this is not an unusual P&L for an

independent channel partner starting with a new product in the
B2B software industry. I can also assure that most independent
channel partners will give up if they have not made such a P&L
analysis up front knowing what they can expect.

Helping
Accelerating
Time to Cash
12

As software vendors we must help our independent channel

partners accelerate the time to cash and to protect their
investments. We cannot just sign an agreement with our
independent channel partners and then expect that they will
figure out how to make a business with our product all by
themselves. Some may be successful, but most will not.
14

Based on a 90 days delay in receiving cash from revenue.

The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

Independent channel partners are particularly sensitive to

making investments when we are new to the market with no
brand awareness and no proven track record.
The more investments in branding and lead generation we expect
our independent channel partners to undertake and finance the
more prepared we will have to be for discussing how to protect
the investments that our independent channel partners are
making. Independent channel partners are not comfortable
making investments that other independent channel partners
who join the party later will benefit from15.

The Partner
Program

Software vendors choosing to approach the market through

independent channel partners must have very strong partner
programs16. The success of the software vendor depends entirely
on the success of his independent channel partners.
In the bootstrapping phase we are very much dependent on
recruiting partners that will and can break the markets with us.
As we grow our partner channel we can take more chances.

Partner Recruitment

Partner Management

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5%

For partner recruitment the partner program must be designed

to accelerate the time to revenue and the time to cash. However,
for certain types of software products the average sales cycle can
be very long. Average sales cycles over 12 months are not unusual
in the B2B software industry. In such situations the software
vendor and the independent channel partner must agree on Key
Performance Indicators ensuring that business development
process is on track. The Partner P&L must be updated regularly
to reflect the expectations as the business develops.

As we grow our portfolio of independent channel partners we

will learn that they do not all have growth potential. It seems as
though independent channel partners fall into three groups.

10%

The stars: 5% of our partners have the ability to grow their

business independent of our support.

85%

The Growth Potential: 10% of the partners have growth

A phenomenon called "externalities"
Please see the whitepaper "Designing Effective Channel Partner
Programs in the Software Industry" TBK-WIPA-012

15

13

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The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

potential, but need support releasing it.

No Growth Potential: 85% of our partners have no growth
potential. They will mange a small portfolio of customers, but
will not grow beyond this small installed base.
The Partner P&L will be very different for each category and so
will our options for making investments in growing the channel.
We will have to focus our investments in the Stars and the
Growth Potential, while we minimize the cost of managing the
85% of partners with no growth potential.

A Note on
Margins

Often software vendors will

partners higher margins on
higher margins are supposed
investments the independent
getting started.

offer their independent channel

the first deals they make. The
to compensate somewhat for the
channel partners are making in

Software vendors should be extremely careful of giving away

margins on their products. In the long run even small variations
in the margin we pass on to the business partners will have a
substantial impact on our own P&L and valuation.

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In general it is my experience that high margins have very

little motivational impact on the business partners behaviour.
Margins are like the salary to employees. They are a hygiene
factor. Changes in margin levels17 may have a small impact,
but in the early days of the business partner relationship it is
the time to revenue and time to positive cash flow that has the
biggest impact on the behaviour. In the early days of getting an
independent channel partner started, high margins will have no
measurable impact on behaviour and willingness to invest.

17

14

Margins increase with increase in revenue

The Partner P&L A Key to Building Successful Channel Partners in the Software Industry

About the author

Hans Peter Bech has been developing and managing global
partner channels in the software industry for more than 30
years.
Hans Peter built the partner channels for companies such as
Dataco (now Intel), Mercante, Dansk Data Elektronik (now
CSC), RE Technology (now Barco), and Damgaard/Navision (now
Microsoft).
As a management consultant Hans Peter has been providing
consulting on channel development and management issues
to companies such as Microsoft, Danfoss, Proekspert, Jeeves
Information Systems, eMailSignature, SoftScan (now Symatec),
Netop, EG A/S, CSC Scandihealth and Secunia.
Hans Peter is the author of several whitepapers on channel
development and management and he frequently writes articles
on the subject.
He started his career as a management consultant in 2003
and founded TBK Consult in 2007. Since then he has built the
company to its present position with 24 senior consultants in 16
countries.
Hans Peter oversees the development of TBK Consult as well
as performs management consulting assignments for selected
clients.
Hans Peter holds a M.Sc. in macroeconomics and political science
from the University of Copenhagen. He speaks Danish, English
and German and is a certified ValuePerform, ValuePartner and
Business Model Generation consultant.

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More about Hans Peter Bech

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