SAP's Gilroy On Recruitment: We Want Partners With Working Capital

SAP is trying to revolutionize the way it identifies and recruits prospective partners with a data-heavy approach that puts a premium on cash flow and healthy balance sheets.

SAP channel chief Kevin Gilroy spoke with CRN Tuesday at SAP's Partner Leadership Forum in Hollywood, Fla., about the company's extensive effort to add more channel partners. SAP last year began taking a "surgical approach" to finding the right partners, specifically systems integrators that are open to reselling SAP software and cloud hosting and managed services providers looking to deliver Software-as-a-Service.

But Gilroy said SAP's -- and the channel's -- approach to partner recruitment in the past was fatally flawed because it concentrated too much on technical pedigrees and revenue growth but overlooked a key area: the balance sheet. The biggest change in SAP's new recruitment approach, he said, was putting more focus on the solution provider's balance sheet rather than its P&L and growth rates.

Why is the balance sheet so important to SAP's recruitment drive? And what are the major challenges for finding the right partners? Gilroy discusses those topics and more in an exclusive interview with CRN about SAP's "Moneyball"-esque recruitment plan.

CRN: Why are balance sheets so important to your recruitment drive?

Gilroy: It's an indicator of their ability to invest ahead of revenue. If they don't have the working capital to invest ahead of revenue, they won't make the move to the cloud and they'll have to wait for revenue before they make investments.

CRN: You mentioned in one of your sessions that this wasn't something you looked at before with SAP or even in previous roles with other vendors.

Gilroy: No, it really wasn't. We looked more at margins and profit.

CRN: So what prompted this change? Were you finding too many VARs going out of business?

Gilroy: No, not going out of business -- we were seeing the capital dry up. And also, for a company like SAP where you're seeing 30 [percent] to 40 percent channel growth rates in certain regions around the world and double-digit growth rates pretty much everywhere in the world, you start to ask, 'OK, if this guy is growing at 30 [percent] or 40 percent, why is this guy only growing at 7 percent?' You start looking for root cause issues.

Why is the growth for certain guys below the mean? And we usually see it in two buckets. The first bucket is, they don't have the working capital to grow. And you know, the industry has done this to the channel for the 30 years I've been in the business -- you can grow a partner right out of business. If they don't have the proper working capital, you can grow them too fast and put them into bankruptcy.

NEXT: Reaction To A Change In The Model

CRN: Do you think the economic conditions of the last few years have contributed to that, in the sense that there just isn't enough good financing options for the channel?

Gilroy: Yes, I do. And I think the move to the cloud has exacerbated it. I personally think that in particular the entrepreneurial partners worry about the balance sheet more than anything else. When they wake up in the morning, the P&L is the second thing they worry about. The first thing they worry about is cash -- making payroll, making rent and preserving cash. Entrepreneurs in general, not just in the channel, are cash conservationists by their DNA. That's what makes them entrepreneurs. So I think in the cloud, and in fast-growth partnerships like with SAP, we need to figure out with partners and potentially with distribution what the playbook is today for capitalizing the channel. The traditional way of capitalizing the channel would be getting credit lines through distributors. But with complex software that's a little bit more complicated.

CRN: Are distributors interested in changing that model? It seems like IT distribution has its sights set on the cloud and becoming cloud aggregators. Do you think they're interested in the software?

Gilroy: I do, and I think their models are going to have to evolve. I think financing is going to be more important. As opposed to a few years ago when logistics was their core competency, today distribution is evolving to where logistics is still core but financing -- creative, flexible financing -- becomes even more critical than the physical logistics.

CRN: Once you've identified healthy balance sheets, what's next?

Gilroy: Well, recruiting isn't the cheapest thing in the world. It requires you to be more diligent about who you recruit. We use objective analysis and some subjective analysis to go through a number of lenses. The first lens is about whether or not the partner has the technical competency, the vertical expertise and the market presence that we're looking for. Yes. Then, do they have the balance sheet, the cash, and the financial wherewithal to be able to stand up an SAP practice and make investments? Yes. Then you get into the subjective stuff. Does their leadership team have scalability? Do they have vision? Do they have risk profilers? And you get through those lenses and you start having a much higher ROI on your recruitment instead of just signing up anybody and seeing who sticks. Recruitment is just too expensive and time-consuming to do that.

CRN: But with all that analysis and filtering, do you have to devote more people to the process?

Gilroy: Not really, no. It actually frees up people because what we used to do is sign up everybody, and then eventually purge a lot of them. And then you have a bigger problem that takes up even more people; the channel could get a bad reputation. Let's say you sign up Partner A, you put them out into the field, and then they don't deliver or don't know how to make a sales cycle or don't make investments ahead of revenue. Well, then our field teams say, 'Who they heck is this partner? This partner stinks!' And then they start saying, 'The channel stinks. They screwed up this deal, they can't run sales cycles, they're not creating any demand, and they rely on us to do everything.' Then I have to defend the channel. Experiences like that taint the whole channel for some people. There's a lot at stake when you're spending around $150,000 per partner on recruitment, sometimes $200,000. And it's not just the financial loss for the partners that wash out. It's the reputation of the channel internally.

But now we're going in with new recruits that are really serious partners and can be off-payroll extensions of us in the market. So there's a whole bunch of reasons for doing it. And you don't have to put more people on recruitment; it's just the opposite. If you have higher productivity, you have higher yield.

NEXT: SAP Already Seeing Results

CRN: What's the success rate now that you've adopted this new recruitment approach?

Gilroy: Now our success rate with new recruits over the last 18 months or so is in the 70 [percent] and even 80 percent. They're real serious people and they know how to build a sales pipeline. And that's the other problem when you have recruiting targets; you say your target is 100 new partners, and they just start signing up anybody just to hit that goal and get their bonus. And then those are the partners that come to you asking for leads. And that's the kiss of death. What we want are partners that, for example, say, 'Let's talk about the health-care market in Boston. SAP has Mass General covered, great, but let's talk about the hospital on Cape Cod and other places where you're not covered.' So we're really excited about this recruitment strategy. Carrie Maslen [vice president of global channel development at SAP], who came over from HP with me, has been re-engineering this all over the world. It's still an ongoing process, but she's been a powerhouse and she really gets the channel.

CRN: Are you recruiting big partners of competitors like Oracle and Microsoft?

Gilroy: Sure, we talk to competitive partners, not just for Microsoft and Oracle but also Cognos and other competitors where it makes sense. But that's where you really have to understand the balance sheet because picking up a second product line is expensive. So you have to look at the risk profile. If a partner says they're an ABC partner and now they're going to pick up SAP, then ABC might turn around and say, 'You're picking up SAP? Well don't expect any more leads from me.' So what's the risk profile for that partner? Are they going to go ahead or are they going to back out?

CRN: Now that the recruitment is more detailed, does the process take longer?

Gilroy: No, not at all. The surgical recruitment is much better for the partner. The best answer for a potential partner in this process is 'yes.' But the second best answer is a fast 'no.' The worst thing for a potential partner is a slow 'no.' You go through the business contracts and the planning process and nine months later, nothing is really happening and you eventually end the relationship. It's better for us to quickly say, 'Listen, I just don't see it. I don't think this a good marriage, and I know you're not happy, but I think it's best for everyone.' So we try to make those decisions quickly.

CRN: So you have a success rate in partner recruitment in the 70 percent range right now. Can you push it even higher?

Gilroy: Well, we get into the 80 [percent range] sometimes, but if you go higher than that, then I think you're doing it wrong.

Why?

Gilroy: If you're up past the 80 [percent range], then I think your risk profile is too low and you're not taking enough risks. If I made it to 95 percent, then you're only going after guys that we think are basically 100 percent locks. But we need to take some chances and take some risks on new kinds of partners. We have to explore some alternative channels like accounting firms and even telcos.

CRN: So SAP is looking for software VARs that have the capital to make investments and move into the cloud. But are you finding enough VARs that also have the desire to move to the cloud, too?

Gilory: Well, that's an issue. The lifestyle VARs are really hard to change. That's where the subjective analysis really comes into play. Will they take the risk on moving to new areas like the cloud? We get a lot of guys that say they're interested but when it comes down to it, they start asking questions about how much we're going to pay them to make the move. So we do have some parallel recruiting where we'll say if a partner makes the investment in, say, cloud, we have the Glengarry leads and we'll prime the pump a little so it lowers their risk profile. But the traditional VARs that are 50-something years old and have been in the software reselling business for a while, they're pretty hard to convince. Some would rather just save their money and shut the business down than take that risk.

PUBLISHED JULY 30, 2013