Return On Investment: What's Your Break-Even?

Vendor recruitment of solution providers typically takes two forms-primarily, recruitment to join a partner program for the first time; second, recruitment of an existing solution provider already in the program-to adopt a new product family expected to be, or that was recently, launched.

IPED qualitative interview results indicate that solution providers have differing expectations regarding a reasonable time to invest with a vendor before a break-even point is achieved and predictable profitability around a product line follows, in a sustainable fashion. Solution providers' break-even timelines are typically a function of the sales and enablement costs a solution provider incurs preceding the predictable sales pipeline and cash flow to offset those investments.

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From a solution provider cost perspective, these include sales, technical and marketing staffing. Staffing costs are then followed by sales, technical and training costs. Often, vendors forget to include an estimate of the opportunity costs of training that result from time lost out of territory or billable engagements when technical staff are not available to "bill" in order to train and/or achieve required certifications. Lastly, marketing execution costs may be factored in to develop the necessary opportunity pipeline.

The revenue portion of the equation is a function of vendor and solution provider "best guesses" around the average selling price of a deal when sold, the number of deals the solution provider firm can sell in a month or year, and the sustainability of this projected revenue stream based on the addressable market in the solution provider's geographic area.

When both the costs and revenue portion of the equation are plotted against a "best guess" timeline, the break-even timeframe, somewhere between six and 18 months, becomes clearly visible to both the vendor and the prospective solution provider.

Investment in a noncomplex product, or one made by the typical solution provider firm, can be as short as six months with expectation to break even. In the case of a complex product solution, emerging solutions (think back to the early days of public cloud services) or in the case of a larger and more diverse solution provider, a longer-term investment is more often sustained. A longer-term expectation for time to break even is most often identified as 12 months. With six months and 12 months acting as bookends on a timeline to break even, why then do we see solution providers sustaining investments beyond 12 months?

Several factors play here including, most often, a planned investment that took longer to achieve profitability, for example, a 10-month solution provider break-even product adoption plan that, in actuality, didn't break even until month 14. In many cases, we have seen solution providers savvy enough to extend investment and break-even goals to ensure they could recoup the previous months' investments and move on to sustainable profitability.

In recent times, the longer ROI timeline has been a function of investing in new computing models or strategic solutions that can differentiate a solution provider in a mass of resellers. However, easier access to capital or the ability to let profits from a main line of business subsidize investment in the newer technology, even when longer than 12 months, explains how and why some solution providers, very few, can sustain investments beyond 12 months.

What's your timeline?

BackTalk: Rauline Ochs, SVP, IPED, writes a monthly opinion column for CRN.com. You can reach her via email at mailto:[email protected].