AGC Conference Panel: "Managing the Ultimate Security Perimeter: Identity & Access Management"

I just had the honor of being invited back to moderate a panel at the Americas Growth Capital (AGC) Conference, held this past Monday in San Francisco. 


It was entitled "Managing the Ultimate Security Perimeter: Identity & Access Management" and featured speakers from across the world of Identity management: Identity Governance and Administration, Privileged Identity Management, Access Management and SSO, and Monitoring and User-Based Analytics.


The reason for posting about that here was to highlight that the belief of the panelists summarized to the fact that customers are now buying best-in-class solutions from each Identity segment and starting to combine them into a comprehensive system that answers the key questions about those who have access to corporate and governmental systems:

• Who has access to what?
• What should have access to what?
• What are they doing with that access?
• Is it typical?

Best practice means collecting and auditing accounts and entitlements across the enterprise – on-premises and cloud-based applications and file repositories - into a single view of each Identity with its currently assigned access rights; defining the business models that capture and manage the lifecycle of each Identity and entitlement; then monitoring and recording activity as those accounts and entitlements are used to access application data – highlighting suspicious or high risk behaviors, abnormal privileged user access, unusual insider activity, potentially hijacked credentials – all to detect and prevent insider threats, targeted attacks and fraud.


Why this in a blog about Business Development?  Because these systems come together for the customer as a result of strategic BD, and the companies that win are likely to have mastered the concepts of 3DBD - and built win-win relationships with those around them - be they centered on go-to-market or technology.


I plan to watch how this plays out in the next 12-18 months as these vendors replace the large Enterprise Software whose offerings are looking somewhat tired to many customers I talk with.


Watch this space - and I am glad to be back in this space after focusing on the success of one particular company over the past 4 years!


As aye


Michael

Managing the Ultimate Security Perimeter: Identity & Access Management

Selecting partners

One challenge faced by Business Development professionals and executive management is deciding which partners are the best to approach at a given time in the company's life.

Clearly, one can play roulette by betting on every number and, while it feels good to have so many small wins, as roulette players know the pile of chips gradually gets smaller. Further, the opportunity cost is huge and approaching the right vendor at the wrong time can be damaging to a future opportunity. So, we need techniques to target better.

Now, there are some 1D approaches to this that can work, such as: which partners might optimize near-term revenue; which are the most likely companies to acquire; which are the most interested in forming alliances with us? While those can certainly bear fruit, and I am never one to scoff at revenue, these approaches are, in my experience, less likely to lead to the desired strategic outcome.

More interesting ways to find strategic partners are available, and use 3D techniques:

• Try building a heat map with tactical and strategic X/Y axes, showing your company at the center. Plot potential partners on the tactical (revenue, near-term outcome) and strategic (ability to drive significant revenue, potential acquisition, etc).


• Plot more interesting vendors closer to the center


• Plot vendors that offer indirect paths to strategic outcomes as themselves strategic

It is also worth looking at your competitors and exploring what strategic alliances they might form, or grow substantially, that could damage your chances of success - those could be some of your top targets!

Repeat this at least quarterly for maximum effectiveness.

This is an art, not a science, but this approach should help maximize the outcome.

Until next time.

Michael

Up front investments

One area where negotiators spend a great deal of time in discussion software contracts is sizing the up-front investment, or commitment, each company is making to an alliance. Often, this is shrouded or overtly captured in subjects like: Pre-payment, up front payment, initial royalty, Non-Recurring Engineering (NRE) charges, and so forth. But, in general, each is a measure of what one company expects the other to "commit" to the relationship in exchange for a special license, commitment to resources, preferred market position, time to market, corporate focus or other less quantifiable "stuff".

As an example, a company may be seeking a preferred (e.g. source code) license and associated set of (e.g. engineering, marketing) services from a software supplier in order to achieve market advantage. In exchange, the supplier must commit resource and an implied single-mindedness to the relationship due to its magnitude or complexity.

For some negotiators, it is hard to get past the size of the financial commitment requested by the supplier (in my example) in exchange for the required license and resource commitments. How do I justify charging "millions" to my potential strategic partner? I find it useful to break down the kinds of value that a supplier is offering in order to come to agreement on the figure.

There are several items that might be embedded in that up front $ figure. Often, the figure was originally based on a need to supplement company revenue (caution!), but the supplier probably doesn't want to share that with its intended partner;-) So, it is helpful to justify the amount on a business level.
I find it useful to consider the following list of components that may be included in that figure. First, value the concrete items such as:

• NRE - Committed engineering labor at fully-burdened cost
• "Buying down" the royalty % from standard rates
• Specilaized ongoing support and maintenance

And, less quantifiable things like:

• Scale (the partner's needs necessarily require you to limit efforts elsewhere)
• Special (e.g. Source code) licenses
• Extended term of a license
• Market exclusivity for a period of time (a scary topic, but this can actually be valued!)
• Cross-licensing of collaborative efforts

To achieve the optimum outcome, the supplier's negotiator should use their skills to break apart the desired financial commitment into one or more of these, and demonstrate to their intended partner the value being delivered for the required commitment. It should help!

More on this over time. Enjoy the spring - the trees and flowers are blooming in Texas!

Peace,

Michael

Cloudy in RSA

Well, for those of us who have been in San Francisco and anywhere near the Moscone Center for the past few days, both the weather and the messaging has been decidedly "cloudy". The weather was typical for February.

The amount of messaging tied to "the cloud" was pretty amazing. I have to say that the level of marketing pile-on I saw relative to messaging for the cloud was a little over the top. From panel sessions to banners and billboards, Cloud was pervasive. At one level, it is exciting that so many vendors see the value in delivering messages, and hopefully product, in support of cloud deployments.

However, digging a little deeper, I and others I talked with during the week have real concern that this feels like another High Tech Marketing Frenzy, not dissimilar to "Virtualization", "The Internet" and "Eyeballs" that we've seen over the course of the past 15 years. In each case, the frenzy dramatically outweighed the eventual value to customers, resulting in more than a few missed expectations for vendors, investors and customers buying into the hype. This is reinforced by customers I've talked with recently that say they need help offsetting the hype with their business users, and that the industry is doing them little favors with self-serving hype.

So, let's be careful out there folks. We all know a bandwagon when we see one, but let's not jump so high that we miss the real opportunity to deliver value to customers. Hype doesn't create value!

It was great to see everyone (and I do mean everyone!) this week.

Until aye

Michael

RSA Monday

Well, despite this being a St Valentine's Day away from home, and a damp day in San Francisco, Monday was as I had hoped.

Maria and the America's Growth Capital team once again put on a fine conference for CEOs, SVPs and interested financial organizations at the Westin SF. As for the past few years this was a very long day, but a day filled with interesting topics, old friends and colleagues, and stimulating conversation. AGC manages to bring together so many people involved in the security marketplace. Most people I saw spent the entire day discussing new opportunities, meeting old friends and finding ways to change the game.

In addition, my colleague John Soper and I met with local San Francisco lawyer David Tollen. David provides outside legal services to local tech and other firms, and also offers training to help contract and legal teams in medium-sized tech firms to help them improve their skills and comprehension. We discussed the potential to collaborate on delivering services to Business Development and legal/contract teams in those firms to help them improve communication between contract teams and BD, and to improve their overall effectiveness in completing the alliance deals they need to maintain their competitiveness in the market, and to build long-standing alliances.

Specifically, we would aim to improve the BD team's comprehension of the business issues implicit in typical alliance contracts, and their ability to communicate using structured term sheets. Likewise, to help the contract team understand the business imperatives and gain trust in the BD team's representation of the issues, to improve the overall outcome and so that otherwise legal "hard stops" can be explored more fully in the negotiation process. I am interested in whether my readers see value in this. John may bring this to the local ASAP chapter for discussion if there is interest.

Particularly exciting to me was the unexpected opportunity to spend time with an old friend from 20 years ago who has some great strategic business development opportunities. Without this conference, we'd never have talked. Because of the conference, we may both have new opportunities. Such is the magic of this week in San Francisco!

Tomorrow is the first full day of the RSA Conference - for me, a day filled with meetings and my chance to visit the show floor. I'll plan to provide a synopsis of what I see as major trends.

Until then...

Michael

From the RSA Conference

The RSA Conference has, for me at least, become the leading Business Development event in the security industry. Combined with the America's Growth Capital conference, it makes getting together with old friends, colleagues and potential business partners easy, fun and rewarding.

So much of what BD folks do in this business is based on building trusting relationships - with partners, and most importantly between people - between colleagues - between friends. This conference enables those relationships to flourish, renew, and create new opportunities. Many former business partners and friends are working at their third or fourth company since we first did business together, and we enjoy catching up and looking for opportunities to collaborate. That's what makes this industry exciting and keeps us coming back - after soooo many years.

I'll add commentary on any interesting events as they unfold.

Good night from San Francisco!

Turning over "Rocks"?

First, I would like to extend my apologies for taking so long to post again! With music performances, Kerrville Folk Festivals and client work, it has been a busy year!

Following my earlier posting on JVP's and Extracting Value, I thought it would be interesting to discuss an example where finding strategic Joint Value unlocked an alliance discussion and led to a unique opportunity for both sides.

In this case, the two companies were participants in the adjacent segments of enterprise security. One large company - call them BigSecure - with a mature customer base and an ageing product in this market, and the other, a smaller company - NewTech - offering complementary technology. During some relatively tactical go-to-market discussions, NewTech realized that its own product direction would eventually compete directly with the mature product from BigSecure.

An interesting dilemma. Should NewTech (i) continue down the go-to-market path, which promised some exciting revenue opportunities, albeit tactical, ignoring the eventual, likely inevitable, collision that risked alienating BigSecure when its new product came to market, (ii) drive the go-to-market discussions off the road and avoid wasting any more time, or (iii) try to figure out how to engage BigSecure in a discussion about the potential collision.

NewTech knew that BigSecure's adjacent product was old, but there was still considerable momentum in the field and a huge installed base to be reckoned with. More importantly, NewTech could turn this approach to its advantage, by finding ways to integrate its technology with BigSecure, and realize even more upside (than a tactical GTM). Finally, there was the threat that NewTech's competitors would get to the table first, eliminating the opportunity. But, NewTech also risked the loss of competitive IP and marketing plans to BigSecure if they opened discussion too far.

What to do? What to do? Tactical gains vs. longer term strategic gains vs. a complete blowout!

The answer is often found in how you negotiate, rather than an "either-or." NewTech decided to negotiate down path (iii). But before showing its cards, it spent considerable effort in a short time negotiating away from the table exploring ways to move forward. NewTech began by carefully assessing BigSecure's options and possible moves, before making a more of their own, introducing a 3D approach into the strategy. With more information about BigSecure's challenges, and its plans with other partners to improve customer satisfaction with the ageing product, NewTech decided it would be able to gain advantage and decided to disclose its own new product plans.

This resulted in (i) identifying competitors who were vying to partner with BigSecure in addressing the problem; and (ii) unlocking new Value Creation opportunities to work with BigSecure by delivering its innovative capabilities into BigSecure’s installed base and new initiatives, both huge strategic advantages.

Lesson learned: It wasn't foreordained to turn out this way. “Turning over rocks” at BigSecure yielded significant rewards. But it was certainly true that the partnership would remain only a tactical GTM alliance if they did nothing. So the key was to explore strategic options in a 3D negotiation paradigm. Then decide a way forward.

Think 3D - it really can make a difference in the outcome and help identify and unlock Value in a relationship...

As aye.

Michael
PS Thanks to my friend John Soper for his invaluable editing!

Panel discussion - Dec 7th - San Jose CA

Friends & colleagues,

I will be participating in what promises to be a most exciting and interesting panel next Tuesday evening (Dec 7th) in San Jose. The subject is "You've signed the deal, now show them the money: engaging alliances in the field". The panel starts at 5:30 and is to be held at TechMart
Network Meeting Center
5201 Great America Pkwy
Santa Clara, CA 95054

You can find more details about the event here:
http://events.linkedin.com/Youve-Signed-Deal-Now-Show-Them-Money/pub/484626

There is also a LinkedIn group you can join to engage in the discussion before and after the panel... check here LinkedIn Alliances Field Engagement Group >>

I hope to see you there! Please come and share your experiences in creating a strong and effective sales effort within a strategic alliance.

Michael

Creating Value – What is a JVP anyway?

As I have thankfully been quite busy since January, I have been talking to my friend and colleague John Soper at New Paradigms Marketing about collaborating on some postings - this is the first in that series of work. Thanks, John, for taking the initiative!

In a previous blog [Northeast, you say?] I have talked about Creating Value with an alliance partner, leading to a compelling Joint Value Proposition (JVP). This is one of most important components of a successful alliance and requires focus over the life of the alliance.

Creating Value is about connecting points of value in you and your alliance partner's business that yields "1+1 is greater than 2" value to your joint customers. But as I pointed out earlier, the best yields usually come from looking beyond existing products; or existing systematized marketing and sales channels; or the existing structure of the support organizations: beyond what's already in your collective "sales bag."

Rather, the Joint Value that often yields the highest return is found by peeling back the layers and looking at the underlying technologies, marketing and sales capacities, service offerings and so forth. For example, you might find move value in combining a platform underlying your product with capabilities in your partner’s application to expose higher value functions that are “must have” upgrades for your collective customers. Or more value in adjusting sales processes to better complement each other (e.g., in combination, broader market coverage, more technology depth). Or, possibly, you can create more value by combining an innovative product offering with your partner’s strong service expertise, so they are seamless to customers.

Progressing down this path of value creation is an evolutionary risk-taking exercise for both companies. So, often you will find executive resistance to devoting effort and expending time and money towards new value creation when you have not yet extracted the obvious value that brought you and your partner together, or there is concern that you don’t yet know the “joint customers” needs well enough to devote more scarce resource. The challenge for the Business Development executive is, then, to lead the formulation of an evolutionary plan that creates sufficient value for launch, demonstrates success and learning from that value creation and then builds on the success to create new value. And repeat! Easy to say, but harder to do successfully – it requires a commitment on both sides to stay in tune with the pulse of the alliance, to learn from each experience, and to have well-supported plans ready to move down the evolution path together.

This search for new Joint Value can be the most creative. And fun! But how do you do you get this value to your bottom line? How do you Extract Value so you are getting your share?

In the next blog, I will discuss some examples, leading into how to Extract your fair share of the Value Created.

Until then - Michael

Developing Alliance Strategies with a View to an Exit

I will be moderating what promises to be a very interesting panel at the upcoming Americas Growth Capital Conference, to be held March 1 at the Westin San Francisco. You can read details about the Conference here. The panelists are from a cross-section of large and small companies, both public and private:

• Tom Reilly, President and CEO, ArcSight (ARST)
• Charles Sansbury, CFO, Attachmate
• George Kurtz, Worldwide CTO and EVP, McAfee (MFE)
• Marc Boroditsky, President and CEO, Passlogix
• Mark McClain, CEO and Founder, SailPoint Technologies

I plan to report on what I learn during the panel, but wanted to give you a preview of what I hope will be discussed. Some of the questions on the table include:

• What strategies have worked in maximizing the outcome for entrepreneurial companies?
• Is there real advantage if companies approach alliances with a view to an exit?
• What lessons have been learned by entrepreneurs when things go wrong?
• What is the role of partner programs at companies that grow through acquisition?
• With a number of new “roll-ups”, must corporate funding & alliance strategy change?
• What alliance strategies can small companies use to maximize their chances of success?
• How do acquisitive firms form their list of possible targets?
• Is there an advantage in having a prior relationship with a large vendor?

With both Private Equity and Public companies represented, I hope the audience will be able to gain some insights into the differing acquisition metrics, and how that might affect Corporate financing in the future.

The panelists are excited about participating, and I look forward to moderating the panel in two weeks.

Stay tuned!

Michael

Value Creation - Developing a Joint Value Proposition

First, I would like to wish a Happy and Prosperous New Year to all of my readers! I have to say that 2009, while a year of hope and change, was also one of challenges for many friends as everyone figured out how to live in a recession. Although the news from Haiti makes us all realize the importance of basic life, health, family and friends, 2010 promises to be an exciting year!

I have circled around the subject of Value Creation in previous blogs, so I thought I would spend some time discussing development of a successful Joint Value Proposition (JVP). As discussed in my October 1 blog "Moving Northeast", developing a Joint Value Proposition involves considering the potential of value created by the alliance. Sounds simple enough, right? Well, there are challenges to getting it right.

First, you are probably trying to figure out the JVP at the same time as you are forming the alliance and, hopefully, even quite early in the alliance (see August 1 blog, "While using a chainsaw..."). So, the target is moving. And, it will continue to move as the alliance evolves, so there will be ongoing opportunities for Value Creation that should be exploited.

Second, you don't know what you don't know - about your potential partners strategies, goals, potential market-changing moves, acquisitions, development plans, constraints and so forth, so you will need to listen well along the way.

Lastly, it is important you are not representing your company's offerings as they exist today, but the entire company's capabilities, including subsets of products and services that might be pieced together with those from your partner to create value. That takes a special skill.

So, how do you get to a JVP?

In my experience, one key to success is building a trusting relationship early in the alliance development phase, so that you can explore opportunities for value creation with your counterpart. Another is having the right people in the room - so that you can seize opportunities to explore value creation when presented.

Personally, I favor the 2-hour brainstorm, where one or two business and technical people from each partner can jump to the white board and test out concepts for value creation and explore the other party's interest. It is always best to walk in with a few ideas of your own, of course - your "agenda", I suppose - so that you can steer the discussion in a direction that is based on your knowledge of markets, products, services and customers. I have been amazed at the results we've obtained when the right people are in the room, with the right attitude. Setting the scene for this is part of the critical skill set of BD professionals, in my view.

Let's contrast this with the typical selling proposition or reseller recruitment effort. In that case, I have a set of products and services in my sales bag, and my goal is to consult with and sell those to my prospective customer or channel partner. Developing a JVP is closer to consultative, solution selling than to traditional sales, but solution selling still lacks the flexibility. The sales exec is, by design, constrained to offering what is in the bag.

With Business Development, the whole company's capabilities are in the bag, and we need to be able to represent all of them to a prospective partner, without going so far out on a limb as to suggest something that cannot be done.

Identifying opportunities for Value Creation definitely uses skills from the artistic side of the Business Development tool set, but following some basic steps can increase the likelihood of success. A marketable Joint Value Proposition is the basis for all truly successful relationships.

See you next time.

Michael

What's up?

This article is intended to raise questions rather than to answer them. So, please read on and let me know what you think.

I have been pondering for some time the question of whether there is a sea change underway: The emerging role of varying forms of "rolls ups" as a more frequent exit for growth technology firms. For so many years, management teams focused on the IPO and public company acquisition as the primary exit strategies - then IPOs went away (they're creeping back, some say), but M&A continued to provide excellent outcomes for entrepreneurs. In the past year, the options for small companies seeking an exit have gone from bad to worse. Exit multiples (of trailing sales) have been comparatively horrible for most.

Enter the roll-up as an alternative exit for early stage companies. I define a roll-up as a company forming a core set of products, technologies and access to markets through small, targeted private mergers or acquisitions. Roll-ups can be led by public companies, often Private Equity (PE)-backed; By private companies with often major PE or Venture Capital (VC) backing; By VC firms seemingly focused on completing a whole product offering in a market as a core investment strategy; or directly by Private Equity firms themselves.

So, what's the difference between a PE firm and a VC firm? Many traditionally VC companies are acting more like PE firms, and vice versa. Strictly speaking, VC is probably a subset of the PE asset class which includes venture capital, LBOs and later stage investments. Historically, VCs have provided higher risk equity for early stages and PE firms have led mezzanine rounds in more mature companies. Those lines have blurred significantly. Is this the result of increased competition in equity financing markets caused by oversupply? If that is true, wouldn't that increase valuations seen by entrepreneurs? I have not seen that, although things have certainly improved in the past few months. Are those related?

So, I am left with several questions to ponder. I have my own theories, but would appreciate any thoughts on them that you can offer:

• Is this a sea change, maybe just a natural result of the recent economy, or nothing at all?


• In the past, combining growth VC firms with solid teams and powerful VCs was near impossible. Must that change for this to work? Is it changing?


• Are VC/Preferred board members considering PE exits more these days?


• I've heard the "they pay low multiples" concern largely ruling out the PE category in the past. Is that changing?

Of most significant concern to me is the effect, if any, this change has on how venture firms approach fundraising? How does this change the way in which CEOs obtain capital if many VC firms are still pessimistic about PE-funded exits, or are resistant to lose some control to a larger group of investors, different management teams or new board members? Of particular interest to me is how this changes alliance strategies for growth companies if their more likely exit is no longer IBM or Oracle, but Thoma Bravo, Attachmate, Brazos or Blue Coat?

I plan to assemble what I gather from this quest into this blog and continue this discussion here. Please join in.

Happy Thanksgiving to all!

MJDE

Coopetition ?

My friend and colleague, John Soper, and I spent some time last year thinking about collaboration amongst competitors: Coopetition. Having worked at Novell during their heyday as an alliance magnet, I practiced strategies every day but hadn't tried to explain what we did; what we discovered.

Every alliance is potentially Coopetitative. Successful BD executives need to be skilled in recognizing and managing in that context, or risk being outmaneuvered.

We defined two types of Coopetition:

First Order, where an alliance is formed between two competitors (A and B). That competitive overlap ranges from small to very large. Such alliances are usually driven by customer demand or competitive threat: the enemy of my enemy is my friend. Industry standards often play a role in these alliances.

Examples about in the market today? On the large scale, Oracle and IBM work together to optimize Oracle databases and applications on IBM hardware, and Oracle applications running with IBM infrastructure software. Clearly, major market forces are at play here. These two companies compete fiercely across Database and Infrastructure software and services, and are about to compete in hardware as well! Coopetition is typical for small companies forming alliances with major players, but examples between small companies are less prevalent, probably because most have simpler product portfolios, so the competitive overlap is large.

The Second Order of Coopetition involves at least three parties (A, B, and C). A forms alliances with B and C, where B and C are significant competitors.

Look at any major vendor (BMC, IBM, Oracle, McAfee, Microsoft) partner program to see examples. The IBM hardware team has close alliances with both SAP and Oracle.

We deemed the imagined 3rd - Nth order cases to be mostly noise unless they reach Second Order status.

So, why do you care? A company trying to approach an alliance partner with First or Second Order Coopetitiion must consider the impact of the overlap on potential marketing and business outcomes, adjust the proposed joint value proposition, and handle the potential competition on both sides. To do otherwise risks a strategic misstep.

If there are complex interrelationships, it can be helpful to plot competing and collaborative products on a “core-context” dimension – the degree of Coopetition then becomes apparent.

In these days of industry consolidation, even if your partner is not a Competitor yet, they may become so soon. So, it is always worth spending time understanding the competitive posture of your potential partners and adjusting strategies and the joint value proposition accordingly.

A value proposition that grows the pie and achieves business goals for both parties will usually trump a critical or peripheral competitive threat!

Back to my coffee.

Michael

Northeast, you say?

In my opinion, the Lax-Sebenius book 3D Negotiation offers the most innovative perspective on negotiation strategy and tactics. One of the important concepts maps to 3D Business Development (3DBD): moving "Northeast" in negotiating share of value formed by an alliance. I call it creating a joint value proposition.

Chapter eight highlights the importance of realizing that negotiations are not just about claiming value already on the table, but about unlocking value created by the alliance itself and sharing that between the parties as well.

I have spent a good part of my career developing joint value propositions around each alliance. It is surely easy to see that negotiating a royalty between 0 and 100% of your own product revenue is a much tougher task than negotiating a share of the total value formed by the alliance, including what you bring, what your partner brings and the value you create by working together.

Whether that is a channel, a new approach to a problem, a market opportunity, reduced waste, a new product or global reach, the result is the same - the combined value makes everyone far better off than they would have been if they'd focused solely on claiming the value already present. So, dividing up that value becomes easier as well.

So, how does that work in our world of Business Development? Some examples might help trigger the imagination:

• The combination of your product with that of your partner forms a strategic edge over all competitors - a whole product - that increases the forecast for both products substantially.
• A licensing alliance that drives volume for your hardware product, resulting in a reduction in per-unit COGS for all sales, increasing margins for your entire business unit.
• As part of a deal, your partner's service personnel call on customers and can provide on site services for you while they are on site, reducing overhead and increasing value with almost no increase in cost.

Of course, each is specific to the negotiation at hand. But, it is easy to see how negotiating shares of a pie that is, say, 50% larger than the basic value on the table is much easier to do.

So, next time you negotiate a product or service licensing alliance, take time to consider both the value you bring to the table and the value created by the alliance and the work you'll be doing together, and make sure you highlight both to your partner.

Life will be much easier, and everyone will be happier if you can use your skills as a Business Development executive to help create value for both companies. A true win-win.

A bientôt.

Michael

PS Thanks to my friends at Lax-Sebenius for their insights

Of Kings and Queens?

I am just back from visiting the old country, including seeing a real live Lord and a few dead kings and queens in churches, hence the delay in my blog schedule - and hence the blog title!

Well, this is not exactly about kings and queens. But, I did want to talk about Royalty - those large, pesky charges that can take months to negotiate, make accountants and operations cringe, yet oil the machine that drives strategic distribution deals including OEM, Strategic Reselling, and so forth.

I have had several questions recently about royalties. and what they should be for a particular situation. Rather than prescribe what a royalty should be, I want to highlight some areas that affect Royalty percentage - the knobs to turn, so to speak.





This chart provides a helpful framework. To explore this, first let's establish terminology: Royalty is what is paid by your distribution partner to you for the right to distribute that product to their customers. And, "Discount = 1 - Royalty"; the inverse. So, if you prefer to think in terms of the discount you give to a partner, you'll need to invert the following discussion. Note that I have carved out the royalty on maintenance or services from the product revenue stream. That is crucial, as the work share is entirely different for each revenue stream.

Margin is paid for effort from the selling partner: Including sales, marketing, G&A, inventory carrying, manufacturing, support - etc. All the things it takes to create and sell a product except, usually, the act of creating the Intellectual Property itself. The amount of royalty is typically inversely proportional to the amount of effort your partner does in helping you deliver the product to revenue-generating customers. The more work they do, the greater commitment they make, the lower the Royalty paid to you. Simple, right? Well, not really.

Here are just a few of the things that make negotiating Royalties so hard:

1. Companies have financial goals. If you place a product in their sales channel, it is subject to the same internal "taxes", SG&A costs, etc, as for their own products. And, SG&A alone can be 50-60% of revenue, so that half of your product margin gone!
2. Commitment. The greater the commitment from your selling partner, the lower the royalty you should expect from them. That works both ways, as you can sometimes negotiate higher commitments from your partner in exchange for a reduced royalty to you. Commitments can come many forms: taking on product manufacturing, making up front financial or volume commitments, assistance from you in selling the product, etc. A double-edged sword, so use it wisely.
3. Channel differentiation. If your selling partner is going to be selling the same thing as you currently sell, how do you differentiate the products so that the result is incremental business to you? Do you even care if the volume is large enough? So, differentiation or "value-added" arrangements can drive down Royalties as they drive up channel differentiation. Again, a double-edged sword as they can be used to arrive at the selling partner's desire royalty by increasing differentiation in the market.
4. Time. Royalties can vary over time. The best example for this is what I call the ramp-up period. For the first 6-12 months, a selling partner will often need lots of help from you to build market presence, expertise, close business and excite their sales team. That costs you something. At a minimum, you might pay sales people so they cooperate and not compete with your new partner. Use a discussion in this area to highlight the value of "effort" and negotiate an increase in your share of the deal.
5. Joint value proposition. Lastly, and most importantly, remember that you are not just negotiating the share of YOUR revenue - you are sharing in the income from the joint value proposition you've created with your potential partner in the deal. So, make sure the partner takes stock of their own upside - that is most likely why they are doing the deal with you, to be sure, regardless of what they actually tell you! Use it in negotiating Royalty.

Another area of complexity is the meaning of "list price" in your own selling model. If you are selling enterprise software with a typical 50-70% discount to customers, you must base the royalty equation on a model reflecting those discounts, or on a Net to Customer rather than List Price basis, if feasible. Can be quite complex, but can kill a deal if not well understood.

So, have fun in the Royal court, and let me know if you have any scenarios or stories to share on the subject.

Until next time,

Michael

Nothing can go wrong, go wrong, go wrong ...

I am not sure who coined the phrase in today's title, but all of us in high tech can relate to it!

Unlike buying and selling real estate or even a car, forming a strategic alliance doesn't end with the signing and announcement of the contract. That's why an alarmingly high percentage of alliances "fail" over time - alliances are more like marriages: they require attention and an evolutionary approach in order to remain relevant, vital and important to both parties. Expectations, business imperatives, and people all change over time and so must the alliance.

So, how does a company improve its chances of being on the successful side of the ledger? While the real answer will depend on the parties and details involved in a specific alliance, following a few careful steps can make the difference.

1. Consider what "success" and "failure" mean - both to you and to your partner. Often, an alliance will seem to be running well for one party, and horrible to the other. Take steps to understand the changing metrics that your business and your partner's business use to measure success, and adjust accordingly.
2. While "Win Win" is a rather hackneyed term, targeting to follow the curve of success for both parties will increase the odds both parties are in for the long haul
3. Maintain executive contact - particularly through organization changes and periods of stress. Just like a marriage :-) Required Quarterly business reviews with sponsoring Executives is essential. Make sure they happen!
4. Don't be afraid to change the fundamental basis of the alliance if you see things going horribly awry. Consider alternative ways to work together, generate incremental revenue or improved market position for your company - think out of the box. For example, if you have a product licensing arrangement and your partner isn't happy with the selling relationship or profit margin, propose a well-considered alternative to increase margins and self-sufficiency. Remove the pain.

Successful alliances take work - not just at the start when the lights are on, and the stage is filled with music, but during the darkest hours when tempers are frayed and there's grumbling in the wings.

Does anyone have a story of an alliance saved from the dead by a well-considered change of course? Please tell!

A bientot

Michael

While using a chainsaw...?

There is nothing like 2 3-hour sessions using a chainsaw to cut a pile of wood in the Texas summer to focus your mind on something - something other than cutting hard, aged oak!



I have spent a great deal of time over the past 3-4 years with my friend and colleague, John Soper of New Paradigms Marketing Group, talking through the various phases of the Alliance Spectrum and when and how various transitions occur (or can be made to occur) during the discovery, formation, management and endgame (or rebirth) of each alliance. One of the most important transitions to understand or control is when negotiations begin and end, understanding how to determine those points, and what to do to optimize your desired outcome.



Some would say negotiations start explicitly when one party presents business terms, starts drafting a contract, or sends one of those "we never change it" standard form agreements to the other party. At least then, I say. In fact, in my view (and I think John shares this view), a good approximation for determining the starting point of negotiations is to find the date when the two companies first sat down together to identify a joint value proposition for the relationship. At that point, with quick minds at the table and a solid understanding of the technologies and business parameters involved, each side has the opportunity to start the negotiations and gain advantage. Identifying ways that fit your company's strategy where capabilities might fit into your partner's strategy, laying out key facts, market realities, technical or market capabilities that set the direction for the alliance from the start. And, most importantly, doing so while establishing the new value created for the other party. As I said, quick minds are needed as one usually doesn't enter the meeting with enough information to predetermine those points. You may not even enter the meeting realizing that you are about to start negotiations.



Missing the opportunity is not deadly. But, for a small company the ability to direct the joint value position in the most positive light for your company at an early stage can be the difference between success and failure in forming the alliance, and in maximizing the benefits. It doesn't always happen then, but you can make it happen then by choosing your team carefully, and being well prepared.



So, next time you walk into a meeting or a call with a potential partner, it might be the one. Make sure you are prepared, and have the right people with you to seize the moment!



So, where do chainsaws come into this? Well, I really have been pondering this blog the last two days while cutting a pile of wood into logs for this fall. But, it also occurred to me that it is a wise strategy to approach each cut as if it could be the one where the blade slips, and one that has kept me safe for 15 years of happy sawing!



Carpe Diem! Until next time.



Michael

A Balancing Act: business focus versus exit planning...

I trust everyone is having a fine summer, and more rain than we have in Central Texas!

Boards of Directors will make it clear to a CEO that building and running the business is central to success, and suggest strongly not to focus too early on who might acquire the company and when. Good advice. It is a world-class team, a solid value proposition, and a strong revenue growth curve that create value in the business - and that eventually affects price and interest from potential acquirers.

But hold on - forming strategic alliances is often critical to both the marketing and revenue picture as well. And, if my competitors are out talking to their friends at potential acquirers, am I not missing the boat by focusing on the business?

Most startups that reach the go-to-market phase where customers are buying their products are balancing business execution with Corporate and Business Development. It is a balance. The executive staff needs to be involved in development of alliance strategy, but generally line organizations should not. Details about progress with strategic alliances should be compartmentalized.

An Alliance Strategy should be based on:

• A clear sense of the value of your product and service capabilities, including both what you sell to your customers and any unique capabilities and components that underly
• A well-considered view of adjacent markets that leads to partner selection - thinking as broadly as possible
• Articulation of a rational joint value proposition to approach each potential partner, and any desired outcomes
• Availability of someone skilled in approaching partners and driving a strategic exploratory process (refer to my June 17 post!)
• Availability of technical resource (e.g. CTO) to keep them honest, technically.
• A market view of your competition and what they might or might not do

I work with each of my clients at quarterly offsite or board meetings to fully develop this plan, and formulate an evolving list of targets. From there, the team can start to execute and then refine the process over ensuing quarters.

Business development becomes more complex as you look 1-2-3 years down the road, consider potential acquirers (or "Chairs" - see May 13 blog), and start to understand what will attract (or repel) you to those chairs. It is not always the right answer to approach or form an alliance with your comfiest chair early on.

There are good examples of companies who tried to get a deal done in the wrong sequence, without considering broad market factors, and drove their preferred chair to their stronger competitor. Consider this example: A company has a market-leading flagship product, but a competitor has both a poorer, but often sufficient, offering in the same area and an adjacent product offering that could provide additional value to partners. A strong alliance strategy may be to complete the offering by internal development or forming an alliance with someone who also has this adjacent capability, and then to approach the desired chair with the combined offering. Approaching the desired chair too early might simply educate them and send them to your competitor.

So, given the importance what are some techniques to manage the balance between business execution and corporate exit? If you have a designated executive running the BD process who manages their strategic work separate from any day-to-day responsibility, you already have some separation. Maintaining confidentiality of the process from the line organizations, particularly if the effort is bearing fruit, is important - but the pressure to pre-announce a revenue or go-to-market alliance to the sales team can be distracting. Choose carefully what you communicate. Sales teams are paid to find out information - including from your corporate team - so I recommend having a clear executive decision process for what and when BD information is provided to line organizations.

In the end, strategic BD should start at the go-to-market phase of the business. The challenge is to find good, focused resources to begin the Corp and BD process - aimed at supplementing revenue and market presence, but always playing the game with an eye to the exit.

Next time, we'll talk about when negotiating actually starts with a potential partner?

Peace,

Michael

Barney? What's he got to do with this?

As you set alliance goals and develop the relationship, you must consider the type of relationship that you and the potential partner seek, ranging from a simple joint press release to a strategic alliance focused on managed services or outsourcing, to value-added reselling, OEM and beyond.

The joint press release is fondly known as a "Barney" relationship because of its superficial nature, but it does have its place in the spectrum. As an aside, I have found that companies who overuse Barney will tend to lose credibility with analysts and press, making that strategic alliance press release harder to pitch.

As you walk across the Alliance Spectrum, you can explore a range of co-selling/marketing alternatives with both products and services. Further to the right on the Spectrum you will find revenue sharing and OEM deals, joint ventures and, of course, the exit: mergers and acquisitions.

As you engage your partner, I encourage you to share expectations about where each firm would like to start, and where you would like to end up on the spectrum. Many leading technology firms now have formal programs that are designed to evolve from a co-selling model at the start to a value-added reselling or OEM relationship as both partners gain experience and success. This makes good sense, and I applaud those who have recognized that truly strategic alliances evolve over time.

Under the Alliance Spectrum you will see a typical distribution of work between the partners. While the distribution of work varies from what is shown here, I have found it important to be clear about precisely who is going to do what. Who is going to build the product or the integration between products? Who is going to market the solution, and sell it? Who will provide customer support and other services? And so forth... From experience, I have found that companies name these types of relationships differently: For example, some companies use the terms "Strategic Reselling" and "OEM" to mean the same thing, and others use them to mean something quite different, so it is crucial to discuss in fundamental terms who is going to do what in order to determine how the relationship, and the contract terms, will develop. Failure to do so can result in misunderstandings and unmet expectations.

So, don't get caught expecting an outcome based on the "name" a relationship is given; talk to your partner about the distribution of work, and how your alliance might evolve across the spectrum so you have a clear picture about the value each is adding to the relationship over time. From there, you can set expectations, and determine how to allocate revenue, cost and margin to each in the term sheet.

Next time I will explore the corporate development arena, and how your eventual exit impacts how you act today, even if it is years away. If you like the game of Chess, we will have some fun!

Until later,

Michael

Defining "Success" for BD professionals

Well, I am back from an extended vacation spent at the 38th annual Kerrville Folk Festival (http://www.kerrvillefolkfestival.com/), which is a special place and time to share music with old friends. I am well rested, albeit a bit sleep-deprived!

At first glance, it may seem trivial to spend time discussing how to define success for the Corporate and Business Development executive. But, over the years I have seen cases where results would have been very different had the goals & incentives been wrong.

As an example, when I engage with a potential partner for a client, one of the first things I determine is the organization and role of the people I am dealing with. Who does the partner BD person report to?; are they in sales? , or do they report to the CEO in a Corp and Business Development team?; are they part of the product team? We've all seen the BD title used in the sales organization, and it usually means something very specific relative to revenue - often with an OEM or reseller revenue goal, coupled with a Market Development function driving new business opportunities for sales. Some of my best friends are sales executives, but they will all acknowledge that their focus on revenue is paramount, and that strategic business development is different.

So, if I am discussing an alliance someone who has a revenue goal, and my expected outcome for the alliance doesn't involve direct revenue for the partner, there is going to be a mismatch at some stage, so it is better to find that out sooner rather than later, and finding another contact in the organization with a more strategic focus.

Why does this matter? Well, we all know that people tend to optimize their own incomes; that is why companies have variable incentive plans! So, working across from someone carrying a primary revenue goal will always drive the conversation to how much revenue I am going to provide for them, resulting in frustration and wasted time if I don't share that goal.

Here's a more interesting example. Many times, my clients seek alliances as defensive moves - either in an attempt to prevent a smaller direct competitor from gaining the upper hand, or in order to prevent the partner from entering your market in competition. In either case, while revenue may be important, the critical goal is to engage with the partner, even if it doesn't result in substantial revenue, or even result in an alliance. So, while the intended goal may be to form an alliance if possible, "distracting" the partner for a period of time is just as effective, so signing a contract and generating revenue are both secondary. If the person assigned to handle this transaction is measured and paid primarily on revenue, it is easy to see how they could fail to achieve the strategic goal.

But, defining measurable goals for BD is important for both the company and the individual. Direct or indirect alliance revenue is obviously important to the business, and is always a component of that goal set. BD professionals who are tasked with forming and managing Strategic Alliances should be goaled and measured on quantitative strategic outcomes aligned with business objectives, such as:

• Forming a specific number of alliances in a specific period of time, possibly with a list of targets or classes of prospects;
  
• Managing a review process with the executive team to define the target list of partners over time - at least quarterly - so that the goals remain fresh, reflect market dynamics, and changes in company strategy;
  
• Generating marketing success - measuring Press Releases, positive analyst coverage, lead generation resulting from activities with partners;
  
• Engaging with a specific target partner to limit or prevent competitive threats, and of course
  
• Generating direct or indirect revenue from partners. Indirect revenue is that generated by the business as a result of influence by the partner. Direct revenue is that generated through and by the partner.

I welcome hearing examples from readers of situations where goal-setting was used effectively, or resulted in disasters - nothing is better as a learning tool than seeing the results of such a mistake.

Next week, I will spend some time discussing the Alliance Spectrum: different types of alliances and how each adds value to the business. Suggestions for future topics are always welcome!

Until then ... thanks for listening!

Michael