Partner Relationship Management (PRM): The Ultimate Channel Sales & Partnerships Podcast

35 - How to PE Takeover-Proof Your Channel Program - David Sherman

• Magentrix • Season 1 • Episode 35

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How does a private equity firm’s takeover typically impact a company's strategic direction and how can it affect their channel partner program?

Sometimes, channel partner programs get the axe when a PE firm takes over.

In today’s episode, we’ll: 

  • explore this issue, 
  • investigate the underlying reasons, 
  • and discuss strategies to protect your channel program from being eliminated during a PE takeover.

Chapter markers:
(01:02) Guest Intro: David Sherman
(04:09) How a PE firm’s takeover typically impacts a company's channel partner program
(07:42) Common reasons investment firms cancel or restructure a partner program
(08:47) Performance metrics evaluated by private equity firms
(09:40) What metrics should PEs really be analyzing?
(12:09) How important is it for private equity to enhance the partner program
(14:26) Potential risks of canceling a channel program could bring to customer relationships?
(15:58) PEs that keep the partner program post-takeover - maintenance strategy for them?
(17:11) Most important aspects of partner management to you that can help a channel chief prove out the channel program to the PE
(22:11) What can typically go wrong with channel program with M&A as opposed to private equity takeover

This production is brought to you by Magentrix ✨💜
Magentrix is a pioneer in platforms for partner ecosystem management and partner relationship management 🤝

If you haven't already, please like 👍 & subscribe! ✅ And if you enjoyed this episode, please leave us a review on Apple Podcasts ⭐️⭐️⭐️⭐️⭐️ https://apple.co/3HcqSsm See instructions to do so at the end of the episode.

To learn about Magentrix PRM, please visit www.magentrix.com

______

Podcast Credits:
Host: Paul Bird
Executive Producer: Fereshta Nouri
Content & Research: Fereshta Nouri
Graphics & Branding: Fereshta Nouri

>> Paul Bird:

This is partner relationship Management, the Ultimate Channel sales podcast. Welcome to another episode of the Ultimate Channel Sales podcast. I'm your host Paul Bird. How does a private equity takeover typically impact a company's strategic direction and how it can affect their channel partner program? Sometimes channel partner programs get the ax when a PE firm takes over. In today's episode, we'll explore this issue, investigate the underlying reasons, and discuss strategies. Protect your channel program from being eliminated during a private equity takeover. As usual, feel free to follow along with the transcript or easily replay sections with our chapter markers. Our guest today has been in the channel space for more than 21 years. His expertise includes Potts transformation as a service and if you're not familiar with the term Potts, that stands for plain old telephone service. SD wan sase and mobility solutions. In his most recent role as director of channel sales at Spectrotel, he was their very first sales hire and grew their channel department to more than 15. Today he's with us to talk about how you can take over proof your channel program from private equity. Please welcome David Sherman. Welcome to the show, David. It's great to have you here.

>> David Sherman:

Thank you, Paul. Pleasure to be here. Appreciate the opportunity.

>> Paul Bird:

Perfect. So why don't you tell us a little bit of some of the highlights in your career in the channel so far.

>> David Sherman:

Yeah, so it's been a great ride, without a doubt. Definitely, always evolving, always growing as we see additional partners and vendors and suppliers continue to join the race, the race to the bottom, and many instances as we see the prices going and more data requirements for the companies across the board. But yeah, I mean it's been a wonderful ride. A lot of growth, a lot of mergers, acquisitions and now private equity getting into the mix. And each one of those have their own pros and cons associated with them. I have pretty diverse background. I've worked for that local income and carrier. The AT and T is a verizon to the world. I do have some cable experience with nodes and head ins. I have worked for a smaller facilities based carrier, so I'm familiar with switching and networking and nnis and things of that nature. And then in the channel space with a next, generation aggregator, more of a global economy provider in the same space. But each one of them bring along their own opportunities, their own potential, and then some downsides that can come along with each of those as well.

>> Paul Bird:

So what do you enjoy the most about being a, ah, director of channel sales?

>> David Sherman:

Well, it's definitely developing relationships, partnerships, nurturing those engagements and helping customers save money ultimately is really the goal or plan for optimization, digital transformations to improve their business processes and increase profitability long term for sure.

>> Paul Bird:

Any plans coming up for yourself? What's next for you and your career?

>> David Sherman:

Yeah, so it's interesting, yes, that director of channel sales has been my title for the past, it would be 16 years. I have personally just accepted a b channel development role in the similar space. More of a boutique firm, but with a global reach and many more products and services to offer, so that there's really no opportunity that's too large or too small. Nothing that you have to walk away from, but still have the ability to take advantage of those partner engagements and customers as well, of all sizes.

>> Paul Bird:

Well, congratulations. So let's get into today's discussion on private equity takeovers. So how does a private equities firm takeover typically impact a company's strategic direction? And how do you feel it can affect their channel partner program?

>> David Sherman:

Well, it can definitely affect it in many ways, without a doubt. Weve seen it run its course in many other companies where this has taken place. And in some cases it can fuel the fire and lend them additional resources and capabilities, the ability to improve their products and their portfolio for their customers and vendors. In other instances, it could be eliminated completely or changed to the point where it's no longer the same program at all and could be through adopting different platforms. It could be through pricing changes that take place, especially in private equity, where those investment bankers, they really want to make their money back in a shorter period of time. Traditional mindset, for that business owner, and in many instances, there are going to be other changes that take place, whether that be on timeframes for things to get done, whether it be on, commission structures for both internal employees as well as agents and partners out in the field. And it could be just based on relationships with suppliers and or vendors, especially in private equity. In many instances, that new ownership could own or have hands in multiple companies in the same space for sure. And again, that can bring along its own positive and negative attributes.

>> Paul Bird:

So if we look at, if the investment firm decides to keep the partner programs, what other ways do they bring about change to it? Is there effect on the channel leadership team? Is there kind of, additional changes that they typically try to make that you can kind of fight against a little bit? What do you see when they decide to keep it?

>> David Sherman:

When they decide to keep it, they usually, try to keep it at the same or lower cost, which in some cases for the partners can be detrimental because they've built this customer base over time, in many cases, a residual commission that is their lifeblood, in addition to what are considered one time spiffs or bonuses for the business they bring to us, like a finder's fee. But not all equity firms want to continue paying in that vein. Now, these are 1099 employees, for the most part, that own their production. But sometimes, it may be looked at as easier to pull the plug on those type of programs than it is on direct internal employees. That might be looked at more negatively as a layoff or something that could potentially drive down share pricing.

>> Paul Bird:

So almost get rid of the long term residuals and focus on net new or land and expand.

>> David Sherman:

Yeah. And then also what you see in some cases is that the internal employees that have the loyalty, the longevity, and have produced the most, which are most often getting paid the most, could potentially be in a position where replacement could become an option. May become an option, or they might look at it as the freedom to hire five or six new people for the same price that they pay one or two today. So those are all on the table. And you see that happen in many different instances across the board, especially within the past five to ten years.

>> Paul Bird:

So in your experience, are, there some common reasons that an investment firm might cancel or significantly restructure a partner program, kind of post takeover?

>> David Sherman:

If they feel that there are other ways to generate that same business and or expand on it at a lower cost, that would be the main reason. It goes back to the fact that they might look at one particular relationship or partnership where theyre paying thousands upon thousands of dollars per month for business that has already been in the pipeline and active, in some, cases, for years, because these original agreements carried evergreen clauses where the partners would get paid for the life of the customer. Unfortunately, once a private equity firm comes in, they may have a little bit more flexibility and leeway on what they choose to keep in place going forward. In some cases, those clauses get pushed by the wayside, along with those residual commissions, which have grown to significant figures over years and years.

>> Paul Bird:

Are there other performance metrics that are often evaluated by, a private equity firm to determine the effectiveness of a, partner program? And are they really looking at the right metrics, or is there kind of a flawed analysis? In a lot of cases, I think.

>> David Sherman:

In many cases, I would hesitate to call it flawed analysis, because when you're talking about private equity, you're talking about investment bankers, and that financial that they bring to their position is the reason that they're there. So its not necessarily flawed, but by the same token, theyre not necessarily concerned with past production relationships, loyalty, time and service, things of that nature, which are generally looked at favorably, at least during the period when youre building relationships and building a business from an entrepreneurial mindset, which is a little bit different than the investment banking side.

>> Paul Bird:

Trey, do you think that they should really take those metrics into consideration, or are, there other metrics that maybe are not as cut and dry, something that you can put on a balance sheet so they get a more accurate picture of the operation of the business?

>> David Sherman:

I think they could definitely be taken into consideration, but that would extend the lead time on them making their revenues back. So a lot of times with private equity, theyre going to want to make back their investment within a, ah, two to three year period in a perfect world. And sometimes they may overpay for an organization and it could take them longer. But if they keep the business running the exact same way that it was when they came in, there's no doubt that that's going to be an extended period. They optimize themselves and try to run a little bit leaner in order to get those monies back in a more favorable position as quickly as possible.

>> Paul Bird:

So we talked about the elimination of the high priced employee as well as the residuals. Are, there some other cost cutting measures that investment firms tend to take that could also impact the partner program?

>> David Sherman:

There are definitely others. Weve seen in some instances where companies will pride themselves on 24 7365 support, and thats the way that theyve built their programs in the past that may not be looked at as favorably by an investment firm that has to pay people to work. 24 7365. So it's interesting to kind of see the progression that could take place in some

instances where 07:

00 a.m. to

07:

00 p.m. becomes much more favorable. Does it mean that you're eliminating those people completely? Not necessarily, but you may be forcing them into a, different environment or working hours that may not be as favorable or amenable to them. So weve definitely seen that take place as well, where people may feel forced out of a position as opposed to laid off or fired. But again, those salary adjustments work to improve the bottom line and help them, make that money back quicker for sure.

>> Paul Bird:

So lets look at the flip side of the coin on programs that have flourished. I know that through my career, m one of the companies that id followed was SolarWinds. And when private equity came into SolarWinds, that infusion of capital really helped them create a more robust partner support system and really expanded their reach. So from your perspective, how important is it for private, equity to kind of enhance a partner program or maybe specialize in a specific market or expand a company's reach? Do you think that from the flip side of the coin where somebody's flourishing, that they can make a big impact?

>> David Sherman:

Sure, I think there are definitely positives that can come from that as well. Additional resources is one. Right off the bat, if you're a multimillion dollar company and you're acquired essentially by a billion dollar company, there's going to be more flow around, you can fill holes, you can bring on additional employees that you may not have had that same flexibility in the past. And you can also look at, ah, additional products, services, support functions that may have been a need in the past that you just didn't have the wherewithal or the resources to fill. So yeah, there are absolutely positives. There could be the ability to bring on additional products into and add to a portfolio as well that you may not have had the interest or resources to attack in the past or as quickly. They may have been a roadmap item for the end of the year that get pushed up to the beginning because they have high margin and are more favorable products. The other thing that we've seen is the adoption of artificial intelligence. So utilize that to your advantage and create a better customer experience. Then ultimately that's going to be a positive for your customers and that agent engagement as well. So if you can get quicker answers to the phone, quicker answers to support or trouble tickets or billing questions, things of that nature, and there is an AI functionality that can be brought into place. Yes, there's a one time or essentially an upfront cost, but in theory, that AI generation is learning each day, and it's learned from your business processes and the support functions and responses that see is passing through the system. So it should be able to do more in an automated fashion each day, each week, each year, potentially eliminating either some positions or giving you the ability to cut back on some salaries that are paid today for sure.

>> Paul Bird:

Im glad you brought up customers because im wondering about the effect. Youve got an equity firm that has taken over a company that they work with. Theyve got a good strong relationship with a partner. Are there any kind of potential uncertainty that brings into a customers mind where they might have to evaluate the risk of losing that relationship with the partner? Or maybe they're concerned about, maybe they'll switch vendors because they're no longer going to be working with a partner. I mean, we've seen this with organizations like VMware that just killed their channel program, or, sorry, not killed it, but significantly narrowed the focus. But what about the impact on the mentality, the thought from a customer perspective, if there's that uncertainty, if they're still going to be working with that partner or not?

>> David Sherman:

Yeah, depending on what the relationship is between the customer and the carrier channel engagement, there's still a question mark because they don't know if that partner is going to continue to be paid on the account. They may not have been aware that the partner is being paid to begin with on the account, but the relationship that they have with that partner, in most cases, you would think they want to stay intact. And if that partner no longer being paid on the account, then their willingness to continue to service and support that same customer may be diminished. So yeah, it's definitely a concern. We've had questions come up during initial pre sales meetings or customer engagements for demos or trainings or quotes where that question has definitely been asked.

>> Paul Bird:

So if a, firm comes in, they acquire a company and it's a really well managed partner program, and they decide they're going to keep it post takeover, is there an effective partner management strategy that they should put in place given that this is a really high performing, maybe they're 100% through channel, they decide to keep it because it's so well managed. But is there an approach in how they'll value that program and the importance of maintaining its current structure because it's performing so well?

>> David Sherman:

Yeah. So, when you purchase a company that's 100% channel focused and channel driven, then you really have no choice for the most part but to keep that channel strategy intact and the leadership as well, because theyre the ones that are driving the revenue partnerships, the engagements, the supplier relationships as well. Whereas if youre dealing with a carrier that has both a direct sales component as well as the channel, then you could potentially have a choice to make or both intact. But that brings along its own kind of internal issues as well. Depends on what the initial strategy was and what that mindset was going in on how to build the business or the best way to go about it.

>> Paul Bird:

So what would you say are the most important aspects of managing partner relationships or managing your channel? That the head of channel or the director of channel would need to prove out to the equity firm to let them know this is a high performing program. Are there any specific aspects or any tools that you can use to help?

>> David Sherman:

I would say it's month over month increase in revenues which show that it's a productive platform, it's a productive strategy. You're always building new relationships and bringing on, new logos in addition to the cross sell and upsell opportunities that come from the existing customer base as well. As long as you're bringing on new products and services and enhancing those capabilities, then there should always be additional upsell revenue as well. And it's really just maintaining that support structure and then being proactive as far as renewals are concerned and really lifecycle management and engagement to stay on top of those opportunities as well. Because in the channel environment and really telecom in general, the longer the customer stays with you, the more profitable their account becomes, building out that infrastructure or renegotiating rates with underlying carriers. So it's really about building a long term relationship both with your partner and with the customer as well.

>> Paul Bird:

Now, does any of this advice change when it's a, merger or acquisition?

>> David Sherman:

I don't know that the advice necessarily changes, but the mindset or potentially the timeframes going into those engagements could differ. There is usually two like minded business owners that, have some type of synergy or some common roadmap in place, or future growth aspect where they either have a product that one is a specialty in and the other wants to get there, or they find that they have so many similar customers that there's a mutual benefit to that engagement. The acquisition is a little bit different just because you could look at it going in as the same mindset, but generally one company is going to be much larger than the other as opposed to just like minded individuals of maybe similar size. And then you also have to determine, are you going to keep multiple people in multiple departments that are shared? I mean, do you really need two HR departments now that it's one company? Integration of systems, are you using the same operating systems, the same order process, same accounts, payable softwares and apps and capabilities? Are you going to adopt best practices from one and not the other? And then are you going to top grade certain positions and allow others to kind of fall off? There's a lot that goes into it in both mergers and acquisitions, but the recommendations are going to remain the same. I mean, ultimately, their capitalism, they're in business to make money and they want to make the most that they can on each partner engagement or customer engagement, really, when it comes down to it, absolutely.

>> Paul Bird:

I've seen this with companies that I've worked with in the very recent past where two companies come together. They both have head of channel. And actually what happened was the company that was acquired, that person became the head of channel, and the person that was head of channel, they got promoted. So they were keeping the best parts of all the organizations. But I know that when I talk to people on the back office side of things, that merger or acquisition becomes a nightmare because. Exactly. Theyre bringing multiple systems together and that can be a lot of work if theyre doing multiple acquisitions within a, ah, really short period of time.

>> David Sherman:

Sure. Yeah. The integration is key and quite honestly, thats also the largest downfall. Without naming names or disparaging any companies, those that have multiple mergers and acquisitions under that one umbrella usually have the most difficult time if it's not managed properly upfront. And we see that on a daily, weekly, monthly basis, just with vendors and suppliers that we utilize daily that may have gone through that over time. And you can always integrate every system in some cases. We've also seen adoptions or acquisitions where a company will buy a certain region, a certain footprint, a certain locality, because they want to get into that market. But what they find is that they don't have any employees with the expertise to run those products and services. So now, they're left in a kind of a lurch where they have to pay the company that they bought, do some consulting for them for a period of time to bring them up to speed on what they actually just purchased. That happened before too. It's just kind of crazy.

>> Paul Bird:

Yeah, I have seen that before as well. So from your perspective, what can typically go wrong with channel programs on the mergers and acquisition side, as opposed to the private equity takeover on the merger and acquisition side?

>> David Sherman:

It could be that these two companies share the same agents and partners already, so they think that theyre getting additional revenues when the truth is that they may be cannibalizing from that other party and there may not be a huge benefit from it, but theres still going to be additional products in the portfolio, theres still going to be additional solutions and additional revenues out of the gate. Its just that that growth may not be as great as they anticipated if theres a lot of shared partners in the space technology, although it's a global economy, it's still a small world in the technology space.

>> Paul Bird:

That's very, very true. So, as we start to wrap up, can you share any insights or tips for vendors who are currently going through either a merger, acquisition or private equity takeover and they're worried about losing their partner program?

>> David Sherman:

Yeah, I would say definitely learn everything that you can definitely stay on top of and read, about the company that's coming in and acquiring and or merging or purchasing outright. Stay on your toes, be open to new opportunities and have your resume up to date. Just be safe and do your due diligence. I mean, go out there and look at the largest competitors in your market they're doing and what they've gone through in the past. Take a peek at the past mergers, acquisitions, and private equity takeovers within the past year in your market as well. Its interesting. In my prior position, we have an annual review in December of each year and December of 2023. Part of what we had to bring to the table as a group were reviews of our competitors. And its great because youre learning about what their product set is, what they do well, and what they don't do, and kind of gives you a holistic view of that entire market and or industry or base of competitors, in the space. But it's also interesting in that you know where to go and look and you know who's doing things right and who may, you know, may not be at the top of their game or who's faltering, because you learn that as well within the feedback that's received.

>> Paul Bird:

So what is the best place to, stay up to date with trends in your market? Is there anything that you recommend in the channel space?

>> David Sherman:

Well, obviously, adoption of LinkedIn and different groups and partnerships that are available on there. There's a wealth of information available, certainly industry events, channel partners, and ITC and channel Connect, what have you. There's a wealth of those available as well. And really being on top of all networking capabilities and engagements, I'd be remiss to just, offer one. There are so many out there and available, including podcasts as well, which there are a ton of.

>> Paul Bird:

Absolutely. All right, David, well, thanks so much being a guest on the show today. It's really been a pleasure to have you here.

>> David Sherman:

Thank you, Paul. Truly appreciate it. Wish you all the best. Have a great summer.

>> Paul Bird:

You too. Take care. All right, guys, thank you for listening to the Ultimate Channel sales podcast. Please don't forget to join us next time. For more information, please visit channelsalespodcast.com. if you haven't already, please like and subscribe to our podcast. And if you enjoyed this episode today, please leave us a five star rating from the Apple podcast app. just select our show, scroll down to the rating and review section, and click write review. And don't forget to share with your friends or professional network anyone who to enjoy it. See you next time on the ultimate channel sales podcast.

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