Ecosystems promise collaboration, but most channel programs are built for efficiency, control, and margin protection — not shared value creation.
By Larry Walsh
Channelnomics maintains a dictionary of common terms specific to technology business and indirect-sales models. If there is a term that deserves a tag as being the most tortured, it’s “channel ecosystems.”
Since I entered the channel more than 20 years ago, I’ve heard about ecosystems, or the pairing of complementary partners — be they vendors, resellers, service providers, or integrators — to deliver a product or a working system that has greater value than the sum of its parts.
While many lay claim to coining the term “ecosystems,” it actually originated with a 1993 Harvard Business Review article by James Moore, who defined the concept as two or more companies working together to create a product for the customer. Moore may have referred to this as an ecosystem, but he was describing something that’s been endemic to business for time immemorial.
Today, the word “ecosystem” has several meanings. Some channel people use it to describe their network of partners and the breadth of their market coverage and capabilities. Others describe it as a means of multiple partners working together to meet a customer’s expectations. And yet others simply use it as a replacement for their partner community.
Two of the three are valid definitions, but vendors have a conflict with the concept and the model. While vendors like to talk about having partners with diverse capabilities that can offset each other’s weaknesses, they’re constantly trying to maximize the potential value of partners by getting them to sell more of their products and services. They look to partners strong in one category and prod them to expand into other categories, regardless of their market focus or customer needs. In practice, vendors often conflate ecosystem strength with partner density or breadth rather than precision of capability and collaboration.
Vendors always want to do more with less. The fewer partners they work with, the fewer resources they need to support their go-to-market and customer engagement needs. Fewer resources mean lower expenses and higher profitability yields or, what we at Channelnomics call, “return on channel investment” (ROCI). This optimization instinct is rational, but it runs counter to how true ecosystems function.
ROCI is extraordinarily important to the health and credibility of a channel program. Boards of directors, investors and stakeholders, and executive leadership teams know the channel and partners are hugely important to their success. They also know that no one company can effectively cover the serviceable addressable market (SAM), much less the total addressable market (TAM), without scalable, cost-effective resources. The channel provides that — but only when the economics align.
By definition, partners get paid only when they do something. If a partner sells a vendor’s product, it gets paid by the customer. If a partner provides a service in support of a vendor’s product, it gets paid by the customer. If a partner exceeds sales expectations, it receives a rebate or other back-end incentive from the vendor, which is derivative of payment by the customer. While there are instances where vendors pay partners in advance of sales, those investments are directed at generating a mutual return. Through this mechanism, the channel scales faster than expenses in most cases, though there are always exceptions. The challenge arises when contribution is diffuse, shared, or difficult to quantify.
Attribution is the persistent challenge. Senior leadership — the C-suite, sales, operations, finance, legal, and compliance — wants to know what partners did to earn the incentives they receive. The partner community is replete with stories of vendors saying, “you’re making too much on a deal,” when discounts go low. Vendors cap rebates and other back-end inducements to keep costs down. And even when a partner lands a large deal, someone inside the vendor organization will ask what the partner actually did. Worse, they’ll try to assign an arbitrary value based on internal financial assumptions rather than analyzing the true cost and effort borne by the partner. When attribution fails, collaboration becomes economically irrational.
A byproduct of this dichotomy is the push to get partners to do more. If a vendor has multiple product lines or operates across multiple categories, it will push partners to adopt products that aren’t endemic to their business or customers rather than managing relationships through a true ecosystem model. The reason is expense. Vendors externalize exploration risk while retaining the option value of success.
Today, there’s no effective way to automate — fully or partially — the ecosystem experience. If a partner brings an opportunity that requires the expertise of multiple partners, products from multiple vendors, and support from unaligned third parties, the vendor or the partner must perform an elaborate, manual dance to identify and assemble all the necessary resources. If a vendor is managing this process, the cost of sale rises because the sales rep or account manager is distracted from other, more transactional and faster-moving deals. Ecosystems optimize outcomes, but most go-to-market systems are built to optimize transactions.
The desire for more sales through fewer intermediaries pushes vendors to compel partners to engage in complex competency and compliance programs. More vendors are moving toward points-based systems in which partners unlock benefits — higher discounts, better rebates, more support — by accumulating competency points. The way to accrue those points is to adopt more products and services, demonstrated through training, certifications, and accreditations. This substitutes compliance for collaboration.
Vendors — both leadership and channel organizations— are often surprised when partners don’t respond. They lay out incentives designed to compel partners to embrace additional products, only to see lackluster engagement. Vendors often fail to recognize the downside. Entering a new category, even with monetary and nonmonetary vendor incentives, incurs risk on the part of the partner. Partners must spend money in advance to develop the new business, train sales teams, build a support infrastructure, and market to customers before earning dollar one. While vendors do this all the time, they typically have far deeper pockets to fund such initiatives. Meta, for instance, spent roughly $70 billion developing its “metaverse” — a virtual world — before pulling the plug in favor of artificial intelligence. Partners don’t have that luxury.
Vendors can and should rethink their approach to partnerships and markets to embrace ecosystems in the truest sense of the word — two or more companies coming together to address customer needs with holistic offerings that deliver value greater than the sum of their parts. In doing so, vendors must accept that some partners may sell only one product family while collaborating with other partners that have strengths in complementary categories. Capability coverage, not partner consolidation, is the goal.
Achieving this ecosystem effect requires trade-offs. Vendors must equip and train field sales and channel account managers not only to engage around specific product lines but also to recognize opportunities across categories and be motivated to collaborate with their counterparts. When orchestration happens internally, it becomes far easier to extend externally to partners. Moreover, this approach reduces both real and perceived risk for partners, making them more willing to engage in collaborative ecosystem efforts.
Ecosystems absolutely have a place in the go-to-market paradigm. Realizing their value requires recognizing their true requirements, accepting the cost and effort involved, and creating systems and workflows that produce durable, value-creating outcomes for everyone involved in the go-to-market process. Success is a matter of applying the right focus, resources, and measurable processes — not rhetoric.
*********************************************************************
Larry Walsh is the CEO, chief analyst, and founder of Channelnomics. He’s an expert on the development and execution of channel programs, disruptive sales models, and growth strategies for companies worldwide.