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Channel Conflict of Interest

July 2002 Energy & Utilities, Partnership

Getting new ideas to market proves a challenge for any enterprise. Determining the correct target, value proposition, and story to tell customers are fundamental issues that must be addressed by all businesses. But channel design represents a particularly daunting task for entrepreneurial firms offering “new to the world” technological products.

Rarely can the value offering of these technological advances be isolated. Rather, new technologies must fit within the overall business and technological infrastructure that currently exists. While taking a very different approach to solving the problems others have identified, new technologies must displace a specific set of solutions that currently exists. In selling their products, entrepreneurial firms become keenly aware that they must look beyond the specific value that they offer and create a whole product solution. Sometimes this requires the enlisting of others within the value chain to create this whole product solution. Unfortunately, enlisting the participation of other firms can represent a conflict of interest in the sales channel.

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Mr. Hill of Sapient and Mr. Allen of 27Co reported numerous technological and business problems in deploying wireless solutions at the e-Business Roundtable of the GSB. They mentioned the rapid evolution of wireless web browsers and user interfaces, the multiplicity of these interfaces, and the variety of wireless network carriers that enable the data transfer to these user interfaces. To solve these problems, Mr. Hill alluded to enterprise users and the advantages of having a captive set of users wherein custom interfaces can be deployed on de jure standardized platforms, whereas Mr. Allen outright suggested the use of transcoders. (Transcoders translate code from one language to another to meet the demands of various user interfaces.)

On the other hand, we are also aware of a number of interesting solutions to these exact problems created by firms such as Novarra, L3 Technologies, Brience, and Chicago’s late Curious Networks. These firms have created products which not only communicate with multiple wireless web browsers over multiple networks much more elegantly than transcoders, but have progressed to capture device information, adapt to the varying data storage capacity of the devices, manage network latency, manage tower switching, and address a number of other issues. They have done this by creating a Presentation Layer in the information technology infrastructure that frees the solution from device and carrier dependencies and the underlying data infrastructure.

Are the respected speakers unaware of the possible solutions? While I was unable to solicit Mr. Allen’s response, Mr. Hill indicated that he is aware of these types of solutions and the value that could be gained in using them. But Mr. Hill isn’t recommending them to his clients building wireless web applications.

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Why the disconnect between the entrepreneurs and the consulting firms who would be their ideal channel partners? There are a few of major reasons.

(1) Sapient is aware of a number of entrepreneurial firms with solutions to sending and formatting data presentation on the variety of wireless handheld devices, but doubts the longevity of the entrepreneurial firms. This is a valid concern. Neither Sapient nor any other major consulting firm desires to suggest a product to a client then have the firm that produces the product declare bankruptcy. Besides raising the question of the consulting firm’s support of that product, it leaves the clients of the consulting firm with a product lacking adequate support. Upgrades, maintenance, and support of that product that should be provided by the producing firm would no longer be accessible once the firm is bankrupt. This would leave Sapient in the uncomfortable position of either migrating their client’s solution to another product or supporting the product for their client without adequate infrastructure to do so.

Bankruptcy is not the only exit strategy of entrepreneurial firms. Other possible exit strategies include being purchased by a larger firm or going public and creating a distinct product category. When pressed on these alternative possibilities, Mr. Hill stated his belief that these wireless-web presentation-layer firms will not survive. Yet it is too early to make such a claim. What else could be driving such a statement?

(2) Productizing a consulting practice is not in consultants’ best interest. The entrepreneur’s product represents a direct substitute for the consultant’s billable hours. Even if the value proposition provides greater benefits to the end customer, consulting firms will reluctantly support a product that significantly reduces their overall revenue. SAP entered the enterprise application arena offering consulting firms a 5:1 ratio between consultant’s billable hours/revenue and product dollars. In many ways, this ratio has become the standard for IT products implemented or customized by consulting firms.

Put another way, consulting firms are not in the business of selling other people’s products. They are in the business of managing projects and selling billable hours to deliver predictable value. Asking a consulting firm to implement a risky new product that reduces their billable hours decreases their ability to both manage project risk and capture revenue.

(3) Consulting firms must clearly understand a technology’s value proposition and place within a larger framework. This type of understanding requires more than a power point presentation during a sales call, it is gained through staff training and their own successful implementation during a project. Staff training represents a significant investment for a consulting firm. Worse, training a staff in a product sold by an uncertain firm or in a product with uncertain demand is a risky investment. This investment of time and effort can be better utilized by the consulting firm in asking their staff to learn about the wide variety of proven technologies or business practices.

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What is an entrepreneurial firm to do in this case?

For a case study, Chicagoans may recall a 6 month period in the late 90s when our ComEd bills were in error. The billing system was implemented by the Accenture part of Andersen using their Customer 1 solution. Customer 1 was not a product, rather it was an approach to solving utility billing that was customized for each customer. At that same time, SPL WorldGroup, an innovative firm with offices in Chicago, was selling and marketing their own product to this exact problem.

Today Accenture’s Customer 1 solution is no longer sold and SPL WorldGroup is the number one provider of utility billing solutions in North America. Furthermore, ComEd still has the Customer 1 solution installed although its future support is maintained by a dwindling team of experts, while SPL offers strong product support and upgrade path for their clients. Moreover, a number of smaller consulting firms have created entire lines of business focused on supporting the SPL WorldGroup solution.

SPL and other utility billing solution providers have displaced the custom approach by selling their own product until they gain sufficient momentum to compel channel partners to support their product.

This case study indicates some of the fallacies in the conclusions of major consulting firms while also providing a path to solving an entrepreneurial firm’s sales channel problems.

We notice in the case study that SPL sold its own product when a channel partner might have been more efficient. In an ideal world, entrepreneurial firms selling their own products may represent an inefficient channel design, however it is often the only effective possibility. This inefficiency will reduce profits and may cause losses as the revenue generation engine of these firms consumes an excess amount of cash, but the direct sales strategy also increases revenue and builds firm value.

We also notice in the case study that the product approach of the entrepreneurial firm had a greater future than that of the consulting firm’s approach. In regards to the wireless computing firms listed, we can also suspect that the longevity of these firms is understated. Specifically, we see in Novarra strong technology partners (BEA) and numerous completed projects. This implies that while revenues may be tight during this tech downturn, Novarra will likely stave off bankruptcy.

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While conflicts of interest in the sales and implementation channel may represent a problem for a number of entrepreneurial product firms, there is a possible prescription to overcome these hurdles: Don’t look to channel partners to solve an entrepreneurial firm’s sales problems. Consulting firms will reluctantly accept entrepreneurial firm’s product’s risk. Entrepreneurial firms sometimes have to bite the bullet, generate the momentum, and demonstrate the approach until the consulting firms are compelled to join the bandwagon.

The May Report, TECH BUSINESS BRIEFS, July 17, 2002



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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