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

This production is brought to you by Magentrix. Magentrix is a pioneer in platforms for partner ecosystem management and partner relationship management. 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's takeover typically impact a company's strategic direction and how it can 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 private equity. As usual, feel free to follow along with the transcript or easily replace sections with our chapter markers. Our guest today has been in the channel space for more than 21 years. His expertise includes POTS, Transformation as a Service, and if you're not familiar with the term POTS, 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 takeover-proof your channel program from private equity. Please welcome David Sherman. Welcome to the show, David. It's great to have you here. Thank you, Paul. Pleasure to be here. Appreciate the opportunity. Perfect. So why don't you tell us a little bit of some of the highlights in your career in the channel so far? 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 in 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 to 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 incumbent carrier. You know, the AT&T is a Verizon to the world. I do have some cable experience with nodes and head ends. 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. So what do you enjoy the most about being a director of channel sales? 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. Any plans? Coming up for yourself? What's next for you in your career? 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 deep 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, so. 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? Well, it can definitely affect it in many ways, without a doubt. We've seen it run its course and in many other companies where this has taken place. And in some cases, it can kind of 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. - 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 an effect on the channel? Is there an 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? - 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, they can get a little bit more out of it. And then when they get a little bit more out of it, they can get a little bit more out of it. And then when they're done, they can get a little bit more out of it. 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 drop down share pricing. - So almost get rid of the long-term residuals and focus on net new or land and expand. - 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 with 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 10 years. - 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? - 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. And it goes back to the fact that they might look at one particular relationship or partnership where they're paying thousands, upon thousands of dollars per month for a business that has already been in the pipeline and inactive in some cases for years, because of these original agreements carried evergreen clauses where the partners would get paid for the life of the customer. You know, 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. - 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 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 finance men that they bring to their position is the reason that they're there. So it's not necessarily flawed, but by the same token, they're 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 you're building relationships and building a business from an entrepreneurial mindset, which is a little bit different than the investment banking side. - 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 kind of put on a balance sheet so they get a more accurate picture of the operation of the business? 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, they're going to want to make back their investment within a 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 can 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. So we talked about the elimination of the high priced employee as well as the kind of residuals. Are there some other cost cutting measures that investment firms tend to take that could also impact the partner program? There are definitely others. We've seen in some instances where companies will pride themselves on. 24/7/365 support, and that's the way that they've 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 24/7/365. So it's interesting to kind of see the progression that could take place in some instances where 7:00 a.m. to 7:00 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 we've 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. So let's look at the flip side of the coin on programs that have flourished. I know that through my career. One of the companies that I'd followed was SolarWinds. And when private equity came into SolarWinds, that infusion of capital really helped them create a more robust kind of partner support system and really kind of 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? Do you think that from the flip side of the coin where somebody is flourishing, that they can make a big impact? 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 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, you know, 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. They get pushed up to the beginning because they have high margin. And they're 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. Yeah. So, if you can get 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. 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, they're 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. 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, they're bringing multiple systems together. And that can be a lot of work. That can be a lot of work if they're doing multiple acquisitions within a really short period of time. Sure. Yeah, the integration is key. And quite honestly, that's also the largest downfall. I mean, 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. Utilize daily, that may have gone through that over time. And you can't 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 companies 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. And that happened before too, which is kind of crazy. Yeah, I have seen that before as well. So from your perspective, what can typically go wrong with channel programs on the mergers and acquisitions side, as opposed to the private equity takeover? On the merger and acquisition side, it could be that these two companies share the same agents and partners already. So they think that they're 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 there's still going to be additional products in the portfolio. There's still going to be additional solutions and additional revenues out of the gate. It's just that that growth may not be as great as they anticipated. If there's a lot of. Yeah, I would say definitely learn everything that you can. Definitely stay on top of the 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. Find out what they're doing and what they've gone through in the past. Take a peek at the past mergers, acquisitions, and private equity takeover. Within the past year in your market as well. It's interesting. We, you know, in my prior position, we have an annual review in December of each year. And number of 2023, part of what we had to bring to the table as a group were reviews of our competitors. And it's great because you're 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 learned that as well within the. So what is the best place to stay up to date with trends in your market? Is there anything that you recommend in the 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. You know, 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. Absolutely. All right, David. Well, thanks so much for being a guest on the show today. It's really been a pleasure to have you here. Thank you, Paul. Truly appreciate it. Wish you all the best. Have a great summer. You too. Take care.