Shared Risk, Reward Reshapes the Art of the Deal

As the IT industry continues to mature, the definition of what it means to have “skin in the game” is starting to change. Instead of customers assuming all the risk by purchasing IT software and hardware outright, they are starting to demand that vendors and their solution provider partners share the risks and rewards of the business outcomes that IT products enable.

“Revenue-share deals are a small percentage of the deals right now,” said Steve Cowley, IBM vice president of industry solutions and sales. “But, in time, I think it’s almost inevitable that this will become the predominant model.”

This trend is not isolated to IT. Just about anywhere that a substantial capital investment is required, customers are asking suppliers to invest in the business outcome. For example, rather than buying airline engines, airlines are being billed for when they actually use them in the air. Similarly, providers of heavy-equipment machinery are being asked to bill customers by, for example, the volume of dirt being moved.

Cowley said that over time, these new kinds of approaches to acquiring capital equipment will require solution providers to not only adjust how they sell products and services, but also to rely more on vendors that have the deep financial pockets required to fund such efforts. “You need a strong balance sheet to be able to fund these kinds of deals,” he said.

In addition, Cowley said that it will be increasingly difficult for any solution provider to go it alone on a sizable project. More often than not, the firm will need to partner with another solution provider. For example, one provider may have the business expertise needed to craft the concept, while the other builds the implementation. That’s a more efficient approach, he added, because it is likely going to be prohibitively expensive for more than a handful of partners to be able to develop both capabilities on their own.

Ultimately, making IT investments based on the business outcome will require sales skills that partners that have focused mainly on selling IT technology to IT organizations don’t really have.

“Selling to the line of business is slightly more nuanced,” said Cowley. “You may end up in the office of the CIO, but the decision maker is somewhere else.”

To help solution providers make this transition, IBM has been making its portfolio of Smarter Commerce tools available to solution providers at no cost for a year. Most recently, it added IBM Marketing Center, a software-as-a-service (SaaS) suite of marketing applications to the list of Smarter Commerce applications it makes available to channel partners for free for one year.

IBM is also creating a new Industry Solutions Business Advisory Council to help build better relationships between business partners. Finally, IBM continues to improve the margins for partners that sell solutions that cross multiple specializations. The latest is an incentive for partners that sell IBM Tealeaf customer analytics tools with the company’s line of Emptoris procurement management software.

One of the essential skills that successful solution providers will need going forward is being able to reconcile the conflicting agendas that often exist between IT and the line-of-business units. In fact, more often than not, solution providers will find themselves acting as diplomats between different units of the business that, for one reason or another, are not on speaking terms.

The downside of all this is that it’s going to take longer to close these kinds of deals.

“It’s definitely a more complex sales model,” said Cowley, “but, at the end of the day, it still comes down to being able to deliver a very complicated piece of software.”

Michael Vizard has been covering IT issues in the enterprise for 25 years as an editor and columnist for publications such as InfoWorld, eWEEK, Baseline, CRN, ComputerWorld and Digital Review.