The Invisible Elephant

When it comes to Business Central, I believe there is an elephant in the room. An invisible one. Potentially, a deadly one.

That elephant is inadequate capitalization of the Partner community at large.

Here’s why I believe this:

In the past, all a publisher like Microsoft really had to do to capitalize a channel was provide favorable payment terms for perpetual licenses. A VAR or ISV paid in say 120 days and collected from the customer sooner. That generated the working capital needed to run and grow the business. A competent entrepreneur could bootstrap their way to success with this support alone. And so, a channel formed.

But  it doesn’t work that way in a Cloud-first world, because:

  1. Subscription revenue gets collected over time, not upfront. Even collecting say a year’s license subscription from the customer in advance and paying the publisher monthly falls well short of providing the working capital needed for business model transition. The cash flow trough begins.
  2. Customer acquisition costs are upfront, but revenue is not. This deepens the cash flow shortfall. Especially, if marketing expenditures rise, which they inevitably need to do to get any sort of customer add momentum.
  3. Upfront project fees go into freefall because the customer expects to pay a “sensible” multiple of their (far lower) license subscription for services. The cash flow trough deepens even further.
  4. The customer demands “productized” add-ons rather than high fees for customizations, which the VAR or ISV must either build or re-configure, resulting in further upfront costs not offset by immediate revenue. The cash flow deficit hits the red zone.

Partner owners, for their part, respond with some combination of the following:

  1. Stubbornly believe that they control the customer and can therefore override subscription demand and avoid the whole cloud thing altogether.
  2. Attempt to “sweat” their customer base and new prospects with the traditional perpetual model that has high upfront revenue, while the undertow of subscription demand flows in the opposite direction and pulls them underwater.
  3. Personally fund the cash flow trough in the mistaken belief (hope) that it will be short-lived and magically self-correct.

None of this is effective, of course. At some point, the Partner simply runs out of cash. 

What happens then?

The publisher fails to achieve their growth and market share ambitions because the channel they rely on to deliver it is undercapitalized, and VAR/ISV owners preside over the slow death of their (traditional) businesses. End of digital transformation story.

The only mathematical way out of this is for everyone to first acknowledge the elephant exists. Then, Partners must build realistic budgets/forecasts that identify the funding needed for their own digital transformation. Finally, that funding must be secured.

As the end of 2018 approaches, and everyone reflects on what they want 2019 to hold, I believe we all need to have a candid conversation about capitalization, and deal with it as a top priority.

My opinion …

What’s yours?

[wpforms id="458"]