ENTERPRISE OEM SOFTWARE LICENSING — THE SELL SIDE (PART III)

This is the third article in this three part series that focuses on the advantages developing OEM channels to sell software. Included in this series are two additional write-ups with different perspectives:

Enterprise OEM Software Licensing — A Primer (Part I)
Enterprise OEM Software Licensing — The Buy Side (Part II)

Assessing the OEM Channel

Selling through an OEM channel provides scale because the OEM is leveraging the licensee’s entire customer base. In exchange for this scale, the OEM will provide significant discounts off its list pricing. The OEM is gaining scale, more customers — and giving up higher profit margins that could be obtained by going direct to customers. The critical questions in the got to market (GTM) analysis are:

Will the OEM channel cannibalize some of my customers? And if yes, to what extent? Will the increased revenue realized through scale outweigh the loss of higher margins from going direct?

Competitive Overlap: When you sell through an OEM channel, you will need to assess the competitive overlap and potential revenue loss due to competitive overlap. The number of your customers that are using your software will grow. However, you will inevitably have significantly lower profit margins for each sub-license since volume discounts will be required to sell through the OEM channel.

Protecting Margins: Your prospective OEM partners need to be researched in each vertical market to determine the extent of the competitive overlaps. The revenue gained at scale from the OEM channel will need to be higher than the lost opportunities of going direct to the end-customer.

Revenue gained from increased scale > Loss of revenue from decreased profit margins.

The time frame used when analyzing this equation is critical to making the best business decision.

e.g., A company may give speed to market a higher value versus higher profit margins over a longer time frame. Or on the flip side, a company may want to pass on near term OEM opportunities for a longer-term strategy.

Vertical Market Protection: If your company is very strong in a particular vertical, and you are concerned that there will be too much competitive overlap, one solution is to limit the markets your OEM partner can sell to.

e.g., If your company is strong in finance, you can work with your OEM partner to protect that market by not allowing the partner to sell into that market or ensure that pricing is set up in such a way to protect your margins in that market. Or, in reverse, if your OEM partner is well entrenched in a specialized market where your company has limited success, you can restrict that OEM partner to that one specific vertical.

Benefits of Selling via an OEM Channel

The risk of competitive overlap and cannibalization can be addressed through a well thought-through strategy and putting the appropriate protections in place. Once these risks are taken out of the equation, or you have assessed that the risks are worth the upside, there are many benefits when selling through an OEM channel.

Access to New Markets/Verticals: OEM channels can often enable a company to access new companies, markets, verticals where they have only had limited success.

e.g., Federal Government markets often take many years to develop. You need government relationships, security clearances, GSA published pricing, and access to specific programs. Instead of starting from scratch, you can partner with companies with a successful history in the space and are already selling solutions into the Federal market, shaving years of your GTM strategy.

The same strategy can be applied for other specialized verticals such as finance and pharma that require significant resources, time, and vertical market expertise to enter.

Market Exposure: OEM channels can enable companies to expand their user base exponentially. Appropriately executed an OEM channel can give a company outstanding credibility and massive market exposure in a short time frame. The goal is to avoid a white-label deal and get some type of branding built into the combined solution, usually your company’s logo appearing somewhere in the user interface. The value gained from credibility and market exposure alone could be worth doing a deal at any price, especially for startups or smaller companies with limited visibility.

e.g., I recently logged into my Dropbox account, and there was a new innovative security measure in place in which you had to match similar icons to confirm you are a human. At the bottom of the security interface, I noted the name, Arkose, a small company of about 100 people. Dropbox has over 14 million paying users. The market exposure Arkose is receiving is worth millions of dollars, and the credibility they are receiving by having Dropbox as a customer is massive. A single OEM deal that is orchestrated well from a branding perspective can be pivotal in a company’s success.

Expanded Customer Base: Developing OEM channels will expand a customer base quickly, thereby seeding the market for new sales opportunities. An expanded customer base can create direct or indirect upsell opportunities for supplemental. If your technology is being distributed through an OEM channel with limited functionality, your salespeople can reach out directly to the end-customers and offer supplemental technology.

e.g., A company that provides natural language query NLQ functionality through OEM channels could then offer the end-customers an added feature of voice-activated NLQ. This could be an upsell across your OEM partner’s entire user base, either directly or indirectly, depending on your GTM strategy.

Even if you don’t have a supplemental offering, the fact that the end-customers are already an indirect customer puts your company in a favorable position to sell them a new solution.

e.g., A company that sells AI technology to identify fraud in internal accounting systems could then offer the end-customers the ability to extend those capabilities outside their internal account systems to other parts of their business.

e.g., A CRM company focused on the health vertical provides a solution to hospitals for patient management and licenses AI technology from an OEM to automate the normalization and input of data into the system. The OEM can then approach the hospitals and sell a similar solution to automate data input into other types of systems at the hospital.

Acquisition Accelerator: When a smaller company is licensing OEM software of high value to a larger company, the smaller company can often become an acquisition target. The chances of such offers can be increased by structuring a deal that provides limits to the larger company that can be overcome through acquisition. This could be limiting the distribution to a specific set of customers or providing limited access to customization and integration capabilities.

The OEM contract creates a working relationship between the companies on many different levels, and the technology is validated and valued by the larger company. This creates a fertile environment for the larger company to think about the potential gains of acquiring the OEM. Some of the benefits could be as follows:

· Competitive differentiator by keeping the OEM software out of the hands of competitors.

· Ability to further develop the OEM software to meet new needs and requirements.

· Talent and expertise acquisition of the OEM to create a new Center of Excellence (COE).

· Tighter control over the OEM software, making it easier to support and do custom deployments.

· Eliminate royalty payments and obtain higher margins on their overall solution.

Implementing an OEM GTM “Go to Market” Strategy

Once your company has assessed the market potential, validated demand, and has decided to move forward with developing OEM channels, here are some ideas and strategies to consider.

Target Market Identification: OEM sales require an extremely targeted strategy. You need to determine precisely (1) what named companies you are targeting and (2) what unique and compelling value proposition you will present to each one. Your value proposition should first and foremost lead with from a business angle, supported by the technology that will enable the business outcome. Here are some initial questions that should be thought through when developing your go-to-market strategy.

· Which software verticals will gain the most value from your software?

· What value gap are you going to fill or enhance with your technology in those verticals?

· How are you going to these companies to increase their revenue and market share?

· Which companies will realize the most significant benefits of filling this gap in their solution?

· What personas within your target customers will be most receptive to your value proposition?

· What joint GTM strategy options are you going to lead with?

· Why should they buy vs. build?

Here is an example GTM analysis that answers the above questions:

Your company sells an end-to-end Business Intelligence Platform that has four distinct categories of functionality; (a) data connectors to enable access,(b) data normalization for preparation, © data analytics to support analysis, and (d) data visualization for presentation and interpretation.

Based on your market analysis, you determine that many software applications have primitive data visualization and can benefit by licensing your visualization capabilities. You decouple your data visualization technology and productize it as a solution optimized for easy integration that can be sold through an OEM channel.

· Process Data Analytics (PDA) companies are identified as promising targets because they have large revenue streams and lack sophisticated data visualization capabilities.

· Ten PDA companies that make up 75% of the market and are highly competitive are prioritized as the top targets.

· The value proposition is that your data visualization will provide a high-value competitive differentiator, and by licensing your technology, they will win more deals and increase revenue.

· The GMs and product managers are the people at the PDA companies that will benefit the most by embedding your data visualization into their solution; hence you will target those personas.

· Your solution can get them to market with superior data visualization within three months. The quicker they get to market, the faster they will see an increase in won deals.

The above GTM analysis will be done for each promising vertical you identify — the “low hanging fruit.” The results of your GTM analysis will then guide your marketing and sales strategy for each vertical.

Dedicated Sales Team: Your OEM target list will go through an extreme qualification process since many variables need to be in place to identify key OEM targets. The total amount of potential OEM customers will be significantly smaller than your potential end-customers’ total amount.

Therefore, OEM sales teams are usually smaller and more specialized than sales teams focused on end-customers. Sales Professionals who focus on OEM have the needed experience and skills to put together complex deals at the executive level. The ability to manage teams, both internally and externally, is essential. Although the volume of sales is smaller, the deals themselves are significantly larger. A successful OEM channel can account for a large percentage of a company’s revenue.

OEM Overlays: In building an OEM channel, there can be internal competition between your direct sales force and your OEM sales force because end-customers can also be potential OEM customers. It is paramount to create alignment between direct sales and your OEM sales force and foster teamwork.

The goal is to leverage your direct sales team’s relationships with the prospective OEM client and the expertise your OEM sales force has in structuring and closing OEM deals. One organizational method is to have OEM overlays work with the direct sales force and diffuse conflict by expanding the commission for opportunities that involve two sales professionals — thereby promoting teamwork.

e.g., Normally, a 10% commission is paid on deals. With a 2X compensation structure, both the direct and OEM reps get a 10% commission. With a 1.5X structure, each sales representative gets paid 7.5% — or one gets paid 5%, and the other gets paid 10%. There are many ways to structure OEM overlays and incentivize cooperation between sales teams. The key is to have all sales professionals aligned to achieve the same goal without any internal friction.

OEM Sales Cycle: Sales cycles for an OEM are usually long; 6–12 months is not atypical. Understanding some of the reasons why these sales cycles are long will help you deploy tactics to help accelerate the sales cycle. Compared with direct to end-customer deals, OEM contracts:

· Have larger financial commitments by the licensee; hence the decision process can be slow.

· Are dependent upon product release schedules for implementation and start dates.

· Require core development resources from the licensee, which is always in short supply.

· Touch a lot more divisions, so it takes time to get them all aligned and create consensus.

· Often need the approval from multiple C-level executives.

· Are more complicated from a legal perspective, and the contracting process can get bogged down.

All the above bullet points can be addressed through a well thought out strategy, deploying the right tactics at the right time — and working on multiple threads in parallel. Here are some quick tips for accelerating deal cycles:

· Start with a target product release date and work backward to create urgency.

· Require a development contract to be in place before any development starts to initiate legal.

· Commit your company’s engineering resources to expedite integration efforts.

· Build relationships with all the involved people and divisions early on in the process so you can move things along in parallel as opposed to sequentially.

· Start as high as possible in the organization, so the people you are working with have a clear directive from above.

· Do not wait for introductions; reach out, multi-thread, and engage with as many people as possible.

· Start commencing legal and INFOSEC reviews ASAP.

As you are working with your target OEM partner, intermediate steps may sometimes be needed to create trust, illustrate demand, and build value if your partner is not ready to make a commitment. The goal is to deploy these tactics in parallel as you work towards a larger OEM deal. Of course, you want to avoid any intermediary steps that may delay a sales cycle.

However, intermediate business arrangement strategies should be considered as a backup plan if a straight to OEM deal is simply not an option.

Direct Customer Relationship: Having joint customers with your target OEM is a great way to show demand for your solution and create credibility. This proves the value you provide to your OEM’s customer and serves as a platform for discussions. The more joint customers you have, the easier the OEM sell will be. If you do not have joint customers, the next best thing is to have customers who fit your potential OEM partner’s customer profiles.

Co-Selling Relationship: If the OEM target customer sees the value of combining your technology within their solution but is not ready to make an upfront financial commitment — an intermediate step could be to partner and co-sell with the company. Such a relationship may require some integration work on both sides, a step in the right direction. In this scenario, the software license is directly between you and their end-customers and is not on your partner’s contract. This could create some friction in the sales cycle for both the sales representative and the end-customer, but it is a way to get some joint wins under your belt and foster relationships with your OEM target customer.

e.g., An text analytics company has the technology to identify patterns in text to flag potential security risks. A communications platform company has seen some demand from its customers for this functionality but is not ready to invest in bringing this functionality to its customer base. In this situation, the text analytics company could co-sell with the communication platform and license its technology directly to its end-customers. Once there are a couple of successful deployments or greater end-customer demand is proven, the co-sell relationship can move to a more strategic OEM relationship.

Resell Relationship: This is a deeper relationship with your OEM target customer than a co-selling. Now your partner’s salespeople are actively selling your solution, and the end-user is licensing your software on your partner’s paper. This creates a lot less friction with both the partner’s sales team and the end-customers. Compared with co-selling, you will be able to get your solution in front of many more end-customers, resulting in more sales and more joint value proof points.

These intermediary steps can be successful business relationships in their own right. Still, they can also be leveraged to create the needed relationships, credibility, and customer wins to enable a broader and more strategic OEM deal.

OEM Sales Strategy

The value of an OEM deal is sold simultaneously on two levels, business and technical. Purely technical requirements can drive the need for an OEM technology, but the business case is usually the key driver. For a deal to move forward, the potential OEM partner needs to see demand for your technology by its end-customers and have a clear picture of how embedding your technology will increase their revenue, competitive advantage, and ability to win new customers.

To enable smooth and efficient OEM sales processes, you should have the OEM specific support systems in place — and anticipate the potential concerns of your OEM target customers.

OEM Support: Technical Support for an OEM is quite different from support for a direct customer. It is more challenging because you are supporting your partner, so they, in turn, can support their customers; you are a step away from the end-user. Separate and OEM centric documentation, SDKs, and support systems need to be in place to make it as easy as possible for your partner to deploy and support their end-customers.

OEM Integration: OEM partners need the ability to customize and deploy in different environments. Robust Software Development Kits (SDKs) and flexible APIs are critical for successful evaluations and Proof of Concepts (POCs).

Channel Conflict: There can be potential channel conflict between your sales team and the OEM partner’s sales team. If you anticipate that the OEM partner will have concerns about channel conflict, you should have a plan to alleviate these concerns by your OEM partner, so your potential OEM partner knows you have a plan to make them successful.

Pricing: One of the first questions by your prospect will be; What is the cost? This is a difficult question to answer in the first conversation because there are so many unknown variables that will directly affect cost. The standard response is always; it depends. But this answer can cause distrust early on in the sales cycle because your counterpart will think you are not transparent. Therefore it is a good idea to have an answer at the ready that does not put you at a disadvantage for future discussions. A potential response can be to provide your end-user pricing and explain that you will adapt your pricing to work with your partner’s pricing model and offer the appropriate discounts based upon scale.

OEM Marketing Materials: It is essential to have high-quality, OEM specific marketing materials to compliment your end-user marketing materials. This creates credibility that your company is focused on OEM and set up to support OEM channels from both a technical and business perspective.

Selling to Multiple Divisions

Enterprise software sales direct to end-users can be challenging because many buyer personas need to come together to make decisions.

OEM Software Sales is even more complex, with even more buyer personas coming from very different perspectives that all have unique and specific concerns and needs. All these players will need to come together to facilitate a successful outcome. The need to adapt your value proposition to these different personas in parallel is a crucial skill required in putting together OEM deals. Well-honed empathy and listening skills enable successful sales professionals to truly understand what will motivate each persona to support a successful outcome.

Managing the OEM partner through a step-by-step sales plan is needed to orchestrate successful outcomes. The multiple teams on the partner side need to meet at the right times and need to be prepped in advance with clear next steps action items, to keep deals moving forward most efficiently.

Executives: The most important decision-makers will be focused on ROI and how your technology will positively affect P&L. They need bottom line quantifiable numbers.

Product Management: They will be focused on engineering resource optimization and creating a joint solution that will be well received by their customers, peers, and executive team.

Engineering: Will be concerned with all the technical aspects around integration and performance. They are looking for technical elegance, flexibility, avoiding risk, and maintaining full control of their technology stack.

Sales Leaders: They have a laser focus on how to increase value to their customers, beat the competition, and close more business in the fastest time possible. Sales leaders will support and aggressively lobby internally for a partnership they can leverage to win more deals.

Customer Success: The team that is in constant touch with its customers will be focused on reliability, ease of support, and how to keep their end-customers happy. Often compensated on renewals and upsells, new functionality that supports these goals will be well received.

Marketing: Always looking for new value angles on how to position their products in the market. Marketing is in a constant war to differentiate from the competition and come up with creative ways to expand market awareness. Although not in a key decision-making role, marketing is often forward-looking and can play a role in moving the deal forward.

Business Development: This can sometimes be a tricky team to deal with, depending on how they are compensated. You need to understand how their success is measured to ensure that the BD team goals are realized.

e.g., Suppose business development is compensated on sales influenced by partners. In that case, it may not be in their best interest to move the partnership to an OEM deal because the partnership structure changes.

Procurement: This team needs to win in the negotiation, squeeze you on price, and feel that they got the best deal possible. Always have your concessions thought through well in advance and teed up, so you are ready to provide the concessions they need to move the agreement to legal.

Legal: Their key focus is to alleviate risk, and the fact that their company is shipping and relying on your software will make them extra cautious. An OEM specific contract is needed to address the unique needs of an OEM agreement. Always a good idea to have a few “red herrings,” clauses in the contract that you are OK with modifying, sprinkled in the contract even if you know they will usually be a point of concern by legal.

Criteria for Success

As discussed in our previous article (BENEFITS OF LICENSING OEM SOFTWARE — THE BUY SIDE PART II), specific conditions need to be in place for successful OEM outcomes. It is worth doing a quick review because the process of creating these conditions will need to be addressed in your “OEM sales playbook. “

· Market Demand: Demand for the joint solution by the OEM partner’s customers need to be proven and tangible. Without proven end-customer demand, the OEM will not make a financial commitment.

· Positive ROI: Quantifiable ROI for the investment will need to be estimated and agreed upon by both parties. This will be a cornerstone of the pricing negotiation.

· Product Management Alignment: The Product Management leaders must champion a vision for the joint solution. They will be the key to get the needed engineering resources allocated to the initiative.

· Sales Alignment: The support of sales leaders is essential since they will validate the estimated sales projections and guide the determination of how much “add value” the OEM technology will provide to their sales process.

· Technical Alignment: All the business conditions may be in place, but without the needed engineering resources and cooperation, a deal will never happen. Creating trust and technical credibility with engineering is paramount.

· Cultural Alignment: This is an unquantifiable and nuanced but an essential aspect to nurture. Every company has certain types of culture, and having compatible cultures contributes to a partnership’s success.

· Executive Alignment: OEM deals need executive sponsorship and approval. Make sure to use executive bridging between your companies and develop your executive sponsors as early on in the sales cycle as possible.

These partnerships are involved, so TRUST and TRANSPARENCY between the partners are paramount. Creating all the conditions leading to successful outcomes is a real team effort by the selling company. The strategy needs to be proactively managed, well-coordinated and skillfully executed to achieve success. A well designed OEM partnership can provide significant upside for both the licensor and the licensee.

If you would like to learn more about Enterprise OEM Software Licensing, two additional articles are included in this series, both preceding this one.

Enterprise OEM Software Licensing — A Primer (Part I)
Enterprise OEM Software Licensing — The Buy Side (Part II)

About the author

Thank you for reading my article. I have a passion for creating business value by connecting the right technology, people, and companies together. Working in the software industry and living in the Bay Area over the past many years has given me the opportunity to close 200+ OEM license transactions. I have had the privilege of working with many brilliant and talented people at large enterprises such as Google, Microsoft, Apple, Amazon, and Salesforce, as well as many exciting startups. Whether you are on the buy-side or sell-side of an OEM initiative, I would be more than happy to share my experience and ideas with you. Please feel free to contact me via my open LinkedIn profile.

Andrew Paulsen / M: 415.269.7350