Poll: On the Money - Agents Report Gains Despite Weak Economy

Despite the economic slowdown, channel partners in the telecom industry are staying positive. The upbeat outlook is according to the results of the recent PHONE+ Channel Compensation Survey. PHONE+ polled agents, consultants, VARs, interconnects and integrators (see Figure 1: Respondent Business Type for respondent breakdown) during a three-week period beginning April 21 about where their compensation is coming from and their revenue outlook for 2008. Seventy-six percent of respondents said they were on target with, or ahead of, revenue expectations for 2008 (see Figure 2: 2008 Revenue Outlook). Furthermore, 43 percent of respondents project up to 25 percent revenue growth from 2007 to 2008, while an additional 41 percent expect between 25 percent and 50 percent growth from one year to the next (see Figure 3: Revenue Growth 2007-2008).

Compensation Allocation

Where are channel partners getting their revenue? A majority (92 percent) of the respondents to this poll derive at least a portion of their revenue from commission on services from vendors (see Figure 4: Compensation Sources). Of this group, 47 percent claimed between 90 percent and 100 percent of their revenue came from commission on services from vendors. Only 20 percent claimed services commission accounted for less than 20 percent of their total compensation. Answers ranged from 2 percent to 100 percent.

Fifty-four percent of respondents reported at least some of their revenue comes from consulting or professional services. Nearly half of these said it accounted for 10 percent or less of their total compensation, but answers ranged from 1 percent to 65 percent.

Thirty-eight percent said they derived some of their revenue from managed services they provide directly to the customer. Again, nearly half (47 percent) said this accounted for 10 percent or less of their total compensation. Answers ranged from 2 percent to 80 percent.

Nearly half (48 percent) said they derived revenue from margins on hardware or software. Of this number, half said it accounted for less than 10 percent of their total compensation. Answers ranged from 1 percent to 65 percent

Only 18 percent of the respondents said they relied on maintenance contracts for part of their revenue, with a third of these saying it accounted for 10 percent or less of total revenue. Answers ranged from 10 percent to 60 percent.

Respondents most commonly cited margins on resold carrier services as other revenue sources.

Partners are reporting growth in disaster recovery solutions, consulting, professional services and managed services, including telecom expense management and mobility management. One interconnect thriving on managed services said the company provides unlimited access to its resources for a fixed monthly fee. “[Managed services] are growing because it takes the risk out of owning technology,” he said.

Dan Bommer, president of agency partnerTEL, said more than 50 percent of the company’s new business is coming from managed services in the form of fees paid directly by the end user. “We are exploring an offering to our subs — IT Professional Services and Expense Management — but have not formally rolled out a plan,” he added.

Commission/Margin Ranges

Compensation varied by product, but not to a great degree. The most often cited commissions/margins were in the 15 percent to 20 percent range.

Respondents said commissions/margins for TDM voice services range from 10 percent to 50 percent. Two-thirds said their commission/margin was between 15 percent and 20 percent. Compensation for IP voice services also ranged from 10 percent to 50 percent, with the majority (57 percent) reporting commissions in the range of 15 percent to 20 percent. Compensation on data services also ranged from 10 percent to 50 percent with a majority (56 percent) reporting commissions/margins between 15 percent and 20 percent.

Commissions/margins on enhanced services, such as conferencing, ranged from 5 percent to 50 percent, with nearly half (49) reporting commissions in the 20 percent to 30 percent range — slightly higher than core carrier services.

Margins on hardware/software were reported between 5 percent and 50 percent, with 40 percent reporting margins in the 20 percent to 30 percent range and 35 percent reporting margins of less than 20 percent.

Very few respondents (20 percent) reported commissions/margins from software as a service. Of those, the commissions/margins ranged from 1 percent to 50 percent, with half reporting commissions/margins in the 15 percent to 20 percent range similar to carrier services.

Margins on managed services ranged from 10 percent to 70 percent, with nearly half (46 percent) of respondents reporting commissions/margins in the 15 percent to 20 percent range.

Less than half of respondents said they sold data center/colo/Web hosting services, but they reported commissions/margins ranging from 10 percent to 30 percent, with a majority citing commissions/margins of 15 percent to 20 percent. Some respondents also noted that the commission on data center/colo/Web hosting services is often a one-time, upfront payment.

Compensation Method

Respondents reported 54 percent of their compensation comes from monthly residual commissions (see Figure 5: Primary Compensation Method). Four percent of partners reported being compensated through wholesale buy rate, and a handful of respondents noted buy rate offers are on the rise. While no respondents said they primarily were compensated with upfront commissions, the 6 percent that chose “other,” cited combinations of upfront and residuals as being the norm.

Denis V. Raue, president and CEO of master agent and reseller Telegration Inc., said he sees a lot of vendors moving to a model that allows an agent to choose between a high residual or a high upfront bonus spiff and a lower residual where the agent or subagent can choose on an order-by-order basis. “Upfront commissions allow us to develop a bonus-based compensation plan for our employees and cover their salaries and benefits on a monthly basis,” said Raue, adding that these allowances are beneficial especially to the company’s hybrid business model.

On top of normal compensation sources, partners reported the majority of their additional compensation came in the form of bonuses and incentive trips (see Figure 6: Other Compensation). Sixty-three percent of respondents receive bonuses on product sold, and 54 percent receive bonuses based on revenue sold. Fifty-nine percent of partners benefited from non-cash incentive prizes, such as trips or merchandise. Nine percent said they received equity or profit sharing.

Some channel partners also reported that more service providers and/or vendors were allowing partners to make choices about how they were compensated. Jon Sullberg, president of consultant Data-Tel Communications LLC, said although the recurring commission structure has remained steady, ranging from 12 percent to 16 percent of monthly billing, over the past 12 years, “what has changed is that some service providers are now letting the agent set the profit margins so the percentages can now go much higher.”

Terms and Conditions

For the most part, respondents said the compensation landscape was steady and consistent, with only a few bumps in the road here and there. “I have been an agent for 17 years and have been pleasantly surprised that the commission percentages have not changed and not too many master agents or service providers have screwed me out of commissions,” said one respondent. “In fact, I still receive commissions from services that I sold 17 years ago because of the evergreens that I worked into my agreements.”

It appears that evergreen clauses are still a sticking point for partners. Forty-six percent of respondents said they are always paid commissions for the life of the customer; 36 percent of respondents count on them more than half the time. However, partners still are crying out to keep evergreen agreements alive, saying that they’re starting to lose them with some of the larger carriers. “I really think we need to continue to push carriers for true evergreen clauses in their contracts,” evangelized one agent. “If they won’t put one in, I just will not sell their product. If we all take that stand, we can force all of them to do it.”

In addition to decline in evergreen commission agreements, partners are seeing other changes in contracts. One agent reported that more often carriers are trying to add “Termination for Convenience” language into their agreements, so they can cancel their agency programs at will.

partnerTEL’s Bommer said he finds it frustrating when a carrier unilaterally changes its program for existing agents. “I am very leery of those carriers who change existing contracts unilaterally and force us to comply, using our base as leverage to sign the new, less favorable agreement,” said Bommer. “Why would I want to put more of my base business at risk for further unfavorable terms? Those are not ‘partner programs,’ they are typically called ‘user agreements,’ and we all know who is getting used in those.” Bommer added that he would walk away from extra points on a carrier agreement for an evergreen clause and more favorable terms.

Contracts also are requiring partners to pump up the volume. Seventy-eight percent of respondents said their commissions are dependent on volume. While this is not a new criterion, carrier enforcement of volume commitments has become increasingly stringent, agents said. “We have seen the trend that carriers are really holding agents to their commitments and canceling contracts,” said one master agent.

Respondents said carriers in general are signing fewer independents and working with more masters, but only those that provide significant value back to the carrier. One master agent said it has been forced by two carriers to roll its base under another master to protect it.

Complaints also were voiced about vendor rules of engagement as obstacles to revenue generation. One consultant noted that to partner with a direct large carrier rep, the customer has to bill $50,000 monthly; whereas, prior to 2007, only $15,000 monthly was needed for this aid. “This negatively impacts our ability to sell complex managed MPLS, hosting and SaaS applications,” he said, also noting that on top of that, some large carriers have increased the amount of companies on their “protected” lists, meaning they’re untouchable by the indirect channel.

Agent Jan DeRobertis, vice president of sales for NBC Solutions Corp., said another common practice is when vendors assign direct sales reps to agent accounts, blocking the agent from building a relationship with the customer, reducing the overall commission potential from the account. Similarly, she said, some carriers block agents from taking over accounts served by inactive agents, forcing the proactive agent to move the customer to a new carrier to earn commissions on consultative sales.

Most of the complaints were leveled at large carriers rather than competitive carriers or resellers, which also received some kudos for creative compensation programs. Level 3 Communications Inc., for example, was commended for joint selling programs on signature accounts while Sprint was lauded for working on pricing without causing a commission hit. McGraw Communications’ profit sharing program was cited by several respondents as an example of creative compensation. Service providers offering wholesale buy rates also were mentioned by several agents as innovative as was one carrier’s bonus program based on testing agent product knowledge. Overall, agents did not find vendor compensation programs very creative — at least not in favor of the agents. According to one respondent: “[They are] creative in how they keep as much as they can.”