**Editor’s Note: Click here for Channel Partners’ images from the Red Hat Summit.**
Last week Channel Partners spoke with Mark Enzweiler, Red Hat’s senior VP of global channel sales and alliances, about the intersection of open source and the channel. Enzweiler gets what drives solutions providers: He spent almost 26 years with IBM, did an 18-month stint at Lenovo and has been with Red Hat for almost nine years, with all but about four years of that career spent in the channel business. As a result, he addresses pain points by, for example, providing support for the subscription-renewal process, funding an array of training opportunities and even embedding Red Hat employees in partner shops.
Is it enough? As with cloud, open source is a whole new ballgame for many solutions providers. But with big IT vendors from Cisco to VMware jumping into community projects and open source spreading from servers up the stack to databases, security and everything in between, channel companies need a plan — or at least, a cogent answer when customers ask whether they should replace Windows Server 2003 with RHEL.
Here are some highlights of our discussion, edited for clarity.
Channel Partners: Please refresh readers on Red Hat’s channel program.
Mark Enzweiler: Red Hat used to be a direct-only company. One of their board members suggested that “we might want to look at this thing called ‘channels.'” That’s how I arrived here. Today, our business typically is around 70 percent indirect. Last quarter we had some big transactions that went through our partners, so it was 75 percent indirect and 25 percent direct. The channel program structure is pretty similar to most IT companies. But I also have a renewals business; we call it “SEEPs” for “subscription education program.” Its purpose is to educate our partners and customers on the subscription model.
One thing that’s a little different versus many tech companies is that our philosophy has been “less is more.” Our number of partners hasn’t changed much in the last three years, even with the addition of new levels. We’re not exclusionary. We don’t tell people they can’t come in. But we give existing partners first right of refusal as we move into new technologies, new geographies. We have just over 800 partners in North America. We don’t believe that if 500 partners is good that 5,000 will be great. But certainly we will add as required, as we introduce new technologies and go into other countries.
CP: What changes are on the horizon?
ME: The channel lines are getting very blurred. Systems integrators are now managed service providers or SIs, or the SIs are cloud providers. Distribution is getting more into the services business. And ISVs are doing a little bit of everything. What I think is interesting and invigorating now is that there are alliances being formed, there are alliances that we are brokering. It’s kind of exciting, yet it creates its own set of challenges as you look at pricing models, terms, conditions, who’s really the “customer” in an embedded transaction or an Internet of Things transaction.
CP: There’s also the difference between partners’ usual manner of selling versus a subscription model.
ME: The most unique thing about Red Hat is that there are two models: the development model and the business model.
In the open-source development model you participate in a community around select open-source projects and made up of end users, competitors, ISVs, other partners. That development model allows us to …
… turn out relevant software, because it’s based off customer pain points. And it allows us to turn that software out at a much quicker rate than if we had to go out and hire another 5,000 engineers. As a company, we have about 7,600 employees, could be a little higher. So the community development model has really been foundational to us, and it’s been awesome.
However, what’s equally impressive is the business model, which is the subscription model versus typical licensed software. At Red Hat, we typically sell subscriptions in one-year, two-year or three-year terms. The enterprise business for us is a minimum one-year subscription. So that creates an interesting challenge for partners that don’t typically have the core competency – or in many cases even the interest – to build out the infrastructure they need to do renewals.
About four years ago, while we were growing and were bringing in lots of net new customers, we really weren’t doing as good a job on renewals as we should have. And again, the partners told us, “Well, it’s not really my core competency. It’s a different process.” So we outsourced that process to a company that does an extremely good job. They actually reach out to the customer; they’ll talk to them about the renewal model. They’ll ask them to renew. They also upsell and cross-sell, but they don’t quote any prices. When they get a customer that says, “Yep, OK, I want to buy these additional subscriptions,” then we just hot transfer it to a partner, whoever sold it to them the year before, and they quote the price and process the order.
CP: That’s a great service for the partners.
ME: It’s a huge value-add to them. They love it. And of course, their margins go up because there’s no cost for them. We pay for that in its entirety, and all we ask our partners to do is report contractually through distribution who the end users are. And by the way, if they want to opt out of the service for a high-value customer, they just pull it off the list.
I think that’s a huge plus for them. We absorb the cost. We move the customer. We upsell, cross-sell. In the vast majority of cases, a dollar today is worth more than a dollar next year. Say you’re a partner who measures a business on a line card. If you were selling licenses, the counter goes back to zero every year. If you’re selling subscriptions, all you have to do is retain the customer.
In terms of the revenue model, for us as a company, we recognize revenue one day at a time, so this is another benefit. So if we were to go and get an order today for $365,000, we would recognize $1,000 of revenue tomorrow, and then $1,000 the next day, and $1,000 the day after that. Because it’s a service, it’s a very conservative and a well-architected way to recognize revenue. Our reps get paid on booking, so they get paid on getting the subscriptions signed up for the year. And, of course, we build renewals into their quotas.
CP: Can you discuss Red Hat’s commitment to open source?
ME: We’re totally committed. Anything that we sell, there’s also a community version. And “community version” means free. So if you want Red Hat Enterprise Linux, we have Fedora, which is the community version. And this is where all the development goes. So if you look at Fedora, it actually will some have features you might not have in …
… RHEL. Everything we do is open. If we buy a software product that’s not open, we will open source it; we may put it into an existing product as a feature, or we may stand it up as a separate open source and available product.
CP: All code from acquisitions goes back to the community?
CP: You were at the forefront of this movement, but now open source is trendy.
ME: In the last two-and-a-half years, everybody’s been bitten with the open-source bug, it seems like. Some are very traditional IT companies – and they’re partners of ours, and great partners – but if you look at HP and VMware and now even Oracle, they’re all talking about open source. Every day I read about someone else coming out and saying, “We’re going to spend a million dollars on open source,” and somebody else says, “Well, we’re going to spend a couple billion,” and somebody else says, “Oh, we’re going to open up all this part of our business.”
That’s been driven by a number of things. One, customer interest. They like the model where you can have input into the product, into the community. Look at the top 20 contributors to an open-source community and you’ll see customers and users. It’s not just IT companies. Second, it’s the cloud. Industry analysts say 80-plus percent of clouds are built on open source.
CP: Does it surprise you to see companies like IBM and VMware saying, “We’re about open development, open innovation, open source software”?
ME: All that talk’s helped Red Hat a lot because, let’s face it, we can go out and sing, but if we’re a voice of one, we’re not going to have near the market reach that you have when you get all the big guys out there singing the virtues of this model. And Red Hat is viewed as a steward of open source — so a lot of that interest, even from business leaders, comes back to Red Hat, and at least we get a meeting. We get a chance to talk about it, and it’s paid off well.
I’m not going to say Red Hat was the driving force behind all the open-source interest, but I’ll tell you — we’re in the right place at the right time.
CP: So who is the typical end customer that your partners deal with? How far down into the smaller companies and smaller verticals do you see your product going?
ME: From the largest enterprise down. I’ll give you a couple numbers here to frame that. About 90 percent of the new customers that come into Red Hat come in through a partner. More than 500 new customers come in every month globally, and again, 90-plus percent of those come in through the partners, so we get lots of smaller transactions. But what does a customer that started off with a $5,000 order look like three years later? McDonalds’ first order with us was like $9,700 or something like that. They just called us on the phone.
Some customers are fast followers and catch up and accelerate quickly. Others are front runners, early adopters. What’s important for partners is to understand that …
… they need to have a methodology and know “How many times do I have to touch that customer, either electronically or on the phone or face to face, every year, to get them to renew the first time, then the second time?”
After that it sort of takes care of itself, but you need to keep growing and get the upsell. So short answer: We start with a lot of small orders.
CP: The touch is another question. Traditionally, you pay a vendor to abstract software complexity, whereas with open source, CIOs may think they require more expertise on staff. Do you find people – customers or partners – worried about the skill sets that they need for employees to run an open-source infrastructure, even with support?
ME: In fact, it comes up from time to time. From a customer perspective, I get the question, “Well wait a minute, Mark. If you guys have had this kind of success, you’ve got to have some very large customers who can self-insure themselves by just hiring 50 Linux people. And therefore why do they continue to pay Red Hat?”
Well, you certainly need to have some open-source skills, especially if you’re an enterprise, because you don’t want to pay Red Hat to come in every time and consult on, “How do I migrate my database?” Enterprise accounts certainly have some open source people on their staffs. The reason I think they don’t all self-insure is because, to be very, very active in open source, you have to be in the community, you have to be active in the community. It’s kind of the way we do business.
It’s a little different for partners. They really don’t like to forward-invest unless they have the business. And they certainly must have a solid line-of-sight of it. So we have free enablement trainings. We’ll train you on every aspect of open source, every aspect of each product, including labs. About 11,000 individuals have gone through that free enablement. We also give them funded heads [Red Hat employees]. In many cases we’ll go and put a funded head in there, someone whose job is just to wake up every day and think about Red Hat, stay tied into Red Hat. What’s going on? What’s happening in the open source community?
Once partners get some business, they can become self-funding, and a lot of these embedded experts will just be absorbed into the partner, and then we’ll look at funding a head in a different area. May still be the same partner, may not be.
That’s how we scale up on skills, but with the partner, probably the biggest learning curve in the beginning is …
… moving from a licensed model to a subscription model.
CP: That doesn’t surprise me — cloud is doing the same thing. It’s a whole different way of selling technology.
ME: The question I get asked is, “Who do you think is responsible to help fund this evolution for the partner into the cloud business? Do you think it’s a vendor responsibility?” Going from a licensed model to a subscription model is one thing. Going from a licensed model to a cloud model where you get paid per drink, well, the economics don’t allow you to spend a lot of money staffing up for that. So we’re thinking through, “How do we help them on the path?” We get asked all the time to help partners build an open-source practice, which obviously we know how to do pretty well. But this issue of “All right, I’m in. I know I need open source as the foundation for the cloud. Now let’s talk about the business model and how do you get me from point A to point B?”
CP: I was very struck at the recent Red Hat Summit by the diversity in the partner ecosystem.
ME: And you know how that happens? Enterprise customers are driving us to move into other areas. They’re saying, “Look, Red Hat Enterprise Linux has NASA-level security,” because its security was developed in coordination with NASA, and then they say, “Well, what are you guys going to do for virtualization? What are you going to do on storage? What are you going to do on middleware? What are you going to do for your management tool?” And what’s great is, we had 91 companies as sponsors at the summit — security companies, management companies, database companies. The interest now is just phenomenal. It’s just a great place to be. [See our keynote coverage here and here.]
CP: It was interesting to see the parade of keynoters from Cisco and Dell and SAP and IBM talking up their open-ource cred and how many lines of code they’ve given back and how many engineers they devote.
ME: It is amazing. And you could just sense their passion. You can imagine as a Red Hatter sitting out there, my heart is beating loud and happy. It was all good.
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