The Real Reason We Debate Exclusivity

By Josh Anderson

The question of exclusivity has recently become the topic of heated discussions between masters and subs. (Click here to read other opinions.) Each side has valid points, but this seemingly endless debate is just a proxy for an argument about the merits and future of two business models the transactional model and the value-added model.

Our industry is going through a transition that is as much about technological evolution as it is about distribution. Core communications services are commoditized, with no meaningful differentiation between providers. At the same time new technologies that often require substantial design consultation are seeing significant growth.

Meanwhile, revenue per unit is decreasing, as are margins, resulting in distribution channel struggling to shore up their economic models. Addressing decreasing margins is clearly the most pressing issue. Fundamentally, you can do one of two things: either improve efficiencies and increase volume, or replace lost margin dollars through other services that carry higher gross profits.

The ongoing debate between masters and subs is an artifact of this split in strategy. The question of exclusivity is really a question of which business model you align with. Organizations that pursue the value-added route generally invest in technology platforms. In addition, they maintain a stable of engineering, project management and consulting resources to support the models success. Given the margin pressure in the industry, these resources have to be applied to opportunities that have a high probability of closing.

A master agent transitioning to a value-added model simply cant justify supporting pure transactional agents. These subs rely on volume and are therefore pursuing any opportunity regardless of close probability.

Complicating matters further, it is not uncommon for transactional agents to utilize masters for top-tier solutions that will make their direct-agreement CLEC prices look more attractive to the customer. This practice is fine if everyone is in on the ruse, but all too often this type of agent claims that the customer is the final decision maker and theyre simply providing the available options. That claim is disingenuous and an insult to the intelligence of our industry. Transactional agents know when prospects are shopping on price. Thus they know that the top-tier solutions wont stand a chance against that broadband voice-and-internet combo.

In the past, masters understood this game and simply looked the other way because the margin structure allowed them to gamble. Back then, the deals they did win were lucrative enough to justify wasting resources on the ones they didnt. Unfortunately, thats not the case today. Masters must be more judicious about how they leverage their resources to ensure that the ROI makes sense.

I suspect the rationale behind exclusivity is that the master intends to invest significant effort into supporting the subagents value-driven sales. These types of deals dont lend themselves to process-driven efficiencies. The effort involved in value-driven sales comes in the form of sales engineering services, presales consulting, and/or access to value-added technology platforms. The expectation is that the subagent agrees that these contributions are valuable, and as a result hes comfortable making a reciprocal commitment.

Subagents who cringe at the thought of exclusivity may do so because they arent willing to make that transition to a value-added model. Embracing commoditization and doubling down on the transactional model doesnt necessarily doom that agent to obsolescence. Just because something becomes a commodity doesnt mean people cant make money selling it. However, transactional agents should recognize the realities of that path.

First off, customers that equate price with value are likely to abuse vendors and agents in their single-minded pursuit of the lowest number. The solution isnt to play their game and be the quickest to price or the one with the prettiest proposal. The solution is to funnel those opportunities to self-service platforms that let them be as cheap as they want to be without sucking up high-value resources.

Justification for this strategy is visible in many other industries that experienced commoditization. The travel industry, the insurance industry, even the consumer finance industry (think LendingTree.com and BankRate.com) are great examples. These industries have seen companies succeed despite commoditization precisely by leveraging process and technology efficiencies and by demanding self-service. Transactional agents in our industry must let go of the belief that they can be a full-service commodity seller. It simply wont be possible soon.

That reality is the message that transactional agents would be wise to take to heart. The transactional business model isnt dead as our industry has been prone to declare. What will die is the success of full-service trunk-bangers who believe they can visit a client once a quarter, with copies of extravagant proposals where the lowest number is in 72-point, bolded font, highlighted in yellow. When commissions on that bargain-basement number are as low as they are, you wont have the first client lunch paid off for three months.

Ironically, in many cases both transactional agents and value-added agents would be wise to partner with a master agent. Transactional agents could leverage the economies of scale of masters who have developed automated, self-service systems. They need to tap into masters intelligence to make the transition from high-touch commodity peddler to strategic marketer focused on driving volume.

Likewise, many value-added agents will need to augment their capabilities with the resources of a value-added master. Unless the agency is extremely large, it makes more sense to avoid carrying overhead and instead use the project management and engineering resources of a master. Sure, your commissions may be incrementally lower than a no-frills volume master, but you can avoid carrying a $90,000 per year CCIE (Cisco Certified Internetwork Expert) or a $65,000 per year project manager.

In a perfect world wed all pair up based on transparent conversations about business models and strategic goals. Unfortunately, everyone is moving very few have already completed their transition. Transactional agents may want to be value-added, but still have those cost-only customers. Or maybe theyre moving to an automated transactional model, but still have those customers that expect low prices and high levels of service.

You cant be two things at once. Rather than arguing back and forth about who is right and who is wrong, decide what business model you want to pursue, recognizing that you cant have your cake and eat it too. Then take action to make the change.

Josh Anderson is the CEO of Telephony Partners, a telecom master agency he founded in 2002 leveraging engineering and software expertise. He also is a former member of the Channel Partners Advisory Board.