OEMing For Fun and Profit (Part Deux)
Mark Hoover, President, Acuitive, Inc.

A couple of months ago I published a Musing about OEMing from the point of view of a systems company sourcing a systems level product from another company. This month, I’d like to invert this and take the perspective of the sourcing company and discuss all the mistakes one can make (believe me, I have) in that role.

As in my first Musing on this subject, my discussion is specifically relevant to only a certain kind of OEMing.  My insights are not relevant to the OEM processes where a chip supplier supplies a device that goes on a board, or a board supplier provides a board that goes into a subsystem, or a subsystem supplier provides a subsystem that goes into a system.  Those are the traditional and time-tested forms of OEMing that will endure forever. Instead, my thoughts are totally oriented towards the trickier OEM situation -- one where a systems vendor OEMs a complete systems product to/from another systems vendor.

Sales People Are (A Necessary) Evil

All too often the motivation for a company to develop an OEM channel is to avoid the cost, energy and challenge of building up an internal sales and marketing force.  The thinking is that if you can present your technology and products to an existing sales and marketing team, you’ll get more sales faster, and you can focus your investments on on-going R&D and beer parties.  This is often the mindset of engineering-oriented companies and/or foreign companies who are unsure of themselves in regards to establishing an effective sales organization in the U.S. 

As much as I applaud the natural inclination to not want to hire sales people, I do believe that in most cases you have to swallow your bile and just do it. 

First of all, your own sales people are the only people in the world who are going to be heavily motivated to make sure that your product sells, because their paycheck depends on that and only that.  By definition, any OEM sales force already has a lot of products that they are selling, are comfortable with selling them, and only have a small amount of time to invest in learning how to sell your product.  If their first attempt or two to sell you product hits a snag, they’ll just dismiss you and focus on selling other things.  In contrast, your own sales force will try to re-direct rivers, move mountains, and defy the laws of gravity to sell your product.

Second of all, through direct interactions with customers, your sales force is your most direct pipeline into the most valuable information in the world – how customers think about you and your competition; how they go about solving their problems; what their pain points and priorities are; what their existing environments look like, and who are their influencers, etc.  Lacking such information, almost all product planning, marketing communications, and pricing activities are performed blindly.  You can’t expect information coming back from the OEM sales force to fill in this void. Such information is usually delayed, noisy, and consciously or unconsciously distorted by the needs and biases of the OEM customer. 

Thirdly, the method for becoming brand-name aware among your targeted customer set is for people to see your company and product names, see your marketing, and meet your sales people, all on a regular basis.  All of these are important ingredients towards ingraining your brand into the minds of your prospective customers. Take any of those away, and you may become camouflaged to these customers, as well as to potential industry partners and others who may have benefited from working with you but who never became aware of your existence.  

Lastly, you’d have a pretty boring company without sales people. Sales people are fun.  Once you get past the superficial veneer and into the vacuous layer underneath, you find a set of people who generally know how to party.  Would you really want to be in a company that didn’t have such people in the overall mix?

Therefore I respond to any company that tells me their channel strategy is exclusively OEM, or heavily OEM, “good luck, talk to me again when you start your next company in a few months.” 

OEMing is Not Free

Sometimes, a system company that is not (thankfully) a pure OEM company will view OEMing as a relatively cheap way to expand their channel or to inject themselves into a market more rapidly.  The problems with this thinking are the goal is rarely met and the cost is never free.  Supporting an OEM customer is massively different from supporting an end customer and even quite different from supporting other indirect channel partners such as VARs and systems Integrators.  To have even a chance of success, you have to recognize going in that you can’t just lay an OEMing program on top of an organization tuned for direct customer and indirect channel support.  You may need separate product management, marketing, engineering, procurement, manufacturing, training, support, documentation, and legal people dedicated to the task to make it work.   Take that into account when evaluating the business case for doing a little bit of OEMing.

Another thing to take into account is the magnifying cost of change management related to the care and feeding of an OEM channel.   If your product has bugs, your documentation has errata, or even if you simply want to incrementally improve the marketing collateral or training materials related to the product, the cost of executing on fixes and updates can be huge.  The absolute worst nightmare is the return process associated with hardware RMAs. Once you ship to an OEM customer, it can go through them to their distributors, to the VARs they support, on through to end customers.  Reversing that process is almost impossible.  If the product fault can be fixed via a software upgrade, the problem is a little bit more tenable, but still getting downloads, patches, EEPROMs, flash cards, or whatever to follow the same path to the customer as the original product can be very difficult. Somewhere along the line, someone will misinterpret what the problem is, how to execute the fix, etc, and possibly start to fix stuff that wasn’t even previously broken.  Then the real fun begins.

My general rule of thumb with OEMing is that every erg of energy you save up front in the relatively clean phase of sales via Powerpoint pitches and demos are offset downstream by 10 operational ergs required to manage change through an OEM channel during the on-going stage of discovery of the ugly reality of the implementation of the product.  This assumes that a product or the information around it is at least slightly imperfect. This, of course, doesn’t apply to you and your situation.

OEMing is Not Fast

Generally, your OEM customer has a release process that just begins when yours ends.  If you are a small company and your OEM customer is a big one, their release process can take as long as your entire development and test cycle!!  The net result of this is that over time, your OEM customer is one or two releases behind the product that you are selling, shipping, and supporting directly.  This has all kinds of implications on the world-view of your product’s competitiveness relative to alternatives, delays on getting feedback on the utility and operation of your product -after you have already launched upgrades, and a widened window of the number of releases you have to simultaneously support. 

Deal With Channel Conflict Up Front

You have prospective customers that you are targeting. You’ve chosen these targets because they are the best fits for your products and represent the most financial opportunity.  Inevitably, your OEM sales force is going to sniff out these same customers and “accidentally on purpose” try to sell to them as well.  You may think that you can prevent this by channel limitation agreements with your OEM customer up front but that always proves to be fruitless.  Whatever assumptions both parties had in mind when the agreement was made change soon afterward.  Alternatively, you may think, “Who cares? – either way my product gets sold.”  But you should care. This situation is very de-motivating for both sales forces, and even worse, can confuse or anger the customer to the point where they choose a competitor’s product.

The simplest way to finesse such conflict is to create a program where your company’s sales force gets commissioned in some way, even though the PO from the customer went to your OEM customer.  If you get that right, you can get your sales force to join up with the OEM sales force and do the actual selling (which they are far better trained to do), letting them take on the on-going dirty work of fulfillment, installation support, maintenance, etc.

Summary Thoughts

Even though most of my analysis above, based on real experience, paints an ugly picture for OEMing, there are sometimes reasons to OEM to another company if you are a systems company.  These include:

·         OEM exclusively if you really don’t want to be in business and would rather be at home playing with the kids or spending your days at the unemployment office just ‘hangin’ with the gang.

·         By all means OEM if you believe that your product cannot stand on its own – that it needs to be bundled with and buried by a bunch of products from another vendor, so that the customer is buying a “solution” and isn’t even aware that they are buying your product.  Of course, if this is the situation, you should also be looking to sell your company for a buck or two, because that’s all it’s worth.

·         OEM your company’s very 1^st  release of your 1^st product if you believe that after FCS, your engineering and other key company resources are best spent distinguishing between possible quality problem and cockpit errors based on 12 word e-mails, training 800 people in the last five minutes of a four-day worldwide training program, and tracking down customers in Rwanda who bought one box from a Central African VAR who sourced from an EMEA distributor who sources from a tier one distributor that your OEM customer has a preferred supplier agreement with, in order to give them the documentation on how to plug your product in, that was forgotten in your FCS package, rather than working on the 2^nd release.

·         Talk to potential OEM customers while developing your first product, to get their insights into the customer needs, market requirements, and competitive landscape, to tee up an OEM deal, including using their systems lab to soak your product before your own FCS, but then forget to call them back to set up the final meeting to sign the final contract for about a year, claiming a software glitch in Outlook (they’ll believe that).

·         OEM your proven, hardened, product in it’s 4^th release, to an OEM customer or two who are strong in market segments that you haven’t been able to reach, and need your products capability to enhance their overall offering.

(volume 4, number 6)