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Greg: Hello everybody this is Greg Alexander, CEO of SBI, sales and marketing consulting company dedicated to helping you make your number. Welcome to the SBI weekly podcast. Today I’m joined by Brandon Tolany who is the senior vice president and chief sales and marketing officer at Freescale Semiconductor. You might not know this but you use Freescale’s products every day for their embedded technology powers your car, appliances, medical devices, networks, and some of your smart mobile devices. The company does just under five billion in annual sales and employs a little over 17,000 people.
Brandon has an impressive eighteen years of business experience at some of the world’s most prestigious companies such as Mitsubishi, Source Photonics and now almost a decade at Freescale. Brandon is a graduate of the University of Texas. Hook ’em Horns. Welcome to the show Brandon.
Brandon: Thanks Greg. I appreciate you having me on today.
Greg: Great. Today’s topic is channel optimization. Our audience is in the middle of the annual planning process when this podcast airs, it will be late summer, early fall. Executives are trying to align sales channels with customer demand. Getting channel design wrong results in overlapping channels, resulting in high cost of sales and worse, frustrated customers and channel partners. We’re going to use SBI’s channel optimization methodology to guide our conversation so we don’t ramble and we deliver a focused thirty minutes of insight. If you want to follow along at home, go to salesbenchmarkindex.com, click on “Our Services” and click “Channel Optimization”. Brandon, you ready to go?
Brandon: Let’s do it.
Greg: All right. The first step in our channel methodology is understanding which channels the buyers prefer to buy from. The objective of this phase is to work backwards from the buyer channel preference to determine the path a product should take when going from the manufacturer to the end user. My question for you, Brandon, would be, how do you determine which channels your customers prefer to buy through?
Brandon: It’s a pretty elaborate challenge for us at Freescale. We have a business that is segmented pretty clearly between our direct customers, where our sales force is Freescale employees, Freescale badged sales force supporting those direct customers. That amounts to just under a hundred customers. There’s a scale element to those customers that has warranted that type of support which is a direct support.
We have a base of customers that measures in the tens of thousands of customers that tend to be much smaller. We’ve had to build a sales channel that is optimized for that mass. We couldn’t hire that many salespeople if we wanted to. We’ve had to build a distribution sales channel, a combination of sales reps and distributors that have a global footprint that can cover all those customers for us.
Greg: When you think about that, you have these hundred or so large customers and you’re serving them direct versus the tens of thousands small customers that you’re serving through an indirect channel. Did these hundred large customers, did they demand direct coverage or is that a decision you made on your own?
Brandon: It’s a combination. Sometimes they demand it and sometimes they are of such a scale you feel like only you can do it at the level of service that you want to provide for those companies. Scale tends to be a pretty important factor and the other thing is trying to be able to predict what the next new most important customer of that top 100 is going to be for you. That takes a little bit of art and science for understanding how markets evolve and what technologies are new.
A great example is if you think of the cellular market ten years ago and you look at the top five cellular manufacturers in the world. You compare that top five which was littered with [RIM 00:04:16] and Motorola and Nokia and you compare that to who the top five cellular manufacturers are today and the entire world has changed.
You have to have an ability to predict at some level those changes in order to get the coverage in place to win the design. For us our design cycles are very long, our customer engagement cycle is very long so from the first meeting with a customer until large revenue, on average can be two years for us.If you bet wrong on customers or segments or whatever the case may be, you’re going to miss a design window that lasts a very long time. Some of it’s predictive and evolving of those top hundred customers.
Greg: Interesting. Your answer reminded me of a friend of mine, Joe Vitalone who’s the president of the Americas region of Mitel Networks. I recently had him on the SBI TV program and asked him how he studied the buying preferences of his customers and he had some interesting points to make regarding channel selection. Listeners of this podcast may not be aware of SBI TV and may not be aware of Joe’s episode, so let’s take a very short break, call it twenty seconds, and make the listeners of this podcast aware of that so that if they’re interested in the topic of channel selection they can hear from Joe as well. We’ll be right back.
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Greg: Welcome back everybody. This is Greg Alexander, CEO of SBI, this is the SBI weekly podcast. Today I’m joined by Brandon who is the senior vice president and chief sales and marketing officer, Freescale Semiconductor, excuse me, and right before the break we were talking about understanding buyer channel preference and working backwards from that to determine how to route your products to individual channels. Let’s progress to the next step in channel optimization. Armed with a deep understanding of which channels customers want to buy from, we need to turn our attention to selecting the right mix of channels to go to market with and the list is long.
For example, if you go direct, this could be the web, on the phone, [belly to belly 00:06:56], if you go indirect this could be private label, OEM, distribution evaluated re-sellers, et cetera. This is a big meaty conversation channel mix so Brandon, how do you select the right channel mix to go to market with, especially in that broad category of customers outside of those top 100 where you might have several choices to choose from?
Brandon: It’s a big problem for us. I mean a problem that we try and solve every day. The business that I run is very fragmented so we have a lot of customers. On top of that, we have large segments that are actually quite different. A big portion of our business today, upwards of 40% of our business today is automotive. The automotive market is dominated by a few key, large OEMs and then the Tier 1’s and Tier 2’s that support those OEMs. The names are well known between, at the top level you’re looking at Ford and GM and BMW and companies like that, and then you have the Tier 1’s and Tier 2’s, the Bosch or [Dell Fire Conti 00:07:59], these types of companies that support those and it’s a pretty distinctly different market than what we do for our micro-controller portfolio.
Our micro-controller portfolio is [tier mass market 00:08:11], serving the Internet of things, very different than automotive. There are some estimates that in the Internet of things world, by 2018, of all the devices, of all the things that are functioning, more than 50% of them will come from companies that didn’t exist in 2014.
Greg: No kidding.
Brandon: Totally evolving market, completely different than what we see in the automotive segment which is more mature and we have to have an ability to touch both. There’s the direct sales model which we’ve talked about, there’s a distribution model, but there’s also for that Internet of things market, a real big shift in the semiconductor market to go after the design engineers of tomorrow who maybe aren’t the same ones you’ve been dealing with for twenty years at Continental or a company like that. You have to reach them through the web. We really noticed in China some very different patterns in those design decisions and buying patterns that make China a pretty unique problem to solve for reaching your customers digitally.
Greg: That is very difficult. I wasn’t anticipating that answer and I’m thinking about the audience listening to that and if you get this right man, you’ll be cracking the code so to speak. Many of our customers, yes their markets are evolving but maybe not that dramatically. This Internet of things market which is a brand new market that’s going to be huge has all these new designers and new locations. You’re reaching them through the web which is interesting.
A follow-up to that, if you haven’t had to do that for the last twenty years and now you do, how do you build up that capability?
Brandon: You have to have really smart people that you work with that see it in advance because if you don’t you’re trailing and if you’re trailing, you’re losing. I’ll give you a good example, in China in particular, we added a bunch of people, we started going out into these secondary markets and we reached a lot of different customers, both direct and through our distribution channel and our marketing teams were talking to a lot of customers and we were understanding how they were making their design decisions. It was very different than everything that we were used to whether in the Americas or Europe or other regions.
What they were doing is very similar to consider edmunds.com when someone goes to buy a car. They’re doing their research themselves, as a consumer, they’re going and researching cars, they’re not necessarily going to ford.com to learn about Ford, they’re going to these third-party websites to get a “unbiased” opinion. The design engineers in China are doing the exact same thing. We didn’t realize it and we found some real good momentum with one of our competitors and we were trying to understand why and we stumbled on a particular website in China that tens of thousands of design engineers in our industry were using in a similar fashion to how Edmunds functions today.
There were independent conversations ongoing about certain types of silicon for certain types of designs. We noticed that one particular vendor was dominant in those conversations. It was a 90% one vendor and then 1% for a whole bunch of other vendors. We went and saw one of these companies that was building solutions based on this particular vendor and said, “Why are you building solutions based on the silicon?” They said, “We went to this website and we saw literally hundreds and hundreds of conversations at the same time on this one particular type of silicon, so we decided to start building [bill 00:11:31] boards for it.”
“That’s great. What type of support are you getting from that silicon vendor?” The answer is, “We’ve never met with them.” It becomes a self-fulfilling sales channel when you have these third party digital forums driving your technology for you. We’ve invested very heavily, very aggressively to try and drive that in China as well.
Greg: It’s a fascinating story. It really is, and it illustrates so many themes right now which is how dramatically the behavior of our buyers is changing every day and how important it is to have your ear to the ground in all parts of the world so that you can spot these things and complements to you guys for having the courage to ramp up the investment and recognize that, maybe not as early as what you would like but you still found it in time to recover.
Brandon: It’s course correction and that’s something we do pretty well. We can always improve upon, it’s an imperfect science and it’s something that we want to get better at every day.
Greg: Yeah. All right, this takes us to the third step, which is coverage model. In our methodology, just to try to keep this simple for today’s call, there’s really three broad coverage models to choose from. First is what we call intensive, which is described as many channel partners in the same space, fighting it out for the business. Second we call selective, which is described as a limited number of channel partners in each market chosen based on a few criteria. Third is what we call exclusive which is what it sounds like, which is one channel partner in a market. Usually executive pick one of these three after considering three things, geography, the products they’re selling, and the psychographics of the markets that they’re competing in.
Brandon, for the purpose of educating the audience here, which coverage model have you selected? Is it more than one and then why did you make that choice?
Brandon: I wish it was as simple as pick one for us. Given the unique challenges of our business and some of the things I described to you earlier in the shape of the businesses, we have a hybrid. It’s a hybrid more of the intensive and selective approach. In the selective approach, we did a channel consolidation with our distribution channel specifically and we really narrowed the focus on a couple of key partners. Because it’s such a crowded market place, when you have a more intensive approach across markets that way and there are many different lines that each of those channels are selling, it’s hard to get the scale you want from the line. It’s hard to get the focus you want from the distributor in question.
We went to a more selective model and as a result of that we got more resourcing on our line because we became more important to the channel partner themselves in selling our portfolio. However, there are some unique elements globally in the distribution channel for semiconductors and there are certain markets in the world that don’t want a global distributor involved. There’ll be a more regional approach, it could be in India, it could be in China, but there’s a more regional approach with more specialized language distributors and more specialized technology distributors. That’s more of an intensive coverage model that we would use in those markets. It’s a hybrid between the two.
Greg: Okay. Advising our audience members here on how to think through this, which is considering geography, considering the products that you sell, considering the psychographics of the market segmentation, you have a hybrid and it’s obviously working for you. You chose that hybrid based on what?
Brandon: We chose that hybrid based on the requirements of our business unit. Our sales team and our global sales and marketing organization, we try and be, I’m going to use this term loosely but we try to be a window between the business units and the markets that they’re trying to call on. We saw in certain markets some success from distributors or competitors in the sales channel that we were not able to replicate using the model that we had. That’s when we, understanding the unique requirements of that geography made a change and maybe went a little more on the intensive model.
We also saw that we weren’t gaining the market share that we wanted to gain globally. If you have enough years as a share donor rather than a share taker, you’re going to start looking at things to change. One of the metrics that we use to understand change is purely share gain. We weren’t gaining enough shares so we wanted to change our model. We changed our model to a more selective model in terms of the distribution channel and share gain has resulted. That’s not the only reason why but we’ve done a number of things that are based on a pretty clear stratification of metrics.
What’s the top of the heap for Freescale has been to grow our revenue and to gain market share. Everything else becomes secondary to those two things and any strategy that is not in support of those two clearly defined goals is technically the wrong strategy. That’s where we got the clarity to optimize based on market share, that we were either gaining or not, or the geographic requirements that our customers were screaming to us, either directly or indirectly.
Greg: One thing I learned recently from somebody, a guest that was on this show, his name is Mark Turner who runs the EMEA business for software provider Genesys was when choosing channel partners, the number one component to choose from or the number one design principle I should say is selection criteria, better said is mind share. It sounds like that you were considering and you went more selective and as a result of that, you had more mind share and ended up picking up market share gains. Is that the way to restate that?
Brandon: Yeah. You can drive mind share or you can earn mind share as well. IF you do both, then you’re really winning. You drive mind share through this type of down select and the law of big numbers focus, but you can earn that mind share by just having products that are better than what other people have at the same time. We like to do both. Given the choice, we’re going to do both.
Greg: Mark’s business, which is the software business, the rule of thumb there is 10%. In other words, if your product represents more than 10% of the partner’s revenue, then you have mind share. If it represents less than that, then you do not. Now that’s unique to software and his particular type of software. Is there a rule of thumb in your industry?
Brandon: That it’s an interesting one, software, it doesn’t surprise me that it would be 10%. Nearly impossible in the semiconductor industry because there’s been a more mature consolidation of the distribution network in the semiconductor industry for the decade it’s been around while software and merchant variety is probably a little more nascent and specialized and fragmented. In the semiconductor industry, each of the largest global distributors, Arrow, Avnet, Future, World Peace, companies like that, each of those large semiconductor distributors have up to three-hundred different semiconductor lines on their line card. 10% wouldn’t be the number, and you’re looking at companies like Intel and Altera and Freescale and TI and all the big names you can have think of in semiconductors. A big number there is, 3 to 5 to 6% tends to be a pretty big number in the channel and anything beyond that is rare and really large.
Brandon: I’d say that would be the type of scale that you’re typically looking at, mid single-digits are big in the semiconductor industry in terms of share in the channel.
Greg: Got it. If you’re listening to this podcast and you’re enjoying Brandon Tolany’s commentary on channel selection and you want to check out Mark’s podcast, let’s run a quick spot here and let the listeners understand how they can go from listening to subscribing to the podcast so that we can push these things to you. We’ll be right back after the break.
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Greg: Okay. Brandon, let’s progress to the next step in channel optimization. At this point, just a quick recap, we know which channels our buyers want to use, we have selected the channel type and decided on the coverage model. Now it’s time to select the actual channel partners and this involves evaluating channel partners on things such as which channels are your competitors using, the reputation of each partner, how long they have been in business, financial strength, their management team. We talked earlier about mind share. You can think about this too from a multi-tier perspective. How do you evaluate your channel partners?
Brandon: Again, a mature market, the semiconductor channel market, there’s been a pretty vast consolidation. A lot of individual companies purchased and gobbled up by some of the bigger global guys. However, once you get past the … There’s sometimes some real strength in the global guys and sometimes maybe there’s some blind spots that you have to use more specialized technology distributors or more specialized regional distributors. Somebody could have an expertise in RF for instance and that’s a very specific requirement and skill set that most distributors do not have great depth in. It becomes a selection on what the requirements for the particular portfolio and what requirements for the particular region would be as you optimize and select those particular channels.
Greg: In these new emerging spaces like that Edmunds example that you gave me earlier, I would imagine that that’s more fragmented, the consolidation hasn’t happened yet so maybe you have some more wiggle room in channel selection. Is that true?
Brandon: That’s geography and sometimes in those types of digital domains where people are making design decisions, in the old days, it’s the customer needs to have you walk in, show them the catalog of products and you pick through it and then you give them the sell job there. Now the customer is making their design decision really before they talk to you. It might be narrowed down, it might be you and a competitor, but they know the technology, they know the process, know they’re looking for, they know what type of software they want to run. When your salesperson is really engaging, you’re down to the end game. You lose that influence on the front end.
For a market, the one I described was in China for the Internet of things, as that grows, you look at, “Okay, there’s literally thousands of potential customers here. We have to go with as broad a net as we can possibly cast to get as many irons in the fire as possible for the next nest or the next [tesla 00:22:34]. Pick a great emerging design opportunity for the next one of those. If you’re not covering the mass market, then you’re not covering those accounts because it is so fragmented.
The only way to cover that fragmented market, I guess there’s a couple ways. One, you can blanket the field with a bunch of direct resources, that’s a prohibitively expensive cost model that your CFO will not allow, or you can really optimize a sales channel to go after the requirements of the market that you’re attacking. That’s really what we’re talking about today.
Greg: Historically speaking and I’m going to speak in general terms here, the relative importance of marketing versus sales in the semiconductor industry was low.
Greg: What these new purchasing behaviors that you’re describing here today, where people are educating themselves and making decisions on their own before they even meet sales, is that flipping?
Brandon: Oh it’s flipped. The importance of marketing, there’s two elements of it. One is and I’d say even fifteen years ago, the relevance of marketing was to make sure that your documents were translated effectively and make sure that your technical documents were comprehensive, so the customer didn’t have to call you every time there was a question.
Our manuals, for a piece of silicon can be 400 pages long. We’re not unique in that. We absolutely have complex silicon but we’re not the only one that has that. That was really what marketing meant back fifteen years ago, and now because of the sheer volume of data at the fingertips of our customers, the sheer volume of information that’s available on your website or someone else’s, you have to reach them through that differently than you did just making sure it was translated properly into Mandarin.
Greg: Mm-hmm (affirmative). All right, you’re listening to Brandon Tolany, chief sales and marketing officer of Freescale Semiconductor and we’re talking about channel optimization, particularly as you enter the new year in your annual planning cycle. We’re moving through SBI’s channel optimization framework to guide our conversation and it takes us up to the next set of activities which I’m going to group together some of these things and call this steps four through ten. All these deal with recruiting new channel partners, onboarding them, making the existing channel partners more productive, and the internal channel management organizational chart needed to support these channel partners.
Brandon, let me ask you a multi-part question here. How do you recruit new channel partners? How do you onboard them and make them productive over time and then how is your internal channel management team organized? Is it by [geo 00:25:07], by product, by vertical industry? How do you go to market with them?
Brandon: How do you recruit them, we don’t do a lot of recruiting of new channel partners. When I think of channel partners for us, it’s third-party entities that are selling our portfolio. Again, consolidation has happened, they’re fairly mature, we make changes from time to time, but largely they’re in place, intact. The key thing is more than recruiting, the onboarding is that if I change the wording and look at how I take new people that come to the channel, teams that are already in place and how do we make them evangelists for our technology? Then I look at productivity, how do we measure and incentivize the channel …
We did a complete reboot of our channel, same players largely in place but a complete reboot about the contracts that governed our channel. The first thing we did and I think it was the most important step we have taken in our organization for a couple of years was to really understand how our channel is motivated. We understood what we wanted, which was growth and we wanted unfair market share gain, we wanted to expand our gross margins. We didn’t really care about what was important to the channel. We didn’t actually optimize our goals and deliverables and metrics around what was important to them. Once we figured out what the key metrics for the channel partners were and built plans that enabled them to be successful and reward them for being successful in the way they wanted to be successful, we found a far more engaged channel. We found way more mind share in the channel and a way more mutually beneficial partnership
Many times in the past, we probably were looking for the benefits to be a little more on one side of the ledger than the other rather than recognizing that if we’re both successful, then the results are going to be better for both parties.
Greg: How about your internal organization that [crosstalk 00:27:01].
Brandon: Our internal organization that supports that, we have global owners of the largest channel partners that are centralized now. They don’t need to be geographically necessarily centralized but for the largest channel partners there is one person responsible for that channel partner. The individual salespeople that either work hand in hand with that channel partner are direct salespeople or are more at arms length, they’re all regionally focused but we have channel relationship managers, channel sales directors that are centralized. In the region, we’ll have regional resources that are responsible at a sub-level to Europe or the Americas or Asia Pacific or Japan.
Greg: As it relates to the marketing component here, channel marketing, is that centralized or is that out in the [geos 00:27:49]?
Brandon: Channel marketing is largely centralized. Not exclusively, but it’s largely centralized. There are marketing resources for the channel in the field, but if I were to look at a percentage, I’d say it’s 90% in the business units, wherever they reside, within Freescale corporate structure rather than in the field.
Greg: Okay, got it. One of my colleagues, Drew Zarges, he writes often for a blog on the subject of channel optimization and one of his articles titled, “Three Ways to Recruit Your Dream Channel Partners” is in our blog hall of fame for it’s been read over 50,000 times at this point. This audience might want to read Drew’s work so let’s take a quick break and let everyone know how to sign up for a subscription to the SBI blog. [Let’s 00:28:30] stick around for when we come back, Brandon is going to tell you what to do with all of this information tomorrow morning, so come right back.
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Greg: Welcome back everybody, this is Greg Alexander and Brandon Tolany, CEO of SBI and chief sales and marketing officer of Freescale Semiconductor. We’re talking about channel optimization and building your channel strategy for the new fiscal year. This is our last segment with Brandon and I’m going to put him on the spot here and Brandon, I would tell you after listening to you today, I’m glad we picked this topic because you clearly are an expert at this and so … I’m going to ask you to speak directly to the audience. Give them your top three things to do immediately to optimize your channels for the new year and do so in such a way and assume that most people don’t have the level of expertise on this that you do.
Brandon: Sure. The first thing, if you’re competing with Freescale, quit now. The second thing would be to really understand what your goals are in the channel. I know this sounds like simple advice but the biggest thing that really shifted the fortunes of Freescale over the last several years was clarity from our CEO on what the most important goals were. There was a whole lot of people driving to a whole lot of different goals and we vastly simplified those goals and it was really all about share gain and how we measure share gain.
Everything else cascaded off of that so we knew what was important for us to drive the channel. If you don’t know what’s important and you just stick with something simple like we’re going to grow our revenue, it’s not good enough. You got to come up with a level of clarity in your goals and what you really want in the channel. You need to understand your channel and what motivates them. If you don’t understand what motivates the channel, you’re going to think of them as truly a third party rather than an extension of your engineering and sales force, and if you look at them as a third party, they’re going to view you as a third party as well and that’s not what a channel is intended to really be.
After you get the structure in place, the goals in place, you measure the hell out of it. You just come up with what are the important things that we need to measure and be pretty relentless about those measurements and you built something that channel partners should be incentivized on their own goals to want to work with you, that should garner you mind share. If you’ve got mind share with that channel, then the metrics should come and if the metrics aren’t coming, that’s when you course correct. Maybe you’ve got the wrong channel partner.
Greg: Great advice, really. I wrote all three of those down. All right, well we’re out of time. I want to thank Brandon on behalf of our podcast subscribers for sharing his knowledge with us. I think all of our chances of making the number went up as a result so Brandon, thanks a bunch for coming on the show today.
Brandon: My pleasure. Thanks for having me.
Greg: Okay, take care.
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