UCaaC: UC as a Channel

In this Industry Buzz podcast, the UCStrategies Experts turn their attention to the role of the Channel in UC-as-a-Service by welcoming Don Trimble, Vice President of Sales at 8x8, to the discussion. UCStrategies' Dave Michels is the moderator, and is joined by UC Experts Jim Burton, Blair Pleasant, Jon Arnold, Phil Edholm, Art Rosenberg, Marty Parker, Kevin Kieller, Don Van Doren, and Steve Leaden.

Dave Michels: Hi, this is Dave Michels. Welcome to the UCStrategies podcast. This week we are going to be talking about the role of the Channel in UC-as-a-Service. We have with us a full house of UC experts, along with a special guest from 8x8, Mr. Don Trimble. He is the vice president of sales there who has been focusing on channel sales. He is going to share with us some of his experiences and observations in building a channel for a hosted provider. Don, you have had a lot of experience with a lot of different product companies, HP, Polycom, Cisco and 3Com. As far as I know, this is your first opportunity to work with a hosted provider. Is that true?

Don Trimble: That is true.

Dave Michels: Are you finding this to be a very different industry or a very different proposition for you?

Don Trimble: Yes it is. It's software is a service, so all of the hardware companies I have worked for have a heavy software element. They just deliver it as an appliance or as a device, and as a wraparound service or whatnot. This is the first time I have worked for a service provider per se. I have worked with service providers, acting as resellers or channels of distribution with my previous hardware employers. But this is the first time I have ever worked for a service provider itself.

Dave Michels: I think we are all really anxious to hear about some of your experience with this. The UC space has been quite a combination between evolution and revolution over the past decade. The Channel is the part that seems to be the last piece to kind of come together. We have seen so much of the technology change, from traditional TDM to the VoIP to the different modalities and the increase in mobility. The Channel seems to be this part that is still confusing a lot of people. They are confused whether it is traditional Channel partners or a new kind of partner, etc. On that line, I want to start off with the first question to you about the role of the distributor in the Channel. We often talk about the role of the reseller. The traditional Channel involved two-tier distributors, such as the Ingrams and the Synnex's, the companies who are distributing to the resellers. Do they have a place in this Channel world, in this hosted world?

Don Trimble: I believe they do in a couple of different ways. First off, we do sell directly to end users. We started that model, so the Channel effort is relatively new since I have come on board. We are moving the company more and more in that direction. As we deliver solutions directly to end users through either our inside sales team or through my outside Enterprise sales team, we use distribution for the product fulfillment aspect. Because we are delivering a phone at the end point, or even video end points for our video service solution, they act as a fulfillment vehicle for us. We process the orders on our systems and we push those out to a distributor, who then ships them directly to the customer. They have also got some value add elements in the sense that they kind of pre-provision those phones, such that we can turn up the service a lot faster by utilizing those. I am also pursuing a second distribution relationship where I could leverage more VAR recruitment, so to try and choose a distributor that is possibly distributing for one of my competitors, i.e. a ShoreTel, or an Avaya, or somebody of that ilk, to have them come on board and work with them to help me on VAR recruitment and whatnot is also another strategy that we are looking at.

Dave Michels: Do you have any distributors reselling the actual core service at this time?

Don Trimble: Not a distributor, no.

Dave Michels: All right. Let me open this up to some of the experts. Jim, do you have any thoughts on the Channel, with hosted?

Jim: I do. I would like to first thank Don for joining us. He is actually helping us with our first podcast for the year. We are hoping this will just help educate the market a little bit more, because of the types of questions and the people we have on the call. Don, I have a question for you. We have been following the Channel, UCStrategies has, for a long time. At our UC Summit every year we have some discussions about Cloud services and how that is evolving and what that means to the various Channel partners. Have you found a profile of the type of Channel partner that's best suited to deliver a Cloud service? Particularly when you are comparing it that most people have been delivering CPE solutions for so long, is there any profile that you can share with us that seems to be the winning one that makes it easier for you to identify people to go after?

Don Trimble: That's a very good question, Jim. I took a two-pronged approach to this when I first got here. Because of what was mentioned earlier, that there's this whole concept of being an on-prem solution provider selling products with wraparound services, and everything a time-of-sale; to get the partner's head around this recurring revenue model is probably my biggest challenge. The low hanging fruit to so speak, from a partner profile perspective, was more the telecom services agent profile that were already accustomed to a recurring revenue model. They were selling ISP circuits and whatnot. The downside of that profile of partner is that they are not able to help us with the deployments because we do have an on-prem element in terms of plugging the phones into the network, making sure that router has got quality of service set up on it and even network assessment ahead of time of sale or ahead of the deployment is where the really ideal profile, in my opinion, is more your UC on-prem solution provider that may be selling Avaya, ShoreTel, Cisco or any of the above today, or any of the Digium platforms. That knows how to go in and make sure the network is maximized locally, as well as wide-area wise, to take on a hosted voice over IP solution and has that knowledge and capability to not only plug the phones in, which is the easy part, but to potentially reconfigure routers to add quality of service to make sure that our service can be delivered in the maximum possible. They also have the ability to do multiple sites. We do best in a distributed environment versus 1,000 employees in a single building. That is probably better served by on-prem, to be quite honest. If it's 1,000 employees over 100 offices, that's where we and a hosted solution really shine. Did that answer it?

Jim Burton: Yes it does. In some ways it's not surprising. We have a lot of people who are the old type of agents that sell services that attend the UC Summit. They don't have the resources to go out and install products. I realize there is a hybrid. Are you able to find people that can partner with someone else? Someone does the sales service and they can go out and find someone to do an actual installation?

Don Trimble: I think in those scenarios we would probably lean back on our own company to do the installation component. But that doesn't scale, which is why I say the ideal partner profile for us is the one who can do the deployments. Not only can we close the deal with them, but we can turn the deployment aspect over to them. They can charge additional money and make more money for those deployment services, and even to the extent where they are capable, possibly take first call on the post-sale support off of our backs. I would say today we are probably just having them bring us the customer. We are working it together. We are selling them the service. When it comes to deployment we are leaning back on our methodology as if we had sold directly to the customer, trying to do as much of that over the phone and whatnot as we can to deploy the solution. If it requires an on-site element then we are either sending some of our own people out or tapping a third-party install only organization that we are partnering with.

Jim Burton: Great.

Dave Michels: Don, if I understand you correctly, you are looking at it from the sales perspective. Is there another VP of Service at 8x8 that is looking at a national support program?

Don Trimble: Yes. We have a VP of support. He is fairly new to the company. He has got everything from the onboarding process all the way through to post-sales support and all of these onboarding issues. We work hand in glove with my SE team. My SE team has been doing a lot of the deployments to date, but they are really more pre-sale SE. We are in the process of building out more onboarding, not only project management but install types of resources under the support team and organization, as well as looking at pure feet in the street install-only partners to just help augment our own employees when it comes to a pure installation requirement, versus going through the Channel for all aspects, if that answers it.

Dave Michels: Blair, did you have any questions for Don?

Blair Pleasant: Yes, thanks Dave. Don, thanks for joining us. One thing I am wondering is, one of the big problems that companies have as they move to an indirect Channel model is Channel conflict. The Channel partners want to know that the vendor is not going to come in and swoop up their customers. As you build up your Channel, can you talk about how you are going to avoid Channel conflict, including when it comes to services?

Don Trimble: What we've created is, for lack of a better term, a deal registration process. Obviously software-as-a-service is big for us. We use Salesforce.com as our internal CRM. What we have is some portal tools where we give all of our partners, whether they are a sub-agent under a master or even a partner that we have signed onto a direct contract, access to our partner portal, vis-à-vis a secure login. They can have multiples of those. All they need to do is enter the customer name into that system. It checks it against our SFDC database. If it is already being worked by one of our own people it will kick that back. They can call the Channel manager and we can try and move it over if need be. If it's too far down the road one of our other people will tell the partner outright not to bother because this one is already being worked by us. They move onto the next deal. Once it is tagged to said partner in our systems, then our own sales people back off and my team manages the sales process in support of the partner.

Blair Pleasant: Okay. Jim had asked about an ideal reseller. Is there an ideal customer that would make more sense for direct versus indirect?

Don Trimble: We are really growing up from the almost micro-business, ASP business. Most of our sales to date through our inside sales team have been to very small businesses, say under 25 phones. That's where we have been most successful. I think if you look across the industry, that has also been where hosted communications have gotten the most traction. A hosted solution really serves companies well that have very limited, if no, IT resources. Clearly a small business is in that vein. You also have the whole OpEx versus CapEx issue. Small businesses tend to want to go more down the OpEx route. What we have done is try to draw the line around 50 phones and above. Anything greater than 50 phones where you start to need that network assessment and more up-front qualification of the customer environment to make for a successful deployment, as well as more likelihood of having to send somebody on-site for the deployment itself, is where we kind of draw the line between our own people selling it and it going to my team, which is kind of a hybrid Channel end user team at this point in time. That is kind of the cut.

I am a big believer that the bigger the customer, the more they gravitate to a bigger partner. Our sweet spot for a partner profile is really more your regional players that are covering a state or two. They tend to be the ones that serve the small/medium business market, more so than a big national integrator or global integrator for that matter. They tend to spend more of their time at the high end Enterprise accounts. That has kind of been the strategy to date. We have about 100 partners today. If you look at the profile, with a couple of exceptions they are mostly small regional players covering a couple of states or even a couple of cities within a state. They are serving that small/medium business market. Does that answer it?

Blair Pleasant: That makes sense. Thank you, absolutely.

Dave Michels: Let's go beyond cities and states. Let's head across the border. Jon, do you have any thoughts on the Channel and UC-as-a-service?

Jon Arnold: Thanks Dave. What I would like to speak to on a broader scale here is the idea of lessons learned. I think we are going to hear a fair bit about that from what you are getting out of your current partners here on the call. I really want to hear a little bit more about what you are learning from the customers' customers, the actual end users, in terms of how they are adopting Cloud. You have got about 100 or so partners now. You are getting some good critical mass. I just want to hear a little bit more about that side of things and what you are learning from the end customers, and how that is kind of living up to what your expectations are and how the market should be adopting this. Thanks, Don.

Don Trimble: Sure. Clearly the overall strategy is to move the company up market. That began with Kim Niederman and myself coming on board here at 8x8. I think even the market as a whole is beginning to evolve in that direction. I do think that the lessons learned are that more and more of the Enterprise customers, especially as I referenced before, a distributed Enterprise, are looking at hosted as an alternative to on-prem. I think the on-prem providers are challenged at this point because they need heavy IT staff. There is a lot of ongoing maintenance. It is also a big capital expenditure and investment to make in those systems. I think what we are seeing is when older systems are coming up for an upgrade potentially, or the requirements to do a significant upgrade or overhaul, for lack of a better term of a current on-prem system, I think that is where customers are now entertaining Cloud as a viable alternative. I also think that the service itself has stabilized significantly over the last few years. All of the issues that might have been seen three to five years ago have gone away, especially with a lot more robust Internet connections and ability to traverse the Internet at much higher rates and speeds, and get that all the way down to the local connection. That has also helped. I think personally, from our own company experience having done this for well over six years now, the service itself is very stabilized. We have a very redundant network for delivery. We can take on much bigger projects at Enterprise customers.

I think the main thing that is really intriguing them is this whole offloading of their entire maintenance of their communications systems and ongoing maintenance, really, for lack of a better term, and management of those communications systems to a hosted provider. They can add phones very quickly and easily. We give them a tool to manage their account so they can update extensions, add extensions, set up ring groups and whatnot, very easily through their own what we call "account manager." That is the tool that they use. It is a web-based portal that enables them to manage their entire account on their own, or we will take that on for them and help them through our support organization. I just think we are seeing a lot more receptivity in the larger customers to a hosted alternative. We have got the ability to deliver. If you look at our financial stats, our average revenue per unit has been going up significantly. I cannot disclose the quarter we just closed, but we are starting to see a lot more significantly sized customer wins for our services than ever before.

Jon Arnold: Thanks, Don. I have just a quick add-on to that. What are you seeing in terms of closing cycles? Because of how they are receiving the ideas of hosted, it's probably working better than they have thought? Is this translating into faster sales cycles for your partners?

Don Trimble: It really depends on customer size. I would say our average sales cycle or the "less than 25 seat" market is 30 to 60 days. In the "under 50," is it probably 60 to 90 days. For the larger Enterprise deployments and deals that I just referenced it is probably an average of roughly six months. You have to realize that we are still competing very heavily with an on-prem solution. In the smaller arena and the smaller company business, the under 50-seat market, I would say we compete more with other hosted providers. Not only are you convincing them to even consider hosting, you are competing with the traditional on-prem vendor who they probably used for years. They are trying to decide whether they just move forward with again on an upgrade basis as I referenced, or a whole new alternative on-prem vendor, and potentially even other hosted providers. The competition gets a lot fiercer as you get up over that 50 to 100 mark, especially as you get up into 1,000 phone-type opportunities. I would say those sales cycles are still pretty elongated, six months on average, maybe even as much as a year. I know a couple of the deals we just took down last quarter were started almost a year ago, believe it or not.

Dave Michels: That is interesting how you have got these different sets of competitors against other hosted providers in the smaller space. Phil, do you think we will see a lot more of the Enterprises adopting hosted services in the future?

Phil Edholm: Absolutely. I think this is a critical area for the Enterprise. Don, one of the questions that I really wanted to ask you was about, having followed 8x8 from the middle of the year before, in 2011, I am just curious to understand not through the last quarter but previous to that, how are you seeing some of the underlying kind of adoptions? For example, back at the end of 2011 your average customer was eight seats. They were buying nine services, which was basically eight voice services and one secondary service. One of the things I noticed was that over the last year you have been growing at about four percent a quarter. I am curious. Is that growth related to predominantly customer seat growth? Is that growth attributed to growth in the size of customers and the number of customers is relatively the same? Or is it a larger number of seats per customer? Is it more additional services, i.e. UC? The underlying question there is how much you see the adoption of more of what we have traditionally considered UC services within your customer base?

Don Trimble: I would have to say that it is all of the above, to be quite honest with you. Clearly the effort that I lead is the up-market effort. That also encompasses additional services. We also put forth at the beginning of our fiscal year a lot of initiatives to cross-sell various services. We go into an existing voice customer and try to ferret out a call center opportunity. Or we even have a hosting business that we are doing. We are going into hosting customers and trying to sell them voice services. All of this various nurturing of an existing customer for one service, trying to get them onto something else. Going into voice customers and trying to sell them our video service. All of that is going on. I also think there is a lot of upselling of additional services, especially related to UC. Getting people into what we call Virtual Office Pro, for a specific product name, but that is the collaboration suite. There is an element similar to a Citrix GoToMeeting or a Cisco WebEx product we have, called Virtual Meeting. It encompasses that. Selling additional services to existing customers is definitely part of it.

I would have to say that probably the biggest factor is this up-market move. Clearly selling a lot of 10-station or 12-station deals gets you a lot of revenue. You are doing it so frequently and you are building up a huge customer base. We are starting to take down some significant 400 and 500+ wins. Some of those have had some pretty heavy contact center element to them. A contact center seat's a lot more pricey. That is another reason our ARPU has gone up quite a bit.

Phil Edholm: I guess the follow-up question to that is that back there in 2011 your churn was running at 2.1 percent per month. I think your CEO at that time attributed about half of that churn to business failures. Obviously 2011 was still pre-recovery to some extent, that would have been based on. Have you seen that number change significantly? Obviously I think the up market would have a big impact on that. We assume that larger customers are stickier than small customers. Obviously there are the failures. Has that underlying statistic changed significantly for the business?

Don Trimble: No, not significantly. We have got a lot of efforts in play to reduce churn, especially in the first 90 days. The overall churn statistics are pretty consistent.

Phil Edholm: Okay.

Don Trimble: It's still running around 52 percent of the churn being from business closure versus any other problems with the service or any of that type of thing. I will just add onto that Phil, that the churn in the higher end customers is a lot less. That's the overall churn. We are finding that with these larger Enterprise customers where we are really doing a lot more up-front assessment, a lot more hand-holding on the deployment, and also a lot more back end support assigned to specific people, we are finding our churn significantly less. The good news is that when we really dive in and hand-hold these projects from soup to nuts and that is the commitment we make to some of these Enterprise prospects, we will do that for them and the churn in the larger customer base is significantly less than the company average.

Phil Edholm: I made some comments a year ago on the model. I thought that was the key factor. You had to go up in size to get away from that market where you had churn driven by business failures. The other thing, and I guess this is a question that also impacts on your Channel relationships, in that you had a pretty significant cost of acquisition a year ago. If you look at marketing spend and you take out what was your activity a year ago, the kind of up-market focus in Enterprise, and reduced it to the in-house kind of customer acquisition... If you look at the number of customers being acquired, it ran to somewhere in the neighborhood of a couple thousand dollars per customers acquired. You kind of looked at the break even point out of that. It was out at about 18 to 20 months break even on a customer. Are you seeing that kind of combination beginning to change, where customer acquisition is becoming less expensive and the number of customers you are acquiring for your marketing dollars increasing? Do you still see that kind of consistent cost structure and payback period on customer acquisition?

Don Trimble: I would say we measure it more by cost per service. That has been on a downward trend. Whether it is getting the customer costing us less versus the customer buying more services, I could not give you the definitives between those two. In combination the cost per service has been on a steady decline over the last four or five quarters.

Phil Edholm: That's good. This obviously has the opportunity to open the opportunities for the Channel to add value. Good. Those are my questions. I was just interested in the underlying of the business as well. Thank you.

Dave Michels: I would like to bring the conversation more toward some applications. Art, do you have any thoughts on the contact center in hosted and how that might be impacting the Channel?

Art Rosenberg: Yes, in as much as the contact center is changing once again, to what I call an interaction center. This is going to be supporting mobile consumers with smartphones and tablets, and self service applications. I just wondered to what extent you see the role of your Channel partners in supporting the implementation for mobile apps for customers. They are going to be text, social and God knows what else. It is very complex. They have to be device independent as far as what the end user customers are going to use. It is going to be consumer BYOD as opposed to employee BYOD.

Don Trimble: I would say that is evolving for us. We acquired a contact center company a little over a year ago, back in late 2011. I would have to say that our contact center solution is sold probably direct to end users a lot more than the traditional voice solution. We do offer that solution up to the partner community. You are right; it is a lot more complex. It requires a lot more education and hand-holding from our perspective on the deployment front, as well as the integration of the applications into the mobile environments/soft phone environments, things of that nature. We are now embarking on what I will, for lack of a better term, call a certification process and program. We are going to come up with some full-fledged training around our hosted contact center solution. Then we will create sort of a certification process or some training requirements that the partners will have to go through to be able to actually access that. Right now I would say we are just hand-holding them a lot more with that particular service than we are with the voice service, for instance. They probably understand that a lot better, especially if they are already selling an on-prem version of it.

To your thought, yes, you are right. It is a lot more complex. There is room for the Channel to play. It is going to require a lot more knowledge transfer from us to them around that specific solution set. How does it integrate with the various CRMs out there? How does it integrate with the various end point devices as you just referenced, and all of those nuances? We are just kind of embarking on that as we speak. We do want to open up that service to the Channel more than we have in the past. We want their help in selling those solutions. Again, so we can scale this whole model for all of our services a lot better than we have previously. As a matter of fact one of the key things as a company that we are trying to do is minimize any customization or custom integration work that we would have to do as 8x8. We are clearly looking to partners that have expertise in workforce management or CRM and whatnot, and are delivering that vis-à-vis the Cloud. To do any customizations specific to an application or vertical market application, yes we would definitely be leaning on the partners to help us with that. That is a key area that we are trying to offload to the partners because we do not want to take that on ourselves.

Dave Michels: You talk about things like workforce management and customizations. Marty, I want to ask you. You deal with a lot of large accounts. The ones that are interested in hosted services, are they talking to the service providers directly, or are they talking to Channel partners?

Marty Parker: So far I think it reflects what Don has been saying. Most of them have been approached directly by a Salesforce.com or a Siebel type approach, an SAP who is doing more hosting these days. Yes, that is what I just said. Most of it is coming in through the application side, and then perhaps evolving to include some communications. Of course, we still see their traditional carriers coming into them with services. Notice that Verizon, AT&T, Sprint are all hosting various brands. I suspect some of them are reselling 8x8 for that matter. We are seeing the carriers also developing a portfolio of hosted solutions so they can say, "well we can do that for you." Sometimes they blend that right in with their MPLS service or their existing SIP and TDM trunk contracts. They try to get a blended price that preserves the average revenue, if you think of it that way. It preserves the revenue stream and grows it enough to cover the cost of the hosted services, if not more, to create profit. That is what I am seeing in large accounts. It is invading the large accounts. Hosting is in the large accounts on the application side already, in spades. It is coming on the voice side in many cases through the carriers as providers. I think Don touched on that earlier. Would you agree with me Don?

Don Trimble: Yes I would. We are not, as a company, really pursuing the huge Enterprise people. Our sweet spot is probably zero to 2,500 types of deployments, maybe up as high as 5,000. The real mega Enterprise is not a focus for us as a company. It may be for other hosted providers. We are trying to stay in that SMB space. We feel that is where we are going to be most successful.

Marty Parker: On that point Don, if I may, I know a lot of SMBs for example use Salesforce.com or Microsoft Dynamics as their CRM platform. Do you have integration to that? Do you have plug-ins for Salesforce.com so that a rep can be making calls right out of their dashboard?

Don Trimble: Yes.

Marty Parker: I thought so. Good. That is one way that you can go in and either follow or partner with path leads. That probably happens at the field level and is not visible to me. There could be a lot of lead sharing at the breakfast clubs in those communities, right?

Don Trimble: Right. We do have the plug-ins today. The next step for us is to go down the API path and open up some APIs to encourage this third-party development effort, whether that is with the partner that is actually reselling the solution or just another software development type of company that wants to create linkages between our systems and these other systems, and sell those as package systems themselves. That is kind of the path we are taking, to take this one step further and go down this whole API road.

Marty Parker: Great. Thanks very much.

Dave Michels: Kevin, I know you were raising the issue earlier about voice versus UC. Certainly with the hosted voice, Channel did not have much of an opportunity. Do you think UC changes that, Kevin?

Kevin Kieller: Hi, Don. This is Kevin Kieller. Thanks for the very detailed answers. It has been very educational for me as well. My question, as Dave pointed out, is that I penned an article recently for UCStrategies saying that voice is not the path to UC. That was really reflecting mostly on the CPE experience, where although everybody buys as voice system looking to add UC features in the future, a lot of times we see that it just really becomes a voice system replacement and the future, in terms of a lot of UC benefits for the CPE, never comes to fruition. You have talked a little bit about that. Phil asked some financial questions about additional services. Maybe you can expand a little more on how you see the Cloud enabling your customers to layer on these UC services, and maybe a little more detail in terms of the uptake that you are seeing in both the smaller and larger market?

Don Trimble: Certainly. Obviously we are pushing hard on the full UC suite. We brought an ex-WebEx guy in maybe six months ago to take on our whole UC development effort and flush out not only the strategy, but the underlying product roadmap behind that. We did add a video service, a full-fledged meeting room type of service midway through the last calendar year. Clearly all aspects of UC from a service delivery point of view are on the roadmap and being tweaked and refined, as well as enhanced, every day. We are big believers in the full complement of UC elements in all of the services we deliver. They all will interact and whatnot. I would say that from an uptake point of view, clearly the basic chat and Virtual Meeting product that I referenced earlier, and we do have some simple video stuff within our straight UC product separate from the overall meeting room service, the uptake for that is good across all sizes of customers. The meeting room and the more robust or heavy duty UC users are probably the larger customers who are much more mobile. Whenever you have a lot more employees the likelihood of more of them being in either remote offices or working from home is obviously a lot greater. That is when you get in a lot more of the UC uptake, with these larger customer deployments. The employees of said customers spread across multiple sites or even mobile devices themselves.

Kevin Kieller: Great. Thank you.

Dave Michels: I'm anxious to hear from Don Van Doren.

Don Van Doren: Okay. Thanks Dave. Don, one of the things that comes up frequently at our UC Summit every year is the issue about the business model that the Channels are having to change very dramatically as they move from selling on-prem equipment with up-front payments to a more annualized model where they are getting payments over a much longer periods of time, smaller ones. What challenges has that posed for them? In what ways does 8x8 help out with that kind of a process for your Channel partners?

Don Trimble: Very good questions. Obviously with the hardware background I have that was probably my biggest challenge in developing a program, to try and address that - partners being so accustomed to everything at time of sale with potentially some ongoing revenue from maintenance contracts and whatnot. Basically they were making not only revenue but gross margin and down at the rep level the commissions on time of sale, taking it down and then moving on to the next one. I consciously had that in my mind when I designed the program that we rolled out about a year and a half ago. The way I addressed it for 8x8 was that I created what I call a bounty payment. It's paid within 60 days of time of sale. This is a one-time pop to try and give the partner some cash flow for that first deal. Then obviously there are the residual commissions or commission revenue for the ongoing monthly recurring kick-in at the same time. Those will trickle in over time. The other reason I did that is that my hope was that the management of the partners would pass that bounty onto the reps in its entirety. Then whether they give them a piece of the ongoing residual commissions or not is their decision. The third element that is kind of more at time of sale is that I pay the difference on product revenue between a cost of said product and the sell price that the partner sells it at. There are two up front elements, shall we say, to the program that I designed, to offset or augment the ongoing residuals. Hopefully both of them are passed on directly to the reps so they can continue to make most of their money, if not all of their money, at time of sale. Then the residuals just go to the bottom line of the partner itself and feed their revenue stream on the ongoing basis.

Don Van Doren: Great. That is very helpful.

Dave Michels: All right. We have not heard from Steve Leaden yet. Steve, do you have any thoughts?

Steve Leaden: Thanks Dave, and welcome Don, to the call. It has been, as Kevin said, very informative. We are really on the cusp of this early stage really, in the timeline of the Cloud model really taking on a lot of traction here. It is very interesting to hear your views, especially with you coming from the premise side. From your perspective, knowing again that it is a train that we cannot stop as an industry, it is an industry trend. And the fact that there will be a slow erosion of sales over time to the Cloud model from the original capital based model, if you will, for a lot of these VARs. All of these disruptors are going on from loss of software subscription and upgrade revenue, as well as maintenance revenue and move of change revenue that VAR has seen up until now. It is ongoing... Do you have any thoughts, I think long term, to kind of preface the thought here; I think your ideal model would really be a capital based CPE VAR. What are some of the elements, values, or structure or characteristics that you might see in an ideal VAR, short or long term? Obviously you have gotten the revenue from the carrier-based VARs that are a bit simpler and more revenue based. Therefore they are not necessarily infrastructure. They do not have the expertise. What would you paint as a perfect picture, short or long term, of a VAR that could distribute an 8x8 medium-to-large solution?

Don Trimble: As I said, I think to me the ideal is someone that is regional in size and scope. They tend to map up nicely with the customer sweet spot for us, which is the SMB market. They are already selling some sort of an on-prem UC solution and potentially any sort of data networking equipment from whatever player, such that they understand not only the local area network of the customer's environment, but also the wide area network and how to work those router configs into the equation. If they are also reselling carrier services or Internet connections, that is a plus. I do not think it is necessarily a requirement. We are a bit of a bring-your-own-Internet type of provider, such that as long as you have a robust Internet connection...clearly we can work inside of MPLS environments and go that extra step of direct connects to our data centers and all of that for the bigger customers we have. But it's not necessary. That ideal profile for me is the regional player who is already selling on-prem solutions. They are potentially losing to hosted providers today and realize their business model has got to shift.

They can wrap around a lot of additional services that go directly to them and don't even go to 8x8 in terms of network assessment. They can pocket the money on that in terms of implementation. We do not have an implementation package that we sell. They can charge the customer for plugging those phones into the network, setting that router up and making sure the system gets turned up and is working functionally. None of that revenue would come back to 8x8. It would all stay with them. Potentially if they want to charge for taking first call in managing the customer after the sale, it depends on how much trusted advisor status they have with the customer. We do even have partners that are managing their account for them. They are actually the ones logging into our account manager tool that I referenced earlier. They have been given the login credentials for that customer. They are the ones who are actually doing adds, moves and changes of services and whatnot on behalf of the customer. If they choose to charge the customer for that, again that's another revenue stream that could go directly to them that they might not even see. We encourage them to charge for it. That just augments a lot more revenue for them personally to help offset what they were seeing with the adds, moves and changes and ongoing revenue that they saw in the on-prem world.

Steve Leaden: Have you worked on any internal tool that can show a premise-based Channel partner here that needs to evolve to Cloud? Have you come up with any internal documentation that they could see a break even point at X-month, where they can effectively transition from a CPE-based model to an ongoing revenue kind of model?

Don Trimble: Yes. As a matter of fact we did create a tool that we use as part of our partner program presentation. I believe there is a scaled down version. There is a bit of a cash flow chart in our program brochure that shows, assuming this much monthly revenue coming in, how we pay out the benefit. There is kind of an inflection point of cash flow and whatnot in terms of profitability. We also modeled that out. I want to say that over a course of about five years the partner could actually make more money selling a Cloud service from us than an on-prem solution. We took an Infonetics white paper case study that was specific to an end user scenario. We backed into some assumptions about what they would make on the on-prem side of that. That was more of a customer savings white paper, which we can get over to you. But also, we kind of backed that into, applying from a partner profitability perspective, what would they make, with some assumptions obviously, for the on-prem side of it, and what they would make if they were selling the 8x8 hosted solution. It turned out that they could make, over a course of about a five-year period, they could make 50% more with the hosted solution than with the on-prem solution, even factoring in the ongoing maintenance of the on-prem solution.

I guess the long-winded answer is that we have both a customer kind of version of what you would save, hosted versus on-prem. I think the study is based on a small 100-seat and a 1,000-seat. Then we took that same data and plugged it into an, okay Mr. Partner, assuming this is what you would make for your on-prem assuming certain margins and whatnot on that, versus plugging our program benefits in directly to that same sale on the hosted side. This is what you would make, or a comparison of those two from a partner perspective.

Dave Michels: This is a great discussion. I want to throw in one more question. The insurance business is a residual business. The way that works is that an insurance agent builds up a client base and then can retire successfully with this recurring revenue that they have built up. A big part of that business model is the concept of loyalty. I am curious how you are seeing loyalty play out in UC-as-a-service. You have got not only dealer loyalty, which has traditionally been basically legislated. Dealer loyalty with premises was a lot of certifications and a lot of parts and inventory. Loyalty was pretty significant when that was all there. In hosted services that does not seem to be there. Dealers can offer multiple service provider solutions and services solutions. That loyalty component does not seem to be as required. Is it the same with the customer? The customer does not seem to be as vested as they were with personal insurance matters and things like that. Is loyalty there? Are you seeing that in your churn rates? What is causing churn? Can a dealer build up a strong residual in the hosted space?

Don Trimble: I think for us it is a little too early to tell. What we have done programmatically, though, is we have levels, such that we encourage. There are three levels to our programs: silver, gold and platinum. We have minimum amounts of monthly recurring revenue to maintain the higher levels, those being gold and platinum. You need to bring them in every month to get paid a higher level of residual commission. Even above and beyond that, within each of those two levels, we have three more levels where once you get to an aggregate base of revenue to us, and I am looking at the chart in front of me for gold level, once you get up to 30K in compounded monthly recurring revenue to 8x8, your percentage payout jumps up 2 percent on the residual side. It encourages the partners to build up the base with us and keep building it with us. Because 1) to maintain a certain level they have got to bring in a certain amount of new revenue every month. We have some bonus kickers on that if they blow it out. But 2), as they build up the aggregate base of revenue their residual payout percentage increases, such that if they stay with us it means more for them in their pockets too, over the course of time. Does that make sense?

Dave Michels: Yes.

Don Trimble: We are trying to build loyalty into the program by increasing the residual payouts as your revenue to us increases in aggregate.

Dave Michels: That works with the reseller. How do you build in loyalty with the customer?

Don Trimble: Just service them very well. And basically support them. That comes back more to the service delivery in my opinion, and making a great customer experience. That is one of the big reasons we have made significant investments in our support organization, to be quite honest. We brought in a very high level vice president of support who has built out - I would say the majority of our hiring as a company over the last six to nine months has been in our support organization, not anywhere else. That is part of that, to make not only the onboarding but the ongoing customer experience as best as it could possibly be, so that we do retain that loyalty. We do have very good customer loyalty. That is the way we do it on the end user front.

Dave Michels: That is very good. With that I think we will wrap up this podcast. Thank you very much Don, and thank you very much to all of the UC experts who participated. I think this was a very informative discussion. We will be back with more special guests in this format for 2013. Thank you.