Cross - What is your primary focus at Level3?

Schlagbaum - My focus is running the indirect channel program and team as the channel chief for Level 3.  In our model, we directly support the customer but pay the partner recurring commissions much like in the insurance agency business. We only got into the enterprise business with our partner program three years ago; before that we were more a carriers-carrier or pure wholesaler and did not have a true enterprise partner program. 

The Level 3 indirect channel represents about 15% of the new sales we do in the Business Markets Group today and we would like to double that number. Typically, an indirect customer is in the $3-5K range in monthly spend for communications services though we see deals as large as $50-100K in monthly recurring revenue. 

Cross - Talk about some of the key issues:  #1 where are agent coming  from or going to in the future?

Schlagbaum - Where we have been is that telecom agent partners historically lacked in-depth industry knowledge.  The big pivot took place in 1999 and, fast forwarding 10 years, now both customers and agent partners are more sophisticated.  One new and growing trend is VARs-Value-Added Resellers that traditionally sold on-premise services now are selling on-demand services which are called Managed Services which some refer to as "cloud-based computing." We just did a study and found that 77% of the current VARs that were interviewed are already involved in selling and/or influencing the sale of carrier services. 

Combining network services with on-demand applications is the foundation of a solution for an MSP.  The MSP solicits IT decision-maker clients and offers them a complete outsourced solution.  With this solution you don't need a CIO-Chief Information Officer or IT staff and you don't need a lot of on-premise equipment.  VARs tell the customer they will handle all the applications, backup, storage, firewall and telephony remotely in the "cloud" - all for a monthly recurring charge.  This effectively changes the model from from a one-time sale to a recurring revenue model that generates ongoing monthly fees, which is very attractive.  I recently attended an MSP conference where many traditional VARs voiced their interest in selling carrier services, effectively combining all services from one source.

Cross - Who is the new MSP?  Can you see a pattern emerge?

Schlagbaum - Most of the network-hardware VARs that sell Cisco solutions, Juniper and others have certified engineers who understand the LAN-Local Area Network and the WAN-Wide Area Network.  I think if you do understand both LANs and WANs it's easier to sell services that are part of the carrier world.  For companies that are in storage or networking hardware, they can simply pivot their business model into carrier services as a portion of what they offer in the solution. 

Typically, application-oriented partners don't understand the network as well because they appropriately operate at Layer 7-Applications Layer, whereas our partners live in Layer 3 of the OSI stack- the Network Layer - which in fact is the genesis of the name "Level 3."  However, you can't sell SAAS-Software-as-a-Service if you don't understand all the bandwidth requirements of a customer in order to make the solution work.  One of our large partners today is putting in place a POS-Point of Sale solution with a major retailer, but they also have a carrier services division involved to help customers make their bandwidth decisions.  This new capability to provide one "neck to choke" for the customer enhances their ability to create a complete solution for the customer. 

These MSPs will win more and more because they influence the decision-maker by saying "I suggest you use this because I have done the research on pricing, capabilities, footprint, latency and SLA and it is all tied together."  By figuring out what the client needs and by suggesting a comprehensive solution, the MSP can sell the client total value and usually at a substantially lower cost than what they are paying today and on a recurring monthly basis versus an up-front cost. 

If the traditional agent partners don't transition to more value-added solutions, they are going to be relegated to more of a commodity status in selling things that are less financially attractive and with slimmer margins.  It's really punitive because the more commodity-oriented services often carry a far lower commission than more value-added services such as MPLS-Multi-Protocol Label Switching, Ethernet and managed firewalls and more, and this is the wave of the future. Many carriers have adjusted to this already.  We are also looking at the new community of partners that includes networking integrators, unified communications VARs and others and we are adding them to our roster of partners. But to be clear, we are putting our eggs in multiple baskets.  I think some agents from the legacy agent world will make the pivot.  I also think others from the traditional IT world will start to include carrier services in what they offer. In the old days it was really nothing but pure agents - there weren't any VARs doing this at all.  Now, when they see how much margin they can make for very little overhead, it's more like a "do you want fries with your burger" strategy.  Having no AR-Accounts Receivable responsibilities, no support costs and just selling the solution is a pretty attractive model and adds a lot of margin to a VAR model.  They key to this is the partner having staff that can speak the language of telecom, like FOC-Firm Order Commitment dates, customer commit dates, and the telecom processes and issues that are often unknown to VARs.  If a VAR doesn't have that knowledge base, they need to refer these opportunities to another partner who can do this. However, I think more of them will become agents themselves in time. 

For example, I just visited a partner in New York that is one of the top Cisco partners in the nation.  He finally decided to create a carrier services group himself because so many of his clients are now buying unified communications solutions that require carrier services. So he did the analysis and the math and realized he was leaving so much money on the table.  Whether he is an agent partner for Level 3, Verizon or another carrier, he could be making a lot more margin by just selling additional carrier services to his existing clients without doing a lot of extra work.  But he needs someone on his staff that speaks the language of the carrier world and can be dedicated to the mission of selling of carrier services.