A consulting firm wants to obtain an exclusive license for my two software products. They will provide support and sales/marketing. What …

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(Last Updated On: August 27, 2013)

The question is probably misleading because consultants are typically not engaged in the business of reselling software, distributors are. Nevertheless, learning opportunities lost due to outsourcing sales and marketing business function outweigh any benefits gain through licensing agreement with a software distributor.

Answer by Dragana Mendel:

I too see red flags all over the place. Let's dissect the information provided in the question step by step:

  • "Consulting firm" — if the firm is on consulting business, they typically don't have means to execute a sales strategy. They are able to give you a framework for one, but not execute it. The core service of a consultant, such as myself, is to advise clients and provide a solution for a specific problem. It is up to a client, a company to take that advice or not, or take some pieces and then implement the solution. Consultants don't have a power to hire or fire your staff, so they cannot be help responsible for the outcome of a project, that's up to you. Finally, consultants don't license out products or services.

If this firm an existing software distributor and not a consultant? If so, then I would first advise you to talk to several distributors and get proposals for each one, so you can compare their offers and figure out which one do you like the best. I don't like exclusivity, I rather have several distributors working for me. In fact, Fortune 500 always use several different vendors for the same service so they don't get locked in into one company. That gives them security that if one vendor fails this month, others can pick up the slack. Why would you, as a startup settle for anything less?

Exclusivity in licensing is usually used when licensor licenses a technology that is still raw and undeveloped, such as getting a research project from University faculty into the market place. This is clearly not your case as you have two products already.

If you do decide to go with this distributor make sure:

  • Define a performance metrics. If distributor fails on these metrics, you can revoke a license. Evaluate these metrics quarterly, set quarterly sales numbers.
  • Set marketing and advertising targets. You don't want them to blow your advertising budget with ads in irrelevant media outlets.
  • 1-2% of revenue can go only to administrative cost of manning a license agreement, plus they need to cover sales force. If you get them for few percentages more on top of that, I would be OK.

Disadvantages of outsourcing. Each time you outsource a business function, you miss of learning opportunities. Outsourcing sales and marketing is probably a big mistake for a startup because you don't have immediate feedback from your customers about the product, you don't hear what they want, what they like, what they would like to see. Without this information it would be extremely hard for you to plan for new features, new product and to evaluate your pricing strategy.

Support: how can you ensure that your distributor has necessary technical skills and access to your source code to provide patches and fixes? This scenario is not only logistical issue, but you also have to worry about protecting your intellectual property and trade secrets.

In summary, cons outweigh benefits on this arrangement.

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About Dragana Mendel 86 Articles
Dragana Mendel is a President and Principal Consultant at ANAGARD, LLC. In her role, she provides management consulting services to small and medium size businesses on the best strategy to achieve their short and long term goals.