Tuesday 18 March 2008

A Revenue Share != an SLA

When white labeling etc with 3rd parties a revenue share as a commercial structure often seems attractive.  There are usually some obvious benefits (depending on your specific terms) such as a low entry cost to a new market/product and shared risk - perhaps even a painless exit strategy if it doesn't work out for you.

One mistake a lot of people make when negotiating these deals is being a little too lightweight on the service levels governing the part of the product supplied by the 3rd party.

On the surface it seems intuitive that with a revenue share agreement in place you can afford to be a little less draconian on any SLA - after all you have a shared interest in keeping the top line flowing right?  Possibly you can.  But first you need to take into account the differences between you and your partner.

A rev share usually is almost always top line based (as that's the most transparent thing you can both count) but what really matters to you is bottom line; the bottom line for you and your partner might be quite different.  If you are in a heavily regulated industry like online gambling then you'll have a whole lot of taxes and levies that need to come out of your share - ergo you're both operating at a different margin.  Difference number 1.

The other thing to remember is that a rev share motivates partners to do the most profitable thing - that's not always the same as the best thing for your business.  Let's say you have a bug on the 3rd party side (undocumented feature?) that you find particularly distressing.  It might be very costly for them to resolve and this, coupled with the difference in operating margin, means they just might not because it isn't the most commercially viable use of their resources.  Difference number 2.

I guess the summary here is just because you're "in it together" doesn't mean you should skimp on the SLAs - treat it like any other contractual agreement or you just might not get what you want.

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