Storage resellers are moving away from boxes and into the provision of services as large vendors continue to erode margins and create channel conflict in the market.
That is the sentiment portrayed IT analysts Gartner in a recent survey of storage resellers in North America. The study, Storage Resellers: The Front Line of Storage Service, found that channel conflict is rife in the storage market and vendors continually fail to provide adequate protection for their resellers.
‘Box market dead’
The research paper found that the sale of software and storage-related services was becoming a far more important part of the reseller’s business than the sale of boxes. Software sales increased between 2001 and 2002 for 61 per cent of those surveyed. Services revenue grew for 78 per cent of respondents.
“The box market is dead,” managing director of Australian storage reseller XSI Solutions, Max Goldsmith, said. “You cannot survive selling disks and tape at an eight or nine per cent margin. We tend to walk away from any deal where we know it will be just a box-drop and the cheapest box wins.”
Goldsmith said that organisations were getting a lot smarter with their storage — and now tend to view storage as a resource that needs to be managed. As such, storage resellers were moving into consulting, design, implementation and support services — assessing data use within organisations and designing systems to manage, secure and differentiate different types of data.
Fellow storage reseller and managing director of SecureData, Evan Penn, said that without these services revenues, there was not a lot of point in a customer talking to a reseller.
“They are better off just buying direct from the vendor,” he said.
The Gartner survey found that the major challenge storage resellers face was resolving conflicts with their suppliers. Generally speaking, storage vendors went to market with a combination of direct and indirect sales, but even those that claimed to be at the forefront of being “channel-friendly” tended to engage in practices that riled their reseller partners.
The first of these issues was when vendors competed against their own resellers on deals.
Penn said that vendors continued to purport that they were increasing their channel mix, but for all of their good intentions, they “don’t always practice what they preach.”
The Gartner survey suggests that storage vendors need to seriously consider their commitment to channel partners in the current economic environment. Because direct sales costs were so high, vendors tended to focus their activities on the top end of town. But in recent years, these customers had “put the brakes” on IT spending. Meanwhile, more than 44 per cent of storage resellers reported hardware revenue increases, suggesting that the small business market was not as severely affected.
“This is all the more reason for manufacturers to try to increase their channel presence,” the report recommended.
They may have a hard time convincing many storage specialists, who have been burnt by the vendors in the past. XSI for example, has escaped the “trap” of selling large vendor solutions by building its own disk arrays. Goldsmith said reselling the arrays of large storage vendors was a “nightmare”.
“The major vendors have done horrendous things to resellers in the past,” he said.
The Gartner report found that the main challenge for storage resellers was resolving channel conflicts with their suppliers. An oft used example is that of EMC — last year it announced that direct-selling vendor Dell would resell and manufacture some of its storage arrays. It provided EMC resellers with little hope in competing on price.
“I have never found a plan that works,” Goldsmith said. “We have had every big name vendor come to us and tell us that we should change, that we should become their sales force. But just look at what happened with EMC. Their resellers invested up to 18 months developing a market for them, then they appoint Dell. Historically, every vendor does it. It is like a cycle.”
While the major vendors are putting in place strategies to avoid conflict between their own salespeople and the sales staff of their channel partners, resellers cited increasing pressure from both large vendors and other resellers when bidding for deals.
“It has been a major challenge for storage resellers over the last 12 months,” Penn said. “The vendors are crowding a limited amount of deals — either they convince the customer to buy direct or they throw as many of their resellers at the deal as they can to make sure they are well represented. Invariably, margins get slashed.”
Goldsmith cited examples where as a reseller, he had introduced a large client to a major storage vendor. Twelve months later the vendor had announced that the said customer was now one of their “named” direct accounts.
“It is so immoral, but it happens all the time,” he said.
Managing director of StorageTek Australia, Philip Belcher, acknowledged that such events occur.
‘We’ve been caught out’
He said that those vendors who had yet to become well established in a market went through “a stage” where such strategies were unavoidable, but once they were well established, their relationships were such that they could keep their channels in line.
The majority of North American resellers responding to the Gartner survey mentioned lead generation as a major channel conflict. Often resellers spend considerable resources in pitching a deal to a customer, providing consulting and design services free of charge. Quite naturally, they are then disappointed when the customer uses these resources purely as a pricing comparison to shop around with other vendors and resellers.
Goldsmith is familiar with this scenario.
“We have all been caught out on this and sometimes continue to get caught out,” he said.
Today, XSI very rarely provides consulting free of charge in order to avoid having the company’s intellectual property merely used as a way for the customer to drive down prices elsewhere.
Rather than offering the consulting services free in the hope of winning a new customer, resellers have begun basing much of their revenues on them. With storage technology being so complex, and interoperability being so prevalent between vendor solutions, resellers are still managing to source deals despite the aggressive and often contradictory stances of their vendor partners.
“Interoperability is a difficulty that only serves to benefit us,” Penn said.
Goldsmith said it was customer empowerment that was improving fortunes for storage resellers, but not necessarily for large storage vendors.
“Customers don’t want to be locked in to one vendor and they are over being dictated to,” he said. “They want to be able to mix and match their storage – that is where we come in, because vendors tend to only know their own environment and not how these things can work together in the real world.”
Customers had differentiated between primary and secondary storage, Goldsmith said.
“They are learning that just because they pay a premium to use a name brand vendor for their primary storage, it doesn’t mean they can’t use several other suppliers for their secondary storage,” he said.
Gartner said that with prices-per-gigabyte of storage rapidly diminishing, services would play an important role in separating the winners from the losers in the storage market — for both vendors and resellers alike.