A new channel has emerged, but are you in it?
- 13 June, 2017 05:15
Deal making is a delicate art, a craft that when executed well, can transform a humdrum company into a dominant business empire.
Jean Paul Getty was a perpetual deal maker, one of the leading negotiators of the 20th century.
Ranked as the richest living American in 1957, the industrialist and oil magnate was frugal by nature, and famously even negotiated his grandson’s ransom.
But Getty followed the advice of his father in business, taking a long- term view of selling.
“My father said: “You must never try to make all the money that’s in a deal. Let the other fellow make some money too, because if you have a reputation for always making all the money, you won’t have many deals.”
Yet despite Getty’s deal making words of wisdom, history shows that not all executive leaders have seen value in sharing the spoils.
PR driven displays of unity aside, a select brand of boardroom executives have forever labelled the channel as “the ugly stepchild of the industry.”
“You’ll find thousands of books about sales methods, but only very few talk about the channel,” wrote Stefan Utzinger, author of Channel Revolution.
“Therefore, it’s hardly surprising that there are still many senior managers in organisations who think that their company can grow without building a reliable channel.”
In penning Direct from Dell — billed as a self-help guide for any aspiring business leader — Michael Dell quite literally wrote the book on going against the channel.
“These executives are reluctant to give margins to the channel or support their channel partners, since that would mean sharing the wealth created,” Utzinger observed.
“Whenever possible, they’ll push their sales teams to deal directly and compete with their own channel partners.”
Yet as alluded to by Utzinger, these executives continue to fail to understand that there isn’t a single major IT vendor left standing that sells products without using a network of reseller partners.
“Even companies like Dell, who for many years were very successful without using the channel, were forced to change their strategy drastically and started building a channel,” Utzinger said.
“It became imperative for Dell to make this dramatic change after losing market leadership to competitors with strong channels.”
For Utzinger, an important lesson for vendors to consider is that it’s not the best product that wins, but in the long run, it’s the company with the best channel that comes out ahead.
IBM may have coined the phrase “all that counts is the feet on the street”, but who said it had to be your own feet?
“Microsoft has the single most powerful and most effective sales force in the world — a deadly army of channel partners,” wrote Alex Schultze, author of Channel Excellence.
And there’s truth to it, with Redmond’s soaring number of partners now offering extraordinary presence in the global market, creating almost automatic demand.
“There is a second lesson here as well,” Utzinger added. “Dell also lost its market leadership because they simply lost track of innovation.
“Because of their sales strategy, they didn’t understand their need for innovation. Without channel partners and their feedback, Dell had become disconnected from the market.”
Fast forward 60 years on from Getty’s heyday and the value of selling partnerships once again carries weight in the context of the channel in 2017.
Today, and according to World Trade Organisation figures, about 75 per cent of all world trade flows through indirect channels, with as many as 20 to 50 million reselling businesses worldwide.
Why? Because indirect selling is back in vogue, as manufacturers realise that Rome wasn’t built in a day.
Instead, and as the age-old adage attests, they were laying bricks every hour, with such a sentiment playing out in the technology numbers today.
According to Global Technology Distribution Council research, 61.8 per cent of vendor channel executives believe indirect sales will grow more rapidly than direct within the next 12 months.
In surveying over 70 leading chiefs across the technology industry, 12.7 per cent of vendors align with being 100 per cent indirect, “with no plans on going direct”.
But while the channel remains strong, it’s not the conventional channel that the industry created.
“The channel is at an inflection point,” CompTIA senior vice president of research and market intelligence Tim Herbert observed. “New business models and alternative routes to market for technology are proliferating.
“And a growing number of non-IT line-of-business buyers are flexing their spending muscle and forcing the channel to rethink sales and marketing messaging and shift how they do business — and in many cases, with whom.”
Outlined in CompTIA’s 2017 IT Industry Outlook report, Herbert said new faces in the channel are testing traditional go-to-market approaches, as the ecosystem across the world evolves at a rapid rate.
Triggered by the rise of Software-as-a-Service (SaaS), emerging technologies and changing business models, the channel is on the move to a new world, a world defined by different rules.
“And let’s not stop there,” he added. “Last year ushered in the rise of non-traditional partner types such as digital marketing agencies and an army of SaaS-based resellers.
“These companies are establishing their own beachhead in the channel and quickly expanding the competitive landscape.”
Despite exact numbers remaining elusive at present, Herbert considered alone that more than 100,000 SaaS partners attended Salesforce’s Dreamforce conference in 2016 — “you get the picture.”
But what can partners expect to see as the channel evolves?
“The balance of power between vendors, solution providers, distributors and end customers
will shuffle and flow,” Herbert said. “New cloud vendors with no channel presence at launch will recognise the need for indirect partners.
“The types of partner programs, benefits and incentives those companies design will differ significantly from legacy vendor programs.
“And finally, we will continue to see IT and business consulting take a lead role in the value proposition and revenue streams of channel firms.”
No longer dominated by resellers of products, Herbert said much of today’s channel is shifting to a services focus and specialising across vertical industries and/or solutions niches.
“In the year ahead, more channel firms will be developing their own intellectual property too, whether that is a piece of custom code or a business process they replicate across customers,” he explained.
“And the players will keep changing: digital agencies, marketing firms, accountants and other non- traditional partners are selling or recommending IT solutions, a development that has upended the traditional competitive landscape.”
In short, the SaaS ecosystem alone is reinventing what it means to be “in the channel”, with a new take on vendor relationships, selling strategies and compensation demands.
“Partners are now playing exclusively in one SaaS ecosystem and are hyper-focused on a particular technology, in a specific sub-industry, segment, line of business and geography,” Channel Mechanics global advisor Jay McBain added.
“I don’t think the channel ever went out of vogue but the difference in today’s emerging channel is the level of specialisation and loyalty to one (or a few) vendors.
“I think the early leaders of the emerging channel are SaaS companies such as Salesforce, NetSuite, Workday, Marketo, Hubspot, etc.”
Of this line-up of traditionally non- channel vendors, McBain said partner recruitment is based on key criteria, covering hyper-specialised, vector players that are running project-based consulting, implementation, and integration services.
For example, the average services revenue for Salesforce partners is US$4.14 for every dollar of SaaS software spend, according to IDC research.
“Agencies have grown up working with lines of business, specifically marketing,” McBain said.
With 72 per cent of all technology decisions now made at the line of business level — according to Gartner research — McBain said market conditions made it natural for agencies to expand businesses into reselling technology and wrapping profitable services around them.
For McBain, digital agencies are an example of shadow channels.
“Shadow channels are defined as those influencers who help line of business professionals make business technology decisions,” he explained.
“There are also ISVs [independent software vendor], start-ups, born- in-the-cloud partners, and industry specific consultants.”
“This phenomenon is also happening with accounting/CPA, legal and other industry-specific firms. Competition in this new world, and vendors partner ecosystems, are going to grow at least 5X in size, scope and complexity.”
The ease of adoption of cloud SaaS is increasingly leading business unit managers to make cloud buying decisions independently of one another and independently of any central authority.
According to Gartner vice president and distinguished analyst Janelle Hill this approach reflects greater freedom of choice for these business units and may improve time to market.
However, it can seriously hamper combined value to the enterprise.
“Independent and uncoordinated journeys into cloud SaaS mean the goals, selection approach, initiation and ongoing implementation of services will be fragmented at best and siloed at worst,” Hill said.
“A coordinated, service-centric approach has the advantage of enabling multiple business units
to benefit from joint decisions and shared support for all of the various SaaS solutions.”
Consequently, by 2025, 55 per cent of large enterprises will successfully implement an all-in cloud SaaS strategy, with this transformation a very different world for the CIO, the IT organisation and the channel ecosystem.
In assessing the evolution of IT, Herbert cited three defining stages when assessing the evolution of IT — the mainframe era, the PC/Internet era, and the cloud/mobile era.
“There are many factors that define distinct eras, but the result is a new foundational platform that supports new tools and techniques,” he explained. “Moving forward, new elements built from a cloud mind-set will play larger roles.”
Naturally, the impact of cloud on the channel continues to be both immediate and profound, creating new partners, new product lines and new business models as a result.
“There’s a natural progression from being focused on selling hardware infrastructure and building a hardware infrastructure 20–25 years ago to evolving to a software solution business and then finally building an application based on the IP that has been built over the years,” Channel Partners CEO Greg Eckstein explained.
Billed as ‘SaaSification’, from the partner perspective, Eckstein said this entails the transformation of a value-added reseller with an on-premise model moving towards a cloud-focused subscription approach.
“While this is a natural progression I caution the channel,” Eckstein warned. “What we see with the majority of the system integrators that are building apps, most of them are failing to get them to market.
“And I think that’s because it’s just a lack of understanding that it is a fundamentally different business model that requires a different organisational team and metrics to get those products to market successfully.
“Product companies need different roles and responsibilities to successfully get those products to market.”
While vendors are exploring new routes to market, the traditional role of the reseller still exists in the modern channel with hardware not going away, although its role is diminishing in a cloud and digitally driven world.
“Vendors still have VARs that do what they used to do,” Eckstein added. “But the new channel emerging is a mash-up and amalgamation of older partners transforming into managed service providers.
“There’s cloud service providers also, along with ISVs. ISVs can be both a partner and a customer at the same time which is a different dynamic for the channel.
“They can consume technology but they are building applications on it, and then they sell their apps to the customer at the same time.”
As partners adjust to the new demands of the market, vendors are also facing challenges in response to the rise of SaaS-based technologies.
“Traditional vendors are taking on-premise licences and breaking it up over a 36-month period to make it look like a SaaS product,” Eckstein said.
“They are losing deals because new vendors are coming in from the bottom up with real subscription solutions at a much lower price.
“As a result, the larger, more traditional vendors haven’t been able to move fast enough which means the only thing they can do is put a new coat of paint on an old piece of software and say that it’s subscription just so they don’t lose the deal.”
According to Eckstein, the conventional software powerhouses such as Oracle, IBM and SAP have been “caught out” because some of the emerging SaaS-based vendors have emerged quicker than expected.
“So, their defensive move is to SaaSify their product line but it’s the same thing just with a different price, it’s purely a blocking move,” he explained.
To compete effectively with this new breed of vendor, IT giants are investing heavily in persuading current channels to adapt.
“They know it’s faster than recruiting a whole new channel,” Eckstein said. “So, the market
has moved on from opening your mind and changing to if you don’t transform this year, you’ll be in deep trouble by 2018.”
In examining the market, Eckstein believes the wave of SaaSification impacting the industry will continue beyond 2020, until the dust settles on this new paradigm of IT consumption and the commercial models associated.
A mandate for change
During the past 18 months, the industry has been flooded with mergers and acquisition activity, as the leaders of the past invest in guaranteeing relevance in the coming years.
Because despite all the talk of consolidation at the traditional end of town, the number of vendor-based cloud companies is growing today.
Telecom providers, thousands of SaaS ISVs, and public cloud behemoths such as Amazon Web Services (AWS), among others, count among the ranks.
“For the channel, this voluminous market is expanding opportunity for vendor management,” Herbert said.
“While seemingly obvious, a vendor manager acts as liaison between end customers and cloud- based vendors/service providers.
“The indirect channel is accustomed to this role, but today the task holds new meaning as customers navigate potential travails of the cloud world.”
According to Herbert, case in point is that many SMB clients provision cloud solutions on their own.
But when things go wrong with a specific SaaS application or uptime performance is spotty, for example, these self-procured cloud solutions can be a headache.
“And many SMBs have no idea whom to call, nor, frankly, the time or patience for finding out,” Herbert said.
“That’s where the channel, and MSPs, are finding ways to provide value, solving a crisis for clients and managing vendor relationships. It’s the one way channel firms can cement relevancy in the era of cloud.”
As demands change, Herbert said channel firms are becoming more fussy when it comes to partner program tastes.
“What they once valued as essential from a vendor benefit standpoint is less relevant in today’s services-based market,” he said.
“Especially among partners heavily invested in consulting work and services, traditional incentives such as sales spiffs, upfront discounts and back-end rebates are not what endears them to any one vendor over another.
“Indeed, while vendor-provided margin once accounted for a majority of their revenue, channel companies today credit their own sales and marketing activities for driving the bulk of sales.
"What does this mean for vendors? Time to revamp partner programs.”