IT channel business model: Blurred lines and new strategies
by Lynn Haber
For channel partners today, the pressure is on to disrupt and change your business model. The strategic changes you make today will matter tomorrow.
It's tough being a channel partner today. In fact, it's been tough for the past few years as every channel business model blurs and what partners thought they knew about the business morphs. They shouldn't despair. While the upheaval in the channel is likely to continue through 2015, there's one sure thing that partners should do: Take hold of their destiny, stop viewing vendor partner programs as the center of their universe, and develop and promote their own brand. Some partners are on course with some of these strategies.
New Signature, a 12-year-old, managed services provider (MSP) based in Washington, D.C., and MasterIT, an MSP in Memphis, Tenn., in its 10th year in business, are two examples. Leaders of these companies have rethought overall strategy more than once but have always been fanatical about customer service, are disciplined around business processes and differentiate themselves based on value-add, focus and depth of expertise -- the foundation for developing a brand. Both of these firms' income is from recurring revenue and professional services. They are not immune to the change going on around them. But rather than weakening them, it keeps them focused.
"In the 10 years that we've been in business, we've never succumbed to the temptation to be all things to all people. We're focused and disciplined around our processes. The only way to get better and to innovate is to make our processes better every day," said Michael Drake, CEO of MasterIT.
The MSP goes deep in several vertical industries, such as healthcare, financial services, legal, distribution and high-level nonprofits -- specialized industries that have their own language, their own compliance and regulatory requirements, their own line of business software, and their own culture.
"These verticals are also rabidly dependent on technology for revenue or [being] intimate with their clients. They demand a high level of IT outcomes and they're willing to pay for it," Drake said.
Named the 2014 Microsoft United States Partner of the Year, New Signature’s depth is around Microsoft products. The partner provides business productivity systems, application platform technologies and tools, and core infrastructure to its customers. New Signature is a cloud-first company that offers high-value consulting along with white-glove services, including application development work, for complex projects. The partner specializes in design, customization, management and support of private and public cloud services, as well as hybrid environments.
The company is zealous about keeping its staff expert around Microsoft products. With 95 employees, New Signature holds more than 400 certifications in Microsoft technologies.
Expertise is what drives intelligent conversations with customers, according to Reed Wiedower, CTO at New Signature."If we didn't do this, we'd be parodying a Microsoft marketing deck," he said.
There are many factors contributing to an increasingly amorphous channel. With the advent of the third platform, expanded vendor partner ecosystems, new competition, a redefined distributor value proposition and new customers/buyers, disruption is everywhere. Some or all of these factors will at some point impact a partner's business, if they haven't already.
Paul Edwards, director of infrastructure channel and ecosystems at IDC, noted that today about 50% of traditional value-added resellers (VARs) are engaging in higher-value services. More importantly, the traditional vendor channel owns the second-platform IT spend opportunity. This second platform consists of infrastructure hardware, servers, networking, storage, etc., and is still significant, Edwards said. However, 60% of traditional partners in the U.S. are not proactively engaged in cloud. Even fewer are engaged in third-platform opportunities, those in mobile, cloud, big data and social networking.
"That's what's driving vendors to engage with new partners and new partner types, such as ISVs [independent software vendors]," Edwards said. Other new partner types orbiting in the partner ecosystem are born-in-the-cloud partners and digital marketing agencies.
Traditional VARs are also lagging other partner types in another key way. The top objective of traditional VARs is to maintain their client base, while the No. 1 objective of other partner types such as MSPs and system integrators is to get new clients, according to IDC research. "These other partner types are offering customers something of higher value," Edwards said, and in many cases they are picking off accounts from traditional partners.
"The pressure on partners to get better and go deeper in what they do (either by focus or specialty) is only going to increase" - Tiffani Bovavice president and distinguished analyst, Gartner
It's no wonder the vendor partner ecosystem is growing. The big vendors, such as Cisco, Dell, HP, IBM and Microsoft, need all types of partners as they straddle the second and third platforms.
Another complexity: Partner types are not clearly defined. Think of the partner community as a bunch of five-year-olds playing soccer, where everyone is following the ball, suggested Diane Krakora, CEO of channel consultancy PartnerPath. "There's no differentiation between what these multiple partner types do," she said.
While an expanded partner ecosystem may suit the needs of vendors, it's likely to confuse partners. For example, at the IBM Leadership Partner Conference 2015 in February, the vendor shared with attendees that it recruited about 9,500 new partners over the past year: MSPs, cloud service providers, ISVs, developers, system integrators and born-in-the-cloud companies. What message does that send to existing loyal channel partners? Are they not doing enough?
It's also confusing for customers in terms of what they can buy and from whom.
Wiedower agreed. "Customers can purchase many of the cloud services that we offer directly from Microsoft. But there's no value in that beyond moving bits from point A to point B," he said. "The question is whether the partner is only helping the customer keep the lights on or [whether they're] helping them be more effective and more competitive," he added.
In the traditional channel, many partners continue to remain loyal to a resale-oriented channel business model strategy, whether they're reselling hardware, software or cloud services. Experts say that these partners need to proceed with caution.
"Ultimately, the numbers of this type of partners will decline as customers begin to consume technology-based services differently," said Tiffani Bova, vice president and distinguished analyst at Gartner. That's because if the consumer leverages IT in a different way, it will lead the IT organization down a different path than they've previously gone.
The good news is that partners have choices, she noted.
One choice is to do nothing -- and face a limited future.
Another choice is to stay in resale, identify areas of density in the customer base -- such as in healthcare, retail or banking -- develop a circle of excellence and capitalize on it.
"The pressure on partners to get better and go deeper in what they do [either by focus or specialty] is only going to increase," Bova said.
In fact, "differentiation" may be the word of the year for partners in 2015.
Another option for a partner firm is to make the conscious decision, supported by investment of money, people, sales, marketing and technical skills, to transform the business in what Bova refered to as a hybrid partner type. She described that type as companies that deliver services on-premises and in multiple public cloud scenarios and understand how to orchestrate, govern and integrate those solutions. Bova expanded on areas where partners should focus: software development, API development, enterprise architecture, UI/UX design (user interface/user experience), mobile expertise, development of unique IP, and advanced professional services, often with no product attached to this service.
New Signature doesn’t call itself a hybrid partner type, as per Bova’s definition, but is a cloud-first organization that believes companies should be moving workloads to the cloud as rapidly as they can and offers customers cloud use cases from the get-go. However, the partner is able to fill in gaps in the market for companies that are not ready to jump in 100% with cloud but that expect to live in a hybrid world for some years, according to Wiedower. At a later date, New Signature engineers can migrate customers to the cloud.
The partner also develops IP across vertical industries for customers around particular solutions, such as CRM, for example. "While we do develop custom solutions for customers, we’re finding that given the rapid cadence of software releases, some customers are more interested in a deeper knowledge about the existing software capabilities that we can turn on," he said.
Hybrid partners are in a much needed minority, Bova said.
Change will matter
The big pill to swallow for partners making any level of change to their channel business model is that they must commit regardless of what their manufacturer partners are, or aren't, going to do for them.
IDC's Edwards expects this year to see more partners define themselves in either the second- or third-platform camp. "Vendors will still maintain partners who don't make the shift [from the second to the third platform], but a lot of vendors are focusing on those partners who transform," he said.
Today, it's challenging for the big vendors to capture the differentiated value of the various partner types within their existing partner programs, but it's coming.
At Cisco Partner Summit 2014, Edison Peres, then the company's senior president for worldwide channels, clearly outlined changes in Cisco's partner program to align with the company's vision of its partner of the future. In a nutshell, the changes focused on new customer consumption models and hybrid IT. (Less than two months later, Peres was tapped as senior vice president of the Cloud and Managed Services Partner Organization at Cisco. His focus is on helping recruit and enable partners around the cloud.)
Over the next few years, Krakora expects vendor partner programs with a big "P" to go away or morph into multiple pods of partner initiatives with a small "p" that create a value proposition around specific areas of focus.
Vendors will inevitably continue to pursue growth markets. Partners will likewise need to put a stake in the ground and go after it.
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