15 for 2015: Channel Trends in the North American IT market

Note to readers: the following post is the product of a joint initiative involving Techaisle president Anurag Agrawal and InsightaaS's Michael O'Neil.

Anurag Agrawal, President, Techaisle
Anurag Agrawal, President, Techaisle

Trends in the channel are felt throughout the IT ecosystem: they affect the pace at which new products gain market acceptance, play a role in determining which vendors rise and fall in market share, and have an enormous effect on the ability of small and even mid-sized businesses to absorb new technologies and apply them successfully to business challenges. The epicenter of the trend impact is, of course, channel businesses themselves as they act as a key connection point in the IT product lifecycle.

What will we see in the channel in 2015? Techaisle and InsightaaS have teamed up to create a list of 15 issues that channel businesses, their suppliers and their customers will want to keep an eye on as the new year unfolds. We’ve tried to group these into three categories: the business of the channel, all things cloud and a final, single-item category that we’ve dubbed ‘one for the future’. In truth, cloud is so central to the trends in the channel that it’s hard to keep it from bleeding into the other categories, but we’ve tried to provide at least a little bit of commentary that isn’t entirely cloud focused. Without further ado…

The business of the channel

1. Marketing matters more and more with the passage of time. Very few channel members can be considered to be ‘excellent’ at marketing; they have tended to make sporadic use of vendor-supplied marketing resources, and to focus their own attention and resources on sales, delivery and support. However, this traditional weakness poses a challenge in the online world, where marketing is the gate that determines whether sales is ever engaged. Successful partners will become adept at using technology to connect with current and prospective customers.

2. Channel partners will invest in pre-sales activities to generate sustained demand – and in delineating the line between pre-sales and delivery to prevent deal subsidization. In a continuation of the last theme, we expect to see greater focus on pre-sales capabilities. On the one hand, channel partners need to migrate from simply supplying products to working with customers in defining requirements based on pain-points, which calls for expanded pre-sales capabilities. On the other hand, ‘trusted advisor’ services have real value, and in a market where product margins are scarce, this value needs to be reflected in billable assignments. There will be a strong correlation between the allocation of resources to pre-sales and importance of consultative sales, and between the investment of resources into building expertise and the importance of billing for that expertise. Successful cloud channel partners will invest in training and certifications, assemble and recommend solutions built from best-of-breed products, and charge appropriately when the customer ‘ask’ moves from ‘what products do I need?’ to ‘how should I deploy these products to obtain best business benefit?’.

3. Vertical specialization will finally begin to take shape. Status as a (billable) trusted advisor doesn’t begin with the question ‘how do these products work?’ but rather, with ‘how does an IT solution benefit my business’ – and the answer to that question starts with an understanding of the business. Most channel members are familiar with their clients’ operations, but in 2015, they will need to understand the ways in which technology is impacting their clients’ competitive environments and market opportunities. The implications of this trend will be evident in the results of the channel: we believe that the growth rates for horizontal specialization channel partners will be limited but vertical specialization channel partners will grow. In 2015 we will see three different types of specializations: advisors, who do not deliver solutions but provide technology consulting; integrators; who will specialize in integrating systems, data and applications; and solution experts, who will figure out how to connect IT-based solutions with the pain and/or opportunities of the end customer. Vertically-specialized consultants will succeed in the first category, vertically-specialized VARs in the third, and several different types of integration-oriented business – including cloud brokers – will ride vertical specialization to success in the second category.

4. Depth will matter. Leverage will matter too. It’s been said that if all resellers using the phrase “we are your one-stop supplier” were eliminated, there would be little left of the channel community. To be fair, this approach works (at least to some extent) in isolated communities. In commercial centers, though, added value will require domain expertise in one or both of applications and industry issues. In 2015, channel partners will go ‘deep’ rather than ‘wide’. Another common phrase, “let’s not re-invent the wheel,” will also come into play here. These words are spoken more often than they are observed – but they offer good advice for a tight margin market. In 2015, channel partners will put together repeatable, profitable SMB solutions that can be rolled out to – and supported across – multiple customers.

5. Managed mobility services will start to come of age. Many successful partners describe themselves as MSPs, but many of these firms focus mostly or entirely on remote security services and/or network support. In 2015, at least some of these firms will take the ‘next step’ and deliver managed mobility solutions that extend the VAR’s reach to mobile experience management – echoing a mounting need (see #4 in this list) in the IT user community.

6. “Turnkey” will be another word for “doomed”. Or to be more specific, partners need to be able to charge appropriately for services whether or not there’s a product transaction involved. The channel tends to tie the value of advice to the cost associated with product transactions, but the transactions are becoming scarcer, and the value of the advice is becoming dearer. Successful partners will capitalize on their competencies and roles as consultants, business process advisors, integrators, aggregators or (note the foreshadowing of the next section!) plain vanilla cloud deliverers.

7. IT consultant influence – and specialization – will increase. In another example of cloud business issues impacted by a broader trend that includes cloud, we expect that IT buyers will rely much more on IT consultants as they look to shape IT/business strategies that are aligned with current and emerging opportunities for greater IT leverage. This trend will have a ‘trickle-up’ effect: IT consultants will become more specialized as buyers look to them to deliver insight on vendor and technology options, technology compatibility, help with negotiations on price and T&Cs, and other issues; IT vendors will need to invest in developing evangelists who understand how and why their products address real buy-side needs. Both will see the merit in flexible relationships that apply needed skills to an expanding variety of customer needs.

8. Messaging will be a challenge for vendors. The fast-evolving technology landscape and eroding differentiation between competing offerings will create new challenges for IT companies as they struggle to gain mindshare in a channel that has historically been most receptive to technology messaging. Successful vendors will need to connect solid (and standards-based) technology messages with differentiated communications focused on business issues like margins and responsiveness; firms that attempt to either maintain product-only messaging or leap to business-only messaging will have difficulty gaining the attention of the partner community.

All things cloud

9. The ability to manage recurring revenue streams will separate the “viable” from the “ready for consolidation”. Many members of the channel recognize that acting as a managed service provider (MSP) and/or participating in provisioning of cloud services is important to the future…but many do not really know how to transition from their current model to an approach predicated, at least in part, on recurring revenue contracts. In 2015, we will start to see a firm separation between channel members that have the sales, technical and management structures needed to combine recurring and traditional business models and those that do not. By the end of the year, we will start to refer to the latter group as “struggling,” “acquired” or “on their last legs.”

10. The gap between the cloud “haves” and “have nots” will increase. There is an assumption that eventually, cloud will be everywhere, and the channel overall will benefit. However, both our data and our experience shows that key cloud vendors are investing in cloud channel leaders rather than in the channel as a whole. This will accelerate the gap between leaders and laggards – and stress the viability of firms that are left behind in this transition.

11. “Have nots” will turn to cloud aggregators and match-makers. Both ISVs and channel partners will have a tough time finding each other and ultimately finding the end-customer, creating opportunities for cloud aggregators and match-makers to enter the market as advisors to the ‘have not’ channel. Despite low barriers to entering the cloud advisory business, though, the deferred revenue nature of cloud will mean that few of these new entrants will find immediate profitability, as they will need to be able to build and manage reseller relationships, structure (or at least plug into) cloud-relevant sales and marketing programs, and/or drive channel investment in implementation and post-implementation support for end users – and fund all of this on a fraction of a fraction of the monthly fee associated with each service sold.

12. The two-tier cloud distribution channel will begin to gain traction. Because there is no need for physical delivery of cloud services, it has been difficult to see where and why distribution would play a role in cloud – and in truth, there is currently little real cloud business traction in the two-tier distribution model (vendor to distributor to reseller to customer). We expect to see this begin to change in 2015. Distribution will emphasize the strengths that it has built over the past 5-6 years – program distribution and management, reseller relationship management – and will find acceptance amongst cloud vendors eager to work with resellers who have presence within the SMB market, and who rely on relationships with distributors for access to programs and information.

13. Integration is already non-optional – and in 2015, the truth of this will become self-evident. Our research shows that the ability to integrate cloud-resident applications and data is a key to operating a profitable cloud practice within a channel business. In 2015, cloud will continue to increase in importance for both channel members and their clients – and this will in turn boost the need for channel members to offer cost-effective integration services to these customers. We expect channel partners to put together repeatable, profitable SMB solutions that include proprietary integration value-added services for cloud-based productivity suites and collaborative applications.

14. “Hybrid” isn’t just an architecture, it will be a management imperative. Some partners sell cloud, some sell products. Selling both is complicated, since the requirements for sales (compensation), technical (integration) and management (metrics) are different in on-prem and cloud environments.  Firms that figure out how to strike this balance will grow, or at least, not shrink. Those that don’t…

One for the future

 15. Cloud channels in 2015 – still more smoke than fire. Throughout this list, we’ve identified where and how the cloud will affect the channel: vendors with cloud offerings want to work with partners; channel members want and need to sell cloud; channel clients want and need to buy cloud. So where’s the problem? There are several, starting with the fact that there’s more enthusiasm than understanding. Vendor cloud channel programs will proliferate, existing channel businesses will spin up cloud practices, and cloud aggregators will continue to enter the market. Profitability will be rarer than activity, though, as all parties struggle with the realities of managing reseller relationships (especially around compensation models) based on recurring revenue rather than transactions, while at the same time trying to develop structured sales and marketing programs and the capacity to deliver implementation and integration, and to align and fund the provision of tier-2 customer support for end users. We’ll feel heat from cloud activities in 2015, but the real flame won’t appear until next year’s list!

 

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