Focus on the future

The headline trends for next year are already well established, perhaps around three major themes of security and business continuity; collaboration and Unified Communications; and doing more with less through virtualisation and server consolidation. The main difference in 2008 is that all this will be carried out against a backdrop of a worsening skills shortage and tightening budgets as the Reserve Bank continues to attempt to reign in an exuberant economy.

IDC recently announced its forecast for ICT budgets in the new year and while they are far from falling in such a strong economy, the researcher did describe them as “stalling”. IDC said IT budgets for the current year will grow by a less-than-the-inflation-rate of 3.2 percent over 2006 budgets, giving the impression the 2008 budgets might be even tighter.

Still that meant there was $39.3 billion up for grabs in 2007 and at least that in 2008. Making sure your business gets its share of that kitty is (as always) the challenge going forward.

Many of the trends play straight into the hands of resellers. Organisations seeking to meet the needs of a still buoyant business climate with a budget that is diminishing in real terms will likely turn to the channel looking for just the solutions it is preparing to sell.

Virtualisation, consolidation, IP communications and collaboration all serve to drive costs lower and efficiency higher while new approaches to delivering solutions will ultimately lower the entry cost to those solutions to the benefit of end-user organisations.

Increasingly both users and vendors will turn to the channel in this climate. As IT vendors seek profits from new markets they are changing the way they partner and while this will mean the channel is asked to commit more to the relationship, in exchange vendors are showing a greater willingness to invest in them.

For several years now large vendors have cast an envious gaze over ever smaller organisations and have begun tailoring solutions for SMBs in a trend that has made the channel an increasingly critical part of their strategy.

In a recent analysis of channel programs, Gartner analyst Tiffani Bova discovered that vendors are altering their relationship with their partners in ways that will begin to fundamentally disrupt the existing industry landscape. The news may not be good for all, but for those who survive this new direction, which Bova predicts will take three to five years to play out, the rewards will be significant.

Vendors are looking to generate a greater Return On Partnering (ROP) as they try to sure up their future revenues and penetrate the hard-to-reach small enterprises with increasingly sophisticated solutions.

Based on these needs, Gartner noted that some channel programs have begun to change emphasis. “Some vendors are farther along in their development path, while others are still playing catch-up to program shifts that happened a few years ago,” said Bova. “Either way, the constant here is change – change that ultimately will alter the relationship between the channel and vendor partners (and vice versa)”.

From asset to access

CRN talked to VP and distinguished analyst at Gartner Research, Craig Baty, about Bova’s report and other trends ahead. Baty, Gartner’s global lead analyst for IT marketing, business and channel strategies, pointed to an overall trend which will affect everyone in the ICT industries. Rather than buying technology, end-user organisations are focusing on acquiring “access rather than assets” he said. It is “less about owning” technology and more about getting to use it.

“It is an overall trend that affects everyone and it is causing disruptions in the market,” Baty said. “As IT providers move from the sale of products toward the provision of service there is a convergence of players with hardware, software and services companies merging,” he said.

Large vendors are on a buying spree to acquire pieces of their particular puzzle so they can provide all the vertical aspects of service delivery. “That will accelerate,” he said. “In the future there will be larger players, but less of them.” And they will deal with fewer partners as we shall see.

An example of this trend is the move toward offshoring. Indian, Latin American and even Chinese companies will continue to grow larger and more influential as end-users look to lower costs and the skill shortage continues to bite. Indian call centre operators and application developers will continue their growth. But Baty noted even they face challenges; skill shortages and pressures to accelerate growth will see large Indian systems integrators offshore their own work. Already seeking to lower their own costs, these burgeoning companies have begun sending project managers to China to gain access to even cheaper engineering talent in a way that is creating a “global delivery model” said Baty. Like all companies in the sector, they are trying to move up the value chain to where services and content are the product, he noted.
In a similar vein Bova sees this process mirrored in the traditional channels with solution providers and systems integrators seeking partners, service providers and contractors amongst themselves to that the channel itself becomes more stratified.

By end 2010, 70 percent of mid-size VARs will generate at least 50 percent of their revenue by selling to, through, and with other VARs, SIs, ISVs and service providers, predicted Gartner.

This quirky change in channel relationships will at least in part come about because of one of the headline solutions trends the industry is embarking upon – Software as a Service (SaaS).

SaaS and even Hardware as a Service (HaaS) is still in “trigger phase” claimed Baty, but it will continue to grow and will in turn spur growth in business process outsourcing with each accelerating as the two solutions leverage each other.

Part of a range of emerging delivery models, SaaS is causing this change in channel relationships as large IT vendors try to decipher what role partners will play in the delivery value chain and what types of partners they need to hopefully maintain a balance between the traditional resale model and the “as a Service” model.

One of the dangers large vendors face in the emergence of this new delivery model is that they are not necessarily at the centre of the ecosystem that provides solutions to end-users. The proliferation of open source solutions and interactive web solutions such as Saleforce.com have begun to dilute their power. This trend is accelerating as ecosystems are growing around such point solutions either by design or by market demand and increasingly the delivery of a solution can be about bringing together point solutions from a series of smaller suppliers rather than the large monolithic application developers of yesterday’s data centre.
Get that SMB

There are still of course traditional opportunities in the market and vendors seeking to add more small and medium enterprises to their client lists, will continue to target them. Baty suggested spending on security and mobility solutions will continue to be in high demand as will PC and server upgrades throughout the new year. Smaller organisations refresh less often and with Vista migrations on the horizon there will be a continuing market for PC upgrades. Server and network upgrades (LAN/WAN) along with demand for new sophisticated storage solutions will all be driven by the virtualisation trend. Many smaller organisations are not using their existing storage effectively and have spare capacity on servers which could be addressed by virtualisation. They will seek to bring these idle resources into play as cost constraints prompt them to maximise their investment in existing equipment.

Baty suggested SMBs are being “attacked by vendors”. With large contracts only coming up for tender every five or so years, large venders are looking at smaller targets in the interim and it is well established that they see SMB as both saviour and tormentor. SMBs have different buying processes, different needs. They are looking for solutions that are industry specific and they don’t want to pay for them, said Baty. They don’t want to pay for large monolithic solutions which are heavy with redundant and irrelevant features, they want to keep their initial investment low and then pay incrementally to grow a solution with the business.

“They are not as worried about getting it all to work together now, so long as it can all be integrated at some time in the future,” he said.

This is leading to changes in the type of solution they are looking for and, again, the industry is preparing to deliver those solutions with answers such as what Ovum analyst Steve Hodgkinson likes to call ‘SOA in the Wild’ – the new era of web services, mashups and social computing.

Hodgkinson sees the rise of SOA in the Wild as a potential threat to traditional vendors, but still sees a place for value-adding solution builders to stitch together the useful point solutions and disparate services being driven out of social computing and Web 2.0.

In response, traditional IT vendors will not give up their potential markets and will concentrate their energies on delivering highly targeted solutions in an increasingly vertical manner by teaming with and cultivating an increasingly select group of channel partners.

Evolving programs

Gartner’s Bova said the days where channel managers were tasked with signing as many partners as possible will begin to recede, replaced with a more select and strategic approach to partnering that will see vendors build even closer ties with enthusiastic and committed resellers.

“IT vendors are demanding more of their channel partners today than ever before,” said Bova. “The current trend is to evolve established programs to improve partner loyalty, profitability, and solution, product and support capabilities within a select group of partners”.

Though it may not always run true, generally vendors are realising that quantity does not always equal quality – a realisation which could lead to significant opportunities for some channel partners or even the end of relationships for those not willing to play ball.

Bova advises vendors that reducing the number of partners in a program does not necessarily mean revenue decline as it focuses the available channel resources on profitable partners and stimulates mutual growth.

In turn channel players may need to be selective of their customers. As solutions become services and the cost of entry to those solutions shifts from a capital purchase to a cost, the buying power within the organisation is being dispersed away from the IT department to other business or finance managers, or even to individuals who are now able to easily download software or sign up to services without buy-in from the CIO. Increasingly, suggested Baty, the channel must focus on the the service providers and business unit managers as well as the CIO and may find themselves stretched thin.

This will put more pressure on vendors and their channel to drive solutions deep into the enterprise prompting vendors to ask resellers to put “more skin in the game”, said Baty.

Simply fulfilling transactional orders is no longer enough. Vendors expect their key partners to play a more significant role and in return are becoming more willing to step up and support, reward and engage with partners that show the most interest and loyalty in driving mutual business growth.

This brand loyalty and commitment to the vendor is becoming even more important to vendors who want to be the primary supplier for a particular solution or solutions. They seek resellers who are willing to continuously invest in training and certification and can provide value-added, integrated solutions with implementation and on-going support for the customers, producing high customer satisfaction scores while giving the vendor access to new accounts and new markets.

They expect resellers to have expertise in a particular segment, vertical industry, geography or perhaps even a complementary product line that brings value to the vendor. And they must have strong sales and marketing capabilities of their own. They must also be based on an economically viable business model, explained Bova.

It’s not all one-sided though. The channel is increasingly able to push back and successful resellers are looking for the same level of commitment from their vendor partners or they are unwilling to make big up-front investments in programs and training the vendors request.
The channel is looking to recuperate the costs associated with maintaining such a close personal relationship with the vendors it deals with. They are – or at least should be – looking for organisations that have a real commitment to the channel at the most senior levels of vendor management. They are looking for skin in the game from vendors who must provide dedicated channel resources for pre- and post-sales engineering and support. They are looking for ease of engagement with proactive communications, partner portals, conflict resolution mechanisms and lead generation, market development funds along with consistent, transparent and beneficial margins, rebates and incentives, suggested Bova.
It’s all pretty familiar stuff, admittedly. But the point about Bova’s research is that there is a discernible shift in power away from vendors dictating what attributes a channel program should have, or how a particular aspect of the program should be implemented. Increasingly, she argued, the channel has more power and influence over the vendors, and is able to demand more.

From opportune to strategic

To protect their investment in the channel, vendors will increasingly choose partners on a strategic rather than opportunistic basis, she said. This will play out in not only the selection of partners, but in the nature of the relationship. Vendors are bringing partners into their strategic planning processes, letting them take part in sales meetings and revealing their most hidden plans.

Rather than simply lobbing kit over the wall for the channel to sell, they want their partners to understand their brand, buy into their best practices and conduct themselves as though they were one of their own employees, Baty said. In return, he said, the vendor is showing a willingness to help the partner grow their business. It’s in their best interest to ensure profitability and reliable business practices in the channel.

This shift from “opportunistic” to “strategic” partnering is mirrored in a channel program shift from volume to value. In the past vendors have focused their efforts on partners that could deliver volume throughput and while that is still relevant, channel programs increasingly place more emphasis on the value a partner can bring to the table.

The new channel programs reward loyalty and skills in a way they haven’t before. This can be a huge advantage to smaller channel players, said Gartner if they have specialities in skills or in vertical market knowledge. While their lower volumes may have disadvantaged them in the past, their specialisation will become their asset as vendors enable them to compete on price with larger volume players.

“Some areas that have proved to be the most successful value attributes include: training, specialisation, competencies, business planning, marketing activities, joint sales efforts, competitive displacement and new targeted account acquisition,” said Bova.

Some of this is being driven by vendors wanting to ensure their channel relationships are truly profitable, other aspects are to ensure customer satisfaction, but it is also to encourage investment in the much-needed skills that will deliver sophisticated solutions the vendor wishes to offer. Reseller training will become an even more important aspect of partner programs over the next 12 months.

“If a vendor is moving away from selling simple point products to selling more complex solutions, then the training curriculum should follow accordingly. Training a channel partner on the speeds and feeds of a product without any context around what business pain the product will solve, and how this solution fits in the overall customer environment, lacks any real substance,” said Bova. This addresses what Baty sees as another major industry trend that will accelerate in 2008 – the move up the value chain.

Most vendors begin selling product and then added services to support that product. Ultimately, in an effort to differentiate, they added ever more services until the organisation became service-driven, explained Baty citing the sale of IBM’s PC division as the perfect example.

Most channel organisations are still at the lower end of this value chain. Vendors who are looking for partners that are higher up the chain are willing to selectively invest in organisations to help them get there.

Vendors are realising there is value in having partners become experts in a particular (technology) solution
and are building the curriculum to support this.

In this way vendors will be endeavouring to provide training in more complex solutions. As their own offering expands they will be looking to channel partners who are able to put together solutions, so we can expect to see vertical market training or specialist training in selling to small businesses.

“Another area where vendors have begun to increase the amount of courses offered is specific to business training on topics such as sales, marketing, managed services, employee recruitment and competitive insights. Some vendors are further along in this process and have dozens of specialisations and competencies in place, while others are just starting,” suggested Bova.

For the channel, training will remain one of the biggest expenses it makes each year, specialising and then co-operatively working with other channel partners to deliver a solution can help reduce that cost rather than attempting to cover all bases. In this way they fit in
with the ecosystem vendors are trying to build around their offering.

It may seem daunting to some, but when you consider Gartner’s prediction that based on lack of engagement and strategic relevance, IT vendors will reduce their current partner populations by 25 per cent by year-end 2009, it could be the only way forward.