Wednesday, October 8, 2014

10 Things I Learned About the Channel This Summer

As the summer of 2014 is quickly wrapping up, I wanted to share some of my observations on the ever-changing technology channel.

I am seeing the very definition of the channel changing. The first generation of the IT channel opened its doors in the late 1970s, with business models around midrange computing, Apple education sales and hobbyist PC sales.

When IBM announced the PC on Aug. 12, 1981, the Microsoft/Intel revolution began. The channel grew quickly and weathered numerous storms such as Dell direct in the early 1990s, explosion of the internet in the late 1990s, Y2K and, more recently, cloud, consumerization, mobility and convergence.

The channel topped out at roughly 500,000 companies worldwide in 2007, employing more than 5 million people directly. In addition, tens of thousands were employed indirectly at vendors, distributors, associations and media organizations.

The deep recession of 2008 is not experiencing the expected bounceback most of us expected.  While the broader economy is trending back to a 6 percent unemployment rate, the channel continues to slide.

What is happening out there?

1. The channel is shrinking at an alarming rate: Recent reports from CompTIA and IPED show a current North American partner base of 160,000 companies. It may sound like a healthy number, but it is down 36 percent since 2008 and continues to face 10 percent to 15 percent annual attrition for the foreseeable future.

Keep in mind the 160,000 includes a much broader audience than just resellers—it also includes all kinds of consultants, coaches, etc. A more accurate number, including people who directly influence and resell hardware and software products, is closer to 75,000 (with half of those selling enough product profitably to sustain a business).

2. The channel is getting younger – much younger: Todd Thibodeaux, CEO of CompTIA, kicked off his 2014 ChannelCon keynote with a couple of pieces of research. First, an estimated 40 percent of the entire channel will retire in next 10 years.

Yes, 4 in 10.

Second, those retiring will be replaced by millennials. In fact, 75 percent of the channel demographic in 10 years will not have been alive when IBM made that 1981 introduction.
This generation grew up on computers and will be pursuing different business models than the traditional reseller models we have today. They will look more like vendors, with in-house development teams, software products and intellectual property.

3. M&A is strong but suffering from low multiples: With a 40 percent retirement rate and a 10 percent to 15 percent annual attrition rate, it has become a buyer’s market for VARs, solution providers and MSP companies. Larger companies are scooping up geographic assets for both the customer base as well as talented, local employees.

I am now hearing about M&A activity falling well below 1X annual revenue, which is unheard of in my 20 years in the channel. There are dozens of underlying facts to each deal, but suffice it to say that traditional IT businesses are not as attractive to investors as they were before 2008.

4. Managed Services has plateaued: One of the most surprising things I observed this summer is the research around the MSP market. Only 12 percent of channel companies report that more than 50 percent of their revenues are recurring.

While a much larger number of companies do offer managed services, they are a part of their offering and not the massive “do it or die” business model transformation that was predicted over the past decade.

Much like corporate outsourcing of IT, or direct hardware purchasing, there is a definite need for it in the market—but it won’t likely become more than a small slice of the pie.

5. Partners are getting mobile in a more serious way: Not surprisingly, 70 percent of the channel now offers mobile services on their line card. Taking advantage of BYOD, BYOA and the weekly consumer security scares, partners are implementing profitable mobile services.

Ranging from risk assessments, policy creation and deployment, mobile device management (MDM), providing infrastructure and support to ongoing strategy and integration, a large number of partners have carved out a successful new niche.

6. The channel is small business, and getting smaller: Much of the attrition that I mentioned above has come from within channel companies. Doing more with less. The average channel partner has eight employees, and 97 percent of them have fewer than 50.

With the rapid growth of freelancing (think oDesk and Elance), offshoring (Fiverr) and rapid software development (Mechanical Turk), many companies are outsourcing their own functions such as marketing, operations, finance and custom development.

Vendors are looking at opportunities to help their partners with these functions and keep them focused on (selling and) delivering solutions for end customers.

7. Vendor numbers are exploding: The above trends have an interesting side effect—the number of vendors in the marketplace is growing at a surprising pace.

Channel companies are leveraging their deep industry knowledge with unique integration skills (across dozens of vendors' APIs) and creating products and specific IP to address niche solutions.

At one time it was called “value add,” but today partners are incorporating these ideas into new companies and products and then going to market themselves. These products have narrow addressable markets and the need to find resellers will continue to grow.

I predict that in 10 years, the number of vendors will outnumber the amount of pure-play resellers.

8. Influencers and Connectors are becoming more important: Without naming names, our entire channel ecosystem boils down to a small number of individuals who connect large amounts of like-minded people. You probably know many of them!

For example, the North American IT channel has roughly 100 people that will get you one degree of separation from anyone else. These super-connectors are very different from one another—some are media, some run associations, others are vendors or distributors, others make a living on making connections for you.

Some things are clear: The amount of noise and clutter will not stop growing. People buy from people they like. Economic scarcity is evolving into information scarcity. The network effect will drive winners and losers in the next 10 years.

9. Consultants and coaches are struggling: The post-2008 economy combined with cloud, content marketing, consumerization of IT & DIY are squeezing average consultants and coaches out of the game.

Check out the daily job change notifications on Linkedin and you will see this group shifting jobs more than any other group.

The good news is that thinning the herd will have positive outcomes for the channel. The same way I want my real-estate agent to be the best in town, I want my consultant or coach to have successfully done what I am trying to do.

10. Convergence is being driven by cloud competition: I have spent a lot of time and energy explaining how pervasive computing and the Internet of things would drive industry convergence—finally bringing together IT, telecom, print, AV and all other technology channels under one roof.

Where I got it wrong was focusing on the network. I figured that all data would travel over a single protocol across one Internet and that would drive vendors to build and adhere to open standards, allowing disparate technologies to talk.

Well, not so fast. Twenty years later …

The cloud is creating competition in places we didn’t expect and almost every traditional vendor is threatened by the rapid growth of public and private clouds. Million-dollar customer deployments of hardware and software are being replaced by $20/user/month offerings that are being decided outside of IT.

Fifty percent of all IT dollars are now being spent outside of IT by people that vendors and channel partners don’t know all that well. Sales, marketing, finance, HR, operations and development teams are rapidly deploying technology and it is forcing the channel industry to get smarter.

These trends are reshaping the channel, not replacing it. As with every other threat in the past 30 years, the channel will come out of it stronger, more nimble and better able to serve evolving customer needs.

Now, what will fall bring?

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