Thursday, April 23, 2015

How big is the IT Channel?

This is the one question that really has no definitive answer. So let's give it a shot!

Using dozens of data sources, we can start from the top down and try to get into the right area code. The global IT industry is forecasted to be $3.828 trillion dollars (yes, with a "t") in 2015 according to Gartner Group.

North America represents about 25% of the world in both spend and number of IT providers. The simple breakdown is $240 billion hardware, $230 billion services, $190 billion software and $340 billion telecom.

The largest consumers of IT by industry vertical include Healthcare, Professional Services, Retail, Construction and Accommodation. About 7 in 10 businesses used some type of IT provider in 2014. (Source: CompTIA)

Ok, let's drill into the North American Channel numbers...

The North American Industry Classification System recognizes 333,965 companies that are channel-oriented. Of this, 208,463 are self-employed or sole proprietors. There could be thousands of additional companies mislabeled as well that have influence on IT purchases by business.

Remember, any of these numbers can be multiplied by 4 to get an estimate of global numbers.

The Channel Company, better know by their industry leading magazine CRN, has arguably the best channel database on the planet. The data has been collected over 30 years and they employ a full-time staff to keep it updated and clean. They report a total population of 170,000 North American partners, with their "ChannelBase" database capturing additional information on 150,000 of them,

CompTIA, the world's largest IT association, uses a research approach sourcing data from the U.S. Bureau of Labor Statistics, BEA - Bureau of Economic Analysis, Bureau of the Census, Department of Commerce, TECNA, EMSI, Hoovers, IDC, as well as their own membership and communities. CompTIA reports a North American channel population of 125,502 firms.

CompTIA further segments the channel data by employee size:

  • 160 Large Channel Firms (500+ Employees)
  • 1,388 Medium Channel Firms (100-499 Employees)
  • 13,680 Small Channel Firms (10-99 Employees)
  • 110,274 Micro Channel Firms (1-9 Employees)

    125,502 Total
CRN Magazine devotes one of its issues every year to the VAR 500 - the top 500 channel partners in North America, ranked by revenue. Almost like the Forbes Billionaire list, channel partners are competing to make the prestigious list. By the way, in 2014, the magic number was $20 million in revenue to make the cut.

CDN Magazine in Canada also does a Top 100 List and the magic number in Canada is just over $5 million to make it into the top 100.

As a side note, I wrote in a previous blog how to get the revenue of any partner by just using Linkedin and some industry average multiples. Very powerful in building a recruitment strategy,

A third data point on size of channel came from my friend Rauline Ochs who leads the IPED Research, Consulting & Training arm of The Channel Company. She reported in summer of 2014 a number around 160,000 (and declining) since 2008.

With the 3 data points above, we can confidently conclude that the North American channel is likely in the 160,000 range. 

The important number however, is how many "real" partners exist?

In 2008, Chris Anderson wrote the book "The Long Tail". For those of us that have been in the channel for awhile - we could have swore this book was about our industry!

Cutting out part-time consultants, people between jobs, artificial tax break companies and other phenomenon, the numbers get dramatically smaller.

For example, Microsoft has unofficially reported their North American channel numbers at around 100,000. This doesn't do a good job of cutting out the non-producers as the barrier to entry is low for that program.

Looking at other large vendors doesn't help because of the 12 different types of channel partners selling unique solutions across dozens of industries. For example, big players like HP, Dell, IBM, Lenovo and Cisco have, on average, about 15,000 partners each in North America.

One good way to zero in on "real" partners is to look at Distribution. Companies such as Ingram, Tech Data, Synnex, Avnet, Arrow, ScanSource, BlueStar, etc. have tens of thousands of partners buying through them everyday and direct ship to end customer 80% of the time. This gives distributors an excellent source of big data about who the partners are and what types of end user customers they are selling to.

I just attended a conference where the President of a top-3 distributor mentioned 60,000 unique partners in the US. Two challenges with this number are that some partners are dedicated to one distributor, thus understating the overall number, and second, it includes the small partner who only bought one printer cable.

I did a piece of work about 5 years ago (while at Lenovo) that added up all of the distributor sales, then de-duped by partner and came up with 75,000 unique partners selling all brands. Unless you are literally 100% services or cloud, I figured it would be very difficult to avoid buying a cable or software license over the course of a year.

Another completely different way to look at the number of "real" partners is financially. In the end, people have to make a buck to be committed to something long term. Actually - more than a buck, each employee at a partner needs to pay for a mortgage and get a decent wage for their geography. The average is about $50K when you include technical, sales, marketing and owner/principals.

Interestingly, that same distributor President said their data showed 18,000 companies who have bought 4 different types of solutions from them in a year (think PCs, backup software, security devices, networking, etc).

CompTIA reported that the average North American partner has 8 employees. So the math would be 8 x $50K = $400K in salaries. Add the overhead and a partner would need to clear about $500K in revenue after cost of goods sold (COGS). So with partner margins somewhere in the 10-20% range - the average VAR type partner is likely selling more than $3 million per year. Services led partners work on different economics as the COGS is mostly the salary line. 

So, the million dollar question, where does the Mendoza Line sit in the North America channel? At what point in the list of 160,000 partners does it not make sense to cross to get a good ROI? After analyzing all of the sources of data, along with getting additional color from some of industries rock stars - this is my best guess:

There are 25,000 "real" channel partner firms.

This doesn't mean that your recruiting target should be 25,000 - it is simply the TAM or Target Addressable Market for North America. Remember that the top 10 vendors in the region only carry about half that many and their products are pervasive across every end customer.

Once you have determined your needs for increased geographic coverage, additional skill capabilities, sales capacity, brand commitment, and solution integrations, the right number may be much lower than you first thought.

There are very successful vendors selling millions of dollars through this channel with less than 100 partners. Depending on the solution you are selling, determining the delicate balance between quantity and quality of partners is much more important than chasing any of the big numbers above.

And don't forget about influencers and connectors - the right connection at the right time could tip a large deal in your favor. There are over 200,000 people in the channel that may not be a typical reseller VAR, but a consultant that holds the right sway over the deal you want to win.

How do you win the hearts and minds of these self-employed consultants en masse? The answer is taking advantage of communities - which I started writing about in 2010.

Final thought - this blog will be out of date once I hit publish. 15,000 partners will go out of business or be acquired this year. 10,000 new companies will be formed this year and may look and act much different than you are used to (or your program is geared towards).

The channel is a living, fluid thing - the moment we think we have it all figured out is the moment we should step down into retirement.

Thursday, April 16, 2015

Recruiting Channel Partners? Here is one secret to help you succeed

On the surface, recruiting channel partners seems to be a straight-forward task. After determining your business requirements, you market to partner prospects at tradeshows, through the media and directly. When you gain their commitment, you then set off to train and build capabilities, change their behaviors and hopefully reinforce their performance to the next level.

Not so fast.

With over a half a million partner prospects world-wide, there are a number of challenges including language, legal and regulatory. Once you have cleared these, the different business models, product focus, competitive entrenchment and vertical industry specialties require a nuanced approach.

Whether you are looking for increased geographic coverage, skill capabilities, sales capacity, brand commitment, or solution connectivity, recruiting is one of the hardest thing a channel management team does.

Ok, I already knew it was difficult, how do I get started?

Segment potential partners by size before you start profiling. It will save a ton of time and allow you to target effectively.

Ultra-large partners look and act like Fortune 500 companies (and in some cases are). You won't be able to call the CEO and close quickly. It will take months, if not years, to work through the multiple layers.

Large partners are also likely entrenched with competitors and have well defined business models, legacy practices and can be slow to move as well.

To put this in perspective, in the United States, a partner would need more than $20M in revenues to be in the top 500 (according to CRN, The Channel Company). In Canada, on the other hand, $5M of revenues will get you in the top 100 partners (CDN).

So what is the secret to segmenting?

Channel Partners are individual businesses. They need to drive revenues, control costs, and after cost of goods sold (COGS), the largest expense is personnel. Salaries differ by employee type and country, but a similar pattern exists across the entire channel.

The average margin of these businesses can differ by many factors including business model, geography, and management skill. The range for traditional VARs can be in the single digits, Managed Service Providers closer to 20%, and software/service led companies can even reach close to 30%. There are always variances to these, but statistically it is a reasonable place to start.

Therefore, take a potential partner, look up the number of employees they have in Linkedin (actual people - not what range they say they are in), multiply by the average salary in their region ($50K is the average for most G20 countries), and you now have enough information to back into their revenue.

For example, let's take a IT VAR prospect with 15 employees. Multiply 15 by $50,000 gives $750,000 in salary costs. With personnel accounting for 75% of expenses, this VAR would have about a million in revenue margin dollars. Assuming this VAR runs about 15% margins, it would sell about $6.6M total revenue.

Knowing what your product mix produces as a percentage of channel sales gets you further towards the recruiting holy grail: Share of Wallet.

Recruiting is an art and a science. The good news is that Big Data is driving the science side of the equation. If you are still recruiting the same way you did years ago, it is time to look at it differently.

Understanding Partner Models

CompTIA, the world's largest IT Association, identified these 12 Channel Partner models for 2015.

Though ongoing convergence is sharply blurring the lines between distinct partner business models – everybody’s doing a little bit of everything, it seems -- the following identifies a set of individual models that have marked the channel ecosystem:

1. VAR / Solution Provider

To date, these are probably the most universal of terms to describe the majority of channel companies. VARs primarily resell products, while solution providers deliver a broad footprint of technologies and solutions. Solution providers sell within specific vertical(s) and/or to end-user focus or to several different verticals with no specific end customer focus. Services are often transactional, project-oriented or break/fix. The company’s revenue comes predominantly from integrating and selling hardware, software and services, including both cloud-based and on-premises solutions. They also rely on myriad types of rebates, discounts, margin points and other resources from the vendors they partner with.  They do not normally retain title to product, while VARs normally do.

2. Consultant

Consulting is typically part and parcel of every channel business type, but for some it is the primary specialty. Revenue comes predominantly from design- and planning-based consulting with a mixture of IT and business consulting.  Title to product is not usually taken.  Value comes from their ability to integrate and support technologies as well as determining product and brands, which has grown in importance with the proliferation of cloud solutions that can overwhelm end customers with choices. Consultants may serve as brokers, vetting various cloud providers, SaaS, IaaS and PaaS offerings for end customers.

3. Systems Integrator

Like solution providers, systems integrators have been bedrock category of channel business for decades. Revenue comes predominantly from design- and planning-based consulting with a mixture of IT and business consulting. Integrators often serve larger enterprise companies and they, themselves, are on average at the top-end size wise of channel firms. Traditionally, they realize approximately half of revenue from consulting services and 40% from IT services in design, implementation and post-transaction consulting. They differ from an IT consultant in that they also take title to product.

4. ISV

Independent software vendors (ISVs) develop proprietary software applications and solutions, including cloud-based SaaS offerings for sale either direct or indirect through their own channel. ISVs run the gamut from giants like Microsoft and Oracle to small applications players creating a single cloud piece of software. Revenue is derived in a variety of ways: selling software licenses, one-time sales of packaged applications and/or recurring payments for hosted or cloud-based software solutions or tools.

5. Direct Market Reseller

A direct market reseller (DMR) earns revenue by selling directly to consumers online or via the phone without a physical storefront operation of any kind. On the business to business DMRs include companies such as CDW and PC Connection; business to consumer counterparts include companies such as Amazon. DMRs are high-volume fulfillment specialists and constitute a market niche that sits between conventional big-box retailers such as Best Buy and distributors such as Ingram or Tech Data. They typically take orders for thousands of IT products from vendors across the industry. Deals are transactional.

6. Managed Services / Managed Print Services Providers

MSP/MPSP revenue comes predominantly from delivering recurring IT services provided on a contractual basis to maintain customer computers, networks, software and/or cloud-related solutions. The MSP assumes responsibility for the proactive management, monitoring and maintenance of the IT functions and/or systems covered by a service-level agreement (SLA) with the customer. Service is primarily handled remotely from the MSP’s data center, where techs mediate problems as they arise. Services also can be delivered either on-site at the customer’s data center or via a third-party NOC to which the MSP has negotiated access. Managed services differs from other types of IT that are billed on a recurring basis (such as a SaaS solution) in that there is a formalized expectation of ongoing technical support. Typically MSPs also conduct conventional IT sales of product and services alongside a managed services offering. Billing occurs in a variety of ways: per user, per device, flat rate monthly, etc.

7. Cloud Provider

A cloud provider is a company that offers some component of cloud computing – typically IaaS, SaaS or PaaS – to businesses and/or individuals. Today, the public cloud market is consolidating around a handful of major players such as Amazon, Google, Microsoft, IBM and Rackspace. Smaller channel companies that fall into this category may be using those public cloud providers on the back end for infrastructure and compute support, but for their own business model be building private clouds for their customers. Private cloud development includes selling any on-premises infrastructure that may be necessary to support the implementation. Revenue is generated through recurring pricing.

8. IT Distributor

Distributors act as an intermediary between tech vendors and the channel firms that resell their software, hardware and other services and solutions. Essentially the hub in the tech go-to-market supply chain, distributors have morphed from basic product fulfillment entities to the channel to more complex organizations that provide training, support, financing and billing assistance. Since 2010, market-leading distributors Ingram Micro, Tech Data, Avnet, Synnex, Arrow and others have created cloud-reselling programs around emerging technology offerings to accommodate new market realities. Additionally, some have made investments in telecom services aggregation, reflective of the convergence of the traditional IT channel and the agent-based channel that sells carrier services to business.

9. Custom Systems Builder

Also called ‘white-box’ resellers, these firms generate revenue predominantly from designing, building and delivering their own brand of hardware infrastructure. Most typically these products are custom-built laptops, desktops, servers and other pieces of hardware.

10. Web Developer

Web developers’ revenue comes predominantly from development of Web sites for businesses and individuals. They typically handle all programming aspects of creating a Web site, including HTML programming, creating graphics, links, and other related tasks of building Web sites. Mobile application development is fast-becoming an in-demand sweet spot for those specializing in this business model, as more and more companies need their Web sites to be mobile-friendly for use on smart phones and tablets.

11. Telecom Services Provider

A telecommunications service provider (TSP) is a type of communications service provide, including competitive local exchange carriers (CLECs), incumbent local exchange carriers and mobile wireless communications companies. Revenue comes predominantly from providing network services (NSP), Internet services (ISP), or VoIP services. They generally take and retain title to product.

12. Telecom Agents

Telecom agents represent the indirect channel middlemen and front line for the major telecom carriers. They include master agents, which serve a role similar to IT distributors in aggregating carrier services that can then be delivered by an ecosystem of sub-agents and independent agents. Those latter two groups sell recurring revenue-based contracts with end user customers of voice/data telecom services.