Thursday, April 28, 2016

The End Of The IT Channel As We Know It. (And the start of something amazing!)

While exploring the question of where are all of these so-called “Born in the Cloud” partners are coming from, a bigger and more complex issue surfaced. Perhaps the competition isn’t coming from “within” the channel but somewhere else?

When Marc Andreessen wrote “Why Software is Eating the World” in the Wall Street Journal 5 years ago, a major shift was taking place in every industry. Infrastructure was firmly in place and technology was finally at a maturity level to start disrupting every business, across every sector.

What Marc didn’t predict is that the center of gravity for these decisions would fundamentally shift into the business units. In those days, about 80% of technology decisions were researched and made in the IT department, today it is only 28%. In fact, Gartner predicts that it could be as low as 10% by 2020.

The BBC made quite a stir last year when it predicted that technology could replace most workers in the next couple of decades. “Will Machines Eventually Take Every Job” walked through numerous industry segments from truck drivers to farmers, from factory workers to service delivery, and from knowledge workers to professional services.

If you wrap these articles together the irony is deafening: 

Line of Business professionals are busy stitching together the very software stack that will one day replace them! 

I don’t subscribe to the armageddon-style predictions, but do believe it will have one of the most profound effects on society since the industrial revolution. Anyway, enough meandering.

The biggest threat to the IT Channel today (already 36% down since 2008) is not the cloud. Nor is it internet of things (IoT), consumerization, mobility, or a host of other emerging technologies. It is the changing dynamic in how customers decide and purchase IT.

The 72% of all technology decisions that are now being made (or highly influenced) outside of the IT department aren’t traditional IT decisions. The Finance person isn’t buying a router. The Marketing Executive is not implementing security protocols, the Sales leader isn’t buying new servers for the rack. They are stitching together a software stack that drives business value for their department.

This myopic view could grow to be dangerous as costs are accelerating, duplication is happening across the organization, holistic security is nearing impossible and interoperability is challenging with the permutations and combinations of disparate solutions. However, I don’t see power shifting back to the CIO anytime soon. In fact, a magazine focused on CIO’s was reporting a trend where they were being demoted out of the boardroom altogether.

In the late 90’s, as PC and other hardware margins were plummeting, the rallying cry for the channel was to verticalize. Find that industry niche where you could get deeper into the business issues and understand nuances such as regulations, legislation and industry solutions. By bundling consulting, software, and focused services, more profit and customer stickiness would result.

By the mid 00’s, managed services were all the rage where individual hardware, software and services could be creatively bundled and profit could be generated by remote access and economies of scale.

Fast forward to today and 90% of companies are leveraging the cloud. In fact, 60% of companies have replaced more than 1/3 of their IT infrastructure already (Gartner). Only about half of that was with the assistance of some type of channel.  Even worse, over 2/3 of the current IT channel report that cloud opportunities have outstripped their capacity.

Yes, you read that correctly - the current channel is beyond capacity (either under-skilled or over-worked) while only touching half of the opportunity.

I reported before my feelings that “verticalization” is being replaced by hyper-focused “vectorization”. The new line of business (LOB) power center is creating opportunities in very specific niches across 287 sub-industries, multiple segments, plethora of technologies and different geographies.

Traditional IT providers that have verticalized are being beat by firms (or individuals) that focus on the 5 vectors (LOB, sub-industry, segment, geography and technology). In many cases these aren’t “born in the cloud” companies, but industry or LOB focused consultants, service providers and independent contractors that have been forced into technology as the world has shifted that way.

-          Transportation logistics consultants are now selling end-to-end technology solutions.
-          Insurance compliance consultants are pitching big data and predictive analytics.
-          Healthcare advisors are now integrating EMR solutions with customer care technologies.
-          Oil and Gas consultants are leveraging technology to recommend hydraulic fracking and horizontal drilling to change breakeven economics.
-          And there are thousands of more examples.

The difficulty is that these new technology plays leverage very little of traditional IT hardware, software and services. Today's solution partners don’t have the relationships, experience, skills or capacity to engage at these levels.

Without these vector skills, IT providers are on the outside of these opportunities looking in. 

Traditional vendors are attempting to position themselves for this future. It has been painful to watch IBM shrink for 16 straight quarters, HP to split up, Dell to combine with EMC and go private, and Cisco to struggle in core areas. The top-line revenue for these companies will be significantly disrupted as the days of selling tons of big iron, monster software license deals and outsourcing are numbered.

For channel partners, it is important to recognize new battle areas for revenue growth and build, buy, partner, merge or acquire their way to success. Standing still is also ok in the short term as none of this will happen overnight.

Understanding the magnitude of vectors is mind-blowing – simple math is to multiply 287 sub-industries by 10 LOBs by 6 size segments by 20 technologies and hundreds of geographic areas (states, countries, regions, etc.) and you are dealing with 50+ million vectors.

We are nearing 100,000 SaaS vendors today and that number will continue to rise by an order of magnitude to capture the demand. I can see a world 20 years from now that over a million technology companies will compete across these 50 million vectors. Many of these companies will spawn from our current IT channel world-wide.

I do know that none of these technology companies will be happy swimming in their own lane for long. They will look at adjacent LOBs, nearby geographies, different sized customers or similar behaving industries for growth. They will also look for partners in those swim lanes where they can participate instead of reinventing the wheel each time.

Buckle your seatbelts.

Wednesday, April 13, 2016

Where are all of these so-called “Born in the Cloud” Partners Anyway?

This question was posed to me at the Ingram Cloud Summit this week in Phoenix. We all know that the cloud is quickly redefining IT, with over 90% of companies using some mix of public, private and hybrid cloud solutions. In fact, 60% of companies have replaced more than one third of their IT infrastructure with cloud products thus far (Gartner).

With 1,300 attendees at this cloud-focused conference, I asked the question: “How many of you are born in the cloud?” Only a couple of hands went up. The same result happened at CompTIA Annual Members Meeting last month.

With the cloud representing $204B in opportunity (Gartner), there must be some big-time winners right? 

Some are theorizing that cloud and “as a service” vendors are selling solutions direct to customer. The reality is that over 55% (and growing) of cloud sales are going through a channel (IDC).

Another theory is that traditional IT Channel Partners are not plugged into cloud demand at their customers. This is also untrue. CompTIA reports that 67% of channel firms are experiencing demand for cloud services that has outstripped their capacity. It could be a combination of technical capability and bandwidth – but they are seeing sufficient opportunities nonetheless.

I have heard some argue that “shadow” or “rogue” IT demand is being claimed by an unseen force. This is actually partially true. Half of traditional IT partners claim to have lost a sale to a non-traditional IT solution provider, such as a industry-specific consulting firm, vendor, distributor, or telecom carrier. This is happening with much more frequency than in previous years.

Here is my theory on “born in the cloud"

1. The biggest threat facing the traditional IT channel (36% decline in firms since 2008) has nothing to do with technology or transforming business models. It is the changing dynamic in how customers decide on IT. It almost sounds unbelievable, but 72% of all technology decisions are now being made (or highly influenced) outside of the IT department. Only 18 months ago I was blogging about the “Tipping Point” when 51% of decisions were outside of the CIO. In fact, Gartner is predicting that the number will grow to 90% by 2020.

2. Every company is being forced to become a technology company. Whether it is a car company with Tesla sneaking up, transportation company with Uber, hospitality company with AirBNB, or any other of the 27 industries, technological disruption is threatening traditional companies with extinction. This means that every ancillary service or consulting company supporting these industries is being forced into technology as well.

3. “Verticalization” is being replaced by hyper-focused “vectorization”. With 72% of decisions now being made by Executives in lines-of-business (LOB), specialization is diving deeper into sub-industry, geography, segment, technology and LOB. For example, traditional providers that may be specializing in a certain industry such as healthcare are losing to firms that hyper-specialize in lead generation marketing at mid-size, ambulatory care hospitals in New York State (5 vectors). The customer Executive likely doesn’t know (or care) about things like security, regulation, changing legislation, network capacity, backup, disaster recovery, uptime, support and dozens of other foundational skills the IT Channel would bring. They care about a business problem of generating more leads – and that is what born in the cloud firms are pitching. They are part of a marketing cloud ecosystem representing solutions such as Marketo, Pardot, Eloqua, Hubspot and hundreds of other software-as-a-service companies.

4. The Cloud is inherently unprofitable. The vast majority of cloud vendors are not making money (some of it by design). Even some of the cloud superstars such Salesforce and Amazon have only recently flirted with profitability. This doesn’t bode well for cloud resellers, looking to take a margin on these low-priced, recurring revenues. Successful born in the cloud firms have leveraged their hyper-specialization into rich consulting and service contracts. Last week, IBM bought one of these firms, Bluewolf, who specializes in Salesforce for over $200M. If you check Salesforce’s partner program, they have 695 of these type of partners generating $20B in services. This is over 3 times more revenue than Salesforce itself – and almost 10% of the world cloud opportunity ($204B) I mentioned above.

So if you are looking to meet and recruit some of these “born in the cloud” partners, your best bet is to skip the over 150 channel centric tradeshows world-wide this year. They simply aren’t in attendance. You will have better luck attending Salesforce Dreamforce, a Marketo event, or specific industry LOB conferences. While the IT and Telco Channel numbers are declining, this new generation of partners are exploding.

Interestingly enough, I have attended a number of these conferences in the past few years. The joke about well-dressed, skinny jeans wearing millennials making up this new generation of channel actually turns out to be true.

Their definition of break-fix is the Apple Genius Bar. 
Their definition of networking is finding a WiFi hotspot at Starbucks. 
Their definition of security is whatever the big guys like Amazon, Salesforce, Google, Microsoft and IBM are doing to protect their respective clouds.

However, if you want to know what the latest hacks are in nurturing marketing leads in mid-sized ambulatory care hospitals in Upstate New York – they will talk your ears off.