The Continuing Transformation of the Channel

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“Transform your business.” That’s a phrase channel members and solution providers hear constantly and consistently — seems we’ve heard the necessity to transform now for the past 10 or so years.

 

Aren’t we there yet?

 

In fact, we are not, and we likely never will be, because transformation is an evolutionary process. Yes, we have been talking about recurring revenue and how that will transform business for at least a decade. Recurring revenue is only a part of the transformation. Today, large hardware and software companies are evolving toward a consumption-based pricing model that lets customers pay according to the resources used; now aligning with newer service provider models.  In addition, converged solutions have emerged, while hardware and software companies’ product lines have become so broad that these vendors have had to train their partners on the intricacies of each other’s businesses. And that’s how they are transforming.


It’s not easy. Software partners don’t necessarily want to touch inventory.  For some application-only software partners, it is new to think about a total solution that includes hardware, and traditional hardware only partners like having tangible products. It’s not just a transformation to recurring revenue, technology advancements include hardware functions now moving to software layers.  

 

So beyond cloud, managed services and recurring revenue, recent drivers of transformation include:   


  • The realization of “Software-defined” technology  
  • Software companies that have acquired hardware companies and vice versa
  • Vendors must continually transform to meet customer needs and to differentiate in the market, consider current conversations regarding the Internet of Things.

Additional trends show us that although 10 years ago partners were more likely to build and manage their own data centers, that strategy has lost momentum. Reselling, white labeling or simply managing a customer’s IT resources offer a partner profit opportunity — while avoiding head to head competition with a commercial service provider such as AWS or Microsoft.


The IPED 2016 Channel Census offers a snap shot of U.S. partners’ current managed and cloud service line card capabilities and preferences:


  • 21% resell another supplier’s managed services entirely
  • 33% offer managed services exclusively at a customer’s on-premises facility
  • 28% offer managed services across a variety of operating environments; customer location, or at a partner’s data center or public cloud
  • 18% offer their own managed services at their own hosting location

 

We can see that a minority offer data center managed services autonomously. In the same way savvy resellers avoid a product fulfillment direct competition with CDW or Dell, savvy managed service providers partner with rather than compete against the enormous resources of an AWS or a Rackspace. Therefore, rather than invest in building data centers, roughly 60 percent are managing customer assets at the customer’s facility or through another partner.


In addition to operational risk, cost is what keeps partners from building their own data centers.

 

Forrester estimates that, when building out an existing property, the estimated cost to construct a data center is approximately $200 per square foot. Add in the cost of fiber to reach your location and that figure can reach stratospheric heights!

 

The select few that do make the investment in their own data centers and management services are typically specialized. They leverage a vertical or other subject matter expertise: compliance, health care, etc. That compelling competitive differentiator distinguishes them from Amazon and others.


And so, although we’ve been talking about transformation to recurring revenue for more than a decade, we still have businesses moving into one of the above-mentioned models. Networking and storage, traditionally hardware based, are increasingly being delivered by software running on standard servers rather than through a traditional data center. A layer of software can simplify operations, reduce costs and decrease the reliance on hardware products.

 

Transformation never stops.

 

Ten to 15 years ago, it was managed services. Seven years ago, it was cloud services. In the near future, it looks to be the Internet of Things, but right here, right now, the movement to software-defined technology is transforming the model.

 

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