The Channel is Evolving...What Do Vendors Need to Know?
The channel can't make money selling hardware, software or maintenance--so how will they survive?
Every October for the past eight years I look at market and technology trends to help plan the agenda for the UC Summit that is held the following April in La Jolla, CA. The event is attended by senior executives from big name resellers like Arrow S3, Black Box, CDW, Dell, ePlus, Meridian IT, NACR, Presidio, SPS, West IP, and Yorktel. And "not so big" (but important) partners also attend, including AGC Networks, Choice Telecommunications, Enabling Technologies, House of Lync, Network Solutions Provider, NuvoSys, One Source Networks, Voice & Data Networks, and The VIA Group
The primary objective of the Summit is to help educate the channel and consultants on industry trends and best practices so that they can better plan and manage their businesses. The UC Summit is the first place most of the attendees initially heard in-depth presentations on emerging trends like cloud, social business, WebRTC, and analytics. It's also the first place where they heard about the need to change their business model from an upfront sales income model to a reoccurring revenue model.
Another objective of the UC Summit is to help vendors recruit new channel partners. As I prepare for next year's UC Summit, I realize that many of the vendor sponsors--Avaya, Cisco, HP, Microsoft, Mitel, NEC, ShoreTel and Unify--need to be prepared to explain to the audience about how resellers can make a profit selling and supporting their products.
The channel's revenue model has changed a great deal over the years. Twenty years ago, the channel made most of its profits by selling hardware systems. Ten years ago that shifted to a combination of hardware and software revenue and the addition of professional services and maintenance income.
Over the past few years, the channel has seen its opportunity to make money on hardware, software and maintenance virtually disappear. As an example, channel partners make no money selling Microsoft Lync software, and Avaya has nearly eliminated channel partners' opportunity to make money on maintenance. Many vendors have changed their financial models, forcing their channel partners to change theirs.
The leading resellers are thinking ahead and understand where they need to go. Many of these channel partners are sitting on large installed bases of legacy products and are looking for ways to migrate their customers to new platforms. Most are looking at the cloud, and some are offering their installed base cloud solutions that they resell or white-label.
Obviously most resellers have looked at Lync's potential. A few have started converting their installed base to Lync, and some major players like HP and Dell are fully committed to the Lync platform. However, most of the resellers mentioned above have very small Lync practices, and still are "testing the waters" so that they don't miss an opportunity to make money with Lync, while not fully committing in case they cannot. Most have found that they can generate some income around Lync in the way of professional services and associated hardware like phones, headsets, gateways and SBCs, but not on Microsoft products themselves.
This situation may create an opportunity for Microsoft competitors. There is also an opportunity for system integrators (SIs) that make their money on providing services, rather than reselling products. However, they would have to win the customer away from the reseller that sold them their current system and continues to provide ongoing support.
The leading channel partners understand why vendors need to change their financial model, and they know how they would like to make money going forward. According to the resellers I've spoken with, the ideal revenue breakout would be:
• Professional Services 25%
• Managed Services 25%
• Applications/Software 25%
• Associated Hardware 20%
• Maintenance 5%
Vendors need to work with channel partners to help them meet their new financial model objectives, and there is much work to be done.
Our industry is going through some major changes. Please share your thoughts with me, I would love to hear from you.