2008 gloomy or bright: who’s right?

December 17, 2007 at 12:07 am Leave a comment

By Diane Krakora

With gas at nearly $5 per gallon at the pump in some areas, a housing crash upon us and the weakest dollar most of us have seen in a lifetime, how can anyone think that the economic outlook in 2008 is bright? Still, it seems no one has told our IT industry leaders the bad news. We hear a constant stream of technology industry success news mixed in with these poor economic indicators. John Chambers, CEO of Cisco, projected strong (but lumpy) revenues. EMC and Juniper are both reporting increased profits. Apple and HP are showing robust growth.

Did the channel contribute significantly to technology vendors’ growth and profitability this year? Undoubtedly. The proof? Arrow’s sales are up. Synnex and Tech Data both beat the street’s estimates. With the consolidation in technology vendors and in the channel itself, will the channel future continue to be bright? I could wax nostalgically about the good, bad and exciting channel turns and developments in 2007 that shape our outlook on 2008 – things like Arrow acquiring rivals Agilysis and Alternative Technology, Dell’s re-entry to the channel and CMP’s changes to the publications and the obliteration of their experienced staff – but I think looking forward to the challenges and opportunities in 2008 is more productive.

There are three trends we’re hearing from solution providers and vendors a like that we expect will shape the channel success and profitability in 2008.

For one, we’re seeing more attention paid to the growing conflict around services. For either complex or commoditized product sets, the solution providers’ main focus is primarily services to their customers. As a “trusted advisorâ€� their role is to solve the business problem or opportunity for the client. The primary way solution providers make money is through services — from consulting, design, installation, implementation, configuration, training and support, through to maintenance. However, most software and hardware companies also expect to provide services to customers. This is both a customer satisfaction concern and a profit opportunity for the vendor. Particularly for complex product sets, Business Intelligence for example, in which case the vendor providing the technology wants to ensure the software solution is installed and configured correctly. A correct installation produces a happy customer, which in turn produces increased sales to that customer through add-on’s and extensions, and referrals to new customers. An incorrect installation produces dissatisfaction and potentially even a lost sale as the customer may switch to a competitive product if the implementation fails or even just takes too long. Thus the quality of the implementation and configuration is extremely important. Most software and hardware vendors believe their teams are the most qualified to ensure a successful implementation and a satisfied client. That leads to a large internal professional services team competing with solution providers for services.

Adding fuel to this conflict is the fact that the vendors’ services organizations are expected to be a profit center. The services teams are expected to generate revenues at a significant profit margin – particularly in tight financial times. In the quest for revenues and profitability, the vendors internal sales teams are encouraged and compensated for attaching the vendors services in sales opportunities – this is in direct conflict with the solution provider playing a trusted advisor role to the customer and recommending the vendors’ products as part of a the overall solution to the business challenge.

This services conflict has been a channel reality for many years. What we predict will escalate the channel conflict even more is the increased acceptance of a Managed Services Provider (MSP) model and Software-as-a-Service (SaaS) in 2008. As more customers are interested in a fully outsourced and managed IT solution the conflict between vendors and solution providers will intensify around who offers those managed services to the customers. Two opposing forces are operating to increase the tension – the vendor’s need to ensure customer quality and satisfaction, which they feel best suited to provide, and the desire to present a full solution to the client’s business challenge, which most would agree is best accomplished by a solution provider. Consider also that more customers are demanding, and more vendors are offering, software and even hardware provided as a service – and we are in for some fireworks in the next year or so as the industry sorts out the channel partners’ value-add in a SaaS offering.

We also see partner-to-partner initiatives blossoming over the next year and impacting the channel. Solution providers continue to focus on their core competencies as they struggle to remain profitable. They form and rely on partnerships with other solution providers to increase their technical competencies or geographic reach – most often for a specific customer opportunity. Again, solution providers have been doing this for years. What’s new and will continue to grow and morph through out 2008 is the vendors’ involvement in facilitating these relationships. Two interesting and yet likely unintended consequences are being born out of these peer-to-peer relationships. One is an increase in consolidation of solution providers. OK, I can’t contribute this trend solely to the growth of peer-to-peer relationships – profitability and growth might have something to do with the acquisitions – but as we talk to hundreds of solution providers a year, they indicate the complimentary and successful relationships they continue to form help grease the wheels of these mergers.

Peer-to-peer relationships and networks allow solution providers to develop product and solution specialties and leverage one another for expanded technical capabilities when called for in a particular solution. This causes great angst for the vendors that are eager to increase sales and profitability by encouraging their solution provider partners to carry and sell the entire product line. Sparked by the many acquisitions in the vendor community, we have seen a trend to compel partners to sell the entire product suite. Take Oracle for example. They have made over 32 acquisitions in the past three years. They’re focused on getting Hyperion partners to also sell PeopleSoft ERP products. Helping the solution providers of these two once free standing companies partner with each other is the first step. But we hear the Oracle partnering teams clamoring to move through that phase to driving each partner to sell the entire suite of Oracle products – from the database through the middleware to the applications – increasing the partner’s commitment and loyalty to Oracle. So, there’s an interesting dynamic at play here – solution providers are specializing to increase their profitability and success and vendors are eager to increase loyalty by having them sell the entire product line. It will be interesting to see how that plays out in 2008.

Lastly, a focus on SMB will continue to shape the channel over the coming year. Most IT vendors announced or launched an SMB strategy in 2007. VMware, Cisco and Oracle all launched specific SMB partner programs and IBM enhanced their product offerings targeted at the mid-market. SaaS offerings, initially made famous by SalesForce.com and most often sold direct to the customer, further complicate the channel’s ability to sell, service and support these customers.

There’s no doubt the SMB market is hot and continues to influence the programs and initiatives vendors offer to their channel partners. For one, we’re seeing an increased focus and commitment to training and partner enablement for 2008. Selling to SMBs takes an army of solution providers and that army needs to be trained and empowered to be successful in generating satisfied customers. Along with enablement programs, vendors are increasing their communications to solution provider partners in 2008 in hopes of bolstering awareness and mindshare. I know every solution provider out there just said “time to update my spam filter�. Hopefully the vendors will be more creative and innovative in reaching the solution provider community with something other than just more email blasts. Of course, all this outreach and enablement to an army of solution providers to connect with the multitude of SMB customers requires efficient and effective processes and systems. So we’re expecting more infrastructure system enhancements through 2008 as vendors such as Oracle, Sun and Symantec continue to struggle to effectively engage and empower partners in a scalable fashion.

So is the economic forecast for 2008 gloomy or bright? My position is it doesn’t matter. Whether bullish technology industry leaders such as Cisco’s John Chambers are right about their companies’ growth opportunities or the bearish Wall Street guys are right about the tightening economy, one thing is certain: Technology vendors will need to continue to invest in partners to quickly reach increasing market opportunities and to continue to “do more with less.�

Effectively leveraging channels and alliance partners in a growing economy can help software and hardware vendors grow faster. In a booming economy, vendors focus on leveraging the solution provider community to extend their reach to customers more rapidly, to capture growing interest and service the need for the vendors’ solutions. We often refer to this as the “land grab� strategy. In contrast, in a tightening economy, vendors are eager to leverage channel and alliance partners to reach customers more profitability. We often talk about this being the “do more with less� strategy. Either way, one thing is certain about 2008: Solution providers will continue to be central to the vendors’ ability to effectively service and reach customers.

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Entry filed under: Industry Perspective.

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