The death of the channel has been greatly exaggerated but it’s not entirely fake news

The transition to SaaS and an expanding buyer community are forcing many IT firms to rethink their sales and marketing strategies.

Technology channels have proven to be remarkable change agents—from both a customer and personal business perspective. From the first non-networked personal computer to the latest ransomware threats, IT partners have been building and displaying impressive support skills in a variety of critical areas. At the same time, channel firms have transformed their business models from reselling, break-fix, installation, and maintenance, to solution providing, managed services, consulting, and other recurring revenue-generating activities.

The one thing that had remained relatively constant was the way customers planned, decided upon, and procured technology. With CIOs and IT departments often at the helm, channel partners and vendors fine-tuned their product, content, and sales approach to capitalize on their clients’ buying journey.

Now, driven by cloud and the growing adoption of SaaS business application ecosystems, that customer buying process is being turned upside down.

Forrester has discovered that more than 65 per cent of technology decisions are now being influenced or made by line-of-business executives. Sales, marketing, finance, operations, and HR department leaders are increasingly taking ownership of their own digital transformations. And more than half (52 per cent) of them are using their own budgets to buy technology instead of asking IT or finance for the money. In fact, 29 per cent of those decisions are now being made with no IT involvement at all—and that number is trending upward.

These newly emboldened business executives are planning, building, and executing these solutions with little or no internal assistance. An important point for partners and vendors is that 58 per cent of those decision makers are choosing outsourced talent for things like integration, implementation, security, backup, compliance, and disaster recovery.

Another factor is the different buying behaviors these business leaders are displaying. While the majority are building robust peer networks, partnerships, and alliances to aid in all aspects of the technology decision, 73 per cent would prefer to deal directly with the vendor. The level of self-service functionality in the solution can strongly influence whether they make a purchase. In the cloud and SaaS world, taking a margin from simply reselling technology is a relic of the past.

In the past 18 months, we’ve noted, business leaders are increasingly relying on a new set of influencers—those who belong to what I call “shadow channels.” That group includes SaaS ecosystem partners, industry-based professional services and consulting firms, ISVs, born-in-the-cloud providers, and those from the startup community.

Uncover the Gaps

Why are pundits predicting the collapse of our traditional technology channels? The four areas that concern them the most include:

1. The lack of sales and marketing skills—As Michael Gerber’s book, The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It, masterfully outlines, most SMB channel partners are technicians at heart and haven’t focused on acquiring the sales and marketing skills needed to scale their businesses. Now, with 10 times the buyers and decision makers at each customer site, that weakness is amplified.

Most vendors are guilty of a similar lack of sales and marketing focus. They center too much on the IT buyer and assume their products and services are just as relevant in today’s world.

2. Basic economics—With the commoditization and consumerization of IT over the past decade, continually shrinking margins, incentives, and return on invested capital have squeezed many partners to the point of insolvency. The shadow channels operate differently. They do not rely on front- or back-end margins, MDF, or any other type of financial incentives from the vendor community. Those technology specialists are chasing downstream integration and implementation work that brings in four times as much revenue as the cloud purchase. The margins for that work are substantial—80 percent or higher in some cases.

3. The lack of hyper-specialization—The new buyers are looking for an advanced level of IT skills to support their desired business outcomes. In this new world, “vectorization” by customer size, segment, sector, sub-industry, geography, and technology application has replaced verticalization. That requires deep skills connected to the line of business itself. Those new measures are what organizations value most today.

4. The will to change—The IT industry is aging. Few would dispute that fact. Many traditional channel partners started their companies in the 1980s with IBM, Apple, or Compaq, or in the early 1990s with Microsoft. But there has been a fundamental shift over the past few years. Millennials are flocking to the new opportunities in the shadow channel and not replacing traditional partners entering retirement fast enough. In fact, CompTIA reports that IT does not rank in the top 10 most desirable industries for college grads today.

Major Challenges Ahead

The transition to SaaS applications is more difficult than adding a new technology practice to the line card. In fact, I believe it may be harder than changing business models. Even the most sophisticated channel firm would find expanding its sales and marketing efforts by a multiple of 10 to be a major challenge. Combined with the level of specialization these new buyers demand, the transition can be a formidable trial for the best-prepared IT business.

The industry is at an inflection point. It is easy to see why some are calling this the end of the IT channel when you look at the four factors mentioned above. IT firms will increasingly be working with a wider variety of buyers, with completely different preferences, motivations, requirements, and levels of influence. That alone will profoundly challenge channel professionals like nothing they’ve encountered before.

For partners planning to grow their businesses over the next five years, the options are pretty clear. They could start by developing a heat map charting their most recent customer successes, and then look at ways to expand into adjacent “swim lanes” to target similar opportunities. Another option is to partner with shadow channel companies—firms already engaged with those customers and prospects. The third choice is to acquire (or be acquired by) another firm to scale the business and obtain resources that the expanding buyer community values.

The fourth option? They could stay the course and continue to improve core services. With the competition aging and consolidating, opportunities are still there for a progressive channel company.

A blend of all four options may make the most sense. But make no mistake, as it has for years before, the channel will be resilient in this new journey as well.

JAY MCBAIN leads Forrester’s research and advisory for global channels, alliances, and partnerships. His focus is on B2B marketing in the age of the customer, understanding and navigating the complexity of multiple routes to market, ensuring contextual and relevant content to accelerate the indirect sales process, and describing the technology infrastructure to build and support channel relationships.

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