As solution providers across the landscape continue to discover the joys of recurring revenue derived from managed services, the rise of this business model is starting to bring into question the role of distribution going forward.
This is a big question right now because of two trends associated with managed services. The first trend is that as solution providers evolve into managed services providers, they tend to start thinking like a customer because the support costs associated with providing the service eat into their profit margins. This means there is a strong incentive to standardize on a single set of products and vendors in any given product category.
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That in itself wouldn't be too much of an issue except for the fact that once you start dealing with a limited number of vendors, the temptation to buy direct from the vendor starts to increase on the assumption that high volumes of products bought from a single vendor will be acquired at a lower cost.
Now, that assumption has yet to play out, but given the history of conflict in the channel, the odds are good that the vendors with lower market share are going to try to gain market share by offering better deals to managed service providers if they purchase directly from them. This in turn will put margin pressure on the established vendors, who in turn will be tempted to squeeze more margin out of the supply chain.
None of this is lost on distributors. Most of them have started practices designed to help solution providers develop managed service offerings. The argument they generally make is that solution providers are going to find managing all the licenses and maintenance agreements with their customers sufficiently complex to outsource those services to distributors. That remains to be seen, but the distributors are smart enough to recognize the inevitability of managed services. So, assuming that, how might distributors evolve?
Well, the next most logical thing is for distributors to invest in building their own network operation centers to provide managed services that could be resold by solution providers. This might help some solution providers get around the significant capital investment required to develop managed services.
But if that happens, won't the dynamic between the distributor and the solution provider change forever? If solution providers are evolving into a type of buyer that on behalf of customers actually selects the services built by distributors, then maybe the distributors are evolving into a type of solution provider that either builds those services or resells services built by others.
It's too early to say how all this will work out, and it's not likely that the need for traditional pick, pack and ship services from distributors is going to disappear entirely. But the distribution model is most certainly in the early throes of another evolutionary cycle that is going to alter the current competitive landscape in favor of the distributor that finds the best way to add value in a new age of business models in the channel that are increasingly being driven by managed services.
Michael Vizard is editorial director of Ziff Davis Media's Enterprise Technology group. He can be reached at michael_vizard@ziffdavis.com.
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