One of the most important key performance indicator ratios for channel partners has always been the product/services income balance. Even more important has been the ratio between the profit generated from the sale of products to the profit from services sold. Since service profitability is more complicated to calculate, many have elected simply to focus on top-line revenue to determine their mix.
As a result, many channel partners were alarmed and perplexed during the emergence and meteoric growth of cloud computing. They feared that these service sales would “cannibalize” their product sales and reduce their sales of high-ticket items like servers, storage and related infrastructure significantly.
They were right.
What many didn’t take note of initially was that the extremely thin profit margins on products made the shift almost insignificant to their bottom line. For every dollar of product sales lost, they were losing far less than a dime on all-important profit. Better yet, they were selling new services with very clearly defined margins that more than compensated for the lost product profits.
Pragmatic Partners Shift Their Sales Models
ConnectWise CEO Arnie Bellini recently said, “Everything is evaporating into the cloud.” This may be a telling statement about the concerns of companies in the channel, in general, and points to the need for them to take a much more pragmatic approach and consider modifying their business plans accordingly.
Even before the emergence of cloud computing, however, many channel partners had already eliminated product sales from their businesses. The operations involved in purchasing, receiving and shipping products consumed most of the available profit, and the impact on their credit or operating capital was overwhelming. They decided to focus, instead, on providing services to their customers. If products were needed, they would partner with a distributor, catalog provider or even another reseller to obtain them, shifting the “burden” of product procurement elsewhere.
Many focused on specific products or platforms and became messaging experts or CAD/CAM experts. Some focused on specific products like Microsoft Exchange; others became champions of open source. Soon, a very well differentiated and robust community of IT service providers was available to customers.
Unfortunately, many of these partners failed to market their differentiation effectively and lumped themselves with everyone else as a managed service provider (MSP). Customers were left to figure out which MSP was right for them, and how to get several MSPs to collaborate on complete solutions.
IT Service Providers for the New Age
The answer was to become an IT service provider for the new age. Many channel partners have realized that those in the network integration business, focused on fundamental routing and switching, network security and related services, still have an available road forward because many customers will not give up their bricks and mortar too soon, and so will need the fundamental data “plumbing” in their facilities. Similarly, software developers are enjoying greater and greater patronage as more and more customers move some of their application needs outside their own company.