Channel Role: Cloud Pragmatists in IT Services Age

By Howard M. Cohen
cloud strategy, IT services

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.

It is only those resellers who have depended upon slim margins on servers, storage, and related hardware and software sales who need to come up with an alternative income stream.

The good news is that these partners are giving up slim and shrinking profit margins and high operational overhead in exchange for the opportunity to sell fundamental services that do not require their direct involvement and bring high profits repeatedly, month after month, for years. Yes, the holy grail of computing—monthly recurring revenue (MRR).

Lest we be guilty of deluding channel companies into the common thinking that MRR is all they need, the end of selling server platform products does not bring with it the end of server platform services. Yes, you're going to see a reduction in product-attached services, such as installation and integration, but wherever their servers and storage are physically located, customers will still need your expertise to monitor and manage them along with network carrier connections and everything else it takes to deliver high-quality compute and communication services.

Seeking New Types of Partnerships

Many channel partners will worry where the marketing money is going to come from once they're no longer selling servers and storage products, and there are three answers to that question.

  1. Smaller product vendors need you more than you need them. Many are more than happy to invest in co-marketing ventures that help them sell more products while you enjoy more service sales. Look to utility vendors, compliance products, network access control and security vendors, and the like.
  2. Your new partners will be the cloud service providers whose services you now sell, including public cloud software-as-a-service (SaaS) providers as well as basic cloud server platforms delivering infrastructure-as-a-service (IaaS). Once you've proven you have the ability to market their services effectively, many will gladly make investments.
  3. Your own increased operating profit margins (yes, increased) become an available source of marketing dollars. Just figure out what proportion of them you're willing to invest and what that will buy you.

The other partners you need to actively seek and select are those who will provide the services that you yourself will not. There are many national and global organizations designed to help you find and vet these partners. Their services will also increase your profit portfolio.

Howard Cohen has spent 30-plus years as an executive and community leader inside the IT channel. He now writes and presents about it in Channel Insider, Redmond Channel Partner, Insight Technically, Channel Partner and more.

This article was originally published on 2016-08-24