Why IP Is Imperative to Channel Partners' Future

By Howard M. Cohen
intellectual property

The dawn of the reseller channel came in August 1981 when IBM introduced the IBM PC. Since company policy held that "nobody but IBM can sell IBM" the PCs were sold to ComputerLand, Nynex and Sears Business Centers, which then "resold" them to customers, creating a four-step "channel" from the manufacturer to the aggregator, to the retail store and finally to the end user.

At the retail-store level, margins were 41 percent or more on sales of PCs. 

We all know what happened next. Discounting. As more manufacturers entered the PC market, the new reseller channel became fiercely competitive, giving services away for free to entice customers to buy from them. When that wasn't enough, they lowered their prices. And lowered their prices some more--and some more. It wasn't long before we stopped talking percentages and started to talk about "basis points," fractions of a percent.

PCs became commodity products, and every peripheral followed along that path with them.  Soon every hardware product that emerged sold at or near list price for shorter and shorter periods. Disruptive new technologies soon became old hat and commoditized ever more rapidly.

Fast Forward

In the reseller channel of 2015, the commoditization period has almost evaporated completely.  No sooner does a hardware or software product emerge than the large catalog resellers have published prices that yield tissue-thin margins for them. Although many of the "back-end rebate" games of the last few decades have gone, products commoditize so fast that most VARs stopped adding the value for free long ago and have now made those services the core of their revenue model.

As Things Evaporate, They Become Clouds

Since "the cloud" became a way to describe data centers that delivered IT services, resellers have been trying to contend with their impact on the business. Initially, many resisted the cloud because it paid them too little, and eliminated their opportunity to sell all the services that could be attached to the commoditized selling of servers, storage and other infrastructure items.

Eventually, these resellers accepted that customers were very attracted to the higher service levels at lower costs that were available from the cloud. Many embraced cloud services into their portfolios.

Back to the Future

Even before there were PCs, there was time sharing of mainframe computers with the core infrastructure resident in a mainframe data center and users connected remotely via terminals.

Today, there are Amazon Web Services, Microsoft Azure, Google Cloud Platform, IBM SoftLayer, Rackspace Managed Cloud and many other data centers vying to be your customer's "head-end." Customers no longer need to purchase or own their own server or storage infrastructure. They can run all their apps, workloads and other platforms on any of these services. The entire concept of server and storage has become completely commoditized.  Login isn't very different from dial tone. You pay to use the service, and it shows up.

Where Does This Leave You?

Since 1981, channel partners have been resellers of products manufactured by others, creations of the intellectual property (IP) those manufacturers own.

As the opportunity to sell any of these manufacturers' IP commoditizes, something will have to replace it. That something will have to be the creation of someone's IP, and smart channel partners are realizing very quickly that the IP they sell in the future should be their own.

Ways to Create Your Own IP

This raises the question of how to create your own IP. Here are a few available strategies to help you get started planning for surviving (and thriving) in the future.

1. The independent software vendor (ISV) clearly has the upper hand already. By definition, they create IP in the software they develop. Their challenge will be to continue to expand the number of customers they have running their software.

2. Many business intelligence (BI) partners who have long focused in on popular BI platforms like Microsoft SharePoint have shifted gears to package some of the customizations they've developed into resellable products that they are now marketing very aggressively.

3. ERP and CRM specialists have also been packaging their customizations and using other developmental strategies to create applications that plug in or otherwise leverage popular platforms such as SAP, Salesforce, Microsoft Dynamics AX and CRM, and others to provide vertical applications or other high-end added value.

4. Data integrators who have specialized in connecting ERP, CRM, marketing automation and other systems to share data have taken the insight gained into their customers' data structures and resold it back to those customers and to other customers in the same industry.

5. Business process re-engineering and project management experts have developed and are publishing repeatable methodologies that can be used to increase the efficiency of various projects, usually with exquisite automation.

Bottom Line

You cannot wait any longer to start planning your own IP. Available margin on the products and services you are selling today are quickly evaporating around you. Creating your own IP provides you with a strong strategic differentiator that helps set you apart from the competition. No competition means no commoditization, preserving and increasing your margins.

The imperative is to innovate. Find new and more innovative ways to deliver real value to your customers. Sales motivator Zig Ziglar said, "If you're doing what you've always done, you're probably getting what you've always got."

Going forward, not so much.

This article was originally published on 2015-08-12