2112’s Channel Predictions for 2016

By all accounts, 2015 will go into the channel history books as “interesting.” Vendors, distributors, and solution providers have reported mixed experiences – particularly when it comes to sales and revenue. Solution providers are having an up year, mostly due to services. Vendors are posting mixed results as customer spending is inconsistent. And distributors are trying to find their way in the middle.

By Larry Walsh

Most would agree that this was a transition year. By 2112’s estimation, however, the transformation is still to come.

Technology advancements are changing the market landscape. Cloud computing is transforming the way vendors and solution providers sell technology, and how end users consume infrastructure and applications. Mobility is allowing everyone to access IT resources from virtually any location. And soon, Big Data will make decision-making better through greater intelligence and insights.

Technology is always changing. But what we find most interesting when we look into our 2112 crystal ball is not how technology is changing but the impact technology will have on the channel going forward. In 2016, the technology industry will apply lessons and new ideas – some as innovative and others out of necessity – to reshape and advance the state of the art in the channel.

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In looking at what to anticipate in the coming year, 2112 analysts looked at our research and conversation notes with vendors, distributors, and solution providers. The following are our dozen channel predictions for 2016. Some are based on hard data; others are more speculative, rooted in experience.

  1. Slowing of Managed Services

While much of the technology industry watched end users curtail spending in 2015, the pain was limited to product sales. Services – particularly managed services – thrived in the channel. Two in five solution providers expected their 2015 revenue to increase by 15 percent or more over 2014 – most of it driven by managed services. In 2016, managed services will start to slow, as providers find it increasingly difficult to grow their revenue through their primary sales source: existing customers. MSPs’ inability to find and capture new customers, driven largely by inadequate sales and marketing, will cause revenue growth to shrink and hit profits. Managed services profitability has contracted over the past three years, and 2016 will see gross profits fall even more. The slowing in managed services will force some MSPs to seek new revenue sources – mostly in cloud management, application development, and outsourcing services. MSPs will also experiment with new business models that involve legacy hardware and software products.

  1. Vendors Creating Cloud Partners

Vendors frequently complain that partners aren’t adopting cloud computing fast enough. Solution providers would disagree, as most already earn between 10 percent and 20 percent of their revenue from some form of cloud service. The disconnect is that vendors aren’t getting to the cloud fast enough, and partners aren’t helping (for various reasons). Needing to grow cloud-based revenue faster, vendors will incubate new partners born directly in the cloud. At first, vendors will apply their efforts to existing partners, but then they’ll start creating new partners out of whole cloth. This approach is not unprecedented; vendors have done this before to spur adoption of new technology. Only this time, the effort will produce moderate returns and will be largely abandoned by 2018 as a new class of disruptive partners comes to the fore.

  1. Resurgence of Hardware Sales

A general misconception persists in the channel that hardware is dead. It’s not; it’s just hard to make money selling hardware alone. Low-margin hardware is the reason most solution providers earn one-half to two-thirds of their revenue through some form of home-grown service – managed, professional, or cloud management. The slowing of services revenue, though, will force solution providers to rethink their go-to-market strategies. Despite all of the innovations in technology delivery systems and the advent of services, hardware is essential to all technology consumption. Vendors and solution providers will team up to devise new go-to-market strategies that use hardware as a loss leader for driving services sales – particularly cloud services.

  1. Vendor Consolidation

The 2112 Group has long doubted the notion that the channel is going through rapid consolidation. Mergers and acquisitions are happening among solution providers, but they’re not rampant. What’s indisputable, though, is that the vendor side of the channel is consolidating. The Dell-EMC deal will go down as the largest technology merger in history (to date), and the two vendors are hardly alone. Cisco, Intel, Lenovo, IBM, and other major vendors made deals to acquire the assets and operations of innovative companies and competitors. M&A is hardly new in the technology market, but it’s now taking on a certain urgency. With overall IT spending falling and a strong dollar dampening overseas revenue, vendors are looking to find ways to keep their balance sheets attractive to investors. Meanwhile, end users are looking to consolidate sourcing, and vendors want to capitalize on that trend by offering more. This vendor M&A trend will continue through 2016, causing disruptions among the channel community, which will struggle to adapt to the changing supplier landscape.

  1. Birth of SuperVARs

The channel is built around small businesses, but that’s going to start changing in 2016 as a new class of solution provider looks to break out of the shadows. More than revenue will mark the rise of the SuperVAR; it will be about business acumen translated into strategy and execution. SuperVARs, of which there are relatively few today, will have superior capabilities in product sales and service delivery. They’ll be less reliant on vendor and industry certifications to demonstrate their capabilities, and they’ll have significant investments in research and development, product development and management, and internal training. The SuperVAR will master the art of aggregating vendor products into holistic solutions, bundled with their home-grown products and services, which offer greater value to their customers. And the SuperVAR will develop its products independent of vendors, with some even developing channels of their own. The new class of SuperVARs will be value-oriented, which means they won’t be just another kind of direct market reseller; instead, they’ll have a maniacal focus on execution and maximizing return on their investments.

  1. Outcome-Based Selling Models

Outcome-based selling goes hand-in-hand with the rise of SuperVARs and vendor consolidation. End users are increasingly looking not for more with less, but completeness in their IT investments. Businesses, whether enterprises or SMBs, don’t want to spend time integrating, customizing, and setting up; they want simplicity, and simplicity comes from prepackaged, turnkey systems. Vendors and solution providers alike will shift their sales models to start at the end of the equation – the customer’s desired outcome. These systems will incorporate complementary technologies and services to give the customer simplicity in sourcing and implementation. And the ROI of outcome-based solutions will be measured by how they grow the end user’s business, not just by how much they reduce IT costs. While this doesn’t seem radical, the real change will come as vendors and solution providers commit to the value-based outcomes, rather than just chasing incentives and unit sales.

  1. Talent Trading Networks

The top two obstacles facing solution providers in 2015 were the inability to attract and retain sales and technical talent. Solution providers lament that the drought of talent for finding and servicing customers is hindering growth, causing some to turn down sales and growth opportunities. Some of the channel M&A activity is driven by growth-oriented solution providers looking to acquire customers and staff. In the coming year, solution providers will start to avoid M&A as a growth strategy and look instead to partner with peers in trading capabilities and capacity. Some solution providers will go as far as to develop their own channels, with peer organizations driving sales back and forth to each other to maximize their respective, limited resources.

  1. Demand for Justifying Investments

Vendors will press partners to commit to higher levels of performance, mostly in the form of sales and revenue. Solution providers, in turn, will demand that vendors validate those investments to ensure they’re reasonable and safe. Essentially, solution providers will start looking for the equivalent of a mutual fund prospectus, wanting vendors to detail why the market wants their products and services, as well as how much solution providers need to invest to capitalize effectively on the opportunity. This isn’t about guarantees; it’s about leveling expectations. Vendors have sold solution providers on vague promises and generous outlooks for years, resulting in limited returns on investment. Solution providers will demand more information before committing to vendors’ desires.

  1. More Vendors Going Direct, Leading Channels

Low channel performance and internal pressure for results will cause more vendors to shift sales efforts away from the channel. This shift is part of a regular cycle in which vendors believe they can get more out of a direct-sales investment than supporting partners. In some cases, direct sales will be used to prove market demand and go-to-market models for new and emerging technologies that the channel doesn’t have the capability to absorb. While solution providers will bemoan vendors going around the channel, this shift will create new opportunities. Vendors won’t have the ability to scale service and support; solution providers will pick up customers looking for the hands-on touch that vendors can’t provide. Over time, vendors will enlist partners to take up the service and support load; eventually, vendors will open up these product sales opportunities to partners proficient in providing support services.

  1. Data-Driven Channel Management

Vendors have talked about “wanting the right partners” for some time. In the coming year, that notion of the right partner will collide with data-driven decision-making. Channel strategists, managers, and field sales will use data from multiple sources to decide what partners to back with resources. Much of this data-driven analytics will come from known sources, such as point-of-sale and distributor data. Vendors will add more dimensions to the evaluation mix, including data gleaned from the public domain, to rate partners. Data-driven channel management will give rise to new tools for measuring and managing partners. While the theory behind data-driven channels is sound, the execution won’t be. Many of the data sources will prove unreliable and support tools insufficient to the task. Early returns on such efforts will reveal gaps in capabilities and assumptions. The practice, however, will force vendors and partners into more performance-based systems that results in lower costs, higher returns, and, ultimately, a weeding of the channel ranks.

  1. The Distraction of Redefining Channel Nomenclature

A recurring channel debate is what to call “partners.” The current generic term is “solution provider,” but the industry still segments partner businesses into different buckets, including managed service provider, systems integrator, value-added reseller, cloud service provider, born-in-the-cloud, independent software vendor, agent, and more. Many vendors and solution providers are starting to talk about coming up with a new moniker to describe partners, as the average solution provider has attributes of multiple types. For some people, the debate on what to call the future partner will have significance as they believe it will guide the shaping of channel programs and relationships. In reality, discussions on redefining channel partners will serve more as distractions and annoyances because, as it will quickly be revealed, they will result in little more than talk.

  1. Emergence of Disruptive Channel Models

Amazon.com is putting pressure on traditional brick-and-mortar retailers. Airbnb upended the hotel and hospitality industry. And Uber is radically changing the way people shuttle themselves around urban centers. More disruption will come, and the technology channel won’t be immune. A new business model will emerge in 2016 that will cause the channel – vendors and solution providers alike – to rethink their go-to-market strategies. Just what this model will look like remains unclear. Already, some start-ups are experimenting with outsourced selling, while others are aggregating back-office services to relieve solution providers of operational burdens. Just what this disruptive model will look like is hard to predict; after all, no one saw Uber coming. We just know that creative people are looking at the market sideways and dreaming up new ways of addressing customer need.

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Market trend predictions are like the weather forecasts: they’re based on intelligence, history, and models, but there’s no guarantee anything will happen. All signs, though, point to 2016 being a transformative year in which vendors rethink their approach to the channel and solution providers adapt and adopt to new market realities.

What do you think of our predictions? Share your thoughts and predictions by e-mailing me at lmwalsh@the2112group.com.

Larry Walsh, The 2112 GroupLarry Walsh is the founder, CEO and chief analyst of The 2112 Group. Follow him on social media channels: Twitter, Facebook, LinkedIn.