10 Lessons 2022 Taught the Channel for the New Year

The channel must internalize the previous year’s experiences to survive and thrive in 2023.

By Larry Walsh

Mercifully, we’re about to put 2022 into the record books. It’s been a helluva year. If the pandemic years were the wild side of a roller coaster, 2022 was the last hill from which we plunged back to reality. The year started off well enough but got bogged down quickly by the recessionary pressures resulting from the Russo-Ukrainian War, skyrocketing inflation, and continued supply-chain disruptions. And, as many of you have heard me talk about, the economic challenges aren’t done with us yet.

Challenging times are exhausting, but they’re not without their positive sides. We can learn much from adversity and uncertainty that will prepare us for the future. By taking the lessons from our successes, mistakes, and trials, we can develop strategies and solutions to anticipated and unexpected conditions that lie ahead.

Suffice it to say, 2022 is full of channel lessons. So, what did we learn this year? Here are 10 things to take away from one of the most economically and operationally challenging years in channel history.

1. Ecosystems are new again, still flawed: The channel word of the year is ecosystems. Vendors are changing their program names to incorporate the word. Channel leaders are changing their titles to ecosystem chiefs, leaders, innovators, and evangelizers. And a new cottage industry of applications and consultants (Channelnomics included) is adding solutions to the ecosystem equation. Ecosystems aren’t new, but they are important. Vendors are increasingly looking to leverage the influence and value of complementary brands to drive sales to and through partners. Unfortunately, most vendors glomming on to ecosystems aren’t embracing the totality of the model. Implementation of ecosystem strategies and models is hampered by legacy thinking and “me-first” constraints. The ecosystem philosophy will continue evolving, and many bumps will smooth out over time. Channelnomics prefers to call this trend “Ecosystems 6.0,” reflecting the six decades since the first true technology ecosystem hit the market.

2. Cloud and services aren’t recession-proof: Partners love managed services and offerings sold through the recurring revenue model. Vendors — particularly legacy hardware companies — are rapidly transforming their go-to-market models to adopt recurring revenue systems. The idea that products sold through subscriptions and service models are recession-proof is being tested. Cloud infrastructure and application companies are reporting downward pressure on their sale prices, and sales cycles are getting longer. IDC reports that over two-thirds of enterprises are repatriating cloud-based workloads to on-premises infrastructure to save money. Managed service providers (MSPs) say customers aren’t re-evaluating and adjusting their service consumptions. And customers say they’re actively throttling their use of cloud-based applications to safeguard against unchecked expenses. The recessionary conditions are teaching the industry that even service and subscription models have limits.

3. Channel programs are getting smaller: Vendor budget allocations to channel programs are shrinking under the weight of economic pressures. However, channel programs are investing more in partners. A contradiction? No, vendors are just supporting fewer partners. Channel programs are getting smaller as the number of qualified partners shrinks — a result of vendors increasing participation requirements and revenue performance expectations. Fewer partners means vendors can focus their limited resources on the resellers, integrators, and service providers with proven track records for making sales and growing business.

4. The long tail is diluting channel strategies: As channel program participation requirements increase, more partners will find themselves on the outside with “authorized” status — no access, few benefits, and highest cost to partner. Interest in the long tail isn’t waning. As much as vendors want to capitalize on the best and most productive partners, they’re often concerned that alienating any partner — even the smallest and most opportunistic — could come back to haunt them. As a result, channel designers are twisting themselves into pretzels to accommodate (or create the appearance they’re accommodating) all partners regardless of status. The net result: a dilution of overall channel program effectiveness.

5. No one has good channel data: Despite assertions that “data is the new oil” of business, technology vendors have precious little data about their own channels. Vendors may have some sales data that helps them gauge partner performance, but they know little about partners’ overall sales, capabilities, capacities for growth, fiscal health and creditworthiness, and complementary adjacencies. Many vendors say they want to use data to optimize sales, incentives and rewards, inventory management, order processing and tracking, and sales prospecting, but most have neither the capacity nor the capability to pull off true data-driven analytics, automation, or decision-making. The lack of data, records siloed in different departments and organizations, and the inability to access consistent data make true channel intelligence for strategic and operational decision-making difficult (if not impossible).

6. Distribution is making a comeback: Many channel chiefs question the value of distribution at a time when products are increasingly virtual and don’t need traditional logistical support. To some vendors, distribution is a legacy tax on sales. Yet distributors continue to evolve their business models and capabilities. More than three-quarters of distributors worldwide have cloud services and support, no-touch or automated sales (marketplaces), and business intelligence capabilities. Distributors are rapidly changing their operations to meet evolving and future channel and market needs. While the core value proposition of distribution remains unchanged — credit and financing, warehousing and logistics, and sales processing — vendors, with increasingly digital capabilities, are beginning to see that distributors will remain a vital, if not indispensable, part of the go-to-market equation.

7. Channel automation management is a mess: There’s no such thing as a channel management automation stack. Despite assertions by channel support vendors, their tools — partner relationship management; incentive management; deal registration; learning management systems; configure, price, quote (CPQ); ecosystem orchestration; and others — fail to meet the expectations of their customers (the vendors). The applications aren’t the problem. It’s a disconnect in expectations. Channel automation vendors provide highly functional platforms that require extensive customization and tuning to meet a given vendor’s channel operational needs. Meanwhile, vendors expect the applications to come with frameworks, predefined workflows, and best practices that will define — or at least fill the gaps in — their channel strategy and framework. The result is dissatisfaction across the board.

8. Partners know vendors are changing: The world and technology market are changing rapidly, and partners know it. They aren’t overly concerned about increasing go-to-market (channel) conflict with their vendors. They recognize that vendors must make choices that serve their self-interest, even at partners’ expense. They do, however, expect transparency from their vendors. They want vendors to clearly define the strategies, identify partner opportunities in specific technology segments and markets, and tell partners where they’re expected to play in the go-to-market equation. Partners don’t want to waste time chasing low-value opportunities that conflict with their vendors. The goal should be mutual success. Unfortunately, partners are finding that objective elusive.

9. The channel fell for the “hot-hand fallacy”: Supply-chain disruptions caused many sleepless nights across the channel over the past two years. At the same time, the high demand created an expectation that growth is continuous. Many vendors — particularly those selling hardware — fell for the hot-hand fallacy, believing that they could and would grow their revenue and market share in perpetuity. The backlog of orders from 2021 and early 2022 underpinned this belief. Now, as the economy deteriorates and demand slacks, vendors are racing to adjust their forecasts, plans, and budgets. Unstable economic conditions and adjustments in tech spending are forcing vendors and channel leaders to rethink their strategies. The roller-coaster ride of 2020 to 2023 is a reminder that the market is fluid and no one can take market conditions for granted.

10. Automated sales stumble and climb: Marketplaces continue to attract vendors and ISVs. Many vendors — particularly cloud-based application providers — are building marketplaces to extend their value and market reach. Others are looking to leverage the scale and capacity of third-party marketplaces such as the AWS Marketplace or Microsoft Azure Marketplace to promote and sell their wares. Most vendors consider their third-party and organic marketplace strategies and efforts as “works in progress.” They’re highly flawed and moderately productive (producing desired results, generating revenue). But automated sales strategies are fraught with challenges and problems that are hampering results. Nevertheless, automated sales are progressing toward their goals of sopping up low-value, low-volume sales, decreasing dependency on field and inside sales teams, expediting purchasing for customers, and producing immediate revenue recognition. Marketplaces are proving the go-to medium for transactional sales, keeping the more complex and lucrative engagements open to channel partners.

The Channelnomics Perspective

The short-term outlook for the channel is challenged. Macroeconomic conditions will pressure vendors to maximize margin retention, constrain expenses, and conserve resources. Customers won’t stop spending on technology, but they will become more strategic and deliberate in their evaluations and acquisitions, resulting in higher pressure on average sale prices and margins. Channelnomics expects the general trend of conservation and optimization to continue through 2024 as vendors look to align with high-performing partners with proven track records for delivering results.

While vendors are painfully aware of the hot-hand fallacy, their stakeholders and executive leadership must demand growth and profitability despite any economic downturns and challenges. While this all seems daunting, the result may be generally positive. Through this adversity, vendors and their channel programs will get far more efficient and effective at directing strategic investments, funneling support to the most critical operational areas, and driving measurable results. The anticipated economic downturn of 2023 will produce a more productive and optimized channel that will deliver better performance through 2030.

Larry Walsh is the CEO, chief analyst, and founder of Channelnomics and host of the podcast Changing Channels. Follow him on Twitter at @lmwalsh_CN.

 

 

 

 

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