Channel Chiefs Welcome the Return of the VAR

The annual 2112 Channel Chief Outlook report finds vendors are turning back to resellers as they look to partners to resell services.

By Larry Walsh

For the past decade, being labeled as a VAR – or value-added reseller – was an insult. Partners no longer wanted the label that, ironically, pigeonholed them as having limited value and utility. Likewise, vendors shunned VARs in favor of more lucrative partners such as systems integrators, large account resellers, and – most significantly – managed service providers (MSPs).

According to the 2112 Channel Chief Outlook report – an annual review of channel chief sentiment toward performance, best practices, opportunities, and challenges for the coming year – the tide is turning back to favor the VAR model.

As more vendors embrace the recurring-revenue model driven by subscriptions and persistent engagements, they’re looking to resellers to carry their services to market and to capture accounts and active users much in the same way they did with hardware and software license sales.

In the 2020 report, now available for download, 61% of channel chiefs and professionals say VARs are their most valuable partner type. Vendors are looking for VARs – or companies that embrace reselling as a core part of their profit and business model – to bring their products and services to market via recurring-revenue models.

What’s changed to make the lowly VAR popular again? Revenue sharing is going out of vogue.

Look no further than the surging stock prices of cloud companies such as Amazon (driven by Amazon Web Services), Microsoft (Azure), Alphabet (Google and Google Cloud), and even IBM (IBM Cloud, Red Hat), and you’ll see a familiar pattern: They’re building new and ever-increasing fortunes based on recurring revenue.

More vendors – even legacy hardware and heavy iron companies – are looking to transform most or all of their revenue to recurring over the next five years. For instance, Hewlett Packard Enterprise (HPE), which is already growing and accreting value through its GreenLake subscription program, pledged to shift all its products to recurring revenue by 2022.

Until recently, vendors – ranging from those selling cloud services to software services to carriers – shared their recurring revenue with partners. They sought MSPs on the presumption that they understood and built businesses around recurring revenue, and therefore could generate more sales on that model. Vendors built channel compensation models around sharing a percentage of the persistent revenue stream with partners.

Building vast fortunes on recurring revenue is harder, though, when you must share with partners in perpetuity. Rather than giving partners a slice of the annuity, vendors are turning back to the VAR model in which partners receive a one-time compensation and the ability to sell add-on support and professional services. Under this reseller model, vendors take a short-term hit on recognized revenue in favor of long-term bookings and returns.

The desire to engage more resellers over MSPs and others comes across in channel chief priorities for 2020. Channel chiefs want partners to acquire new customers and market share, adopt new products and services, exceed sales goals, maintain a frequent sales volume, and build and maintain growth.

The pressure is on vendors to perform in 2020. Channel chiefs and professionals entered 2020 with muted optimism about the economy and performance expectations relative to 2019. The looming threat of a recession, the impact on sales due to regional and global disruptions, and the political turmoil that always comes with U.S. presidential election years dented – but didn’t break – economic enthusiasm.

According to the Channel Chief Outlook report, 41% expect indirect sales driven by and with partners to increase by 15% or more in 2020. The growth expectations are healthy, given that four in 10 channel chiefs expect growth as much as five times greater than general IT market growth. The optimism is cautious, though, as that group is down 17 points year over year.

For vendors, achieving growth and insulating against disruption comes from building recurring revenue. The path forward, they believe, is not through building more secondary service providers tapping into recurring revenue but rather resellers that sell and support service-based products.

The 2020 Channel Chief Outlook report is now available for purchase through the 2112 Library. 2112 Brainstorm subscribers have access to the full report and background data.

Larry Walsh is the CEO of The 2112 Group, a business strategy and research firm servicing the IT channel community. He’s also the publisher of Channelnomics, the leading source of channel news and trend analysis. Follow Larry on Twitter at @lmwalsh2112 and subscribe to his podcast, Pod2112, on iTunes, Google Play, Spotify, and other leading podcast sources. You can always e-mail Larry directly at lmwalsh@the2112group.com.