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Channel destruction: why traditional resellers won’t exist soon

01 Sep 2011

When the Bank of New Zealand recently sent out an email to its SMB clients offering HP Touchpads and Microsoft Office 365 for sale, there was a collective eyebrow raising in the New Zealand IT reseller community.BNZ’s offer, which noted that the bank had ‘used our purchasing power to secure exclusive, limited time offers from top business suppliers’, came as resellers face increasing pressure from non-traditional channels, including the proliferation of one day sale websites. In one of several technology offers in recent weeks, Grabone had iPod cables – one of the more profitable items for technology – at heavy discounts, an offer followed quickly by one for Dell desktop computers.And it’s not just the one-day sites, with their super low to non-existent margins, which are causing consternation. Many believe that in the not too distant future hardware will be centrally supplied at cheap prices and that large vendors will sell software direct to both consumers and businesses via their app stores, raising questions about the road ahead for the reseller channel.The changing landscape"At the end of the day it’s all about margins, and margins on boxes are being constantly squeezed. And OEMs are moving in and encroaching on resellers and distributors space,” Ovum principal analyst Jens Butler says. Neil McMurchy, Gartner research vice president for IT marketing and channel strategies group, adds that the emergence of the cloud – which will bring to market a range of new selling channels for vendors – will only exacerbate issues for resellers.But it hasn’t been an unexpected – or sudden – change. In fact, back in 2008, The Channel coined the phrase ‘the going out of business business model’ in reference to channel partners not embracing services contracting and consulting.Margins, first in hardware, then software and now even in services, have been under pressure for the past 10 years. "Margins now are sub-10% and you can’t run a business on those margins unless you have massive scale,” says McMurchy, who recalls the 40% margins seen in the 80s and 90s. "Now you’re lucky to get a 4% margin,” he adds.He says the New Zealand market is ‘very small and, in truth, probably a chronically over-serviced market’. "There are too many people trying to sell stuff and I’m relatively pessimistic about the traditional reseller business model,” he says.McMurchy says the low barriers to entry in the IT reseller market have also contributed to the issue. "Major vendors took the Coca Cola approach – the more points of presence, or vendors, they had the more sales they have. And that’s true to a point. But, while they won’t talk about it publicly, virtually all the major vendors now know they have too many resellers.”That overabundance of resellers has seen many vendors offering ‘enhanced’ partner programmes. "They’re aggressively pushing a small number of their partners to greater specialisation and effectively saying ‘if you are not serious about engaging deeply with us, deal with the distributors’. They won’t admit it, but they are now acting to reduce the number of resellers because it is not sustainable business. Just because you have double the resellers doesn’t mean you’ll do double the sales.”It’s not just vendors pushing for fewer resellers per product offering. Distribution Central managing director Nick Verykios says resellers are telling the distributor they want products not already being sold in the market – and products that are at the forefront of technology and can add real value for their business. "They want pre-sales support to get accredited and, more important than anything, they don’t want us to open up to everyone, so they can make money.”Verykios believes the answer lies in selling technology that is ‘thought-leadership, innovation leadership, true technology leadership’, saying that technology is ‘much more sticky’.Mid-sized major woes"At the end of the day, there are plenty of end users,” Verykios says. "The very small resellers, just selling a box, will survive, as will the really large resellers. But there will be nothing in the middle. That’s because the small resellers are the ones just servicing their local area, and the larger ones will survive because they deal with large corporate and government departments who have their own IT departments and just want someone to supply a commodity. You’re not going to be selling advanced technology to them – it will be the core IT.”Verykios believes there will be plenty of space for resellers offering the more advanced, newer – and traditionally still higher margin – technologies, with companies removing legacy technology and putting in advanced technology. "Partners can’t be across every area with advanced technology. They’ll be specialists in set solutions, so there will be plenty of room for resellers to be accommodated.”McMurchy says commoditisation – and the business model changes it brings with it – is a natural part of a maturing industry. "It’s like many other sectors, such as global manufacturing and banking, where things are shifting to a small number of large players and a small number of lower level, smaller players and the middle companies are disappearing. In maturing industries, the mid-sized companies are the ones who disappear.”The path less travelledMoving to a business model based on billable hours, charging for consulting and services is held up as one panacea for the sector, but the experts warn it’s not as simple as just providing consultation."Every man and his dog is offering consultation – from the man in the corner store up – but it’s difficult if you don’t target it properly,” Butler says. He says resellers will need to focus carefully on specific niche markets, rather than generic consulting, in order to avoid getting into the volume game again. "Resellers haven’t got the resources to compete so then you get into a rate-card discussion, which no reseller wants. You need to be looking to add value and wrap up and create extra stickiness with the client.” Butler says resellers moving into consultation need to tie the consultation around their core capabilities. "If you’re used to shifting routers or servers, it could be around pre-configuring, testing components and so on. It has to have some tie to existing capabilities."If resellers aren’t considering their options, they’re being remiss – but they cannot just jump in feet first, they have to consider how it fits and where their capabilities could lie.”Kaseya New Zealand countrymanager Sim Bong also issues a note of caution, saying New Zealand resellers reluctance to share ideas and discuss things openly may hinder the move to consulting.The business viewBusiness New Zealand’s Phil O’Reilly, with a non-IT but strong business background, has a slightly different take on the situation and urges resellers to ‘become much more focused on business benefits’ and learn to speak the language of chief executives."A point we’ve made to the government over broadband is that big IT decisions often feel geeky, covered in slogans and too hard to understand language."Too many chief executives still feel disconnected from ICT. I think that’s reflected in that you rarely find CIOs sitting on executive teams. You’ll find HR people there, but not the CIOs, yet I cannot think of a single business where ICT is not critical.”He says resellers and the ICT sector in general need to get away from technical speak and learn to talk to CEOs on a business level, clearly explaining how their offering can drive business benefits. "It’s no wonder the conversation turns rapidly to pricing [when CEOs can’t clearly understand technology jargon]. Rather than understanding fully the different business benefits being offered by resellers touting their wares, it becomes a price debate.”O’Reilly says resellers need to build their own business capability, and truly understand the needs of businesses. "that applies for corporate advisors of all types, be they legal, accounting... I’m from business. I understand it and in my role I can have conversations with CEOs about business issues other than what we’re doing and what lobbying we’re doing."It’s not just about getting away from selling boxes. It’s not even about selling solutions, it goes past that point, because to be selling solutions you still have to be thinking up problems. It needs to be more strategic. How can ICT and providers create a strategic need within the business and create demand-side pull?”O’Reilly is a staunch support of the move to services, saying it’s the ‘number one hardest thing to commoditise’ because people want human interaction. "Invest in that human interface... If you can go beyond average there, wow, that’s worth a lot.”O’Reilly says resellers should remember that commoditisation is probably happening to their clients as well. "They’re feeling the same things that you are. That’s why there is such pressure and it’s par for the course.”He says the changes mean constant innovation will matter even more. "If you see a niche create [business there], albeit probably for a shorter time and with less remunerative impact. Innovate in the niche, around the edge and be not just first to market, but first to market effectively, that matters more than ever too.”Crystal ball gazingAsk McMurchy what the New Zealand reseller channel landscape will look like in five years time and he’s direct."The New Zealand market will look increasingly like Australia, with a limited number of substantial systems integrators and a lot of small niche services providers. The mid-range value added resellers and systems integrators will be acquired and there will be a lot less companies in the New Zealand channel.”And distributors won’t be exempt from the changes."They’re facing the same challenges in working out what their place in the sun is,” McMurchy says. "The global trend is to more specialist distributors. It’s the same cycle. You have either really large distributors with massive economy of scale and leverage, who have invested in really good processes, or specialist distributors, maybe focussing on something like networking. And they’re growing much faster than the broadline distributors.”McMurchy questions the long term viability of broadline distributors, if they’re not ‘one of the really big guys’. "They’ll have exactly the same problems as resellers and systems integrators if they’re offering a broad range of products with limited [specialist] knowledge.”Cloud – threat or opportunity?All agree that cloud will bring new challenges. "It opens up an entirely new technology channel,” says McMurchy. With telcos having almost 100% connection to SMBs in every country, it’s an easy option for software vendors to team up with them to offer subscription software attached to the Internet bill. But he notes that software-as-a-service also opens the door to other channels. "It’s very easy to sell through accountants, for example, and give referral fees to them. That’s the opportunity of the cloud – it dramatically opens up new ways to get to customers. You don’t have to be an IT expert to recommend and sell software as a service, you don’t have to worry about implementing it or anything.”McMurchy says smart distributors are already building cloud services that their resellers can sell themselves, and he expects to see many of the offerings available in Australia come to fruition here.Butler agrees that the cloud is having some impact, but says the uptake in New Zealand, like in Australia, remains ‘pretty low compared to the hype’.And on a positive note, O’Reilly paints a rosy picture, saying the goverment’s broadband project also offers amazing opportunities for the local reseller channel."Businesses are thinking really deeply about how this will change their business. Will it change the face of retail? Gee, I’d be surprised if it didn’t. It will accelerate changes we’ve seen coming, but also, in five years time I think there will be things we think of as normal in the retail sector that we haven’t even dreamed of today, because we’ve got fibre in the ground. And it’s not because of the fibre in the ground itself, but the opportunities that brings."I can’t think of a bigger opportunity for the New Zealand reseller channel. There are fantastic opportunities ahead for that sector,” O’Reilly says before quipping "just make sure it’s at the right price!”

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