projections for the post-recession channel€¦ · the economic challenges—are more optimistic...

Projections for the Post-Recession ChannelHow changing economic conditions, shifts in business technology consumption and new delivery systems are forcing the rapid evolution of the technology solutions sales and services model.

By Lawrence M. WalshVice President & Group Publisher, Channel Insider

March 2009

:: Perspectives

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empowering the next generation channel

[contents]

Revenue and Profitability: Leading Indicators of Change 3

Business Goals, Missed Opportunities 5

Success and Growth Is a Choice 8

Post-Recession Channel Economy 9

About 12•TheChannelInsider2009MarketPulseReport

•TheAuthor

•ChannelInsider

•ChannelInsiderResearch

•ZiffDavisEnterprise

•MoreChannelInsiderPerspectives 13

Recommended Reading 13

Contacts 13

Copyright © 2009, Enterprise Media Group, DBA Ziff Davis Enterprise and Channel Insider. All Rights Reserved. No redistribution, reuse or republication of all or part of this material is authorized without express written consent of Ziff Davis Enterprise. For permission to reuse material in this publication or to use our logo, email [email protected].

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As of this writing, the United States is suffering the worst economic recession in half a century. The fall 2008 seizing of the credit markets was likely the midpoint in a chain of events that plunged the United States and global economies into a deep recession. Over the past two quarters, the United States alone has shed more than 1 million jobs, gross domestic product has shrunk more than 6 percent, more than $2 trillion in consumer credit has been retracted by lenders, and many industrial and services institutions teeter on the brink of oblivion. In the technology industry, major suppliers of hardware and software products, as well as their distributors, have reported significant quarterly revenue and profit declines; forecasts don’t show a quick rebound.

In spite of the economic downturn, solution providers are unfazed and, in some cases, optimistic. Cursory reviews of channel economic performance data generated by Channel Insider find solution providers believe their revenue and profit will increase in 2009, even while their vendor partners are cutting back and businesses are slashing IT budgets. Solution providers claim a shift in revenue, as an increasing amount of their business is derived from profes-sional, remotely managed technology and consultative services that have no bearing on vendor product sales.

In reality, the recession is having a profound impact on solution provider performance and businesses. The Chan-nel Insider 2009 Market Pulse (see page 12, for Channel Insider Market Pulse methodology) survey found a clear bifurcation among solution providers that shows how solution providers choosing to evolve and expand—despite the economic challenges—are more optimistic and expect to grow, while those clinging to the conventional reseller models of the past are bracing for rough times ahead. Based on the survey findings, Channel Insider believes the recession will irrevocably change the landscape and nature of the IT reseller channel, eliminate many solution provid-ers through acquisitions or attrition, and result in the rise of “services as a solution” business model.

In this Channel Insider Perspectives, we will review:

• Channel revenue and profitability trends • Trends in channel business plans and goals• How differing business strategies lead to success and failure• Evolution: Post-recession projections

Revenue and Profitability – Leading Indicators of ChangeEconomists believe the recession actually began in late 2007 and early 2008, meaning the United States has been in a recession for more than a year. Despite the downturn, solution providers—as a whole—say their 2008 revenues and profits increased over 2007 (see Figure 1: Revenue Expectations, p. 4). Comparing 2008 to 2007, nearly one-half of solu-tion providers (46 percent) say their gross revenues increased, while only one-quarter reported a revenue decrease. Profitability numbers were slightly different, with 45 percent reporting profit increases and 30 percent reporting decreases (see Figure 2: Profit Expectations, p. 4).

In 2009, the majority of solution providers believe their revenues and profits will increase. Forty-seven percent of solution providers anticipate their revenues will increase, and 50 percent project profit increases in 2009. By compari-son, 32 percent expect revenue to decrease, and 30 percent expect profits to decrease.

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[ Figure 1: Revenue Expecatations ]

While these numbers may seem remarkably similar to 2008 performance and indicate a stable marketplace, the truth of what’s happening in the North America IT channel lies in change in those projecting nearly unchanged rev-enue and profits. In 2008, only 30 percent of solution providers reported no change in revenue and 30 percent had no change in profit over the previous year. The expectation for 2009 shows a dramatic shift, as the number of solution providers anticipating no change in revenue and profits drops to 20 percent. Since there is only a slight gain in those expecting revenue and profit increases, the shift is clearly to the negative. This shows that most solution providers are actually pessimistic about their financial health.

[ Figure 2: Profit Expecatations ]

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The shift in channel dynamics from where solution providers see the bulk of their future revenue coming is pro-nounced. Solution providers are projecting revenue decreases of 5 percent and greater in the following categories: IT consulting (26 percent), hardware (26 percent), integrated hardware/software solutions (24 percent), voice network-ing (23 percent), managed services (22 percent) and custom application development (20 percent). Conversely, solu-tion providers are projecting steep increases in revenue (15 percent and greater) in the following categories: software as a service (38 percent), managed services (34 percent), software (33 percent) and systems integration (30 percent). The trend shows a clear shift toward a services-based channel, in which the bulk of revenue and profitabiliy will come from the integration and on-going delivery of on-demand or subscription-based managed or application services (see Figure 3, “Net Revenue by Category”).

[ Figure 3: Net Revenue by Category ]

Solution providers anticipate that managed services, software as a service, virtualization, productivity software and data security solutions will be the most profitable technologies over the next 12 months. Traditional channel products that in the past carried solution providers’ profitability—network infrastructure, storage infrastructure, x86 servers, blade servers, wireless data networking—failed to make the top 10 most profitable technologies. More so than any category, hardware-based technologies showed the greatest softness in pricing. One in three solution pro-viders anticipates a net decrease in hardware pricing over the next 12 month; that’s more than double any other technology. Further, professional services, managed services and systems integration (which include the integration of host-based and on-premises technologies) showed the greatest shift in anticipated net price increase (see Figure 4: “Year-Over-Year Pricing Change”).

As the business-technology user market continues to shift toward technologies that consolidate and optimize infrastructure performance are delivered in part or whole as a service, demand, profitability and importance of indus-try-standard equipment will decline. This ongoing transformation will pressure traditional value-added resellers and solution providers, forcing change or obsolesce.

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Business Goals, Missed OpportunitiesMany people would think that these trends would prompt solution providers to adjust their focus and change their business plans to match these trends and enter the new professional and managed services marketplaces. However, there’s anecdotal evidence that solution providers are haphazardly adapting to the new market dynamics and not planning for the post-recession economy.

The current conventional wisdom holds that solution providers should retrench, cut costs and expand their sales footprint with existing customers. With little money for marketing or outbound sales, businesses can mine their active and—in particular—their inactive accounts to engage with the people who know their products, services and capabilities. It’s almost always easier to start a sales conversation with someone that you know rather than trying to find a person and open a dialogue with someone that you don’t know.

That’s conventional wisdom. Reality, though, calls for something completely different. This is more than an eco-nomic downturn. It’s a transformative period during which the way technology business is conducted, delivered and valued will change. This means solution providers need to make investments even when money is tight and revenue streams are unpredictable. This means hunting for new customers and new opportunities when consumer resistance is high. This means adopting new models, technologies and partnerships even when the immediate financial benefit is not readily apparent. This is not to say that investment and expansion should be done blindly, but rather that solu-tion providers should plan the future and have the conviction to execute and see their plans to fruition.

[ Figure 4: Year-over-Year Pricing Change ]

The Channel Insider 2009 Market Pulse survey found a clear division between solution providers that are gearing up for the future—the post-recession economy—and those that are remaining tied to the channel of yesteryear. Where conventional wisdom calls for retrenchment, the survey found that solution providers taking the latter posi-tion are pessimistic about their revenue growth and profitability. Solution providers in expansion mode, on the other hand, believe their revenue and profits will climb despite the economic challenges.

While the Market Pulse data shows relative stability in solution provider revenue and profit performance, deeper cuts of the data presented in the previous section show in detail how some solution providers are choosing to suc-ceed and others are choosing to fail.

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When asked their primary business goals are for 2009, solution providers were resolute in wanting to improve cus-tomer satisfaction and retention. Increasing revenue and profit is a near universal concern among solution providers, ranking second and third, respectively, on the list of 2009 goals, while expanding market share was a distance fourth. This prioritization of goals fits well with the retrenchment philosophy and that of mining existing customers for new business and keeping current customers in the fold and producing revenue (see Figure 5, “2009 Business Goals”).

[ Figure 5: 2009 Business Goals ]

A deeper look into the different business plans and strategies of solution providers reveals the divide in the chan-nel community between the optimists and the pessimists. Solution providers say their revenue growth is predicated on acquiring net-new customers more than any other revenue growth strategy, including expanding existing cus-tomer relationships and adding new products and services to their portfolios. Solution providers that are focused on growing their market share and increasing their profitability believe they will increase their profitability greater than solution providers focused on improving customer satisfaction and increasing revenues. In fact, solution providers focused on improving customer satisfaction and increasing revenues, by and large, expect their profitability to re-main flat or decrease in the coming year (see Figure 6, “Goals vs. Profit Expectations”).

[ Figure 6: Goals vs. Profit Expectations ]

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Ironically, improving the quality of solutions and the delivery of services is not only the lowest rated business

objective for 2009, but solution providers that are focused on quality anticipate no change or declines in their profit-ability.

Success, Growth Is a ChoiceTo truly understand the significance of this divide, let’s take a look at the business strategies of solution providers in growth mode as opposed to those focused on sustaining and retrenchment.

Optimistic solution providers—those focused on growing profits and market share—are pursuing acquisition and expansion strategies that include expanding in domestic and regional markets, acquiring complementary solu-tion provider companies, entering new lines of business, and signing new customers. These growth strategies are indicative of strategic business planning, sound budgeting and spending forecasts, and long-term vision for growing a company.

More pessimistic solution providers—those focused on improving customer satisfaction and retention—are pri-marily pursuing paths of increasing sales with existing customers and partnering with new vendor and suppliers. Broadly speaking, such companies in retrenchment mode are likely not conducting annual business planning or forecasting revenue and expenditures. These solution providers are more than likely always focused on sustaining a moderate revenue stream and a level of success to ensure sustainability.

Solution providers of both stripes say they need several critical elements for growing their businesses. Topping the list is more and better end-users leads, and new technologies with higher margins. Both elements support the optimistic and pessimistic perspectives. Growth-oriented solution providers need new customer leads and new technologies to sell to fuel their expansion. Retrenching solution providers are seeking new products with higher margins because they need something to present to their existing customers if they have any hope of maintaining and expanding sales.

The difference between the two groups is that the optimists will exit the recession with a broader set of tools and market reach than the pessimist. This will create a higher barrier to success for the pessimists when the economy rebounds.

The optimists, the Channel Insider 2009 Market Pulse survey finds, are transforming their businesses to the new realities of the next-generation channel. They are becoming more services-focused, adopting Web 2.0 tools, embrac-ing software-as-a-service and managed services, and becoming more adept in specific domain expertise. They are taking on new business models that more often take the appearance of their vendors rather than the traditional solution provider. They are often less dependent than their rivals on vendors’ presales and technical support teams. They are developing branded products and custom build solutions. And, perhaps most importantly, they are leading with their brand and maintaining the importance of their unique identity in the marketplace.

The same cannot be said of pessimistic solution providers. Rather than creating a distinct identity, they remain tethered to their vendors’ brand recognition, marketing and lead generation mechanisms, and field support. Rather than investing in new marketing, sales and technology opportunities, pessimistic solution providers are content to sit on the sidelines waiting for opportunities to come or—worse—to be brought to them. In good times, vendors are typically happy to feed their channel business opportunities to meet market demands, but in hard times, vendors are looking for ways to cut their channel sales and general administration costs. That means few opportunities com-ing to passive solution providers. In the Channel Insider 2009 Market Pulse Report, solution providers say vendors are trending toward taking more business direct and scaling back on their partner support (see Figure 7, “Partnership Experiences with Vendors”).

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[ Figure 7: Partnership Experiences with Vendors]

Business planning is hard. Executing on strategic plans is extremely difficult. And investment—especially when funds and resources are tight—requires taking a risk. Optimistic solution providers, based on Channel Insider re-search, are embracing the challenge of investing in their futures, taking command of their destinies and aligning their businesses for the next-generation channel.

Growth and success require risk taking, but risk is not the same thing as chance. Risk is calculated and planned. Chance is synonymous with haphazard decision making that has no logical preplanning and only loosely conceived conclusions. Solution providers should draw more upon their business management talents than technology skill sets to divine paths to future success, devise and execute business plans, and continually measure progress toward objectives.

Post-Recession Channel Economy The division of the solution provider community into two groups called optimists and pessimists may seem an overly generalized characterization. But consider this: Those two designations in the post-recession economy could be substituted with two new labels: “existing” and “extinct.”

The channel community has debated for years the value of the so-called ‘lifestyle VARs,’ or solution providers that are not growth-oriented and generate mostly low-volume transactional business. To the vendors/suppliers, lifestyle VARs represent a drain on resources in return for sales with much higher costs. Vendors want to focus on and support reseller partners that can generate high sales and revenue volumes because they have a lower sales, general and ad-ministrative (SG&A) expense. Growth-oriented solution providers also have the ability to generate capital to support their business expansion and, in growing numbers, acquire rival businesses.

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Solution Providers Characteristics

Optimists PessimistsInvesting In Their Future

Transforming businesses

Service-oriented

Adopting Web �.0 Tools

Metrics Driven

Expanding Customer Base

Expanding Geographic Reach

Independently Developing Solutions

Developing Brand Value

Cutting Costs & Resources

Retrenching in Conventional Business

Break-Fix Oriented

Unsophisticated Tracking Methodologies

Expanding Footprint with Existing Customers

Limiting Geographic Expansion

Reliant Upon Vendor Technologies

Dependent Upon Vendor Brand Recognition

Growth measured in terms of revenue and profitability is not simply a pursuit of wealth; it’s a survival mechanism and a reflection of a business’s evolutionary ability to adapt to changing economic conditions and market expecta-tions. Growth is the measure by which a solution provider is judged as viable.

Based on the findings of the Channel Insider 2009 Market Pulse survey, Channel Insider projects the following outcomes in the post-recession IT channel.

1. Bifurcation of the ChannelThe gulf between profitable and growing solution providers and stagnant solution providers will widen. As productive solution providers grow, they will amass capital and acquire smaller rivals with lower valuations. This recession has the potential to sweep away huge swaths of small and local solution providers as their larger rivals acquire them for access to technical and sales talent, sales accounts, and market specializations. The post-reces-sion channel may have two distinct groups: large national and international companies operating as a network of regional solution providers and local solution providers that are self-sustaining. In other words, the recession may cut the middle of the channel out of existence.

2. Greater Market SpecializationSolution providers have been told for years that market (vertical) specialization is one of the fastest ways to grow a business. The more of an expert a solution provider is among a particular business class, the more it can build repeatable solutions that meet the specific needs of an industry. Additionally, as marketing guru Geoffrey Moore detailed in his book Crossing the Chasm, vertical alignment helps businesses grow through references and in-dustry contacts within vertical sets. Even though key vertical segments (financial services, retail, manufacturing, construction) saw significant decreases in IT spending, many other verticals (health care, government, energy, utilities) saw either small decreases or increases in their technology spend. Solution providers are rediscovering vertical alignment—how it decreases costs of sales and solution building, increases sales opportunities, and aids in the expansion of market share. In the post-recession economy, solution provider market specialization may result in the formation of tightly organized subchannels that cater to specific verticals.

3. New Technology ChannelsThe North America channel was built on hardware reselling and the value-added services provided by solution providers. Commoditization and hosted services are decreasing the profitability of traditional hardware (routers, switches, storage). However, solution providers are already finding new, profitable product sales opportunities in

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technologies that were previously either direct-only or in segregated channels. The Channel Insider 2009 Market Pulse survey revealed a sudden surge in cell phone/smartphone resale and implementation services among solution providers. Virtualization technology, another rapidly expanding and profitable technology, is opening new opportunities for solution providers. And the adoption of handheld and portable devices is leading many solution providers to enter the custom application and mobile device management markets. The recession forces end users to rethink their technology strategies, which will force solution providers to realign their sup-port and specializations in new and high-demand, high-margin technologies. In the post-recession channel, thriving solution providers will have established practices in what are now considered ancillary product lines and businesses

4. Greater Professional ServicesOne of the more interesting trends of this recession is solution providers reporting steady or increasing business while their vendors and suppliers are reporting record declines in revenue and profitability. Anecdotally, solution providers are saying their revenue sources have inverted from heavily weighted toward product sales to profes-sional services. This may explain why vendor revenues are trending down and solution providers’ business remains healthy. As the business-technology consumer market continues to migrate toward service-driven tech-nology delivery models (software as a service, managed services, hosted services), Channel Insider anticipates that the demand for professional services will increase. End users will continue to need the expert guidance and support of solution providers in designing and implementing IT strategies. Post-recession solution provid-ers may find themselves doing more consulting and professional services work, influencing more than just the technology that their customers use, but optimizing workflow, business processes and revenue models.

5. Solutions as a ServiceTack the word “service” to any technology, and you seem to have a winning, profitable strategy. The challenge for solution providers is adapting services to their existing product sales and conventional break-fix models. In practice, services regardless of their nomenclature are nothing more than a technical solution to a business problem or need. The demand for greater professional and managed services will continue to grow unabated. Channel Insider believes the services revolution doesn’t mean abandoning the product sales model of the past, but incorporating conventional solution provider models with emerging professional and technology services to create a holistic “solutions as a service” business model. In this model, professional services, Web services and on-premises products are treated as components of the ultimate solution delivered to the customer.

6. Business SavvyThe general axiom that describes the IT channel today is there are two types of solution provider: the business-oriented company that is focused on a business model and the technology-oriented solution provider that is less concerned with business operations and principles and more enamored with the underlying technology. Again, generally speaking, the difference between these two groups is that the business-oriented solution pro-vider is larger, trending toward growth and more diversified against downturns. The technology-oriented tends to be smaller companies that lack back-office resources or management. In the post-recession economy, the channel will be dominated by business-oriented solution providers that are building in-house professional sales, marketing and operations resources, or engaging professional business services to compensate for lack of in-house expertise. Channel Insider believes that solution providers that fail to place greater emphasis on business planning, management by objectives and creating a distinct business value proposition will find themselves locked out of the growth opportunities of the post-recession channel.

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[about]

About the Channel Insider Market Pulse ReportThe Channel Insider 2009 Market Pulse Report is the result of a survey of solution providers, value-added resellers and service providers to measure the economic activity and health of the North America reseller channel. The survey was conducted in December 2008 and measured channel sales and revenue activity for calendar year 2008 and expecta-tions for calendar year 2009. The survey had nearly 200 qualified participants.

‘About the AuthorLawrence M. Walsh is the vice president and group publisher of Channel Insider, a leading source of solution provider information and intelligence. Walsh is considered to be among the foremost thought-leaders in the technology channel, with expertise ranging from security technologies to managed services to channel and solution provider business strategies. He is the author of “The Seven Laws of Managed Services,” the first quantification of basic opera-tional characteristics and challenges of the managed services model. In his role at Channel Insider, he oversees all editorial, research and product development. Prior to Channel Insider, he served as editor of such industry-leading publications as Baseline, VARBusiness and Information Security.

About Channel Insider Channel Insider (www.channelinsider.com) is dedicated to providing IT resellers and the partner community with the technology and market intelligence to increase revenues and grow their businesses. Channel Insider addresses the $450 billion marketplace populated by more than 225,000 solution providers, services companies, ISVs, distributors, custom application developers, system builders, managed services companies and technology consultants. Channel Insider’s rich news and analytics Web site, case study and technology review magazine, market trends research, and virtual and face-to-face events provide its readers with a 360-degree view of the North America reseller channel. As a result, Channel Insider has the most robust and engaged channel audience.

About Channel Insider ResearchChannel Insider’s industry-leading research is a product of independent and collaborative surveys. Data used in this report was derived from the Channel Insider 2009 Market Pulse Report (January 2009) and the Channel Insider 2008 Managed Services Report (July 2008). For more information about Channel Insider research, please e-mail [email protected].

About Ziff Davis EnterpriseZiff Davis Enterprise, Inc. (www.ziffdavisenterprise.com) is business-to-business technology’s trusted information re-source. Millions of technology buyers rely on its relevant, objective content to identify the right solutions for their organizations. Its leading brands include Channel Insider, Baseline, CIO Insight, eWEEK, Baselinemag.com, CIOInsight.com, eWEEK.com, WebBuyersGuide.com and the Developer Shed network. Ziff Davis Enterprise has proven market-ing solutions for branding, engagement and face-to-face events. Our products include print and online advertising, eNewsletter sponsorships, content syndication, eSeminars, virtual tradeshows, events, and custom media services. Ziff Davis Enterprise has a global database of 4 million users representing an unparalleled community of business and technology professionals, developers, and the channel.

Copyright © 2009, Enterprise Media Group, DBA Ziff Davis Enterprise and Channel Insider. All Rights Reserved. No redistribution, reuse or republication of all or part of this material is authorized without express written consent of Ziff Davis Enterprise. For permission to reuse material in this publication or to use our logo, email [email protected].




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[recommended reading]

Managed Services Evolution in the IT Reseller ChannelGo To: www.channelinsider.com/c/s/CI_Perspectives

[contacts]

Editorial, Research & ConsultationsLawrence M. WalshVice President & Group PublisherChannel [email protected]

SalesEast CoastSteve [email protected]

West CoastLee [email protected]




projections for the post-recession channel€¦ · the economic challenges—are more optimistic...

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