The Rocky Road To IT-Telecom Channel Convergence4:00 PM EST Fri. Nov. 30, 2012
The IT VAR and telecom services agent channels are finally starting to converge, and why shouldn't they? Customer appetite for cloud services -- estimated by Gartner to be a $200 billion total addressable market by 2016 -- is driving the need for both types of channel partners to ramp up recurring revenue streams as a way to address the cloud model. The clarion call is out for partners of all stripes to be truer solution providers -- trusted advisers -- who can handle everything from hardware and software integration to business connectivity and telecom expense management.
But even if the long-expected convergence of the two communities finally comes to pass -- the industry's been seriously talking about it for, oh, only about a decade now -- the one thing everyone can agree on is that it's going to be one of the messiest transitions yet seen in the channel.
Start with the rampant suspicions on all sides. As many IT VARs see it, telecom service providers don't understand VARs, yet want their customers. They see service providers and cloud hosters acquiring VARs and integrators just to cover their bets and protect their services margins if the VARs they partner with don't want to play nice. But from the perspective of the telcos, IT VARs accustomed to up-front payments from big hardware and software deals are resistant to working with them and aren't set up to building recurring revenue streams.
Meanwhile, telecom agents don't fear the cloud model -- they've been living off recurring and annuity revenue streams and selling by-the-drink subscription-type schemes for years. But they worry about the VARs who are now eyeing their customers and looking to add business connectivity services to complement their hardware and software sales.
How this tug-of-war shakes out remains to be seen, but for VARs, convergence is a challenge that can't be avoided. Customers no longer intend to buy IT, networking and connectivity services from disparate solution providers -- the partner that can bring that customer everything from switches and routers to voice and video and MPLS and SIP trunks, as well as manage, troubleshoot and maintain the network is the one who gets the business.
AN INEVITABLE SHIFT
Over several months' worth of interviews and ongoing discussions with various cloud and business connectivity services stakeholders, CRN has sought to better understand how traditional boundaries between the formerly separate IT reseller and telecom agent channels are slowly disappearing. What's emerging in place of those boundaries is a messy ecosystem of new partnerships, new channel conflict and plenty of uneasy curiosity. But the barriers to convergence -- while shrinking -- are stubborn.
"Carriers have been trying to tap into the VAR community for so many years. But apart from a few examples, there hasn't been a lot of traction," said Ted Schuman, CEO of PlanetOne Communications, a Scottsdale, Ariz.-based master agent. "But the truth is that the box guys still want to sell boxes, and the telecom guys want to push broadband, and neither has all that much success or interest in doing what is not in their wheelhouse. Someone has to help do the heavy lifting. VARs argue that it's more trouble than it's worth, and in many cases they're right: The carriers aren't set up to support them through a full solution."
The difference between the convergence discussions of prior years and now, however, is that solution providers now see convergence as inevitable. The industrywide shift toward cloud computing is changing how customers want to consume IT and services, and both VARs and agents must shift toward recurring-revenue streams and deal with vendors they hadn't previously orrisk losing customers to those who have already made the move.
Herbert Rosen, president of Trans-West Network Solutions, a Phoenix-based solution provider, is among many longtime voice and networking solution providers who reluctantly moved into carrier and telecom services in the past two years, sensing a shift in the way most customers want to buy.
"Carrier services are worthwhile, but a necessary evil," Rosen said. "If you're looking for that total customer stickiness -- especially if the customer wants to move into the hosted phone business -- that changes every conversation we have. The customers need bandwidth, so that's one more thing you're involved in. For the margin you get on it, it's not worth it. But you have to do it. It's a loss leader for other products and services you sell."
Greg Persky, communications solutions consultant for InhouseIT, a Costa Mesa, Calif.-based managed services provider, said, "We have been very resistant to cloud because we see it threatening our revenue stream with respect to the margins we're making."
But what happened, he said, is the type of migration VARs fear most: customers "leaving in the night" because Inhouse didn't have answers to the cloud questions they were asking.
"We were protecting our base of ShoreTel [customers] until last year," he said. "We lost a good chunk of clients because we didn't offer a cloud solution. The bottom line is that if you don't adapt, you won't be in business in five years."
DO THE CARRIERS GET IT?
By far VARs' biggest complaint about working with carriers -- particularly tier-one carriers such as Verizon and AT&T -- is channel conflict, whether real or imagined. During a channel discussion at master agent Intelisys' Channel Connect event in San Francisco in October, solution providers agreed that even seemingly simpatico carrier services relationships often lead to culture shock.
"The direct sales force and indirect sales force are in competition," said Jessica Mayo-Pike, business development leader of advanced solutions at IPLogic, a Latham, N.Y.-based solution provider. "We're used to being able to [count on] vendors, so at the end of the day, the customer suffers, the direct sales force suffers, and we, as agents, suffer."
Jason Kraft, a district manager who's helped build the growing carrier services practice at San Francisco-based integrator FusionStorm, said there's a lot of hesitation to bringing carriers into large accounts because of how often they try to draw those accounts in-house.
"That happens, and that's what everyone is afraid of: They're now telling you you can't sell to a client that you brought to them," Kraft said. "That is a model that won't ever work. But we have been able to find people that understood our business and understood what we need from a trust perspective."
Patrick Wefers, president of Infinium Communications, a telecom consulting firm with expertise in VAR channel relationships, said he spends a bulk of his time helping to sort out that conflict.
"That's one of the major reasons VARs bring me in, to protect them from competition on their deals. It's worked out well for me," he told CRN. "My partners get tired of quoting a Cisco [implementation] and then bringing in a carrier that offers the customer a ShoreTel."
"It's a cultural thing. You can't change that about the carriers," said the top sales executive at a national solution provider with a significant carrier services arm, who requested anonymity. "There are carriers with good programs, but I've had even the better ones go bad. I've had XO take deals from me. I've had Windstream take deals from me. I've had Level 3 take deals from me. This is not the type of thing where these guys are going to get channel religion and somehow wake up to our plight. Everyone has to manage their expectations."
Fred Holzsager, managing member of Holzsager Technology Services, a Fairlawn, N.J.-based solution provider, said many VARs avoid carrier relationships because it reminds them so much of conflict with old channel nemeses like Dell.
"When you look at Dell, and when you look at Amazon, and when you look at Google, a lot of them have things they offer directly and some things they offer through partners," Holzsager said. "But they're trying to grow business, so they're constantly remodeling themselves to go after the end user and that usually means going around the channel. The [carriers] are like that. Even if you speak to your rep and you say, 'Hey, that's not right,' and they'll tell you they'll change things, you're talking to one finger on a hand. That hand is attached to a body that is definitely not listening to you."
But still other solution providers argue that that conflict, while challenging, can also be a golden opportunity to hang on to customers.
"The telcos have tried so much to get into our space, and the truth is that the customers and the partners don't trust them," said Lawrence Reiber, owner of Tanda Technologies, a Toronto-based solution provider. "All you have to say to a customer is, 'When you had a problem, how long did you have to wait when you were on the line with the [carrier]? And how long do you have to wait to get an answer from me?' That's often as far as it goes."
Planet One's Schuman sees that conflict as the reason why master agents such as his -- and other well-known national master agents such as Intelisys, World Telecom Group and Telarus -- are becoming more valuable as channel relationship managers and power brokers.
"The carriers aren't structured for this; they're not structured to do the heavy lifting, get into the trenches with VARs and walk them through deals from cradle to grave while letting them profit," he said. "They're equipped to support a channel already knowledgeable on product. They know how to price circuits, not help project-manage entire sales cycles."
It's a new world for all involved, said Vince Bradley, president and CEO of World Telecom Group.
"Business that traditionally was given away or referred is now being looked at as a profit center by VAR companies," he said. "Voice is truly just an application of data today. So with this movement, the VAR can now control all aspects of the customer experience, which is achieved by controlling the network connectivity."
Bradley explained: "For the VARs that have worked with providers directly in the past, most have worked with a direct sales rep from one or two companies. That was their extent of working with connectivity. If the company could support the network, they proposed it, sold it and got a referral fee. A lot of VARs felt like this was a safe way to do things. But it was never a profit center for them -- many have never 'crossed the line' into business connectivity."
THE COMPENSATION QUESTION
IPLogic's Mayo-Pike said that despite all the attention paid to the MSP and CSP models, most VARs have a sales force "still accustomed to selling boxes, switches and routers."
Getting them to understand why carrier and telecom services need to be sold on top of and adjacent to those traditional "box" solutions isn't the challenge -- it's compensating VAR sales reps under a model that's in many cases completely foreign to them, she said at Intelisys' Channel Connect event.
"How do you incent the sales force? They don't feel the comp is good enough for the risk, so how do we change that mentality?" she asked.
Some carriers and telecom service providers have changed their programs with an eye toward IT channel friendliness. Level 3, for example, awards partners 15 to 18 points of commission on the total contract value of deals for the life of contracts, while, at the same time, it doesn't resell major networking vendors such as Cisco so to avoid competing on product sales with the VARs and agents it's trying to partner with.
XO Communications -- like Level 3, among what's perceived as the more channel-friendly class of service providers -- made a significant change to its program this past year. In January, it went live with a new commissioning system that buckets partners in one of five tiers. At the higher end of those tiers, XO partners receive better commissions and more contract protection than ever before, and at the entry level, XO has no required revenue or sales thresholds -- making it easy for XO services dilettantes to establish a lower-risk relationship with the supplier.
Other vendors are pulling back resources and reinvesting them in channels. Windstream, now a $6 billion behemoth service provider thanks to years of strategic acquisitions such as last year's purchase of Paetec, is cutting layers of management and putting dollars back into process management and channel programs.
"We're going to continue to support the channel in terms of field resources and behind-the-scenes operational customer delivery resources," said Jeff Howe, president of Windstream's central region and its national channel chief. "What happened was, we sat back and looked at all these acquisitions and we simply saw too many layers of management. And not only that, but the span of control in that management was not wide enough. So we knew we had to bring power and decision-making closer to the field level, and I will tell you that we have seen incredible progress in that area."
BUILD OR PARTNER
A big debate among solution providers embracing carrier services is whether to build those services practices in-house or partner with telecom agents or fellow VARs and integrators to close deals. Nationally known integrators FusionStorm, Presidio and Alvaka Networks have carrier services units staffed with market experts, but smaller or more specialized VARs don't have that luxury.
Joe Little, general manager of Laketec Communications, a North Olmsted, Ohio-based solution provider, said his business often partners with other solution providers that have complementary expertise.
"I came out of the telecom world and we worked our way into IT, but regardless of where you come at it, at some point, you have to know what you're really good at and know what you have to bring other people in on," he said. "If you get a good partner that shares your values, you have a profitable relationship. You recommend them, they recommend you. We can do a managed router offering with a partner that competes with the bundles being offered by, for example, an AT&T. We can offer the service and the support and hold that customer. So it's symbiotic."
Trans-West's Rosen, however, said that adding solution provider partnerships into business connectivity deals further complicates what for many partners is already a tricky sale.
"We tried those relationships but they were not bringing us the leads we needed," Rosen said. "It was worthwhile to take it on ourselves. We didn't want to get into situations where we're having to discuss who gets which tiny points on what part of the deal."
WHO'S THE BEST BROKER?
While solution providers build or partner on carrier services, they're also watching the increasing importance of master agents in the convergence ecosystem.
World Telecom Group's Bradley said VARs often hit a wall while deciding whether to dedicate current resources to building telecom relationships, in that they see a significant cost for the necessary investments and a lot of administrative headaches involved with getting and managing service provider contracts. That a master agent handles so much of that on behalf of the VAR -- and, in WTG's case, allows the VAR to work directly with the carriers on deals where it makes sense if that VAR so chooses -- makes that relationship hugely appealing.
But channel partners are also keeping an eye on telecom channel encroachment from value-added IT distributors such as Ingram Micro and Tech Data, both of which have fast-growing telecom services practices, with master agents such as PlanetOne and World Telecom Group.
"Yes, they are in competition," said PlanetOne's Schuman. "But that's natural. It's possible in the coming years that companies like PlanetOne get consumed by VADs and mega-VARs. As part of an overall solution, I think it makes sense."
AIMING FOR THE CLOUD
Beyond traditional networking vendors and telecom service providers, there is another class of vendors anticipating the convergence trend -- vendors for whom both cloud-savvy VARs and telecom agents already represent opportunity.
Traditional IT vendors are making a big play for the cloud services pie -- and backing up their ambitions with aggressive channel programs. Microsoft, Cisco, Avaya and ShoreTel are all UC system vendors with budding cloud services channel sales strategies.
Cisco, for example, has fine-tuned its various channel programs and incentive schemes for what it describes as cloud builders, cloud services resellers and cloud providers, pushing each type to either build data center infrastructure that supports cloud deployments or offer "Cisco-powered" services such as Cisco's Hosted Collaboration Solution (HCS) and WebEx conferencing.
NWN, a Waltham, Mass.-based solution provider and Cisco Gold partner, is among the nearly 40 HCS providers and has a rapidly expanding pipeline of business.
"What Cisco has chosen to do here is pretty unique from an industry perspective," said Skip Tappen, NWN's chief operating officer. "If you look at it, it's a co-dependent model, in that they have the products, we have the services, and you're taking both as an offering to the customer. A lot of vendors want to bring all that in-house and resell the built services offering, as opposed to giving partners the opportunity to really participate."
Cloud backup and recovery specialist Intronis has ridden both VAR and telecom business to 50 percent year-over-year growth, according to Ted Roller, vice president of channel development.
"The product is so easy to use, and that's the appeal for both telcos and VARs," Roller told CRN in a September interview. "It's multitenant, multilayer, it can be managed at the machine level or at the business level, and it can leverage partners for NOC and help desk services. The telco guys might have a more natural advantage over the VARs to sell cloud services. But as more stuff moves to the cloud, the MSPs who have grown as a result of using MSP platforms are the ones doing fantastic today, too. They learned how to market and build value, and there are a whole lot more sophisticated MSPs out there than there used to be. If you didn't go that way, you are now behind."
WHY IT CAN WORK
Schuman said he sees some heightened profile among VARs adding carrier services, but the opportunity is still "pennies on the dollar of what it could be."
"A lot of VARs haven't seen the best of times -- they've struggled in the past few years," he said. "So the more progressive ones are looking at alternative sources of revenue. They've got this fabulous Rolodex of customers, and they still don't know just how much money they're leaving on the table."
Schuman agreed with other master agents that many VARs, out of frustration with having to change their sales rep comp models or just the investment it requires to build a carrier services practices, haven't done the math to see just how much.
"Our average customer, we keep about eight years, and that's recurring revenue all that time out to year eight," Schuman explained. "So say a VAR goes out and sells $50,000 of equipment, and their average on a deal like that is 40 percent, meaning they'll make about $20,000 on it. OK, good. On our side, a partner might sell $10,000 worth of broadband and on average, make 20 points -- that's the standard margin from carriers across the board. So that's $2,000 a month, plus the additionals, and you take that out, what, 96 months, you're looking at close to $200,000. Most guys don't want to sit down and do that math. But there it is."
In a 2012 study fielded by UBM Channel's Institute for Partner Education and Development (IPED), solution providers indicated that up-front commissions were one of the best ways to catalyze sales of carrier services --in other words, motivate VAR sales reps to sell carrier services using a carrot -- an up-front kicker -- they're very familiar with. Some service providers, such as hosted UC provider 8x8, offer up-front "bounties" in their channel program compensation for exactly that reason.
"Many of them now have some kind of up-front kicker," PlanetOne's Schuman said. "It's not comparable to what VARs make on the box, but carriers are doing it -- that little up-front spiff or whatever they're calling it. So you take that, plus the residuals, and it's not an 'either/or' sale, it's an 'in addition to' sale."
PUBLISHED DEC. 3, 2012