Channel Crossroads: The New Rules

VARBusiness

I continue to be amazed at the survival, evolution and, in many cases, flourishing success of solution providers in a tumultuous year and an ever-changing industry. In my travels across the country, I've seen bold solution providers that have taken their horizontal IT expertise and morphed it into vertical-market expertise. I've also seen partners that have transformed their pure hardware businesses into robust, healthy service businesses. The "net net" of this activity is that solution providers are here to stay. Furthermore, the opportunities to create real value for our mutual end users appear boundless. To me, the dominant question that remains, however, is: Which traditional boundaries and borders do partners need to break through in the process of creating new value? Here are my thoughts and observations on the current state of the channel.

First, it's important to note that solution providers speak loudly and clearly on what it takes to succeed as both a strategist and a practitioner in a period of instability, uncertainty and rapid change. And while the vast majority of solution providers clearly understand that change is inevitable and increasingly more difficult, one axiom that dominates their daily motion and has not changed: customer satisfaction. The solution providers that are thriving today and are ready for the inevitable upturn in our industry are those that view customer satisfaction not as some trite tag line, but as the driving passion behind their businesses.

History tells us that the IT channel is not the first business to mature and require change. Complex, nonlinear, difficult change has beset other fields for some time. In industries from auto to travel to consumer electronics, business models are always dynamic and inevitably under pressure. Going forward, I see two distinct business models that will be clear winners:

1. Low-cost, low-SG&A horizontal procurement and deployment. Simply put, these models work. If a solution provider can structure its selling, general and administrative (SG&A) down below 6 percent or even 5 percent, it appears it can play in that model but will still require deeper integration with the manufacturer in one seamless SG&A model in the future.

2. Vertically focused, hardware/service-balanced solution providers. This model supports materially higher-selling motions and infrastructures. This is where the margins lie, as well as customer entanglement and dependencies.

Operating in between those two models may not be wise or even workable. Naturally, it is the subject of much spirited debate within the industry. Another debatable point is whether we will again see opportunities as significant as the Y2K phenomenon that drove sales to record heights. If you think about it, there really are Y2K-like crises all over this country that beg for technology solutions provided and supported by local, trusted and nimble solution providers.

For example, the health-care industry is absolutely in a crisis. Costs are spinning out of control, and regulations are piling on top of hospitals, clinics, small practices, etc. Their only real salvation--other than a U.K.-type health-care model--will be technology. But, today, health care views technology as a cost, rather than the cost-saver it can be in the areas of medical records management, patient testing, administration and legal-risk mitigation.

Homeland security is another Y2K-like opportunity. There are 18,000 police departments, 26,000 fire departments and thousands of 911 call centers all in need of technology upgrades. Better yet, many have money to spend. These customers need solution providers to help create the right tapestry of hardware and software, which can be delivered along with their value-added services. Sure, large manufacturers can create alliances to directly deliver needed services to, say, the NYPD, but not the midsize and small agencies.

I also see epochal levels of change from an economic perspective within the solution-provider community. Today's margins and competitive pressures from direct models require solution providers and manufacturers to understand their economics down to a single basis point. We can no longer count on understanding only an approximation of the gross margin; we must know the overall economics of an account in terms of the cost-to-serve in both the short and long terms.

In the old days, both manufacturer and partner had double-digit gross margins. They were so high that one did not need to know exactly what impact they had on the bottom line. Now we're down to low double-digit or, perhaps, single-digit margins. This begs a number of questions that each solution provider must answer any time it caters to a customer: Is non-value-added SG&A part of this customer solution? How many times do we have to fix problems without receiving compensation? What do our short- and long-term costs to serve actually look like? Are we articulating and being compensated for actual value delivered, or a lower perceived level?

Solution providers, distributors and manufacturers that understand these and other questions will likely excel on many fronts. Moving forward, it will be necessary to take that inevitable next bold leap and build out one seamless cost-to-serve model among the manufacturer, distributor and solution provider. That's no easy knothole to get through as it will require trust and, perhaps, a loss of perceived customer control as they share customer and financial information. HP must take the bold first step in sharing its customer data so it can start building toward this model. HP plans to pilot this concept next year.

One area where solution providers can break new ground is creative financing, an untapped area. Leasing, rentals and trade-in programs must improve. The future will require solution providers, manufacturers and distributors to create mutually beneficial financial packages tied to specific solutions. The winners will be creative ones that push boundaries.

In addition to creative financing, the channel needs to reconsider cutting-edge technology. The future of our industry is advanced technology and solutions. Sure, supply-chain efficiencies, effective marketing and creative financing will always play a major role, but the most impactful element will be technology skillfully woven together with delivery, support and finance. Technology is where the sustainable success lies.

Finally, I must state that I am amazed at the resiliency of the channel community. As time passes, there will continue to be new models, acquisitions, mergers, bankruptcies and more. And while I don't have a crystal ball, I firmly believe that the future belongs to those channel partners that blend their clearly superior business and technology minds with the boldness to cross traditional boundaries.