Channel 2.0

CDW's acquisition of Berbee Information Networks (VARBusiness 500 No. 112) last September sent shock waves through the channel. Suddenly, the big DMR was diving headlong into solution selling on the VAR level.

The reality is that such deals may be a harbinger of changing business models within the channel. Five years ago, solution providers relied heavily on hardware sales to carry their business. Today, solutions and complementary services are where they make their money. Five years from now, solution providers will adopt and compete against what may seem today like a strange array of business models: distributors as solution providers, vendors collaborating with end users to deliver integration services, solution providers assuming the role of ISVs, solution providers acting like vendors in the delivery of managed services, retailers acting as solution providers and vendors marginalizing the channel with software as a service (SaaS).

Take vendor services, for instance. At its partner conference last summer, Microsoft unveiled the workings of its Windows and Office Live program. Partners were told that they could host the service or resell the service, or customers could buy the service directly from Microsoft. The model has left many solution providers puzzled over the direction SaaS will take.

Microsoft recently announced a deal in which retailer CompUSA would serve as an exclusive provider of goods and services to very small businesses (typically, with fewer than 20 employees). After the first year, Microsoft expects to open the program to other retailers, which may include Best Buy, Office Max and Circuit City. Best Buy (Geek Squad) and Circuit City (FireDog) already offer integration and support services to small businesses.

"You can see this becoming a challenge to the traditional channel," says David Roberts, Websense's vice president of sales Americas.

SaaS vendors such as Salesforce.com and Citrix Online pay solution providers referral fees for leads that are turned into direct sales. Salesforce.com has developed its Application Exchange, where ISVs can develop and market their add-on modules to the subscription-based Salesforce.com applications.

For SaaS vendors, the evolution of the channel is putting the customers' needs first and putting "value" back in the term VAR.

"VARs pride themselves on their long-term relationships with their customers. You have to make the customer successful. If they're not successful, they'll turn you off," says Bobby Napiltonia (right), Salesforce.com's senior vice president of worldwide sales and alliances.

Software solution providers may find opportunity at the expense of ISVs. The cost of developing custom software--particularly through offshoring arrangements--is falling rapidly. Already, solution providers are taking deals away from ISVs because they're able to deliver lower-cost, custom applications.

"The amount of stuff that you can get done for less than $5 million is increasing, and that's going to benefit solution providers like Perficient," McDonald says.

Managed services are also a game changer. Most of the major distributors are building managed-service infrastructures that solution providers can buy or lease space in, alleviating them of the time and expense of entering the managed-service market. Some worry that the distributors could take these services direct to end users, but the distributors almost universally pledge never to do this.

"The services we're investing in are the ones that will enable VARs and will scale so they'll be the most efficient," says Roy Vallee, chairman and CEO of distributor Avnet. "The services that require presence on the ground--we won't be doing those--and we're trying to encourage our VARs to develop those for their customers."

Managed services may also turn VARs into vendors, of sorts. VARs turned service providers are already developing channel programs of their own to sell their services. Since they've made the infrastructure investment, it makes sense for them to partner with other VARs to extend their sales reach.

Over the next five years, the definition of a VAR will probably change more dramatically--and potentially be more obscure--than at any time in the history of the channel.

NEXT: Rethinking channel programs