It's a good time to be a solution provider, according to some of the top channel chiefs in the IT industry.
During CRN's recent Channel Chief Roundtable at XChange Solution Provider, the channel executives discussed how partner profitability and valuations have greatly increased in recent years, thanks to a number of different factors.
"We do profitability surveys every year and kind of check on the health of the partners," said Edison Peres, senior vice president of worldwide channels at Cisco systems. "They're actually higher now than they've been in a long, long time. So I would say we're at a height, if you will, on the value."
In addition, Peres said, valuations of solution providers are climbing, as many companies are seeing eight to 10 times EBITA (earnings before interest, taxes and amortization) instead of just two or three times EBITA 10 years ago.
So what's driving those profits and valuations upward? First, more solution providers are focusing on higher-margin professional services, Peres said. "I would say that even if you're born in the cloud or if you're not born in the cloud, I think, generally speaking, the economics of the partner community is actually doing well," he said.
Concentrating on services alone won't cut it, the channel chiefs said. Solution providers have to find the right kind of business model to deliver those services and earn higher profits. "I don't think [partners] are giving away their services the way they used to," said Jesse Chavez, vice president of worldwide channel strategy and operations at Hewlett-Packard. "They've learned that, in a lot of ways, they have to charge for their services. I think that is helping their profitability."
In general, the channel chiefs said partners that have adopted recurring revenue streams around cloud and managed services are the ones driving the profitability and valuation increases. For example, Cindy Bates, vice president of Microsoft's U.S. Small and Midsize Business division, said solution providers that have made the shift are reaping the benefits.
"If you look at the partners and our data, we say about 13 percent are fully cloud-transformed," Bates said. "Those guys have figured the model out, and they've got rockets on them."
But the channel chiefs said there is a divide between the old and the new. Solution providers that have embraced high-value services are thriving, while partners that are sticking with the traditional product reselling model aren't faring nearly as well.
"The good ones that differentiated themselves, where they've got some unique cloud-based offerings and some unique services, are approaching eight, nine, 10 times EBITA," said Frank Vitagliano, vice president of North America channels at Dell. "With the other guys that are running around still in the old model, it's significantly less."
As a result, the vendors themselves are putting more emphasis on various services opportunities -- and sometimes less on their products -- as way to strengthen their partner bases. Tami Duncan, IBM's vice president of global business partners for North America, said IBM's top services-focused partners may not be doing 70 percent or more of their revenue with IBM, but that those partners are usually the strongest companies from a financial perspective.
"The partners that are big enough that they've kind of gotten it and they've made the shift, they're doing fairly well," Duncan said. "I'd say that very low tier, maybe they're a vintage VAR, maybe they're a very lifestyle VAR, probably not as healthy as they were, and they will need to make a change relatively quickly if they want to move to the future."
The message from the roundtable was clear: Solution providers must adapt to the changing IT industry or become extinct. "There’s a lot of money in the channel right now. Valuations are great. There's a lot of cash. There's lots of opportunity," said Frank Rauch, vice president of VMware's Americas Partner Organization. "But [the lifestyle VARs] are probably not going to survive."
NEXT: Recurring Revenue Shifts