Microsoft At Varnex: Cloud Just One Part Of Overall Channel Transformation

Solution providers looking for ways to increase their business' value in the eyes of customers and potential acquisition partners need to look beyond the cloud.

That's the message from Brent Combest, director of partner profitability and compete in Microsoft's worldwide partner group, during a keynote presentation at this week's Varnex conference.

Combest told the solution provider audience at the event, held by Fremont, Calif.-based distributor Synnex, that while building competencies in cloud computing is an obvious way for channel partners to increase their value, there is actually a wide range of strategies solution providers can adopt.

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Transformation has become a way of life in the channel, something that Microsoft has seen up close via its community of 80,000 solution providers, Combest said.

For example, he said Microsoft saw about 800 merger and acquisition transactions in its channel partner base in 2014. "And I have to admit, the pace of change is the highest it's been," he said.

Combest cited a number of ways solution providers can increase their valuation.

The first, and perhaps most obvious, is to show revenue growth. However, Combest said, the bar has been rising on what kind of growth will get noticed. With the move to cloud computing, a 40 percent to 50 percent growth rate is considered best of business compared with the 20 percent to 25 percent growth for traditional channel partner practices, he said.

The second way is to increase gross margins, which Combest said is getting more and more difficult. Product and license margins are typically in the 4 percent to 20 percent range, with services margins in the 35 percent to 40 percent range.

However, those services margins are under pressure as daily and hourly billing rates stagnate when customers see little differentiation between providers. At the same time, Combest said, the cost of hiring and management consultants is on the rise as experienced consultants move from partner to partner.

The third way to increase partner value is to develop packaged IP solutions, which Combest defined as solutions developed for specific customers that can be re-packaged for multiple customers as a way to decrease billable time in developing solutions. Packaged IP solutions, when done right, can bring in margins of 60 percent to 65 percent, he said.

Other methods for increasing value is for partners to add more technical specializations and to find ways to increase their addressable market such as expanding their geographical reach, Combest said.

"These are the five key things people on the buyer side will be looking at [from you]," he said.

There are also several things that could lead to solution providers discounting their value if they're not careful, Combest said.

The first is the question of leadership transferability, or the question of whether someone other than the owner can take over a business when sold. "I see so many owners work in the business, and not on the business ... and so have difficulty in scaling the business," he said.

The second factor is management experience. Combest said it is common for an acquirer to interview all the management personal of a company being acquired as a way to find potential issues.

Other factors include a partner's liquidity, its location, and how the maturity of its technology and services stands against the competition, he said.

When looking at the ways to both increase a solution provider's value and mitigate the factors that detract from that value, Combest said it is important for partners to focus on four key pillars.

The first pillar is to develop a focus that separates a solution provider from the herd, a move that can come from and result in higher price points, increased efficiency, and improved trust. Just as important a differentiator is the cloud, where increased differentiation eliminates the geographic limits of traditional businesses, Combest said.

The second pillar is to increase scale, Combest said. One way to do so is to invest adequately in marketing. While typical solution providers may invest 1 percent to 2 percent of their budget in marketing, those who grow the most invest 8 percent to 10 percent, he said.

Scale can also be increased with investments in the sales staff, Combest said. He suggested solution providers invest in sales reps fresh out of school who understand the cloud more than older sales reps, as well as hire reps from the industries a channel partner is targeting to get their expertise.

However, Combest cautioned against a wholesale shift in business models to the cloud, and suggested using new hires to develop new business while keeping older sales reps focused on developing existing business as a way to fund the expansion.

The third pillar is to increase attach rates. Combest cited as an example Microsoft Office 365, where a solution provider might make $5 to $10 per seat when deploying the solution but up to $50 per seat when adding on management services.

The fourth pillar is to create "stickiness" by finding ways to add unique value to what might be an otherwise common implementation. For example, Combest said, as customers move to the cloud, solution providers who help move their data to the cloud will not be as sticky with customers as those who find ways to generate value from the data in the cloud and sell it back to customers.

Combest's presentation was a real eye-opener, and could have easily gone another 30 minutes without losing the audience's attention, said Dean Edouarde, group vice president at UGM Enterprises, a Los Angeles-based SMB solution provider.

"He was dead-on," Edouarde told CRN. "It's always great to get guidelines. He came up with real-world revenue and expense examples. Most people talk generalities. He gave specifics."

Edouarde said Combest was right in saying the move to new businesses like cloud should be done in a measured fashion.

"With Office 365, we went from zero seats two years ago to about 2,000 seats installed now," he said. "We shifted the whole business over at once, not slowly, and so we lost some talent. But we didn't look back. Our Azure practice is going to grow by double, maybe triple, digits this year."

PUBLISHED NOV. 12, 2015