A Trio of Thought Leaders

Because they directly influence the lives of so many partners, we thought it would be worthwhile to assemble the trio for an hour-long talk on the future of the VAR community. We should have scheduled four hours,not that any of them stay anywhere for that length of time. Gilroy, for example, flew in from Philadelphia. Watson, meantime, ventured down from her company's Redmond, Wash., headquarters after returning from Chicago to participate. As for Mountford, he was preparing for a trip to Miami.

Although they previously have spent little or no time together,Gilroy and Mountford once shared a meal together,they quickly settled in when the questions started. They instantly recognized that they spoke the same language and had many of the same challenges: How do you motivate tens of thousands of partners? How do you accommodate the recent changes in business models and address the age-old question of partner-to-partner conflict?

All see the need for partners well into the future. Watson, for one, sees the need for more partners, while Mountford sees changing the nature of the work allies do. Gilroy, meanwhile, thinks partners are getting better. They are smarter and more savvy, he believes. And so long as they can figure out how to extract margins in an ever-evolving world, their futures should be sound.

Interestingly, all see themselves as something more than glorified relationship managers. Indeed, they all agreed that their roles within their own organizations are evolving, taking on more significance and more operational responsibility.

Did we mention that they were funny and enjoyed one another's company? Because the tone of the meeting was light and the atmosphere comfortable, the level of thinking was especially high. But you can read about that for yourself.

VB: First off, can we get a feel for your goals for 2003? Most of you are revamping your programs, executing on plans that you put together, etc. Let's start with you, Allison. Set the stage for us in that regard.

Gilroy: She's going to say build their white-box business just to piss me off [laughs]. A big white-box business.

Watson: No, I wasn't going to say that. I was going to say we're going to continue to deliver on our promises%85I think our overall partner channel probably will remain flat. It might be a little bit down. It was a little bit down last year. We believe that there's a great opportunity for ISVs who've been talking about vertical markets, and the more people decide to specialize, [the more] we've seen potential partners coming up that will need relationships with strong vendors in the software industry.

VB: Paul?

Mountford: A lot of things are changing. The fundamental model, the value model, still remains the thing we drive everything through, and that still underpins everything. Clearly, the market is changing in the sense of it's getting more and more solutions-oriented, and the players that are winning and maintaining margins during this time are the people who can deliver into that. The people who don't have a services business are the ones who are clearly suffering.

VB: Kevin, goals for this coming year?

Gilroy: We're still in our post-merger posture and re-engineering the channel. [We're focused on] three tenets, which you've heard before. One is a viable, sustainable economic model on both sides of the equation. The second is to improve our demand-generation capabilities together with our partners. And the third is we want to make sure through our partners that we have a measurement, and we understand the total customer experience, because end-user satisfaction is going to be even more critical over the next five years.

As far as specific goals, we will grow our printer business very quickly. We're in Chapter 2 now, which is a huge opportunity in the digital-convergence space as we move upstream. And in the PC business, perhaps we'll see some very low-level growth,flat to low-level growth through the channel. [As for] our notebook business, we'll take share. We'll grow that business materially, and then in the storage business and Unix business, we should see some growth if we see a bounce out of the economy.

VB: Where do you see the biggest opportunity? We hear storage, security, wireless, etc. What is it, if you had to put your finger on it?

Gilroy: It's Chapter 2 in the imaging and printing business. It's just a huge, huge opportunity. When you think about it, you move from textbooks to printing out chapters at schools with high-speed printers. You go into hospitals, you go into health care, you go into almost any field. If you take a look at our printer business, where more paper comes out of printers today than comes out of copiers, and that trend continues to move up and to the right, we're still only capturing 3 percent to 4 percent of the printed page. There's newspapers, textbooks, medical records,it goes on and on and on. So the partner base starts to understand the solution to the printer, and not just the commodity printer. It's more than just a printer, but digital devices.

Mountford: The IP-telephony space is still a huge opportunity. The dynamic that has prevented it from really flying is how you convert a mature, high-margin market to a converged space where margins typically haven't been so high. Margins in the IP data world have been less than the traditional voice world. So we're looking at some pretty progressive programs that we're probably going to be announcing over the course of the next couple of weeks that will actually change that dynamic. That said, there are a lot of reasons why it makes sense to move to an IP-converged single network with voice and data infrastructure. There are lots of applications now being developed that make sense for that. The problem is that the conversion costs are a bit too high on one hand, while the margins are still too high in old technologies. It's a real paradox.

Also, security is just huge. The thing with security is when people say "security," you could break it up into about 100 different pieces.

Finally, we've done a lot of solution work recently by trying to take our stuff, which is classically horizontal technology, and turning it into vertical relevance. What we started to do is build up a typical set of applications that you would use in schools, and we deployed that successfully in police departments and a number of different areas. We've come up with a suite of solutions that are really getting traction in the market. And all of them are designed so that our partners can make money out of delivering a set of products and services.

VB: What about short-term opportunities? Is it CRM? Is it the desktop?

Watson: It's a variety of things, and I think it ties well [with] some of the things we're talking about. No. 1, we've got a release of Windows Server coming up, Windows Server 2003. There are five million Windows NT 4 servers out there, so that's a huge opportunity to combine with hardware upgrades, networking upgrades to address the security issue, infrastructure upgrades to make sure you have a secure connective infrastructure, etc. And it's the single, biggest opportunity out there for the traditional installed base market. Coupled with that is this Small Business Server promotion that we've been running. We offer an aggressive rebate opportunity for services partners, a $500 rebate that started in August. We just kind of rolled it all out, and we've got VARs who finally realize its potential. We had a VAR in Southern California in the past two months who sold 300 units, and he had never sold one before.

The second big area where customer interest is still very high is around intranets and portals. And, then, how do you collaborate and get to a next generation of collaboration? That's big, too.

Finally, the third major area is one I would describe to be a total-systems view. VARs have a great opportunity to take products from all of us and go out for a total solution for the [midsize] business and offer for the first time together Microsoft CRM, ERP, basic networking, security, infrastructure, printing, etc.

VB: When you look at the channel and you look at your partners, who won the recession and distinguished themselves among their peers, and who consequently lost it?

Watson: Those who [won] figured out where they were good, figured out how to create networks in areas where they weren't good and put a value chain together.

VB: And were those guys of a certain category? Regional, midtier systems-integration companies? Global, national systems integrators?

Mountford: I don't think you can categorize them into one group. I think the ones who were the winners were the ones who reacted the quickest. The ones who were the losers were the ones who still haven't reacted. That's the short answer. If you look at what really took place in the market, everybody built their businesses to pace to the tornado experience. They didn't look at costs, they didn't look at efficiencies, they didn't look at optimization classically, and they were rolling out to get market shares as quickly as they could. The winners were those with a good business model. So long as they took the cost out of their businesses when the market started to collapse, they survived.

Gilroy: I totally agree. I don't think you can categorize the winners and the losers. To me, the winners are the ones who understood their P&Ls, who understood their cost structures relative to their revenue and gross-margin structures, just like Paul said. And I think that's probably axiomatic in any recession.

VB: How different are your channels going to look two or five years from now than they do today?

Mountford: I think the channels will reflect what the customers want to do. But let's make some assumptions here... If we keep introducing new products, then we might need different partners, or we might be able to leverage the same partners. We hope to leverage our own partners because it's a [more] optimized way of doing things. But because technology or this market space is maturing, then you will see more and more "verticalization",more vertical solutions,and the people who are good at doing that will be the ones who win. Specifically, I think managed services will be much bigger, especially in the [midmarket] marketplace, than it is today%85[They] may not be service providers, [they] may be traditional integrators and [systems integrators] that might deliver into that space. But I think you'll see a lot more of that. So there will be less vanilla and more customization.

Gilroy: I see people who will continue with commoditized products with a very low-cost model, efficient supply chain, etc.

VB: CDW?

Gilroy: Yes. I think you can be an effective smaller partner also,maybe not necessarily a giant. But I do see a continued evolution into more verticalization of the partner base. I also think that we'll start seeing alternative financial flows, where today we have traditional passing of title in a two-step process. Instead, I think you will see some adoption of the agent model. I think you'll see all sorts of different things starting to pop up between the channel.

Mountford: The challenge we find is customers don't differentiate between complexity and simplicity. In other words, they want to buy simple things, cool things, as well as complex things. They still want to buy it all from a brand, maybe, but they've got to have it delivered by a partner. The question is, how does the partner accommodate the three or four different models to get that to the customer, given that what they want to do is own the customer relationship? They want to keep all account control, but they've got to supply everything. So the question is, how will that translate? Web delivery will be much bigger. Telesales and telemarketing will sprout another head because [they're] going to provide a lower-cost way of doing things. And then really having eye-level specialists who can do high-touch complex projects at the top end. So they'll deliver the whole raft to keep control.

VB: Will you have a greater number of or fewer partners going forward, and what percent of your overall business will they account for? And what about CDW and Insight? Do they own a larger part of that channel flow for you guys, and is there potential conflict?

Watson: That's a long question.

Gilroy: It's difficult to say because we have partners that range from CDW to very small companies. We have 30,000 partners in our database in the Americas. So to say we're going to have fewer depends on what you define as entangled partners, deep partners, etc.

VB: Regardless of the number, will they still account for the percent of revenue they do today?

Gilroy: It's interesting if you take a look at CDW and Insight. CDW just announced that they made their bottom line, though they had some top-line struggles like the rest of the industry. But what have they done for the channel? Well, they delivered easy IT procurement deployment. And they forced a model change on the small VAR, which means either get your SG&A down or verticalize. In an interesting way, the CDWs of the world have accelerated change.

VB: So, overall, that's positive?

Gilroy: I wouldn't call it negative or positive. I'd call it%85

VB: %85Evolutionary?

Gilroy: Yes, evolutionary. It's inevitable.

VB: When do they get opposable thumbs? [laughter]

Watson: I still see the channel growing. I don't see technology adoption doing anything other than continuing to accelerate, and the complexity of that adopting continuing to accelerate. There will need to be more specialized partners out there that can address the element of the business they understand. Information-worker technology is going to be linked to a services-provider partner because it's not going to be something you buy and plug in off the shelf. So I see the total number of partners going up. The challenging question is: What will be the real value measure in a more services-oriented economy? It will be harder to measure sell-through because who sells the actual product may become less relevant. But who actually influences the customer is critical.

VB: Paul, Cisco converted from a volume-based program to a value-based one. How much pain was there to get to that, and what has been the benefit?

Mountford: The huge pain was converting the contracts and the big players who were doing huge volume, and getting them to accept that they were going to be treated the same way as a regional VAR in Chicago. At first they said, "Are you mad? Do you know how much business we do with you?" When you're moving from volume to value, you're constantly being challenged by the requirements of the business to grow. So if you're doing anything that suggests you're stopping it, you get the antibodies within the company trying to prevent you from doing it,as well as the antibodies in the channel itself,even though you know it is good. But we increased customer satisfaction, which was [our] goal. The point is, if you're watching customer satisfaction,if you are intimate with the customer,you know what they want, and you're providing it in a better way through your partners.