Transcript for Static in the Channel
Dave Michels: Hi this is Dave Michels, I’m with the UCStrategies Experts and today we’re going to be talking about the UC channel and how the channel is changing and the channel’s future. The traditional channel was pretty clear, I guess it goes back to the 70s, maybe the 60s, even. It was typically a local-based footprint type of business with a large inventory, a fleet of trucks, and lots of ladders. They had proprietary hardware equipment that they knew their way around, and they knew how to work with the local carriers. But as the hardware equipment has turned into industry-standard equipment, and the carriers have become flat with SIP, the whole concept of the local business is really changing. In fact, I was talking to one of the dealers recently, a company called .e4 VoIP that says that they hardly have any local customers; it really kind of changed the model completely.
So, I see that on one hand, and on the other hand I listen to these vendors talking, the manufacturers, and I think if I got it right, Avaya, Mitel, NEC, Siemens, Aastra, and Microsoft have all expressed a need to want to expand their North American channel. Usually when companies want to change or expand their channel, it’s usually an indication of one or two things: either the existing channel is not keeping up or meeting the current demand, or probably more accurately in this case, that the channel is not meeting the expectations of the vendors and I’m wondering if adding more vendors is the solution to that, or if there’s something bigger going on here where the value proposition of the channel and the roles of the channel are fundamentally changing. So with that Marty, what are your thoughts on the shifting UC channel?
Marty Parker (1:52): Dave, thanks for calling on me. I know you have a real depth in this topic, having worked in distribution and also running your own system integrator reseller company, so thanks for hosting this. I think that it is a real tense time because there are so many moving parts. You’ve touched on a number of those. Certainly the vendors in this changing technology world are finding themselves really pressured to get more customer access and to grow share. One of the things that’s happening in the communication industry here is that it’s moving to software, and in the software world, volume is everything. Generally that will consolidate down to three or four companies that have the majority of the volume and that volume pays for their R&D and then they tend to just run away from the rest of the market. There's always the room for the small innovative company to come in with a new idea and get into the market, but they then try to quickly sell themselves to the larger software companies, a trend that we’ve seen Cisco do so… you know, "master" from the high end, but certainly many, many start-ups have that in mind: get bought by one of the bigger players.
So what that means, I think, to the channel, is they’re going to have to be much more selective and much more nimble. In the first place they’re going to see prices continue to drop both because software over the long run becomes that kind of a game: high volume, lower prices is the competition. The value that the value added reseller gets to add is usually the customization and the personalization – I’ll say personalization, customization... So they can go to a company, whether that software is being run in the cloud or on premise on premise servers, and they can say, “now, let me tune this up for you,” much as people did in contact centers for many, many years. There’s a lot of money that’s been made in customizing contact centers and agent desktops. Now they get to come and do that same kind of service across the entire enterprise with unified communications, whether that’s plugging communications into a portal for customers and supply chain; whether it’s plugging it into the business software applications; whether it’s tuning it to the individual use cases; whether it’s enabling wireless functionality... all of this personalization, I’ll call it “configuration for the customer,” is going to be a major place that the VAR is going to get their money.
In addition, they have the opportunity to create application packages and then to resell them in the application marketplaces. Certainly we’ve seen that with salesforce.com, we recently heard Microsoft announce the first year anniversary of the shipment of Microsoft Lync 2010, saying that they had over 1,100 apps developed. These aren’t apps like you have for your iPad where there’s tens of thousands of them, or hundreds even, this is apps for businesses for specific vertical industries and so forth. Those were developed by value added resellers who then put those out in the marketplace and either attract customers or get some incremental sales in partnership.
The last thing I’d say that the VAR should be looking for, besides shifting their business model from just resale to services as I’ve suggested, is that they consider looking at partnering and forming their own ecosystems. Last week for example, Enabling Technologies, who is doing very well as a Microsoft UC VAR, was partnering with Gigworks, who is a Microsoft Sharepoint VAR, talking about how those two products work together in a collaborative environment. So it’s that kind of an opportunity to partner... it’s also possible if you’ve got a specialization in some area, a vertical market mobility or whatever, to partner with the large volume resellers who have chosen not to invest in that kind of expertise yet, but will hire you as part of their team and the concept is the VAR with that expertise builds their expertise as a result and can do more of it and in the end has perhaps a business that becomes, (or) that can move into the lead over time. So there are lots of possibilities.
The last thing that I think of that business management will have to worry about, of course, is the financing of all this. Certainly as things move to hosting, there’s going to be a different model, whether it’s more of the cellular or insurance company types of annuity model, or it’s going to be a discounted up-front payment. Those that can afford it I think will prefer to take the annuity, but it’s also important as the market shifts and converges and grows, that you watch your cash flow. We’ve seen resellers get in financial trouble either in the down cycle, or even in the up cycle, they go out and double or triple their sales volume and find out suddenly they don’t have the line of credit to support that, and end up bankrupt as a result of growth, which is even in a worse case than being bankrupt because of no sales. So, really important management issues will come up for the buyers at this time. Hopefully that was some helpful insight there, Dave, so back to you.
Dave Michels: Earlier I mentioned a bunch of vendors that were looking to expand their channel, but I should also mention that Cisco and ShoreTel seem pretty happy with their channel. Do you think that these companies are doing anything different, or do you have any insight or explanation as to why these companies are happy and the other ones aren’t?
Marty Parker: Well, I would say in both cases, but in different ways, they really believe that their channel is their partner for success, that they really believe they don’t earn revenue without the channel. I mean it sounds obvious, but it depends on how you relate to the person. Now in Cisco’s case, they’re building on their dominant position in the network architecture world and it was an up-sell opportunity. They could teach their VARs to sell more by selling into the voice and unified communication and now collaboration portfolios.
But the other thing I’ll give Cisco a lot of credit for is, they actually made certification a big darn deal. Not only did they allow people to get permission to sell their product through certification, but they put all the tools in place with plenty of educational companies out there, Global Knowledge and others, offering these certifications, and certifications became a key career factor for the employees of those VARs. So Cisco really made it a cultural thing – you know, you’re a member of the club – and I think that made it very... that built a really strong bond between Cisco and the VAR. Granted, the VARs still say Cisco’s margins are really thin, etc., but they know they’re going to get treated well; they know that they’re going to get supported well and there won’t be much risk of failure. I think in ShoreTel’s model, it was a slightly different thing which they’re now changing as they move to distribution. With ShoreTel it was more of a territory bartering program where they would set someone up to be their representative in that territory and it was a win-win process as ShoreTel grew. Now as ShoreTel wants to grow even more and is opening up more channels through two-tier distribution, that relationship’s going to change. I think it may be a bump in the road for ShoreTel as they try to move from territory assignment to broader distribution. But I think Cisco has pretty well mastered, and I give Richard McLeod a lot of credit for running that whole program at Cisco. I knew him when he was back at Avaya, but he’s doing a great job there.
Dave Michels: Thanks, Marty. Kevin, I know you’ve worked with a number of system integrators; do you have any thoughts on the different roles of the channel?
Kevin Kieller (9:30): Sure, thanks Dave. You know one of the things that I see, between vendors and the dealers, is really this expectation gap, depending on the product and depending on the vendor. We have dealers who are traditionally resellers and they work well with vendors who put together and bundle the whole solution and by that I mean the software, the hardware, the entire bundle was put together, for example, if you’re selling a Cisco or an Avaya solution. And then we have some newer vendors that are offering voice and more solutions like a Microsoft, and their expectations of their dealer channel is really that they become systems integrators, so Microsoft expects that a dealer, a systems integrator, a value-added reseller will identify the hardware devices both the server devices, the front end devices, whether they came from HP, Polycom, Aastra, that they will in that case with a Microsoft solution, invest the time to bundle the solution. And what I often see is that as a reseller, as a dealer tries to adopt and offer the Microsoft solution, at least for the on premise version, they may not recognize the amount of work that goes into it and consequently I think that Microsoft as well may be disappointed with some of their channel partners who in the voice world don’t understand the amount of effort that goes in to bundling that solution.
And then into the mix I also see the collision between dealers and consultants. Certainly customers now being offered many other choices in the voice world, not only dealing with voice with some of the unified communication and collaboration, are seeking out individuals that can provide them with an independent assessment as they look at some of the more traditional solutions versus some of the newer emerging technologies, and really getting this independent assessment, getting this consulting experience is often the entry point into an account making a new purchase and either dealers or value added resellers are pretending to be consultants and offering an independent opinion while they’re really just pushing a particular one, and that doesn’t work well. Or independent consulting firms are coming in and becoming the trusted advisor and finding themselves then with the downstream opportunity to resell some of the gear based on the upfront strategic consulting that they’re doing and this type of collision then between these consulting firms and traditional dealers, I think, is creating some challenges and some re-shifting inside the entire channel. Back to you, Dave.
Dave Michels: That’s great; I’m wondering though if we’re seeing a consumerization of UC in a way if things aren’t going through the traditional dealer, where are they going through? And on your other comments I’m sure that Steve has a few comments, so Steve, what do you have to say about that?
Steve Leaden (12:42): Thanks, Dave. From my perspective as Leaden Associates and industry consultants, we see it as dealers really needing to take a holistic look at the market, and what changes are taking place and what areas they will lose business to over the next 2-5 years. They really need to look at what opportunities are on the horizon, what systems and staff are in place that can continue to be used, what geography or geographies they serve, and how all of the above really will have an impact on their business.
So I’ve come up with a couple of key questions that they really need to address.
1. Do they expand on the services offered?
2. Can they serve the customers in these growth areas?
3. Can they be part of a national VAR partner program that can be a resource for larger venue client rollouts?
4. What focus do they have on UC and possible professional services to support a fully loaded UC environment?
5. Can they offer data services, TEM type services, cabling implementation services, help desk and NOC services and maybe even IP Security via cameras, etc.?
And then finally, can the vendor make it worth their while financially for the dealer to support the vendor program such as NOC services that the dealer would be in competition with? So again, these are all key questions.
Some additional questions for the vendors/manufacturers: what does the vendor’s cloud offering look like and how can it be financially attractive for the dealer network, a.k.a., what’s in it for them? Really, from my vantage point there has been little incentive to date to establish partnership and programs supporting the cloud offering. How can the vendors incentivize the dealer network for vendor services offered, such as cloud services, NOC services, professional services, and others? These are the key questions on the manufacturing side.
So the key here is really, the dealer needs to be proactive rather than reactive to the changes taking place in the market. They really need to get ahead of the curve and not behind it, to be flexible on what the company offering is and will look like, and where your profit centers will be in 24-36 months. And then they finally need to determine what growth areas are (a) most interesting to you and (b) how it coincides with their firm’s culture. And really, how do you protect your dealership to grow rather than react to market changes and see it diminish over time and really take advantage of the opportunity that’s here in the dealership network as opposed to the diminishing of the market at large.
Dave Michels: Thank you, Steve. Art, what are your thoughts on the channel right now?
Art Rosenberg (15:29): Well, I’d like to go back to what Marty was pointing out and I think that’s absolutely right on that there’s a need for not just hardware... If everything was free, and you can get all the hardware you want, you get all the connections you want, you get all the software you want... the question is, who’s going to use it and how they’re going to use it? Because you have to get down to the level of the individual end user which means personalization and also consumerization, if you will, because of mobility. So, we have the BYOD issue coming in where people say, “I’ve got my end point device and its multi-modal so I can do anything I want as far as business as well as personal stuff.”
So, what does the enterprise, the organization, have to do to support that kind of end user and their devices, and their services that they happen to use? Because when they get the device they obviously have to get it from somewhere that can also provide connectivity, so there is a lot of flexibility and ongoing change in terms of applications that the enterprise wants to support, versus what the end users are using because of their jobs and because of their other relationships, so there’s a lot of complexity and confusion and interoperability that’s needed, and who’s going to do that from the enterprise perspective... to have that kind of control, because it’s not the hardware, it’s not the networks so much, ultimately it gets down to the applications that are involved because ultimately, if you don’t have an application, what do you need the rest for?
So I think that the role of being an advisor or supporting individual end user customization is going to become critical and the enterprise organization is going to realize they can’t do it, and so who are they going to get it from? You can’t call them system integrators... it’s more than that, it’s the application designing and the devices that are going to use those interfaces that has to be supported. And that’s the role that I see that is going to be open for the future, and the question is how is that going to happen in terms of being organized to do that?
Dave Michels: You know Art, you bring up an interesting point because so much of the new technology allows customization, or what we call CEBP, and that doesn’t seem to be coming from the traditional distribution or resellers. It’s coming from different organizations. Do you see the developers and the resellers merging together, or do you think they’ll remain separate?
Art Rosenberg: Well, I think they’re ultimately going to have to be working together because maybe there’s something already in existence; I’ve got a network already, I’ve got whatever I’ve got as far as hardware, the question is, I want to start using the new technology – and what does that mean? Mobile apps for example... mobile apps for my employees, mobile apps for my business partners and mobile apps for my customers... the consumers. And so they’re all different but it’s the same kind of flexibility and customization that’s needed and that means looking at not just the connections, but also the user interfaces for the applications that are important, and who’s got that kind of knowledge and intelligence? And as these things change, it gets even worse.
Dave Michels: Very good points. Don, one thing that we’re seeing in the new world of UC is these distributed call centers and I want to get your take on the call center. Is the dealer location as important as it once was, and what do you see in that space?
Don Van Doren (19:12): Thanks Dave. Yeah, I think clearly, especially as we’re moving into more hosted environments and as we’re moving into more remote agents, what we’re seeing is a desegregation in all these factors, and so you’re absolutely correct – there’s much less connection between specific geographical areas than there was in the past.
The other thing I’d like to comment on is again, just the changes that have come up and really the differences between the different kinds of VARs that we’ve got. If you look at the legacy telephony VAR and their whole model, of course, coming out of years ago was sort of box selling. I, and I think several others on this call, have beaten their heads against the wall trying to figure out how we get that traditional telephony VAR channel to understand and sell applications. This has been an ongoing challenge for at least the last two or three decades and it wasn’t really necessary in the past, and especially the way compensation models were set up... it didn’t even often pay for them to do it.
Now it’s absolutely critical. Dave, when you started this you mentioned a couple of reasons that some of the suppliers are looking for new kinds of capabilities in their channels. You said to expand the number of people and also the fact that existing channels may not be meeting expectations. I think that the third thing about this that I would add to that is the realization on the part of the manufacturer is that they absolutely have to get somebody doing the kinds of customizations that Marty and Art and others were talking about here. It’s absolutely crucial to their business success just because of the fact that the current applications require that kind of tight integration and so therefore we really need a very different kind of channel partner for these companies, so I think that’s the other reason that we’re seeing a real shift here coming forward.
Art Rosenberg: Don, I’d like to make a comment real quickly to just reinforce what you said. In terms of support when you get to customization, there’s really an application – there’s two things... two new areas if you will, one is the metrics, the analytics to see what’s needed in terms of design and then there’s the application design based on that.
Don Van Doren: Sure, and of course both of those are pretty foggy areas for a traditional box salesman. I think that’s really the hurdle that a lot of these guys are currently going through. What’s interesting though is, and you know you pointed out, Dave, a couple of the vendors that seem to be happier with their channels. If you think about it, the Ciscos and the Microsofts and some of those other let’s say less traditional channel partners have more potential, I think, to within their own organizations, develop these kinds of skills and capabilities. For a lot of the legacy VARs, it’s really a matter of trying to restart their business in a very different direction; that can quite often be a real challenge.
Dave Michels: One thing we haven’t really touched on yet is professional services, Blair do you have any thoughts on that?
Blair Pleasant (22:31): Yes, one of the things when I talk to the resellers it seems that the big challenges they have is that they’re competing with their vendors and especially now as UC and IP telephony and IP-PBXs are becoming a commodity, the revenue is really coming from services and professional services rather than the hardware and software, and both of the vendors and the VARs want to be the ones to provide this, so what we’re seeing is that they’re really competing with each other in a lot of cases and this is going to become even a bigger challenge as the margins for hardware and software keep going down. And really the only way to make money in the near future is going to be in the value added things like customization, integrating solutions with business processes and other professional services. And most of the vendors have their own organizations to do this, so they’re really competing with their channel partners – they’re making a lot of their money from professional services. So the vendors need to come up with ways to ensure that their channel partners can still make money from professional services without harming their own offerings in this area. And I haven’t seen anyone come up with a really good model for doing this.
Art Rosenberg: Your suggestion sort of says, well maybe, the vendors, who want to do the professional services, and maybe they have enough staff to do all of that, now they’re looking at their VARs to resell their professional services, real simple. Instead of selling hardware or even software, now its professional services to add to the list.
Blair Pleasant: Well, that’s one way of doing it, but then the VARs aren’t going to be making as much money because they’re going to be reselling... the margin just isn’t going to be there, they’re going to be reselling the vendor’s offerings.
Art Rosenberg: Right, they’ve just got to be compensated enough to do that for them.
Blair Pleasant: Exactly.
Dave Michels: That brings up an interesting point... Don mentioned Microsoft earlier. A lot of the Microsoft implementers... or system integrators, aren’t even reselling the product. Microsoft pushes the enterprise licensing through their LARs, Large Account Resellers. So in that situation the implementation company is often not even making any money at all on the actual product itself.
Kevin Kieller (24:39): That really requires the model shift because it is a different revenue model and I’ve actually worked with some resellers to look at a traditional PBX sale versus a Microsoft PBX sale and the revenue comes from many different places. Now it actually may add up to the same, or slightly less top line revenue with a Microsoft solution. Arguably there would be better margins on that because as you point out, Dave, there’s often not any licensing revenue and sometimes there’s actually no hardware revenue because the customer may already have existing servers or virtual server capacity and then it becomes all of the implementation revenue. So it is very much... and I think Marty talked about it from a financial aspect, you need to look up the models and work through the finances because it is a very different model and I think it’s dangerous for existing dealers or VARs or SIs to make assumptions in terms of where the revenue is going to come from for these different solutions unless they’ve actually done the math.
Marty Parker (25:54): Right Kevin, this is Marty. Let me jump in on that point because it’s exactly right that this is all shifting. The key thing to emphasize from my perspective is that this is not an end-of-the-world scenario. It could be a future-of-the-world scenario. Look at Hewlett-Packard, for example. As they consolidated Compaq, which had consolidated Digital Equipment Corporation, a big portion of that whole consolidation chain was the professional services business. And HP has a huge professional services business in the IT community. Now, IT has been totally commoditized, people may or may not be buying any of their hardware from HP, but HP still delivers them quite a large portion of services. IBM is now primarily a services business. IBM Global Technology Services is a major portion of the IBM Corporation and drives a lot of their decisions and is responsible for their customer relationships.
One thing that caught my eye, I made a post on NoJitter about a month ago in response to the Eastern Management Group’s comment that the IP-PBX market was a $59B market in 2010. I went and decomposed that based on public information and you can see that only one-third of that number is the vendor hardware and software. Thirty-four percent, and there’s only one point but a slightly larger amount of it is VAR services, so huge portion is now coming from VAR services and my other data point on that is an e-mail I received just yesterday that Dimension Data, even though they’re now a subsidiary of NTT, is reporting their results for the year-end September 30th, and they are now larger than Avaya, and they’re larger than Cisco’s UC business. Cisco said that business is going at about $4B in a forum recently. So Dimension Data sold $5.8B worth of revenue last year with growing margins.
I’m trying to find out the split between product resale because they resale both Cisco and Microsoft and services, but my estimate is that most of that money is going to show up in installation, implementation, customization, and hosted and managed and even some maintenance services. They do emphasize that their total revenue grew 22%, their managed services grew 15.5% for the year, so I’ll try to get more detail behind that, but at the bottom line here is a company that has moved into that leading position in a communications systems integration and value added reseller model, so the future can be bright if you’re willing to adapt your business model appropriately.
Art Rosenberg: Marty, I want to second the motion. You mentioned it, but I think it is a strong one. It’s the managed services because you’ve got all this new, complex technology, you don’t have the expertise, you’ve got to have someone put it together for you and now really you need someone else to manage it for you and tell you, what is it doing? How well is it doing? What has to change? The organizations that use the technology don’t have that kind of expertise, bottom line.
Dave Michels: Well, adapting the business model is not a trivial matter. It can be a very painful and even death defying act to do that. Don mentioned that the Microsoft model is working pretty well, but my understanding is a lot of the Microsoft traditional resellers have had trouble adapting to voice or unified communications and have not been able to pick up that skill set easily.
Dave Michels: Michael, you’ve been quiet, what do you have to say?
Michael Finneran (29:39): The channel business is kind of external to what we do in mobility because the primary channel for equipment of course, is the mobile operator, and nobody’s cutting them out of that business any time soon. From an applications stand point, that’s kind of developed as an independent business, really much along the lines of the consumer model. The one place we do have value added resellers, I was thinking of this when Art was talking a little earlier, is when we get to real mobile applications.
I always chuckle when I hear communications enabled business processes, like it’s something new. We’ve been doing that stuff in the mobile space for a decade or more and particularly with companies like Motorola and their mobile computer line. That’s Motorola solutions now, that side of Motorola. And one of the things they attest to their success in that has been a great set of systems integrators who basically sell Motorola’s clunky mobile computers which run on the Windows mobile operating system, but provide the back end interfaces and applications for countless applications: when you’re checking your rent-a-car at the airport, when you check in to a stadium... all those mobile based applications are generally built on Motorola equipment. So we do have a channel, but what we’ve failed to see yet is somebody who’s stepping up to do the same sort of thing with the newer tools. We can put credit card readers now on things like iPhones and Blackberries, but we really haven’t seen that business begin to gel. But in terms of an opportunity for VARs in the mobility space going forward, that is one place I’d look right off the bat. We’ve seen a company generate real ROI with mobile applications, not real sexy things, but good, down-to-earth doing the job, better, faster and cheaper applications. And for a VAR looking for expansion in the mobility space, I’d be looking at how I’d package those things... basically do the traditional jobs that can be done with mobile computers, but do them with iPhones and Androids and Blackberries. Back to you, Dave.
Dave Michels: Thanks Michael. You know one thing I’ve been noticing as I talk to a lot of the vendors at the conferences is the cloud vendors, the hosted vendors, are all seeming to do really well. They all claim to be penetrating the enterprise, but they won’t really share a lot of information to validate that, but the cloud certainly is changing things and is certainly getting some momentum. Kevin do you have any thoughts on how the cloud’s changing the channel model?
Kevin Kieller (31:55): Well, I think that there’s two points, Dave. One, I think Marty hit on the financial model that the cloud switches to annuity, but the other point that’s been brought up is with some of this newer technology, customers don’t have the expertise to deal with all the different modalities, so instant message, presence, voice, the different modes of conferencing including video...
And that is another thing that I think people are looking to the cloud for, so yes, it changes the OpEx versus CopEx, but also, I think that there’s the thought that let the cloud vendor or vendors, sort out all of the complexity and it’s truly in the cloud and it becomes a black box and the upgrade cycles and dealing with the integration and new mobile devices come on line... make that somebody else’s problem and we’re willing to pay for that. I think that from the dealer’s perspective, the cloud disintermediates the relationship with the customer. Initially there’s some good set up, migration of data revenue, but as a dealer, as a reseller, I would be concerned in terms of “yes I have that annuity,” but what does it take for a customer to either deal directly with the cloud provider? If I’m not providing any ongoing value added services, but I think initially for the customer, the cloud, as I said, masks the complexity and is one reason that’s driving a lot of people looking for UC solutions in that direction.
Dave Michels: Great, thank you Kevin. David Yedwab, I know you’ve worked closely with the channel and quite a few vendors; can you share your insights?
David Yedwab (33:43): Thanks, Dave, I’m pleased to add my comments to the broad, waterfront discussion covered by my colleagues here. The world of resellers, dealers, VARs, and channel is changing dramatically. Selling a bundled UC and collaboration solution to a voice guy, inside a business or an enterprise, is transforming into a much more complex sale to multiple buyers: voice organization if it still exists, IT, desktop group, applications group, and business units or functional areas are the new buyers, and all/many must be involved in each sale. How channels adjust to sell these solutions and to be paid differently, perhaps more towards a recurring revenue model, is going to be a series of great challenges for the channel. And we all know that the vendors need to have a successful channel to go to market with, and perhaps the slower takeup of UC solutions is partially because the channel is not yet prepared to sell and prosper in the new and evolving model. Clearly the challenges for 2012 and beyond will be the transformation of how vendors go to market, and how the channel evolves to meet the broad needs of enterprises in unified communications and collaboration. There is lots of work to be done by both vendors, by channel partners, and by us industry advisors, and certainly more discussions to be held about this stuff in the future.
Dave Michels: Okay, with that I’d like to thank all the experts. Talk to you next week.