Mike_Kiev - Fotolia

Unconventional rivals to challenge IT channel companies

Channel companies in 2019 may find themselves weighing the merits of ISV partnerships versus the possibility of developing their own software lines of business.

The growth of unconventional partner types is expected to continue in 2019, challenging the more traditional IT channel companies to collaborate or compete.

Nontraditional companies playing a bigger role in the channel include ISVs, SaaS and other cloud ecosystem consultants, and professional services firms. Collectively, those competitors have been referred to as the shadow channel, which has expanded in recent years while the population of old-school resellers has declined.

Many of the nontraditional players' business models are rooted in software, whether they are software developers or accountancies offering expertise around a financial app.

Carolyn April, senior director of industry analysis at CompTIACarolyn April

Carolyn April, senior director of industry analysis at CompTIA, said SaaS partners, which resell or refer SaaS offerings, are the most prevalent type of nontraditional partner in the channel today. She also cited ISVs and Digital marketing agencies. Additionally, April has studied legal and accounting firms, a large percentage of which now sell or refer technology to their clients. She said those firms tend to focus on a particular application -- an accounting package, for example.

Jay McBain, principal analyst for global channels at Forrester Research, said the ISV has been, and will continue to be, the fastest growing type of company within the shadow channel. He said the number of ISVs has grown from 10,000 firms 10 years ago to more than 100,000 today. "I expect there to be over 1 million firms by 2028," he noted. McBain believes the channel, including the managed service provider (MSP) space, is in for significant changes (see sidebar).

Changing the channel

The channel is on the cusp of a substantial changeover amid maturing MSPs -- once the new business model -- and the high growth of shadow channel firms such as ISVs and cloud ecosystem partners. In this interview, Forrester Research's McBain comments on this trend.

Do you see the growth of the shadow channel and decline of the traditional channel continuing in 2019? Will the trend accelerate?

McBain: We are seeing some significant changes in the channel industry with 70% of MSPs stating that they are looking for an M&A exit in the next five years (Source: Service Leadership). We have seen average margins drop to 17% for MSPs and future growth numbers drop into single digits. With emerging technologies starting to take hold, new buyers surfacing and software marketplaces growing, many traditional business models are being transformed to take advantage of new technology ecosystems and opportunities.

Will the rapid rise of XaaS ecosystems companies -- AWS adding 10,000 Partner Network companies in 2017, for example -- trigger a wave of consolidation?

McBain: AWS added another 30,000 partners in 2018 and will likely add 50,000 more in 2019. M&A activity is at an all-time high and this industry definitely has the attention of private equity and venture capital firms. That being said, the pace of new 'born in the cloud' partners will outpace consolidation for the next three to five years at least.

ISV partnerships

April said the nontraditional players present both a competitive threat and a partnering opportunity for traditional IT channel companies.

If you are struggling to find the right people and it's too expensive to retrain, consider partnering with another channel company that might be nontraditional.
Carolyn Aprilsenior director of industry analysis, CompTIA

"If you are a forward-thinking traditional partner, you would view this as an opportunity," April said.

Both sets of partners bring different skills sets to the table, she said. Most of the traditional partners have expertise in IT infrastructure solutions, perform a lot of security and compliance work, and handle the basics of devices and networks. The newer players, on the other hand, are "steeped in applications and the cloud" and tend to specialize in a vertical industry, she added.

There is considerable cost involved in cultivating vertical industry expertise or developing a software offering, April pointed out. So, alliances with nontraditional channel firms -- ISV partnerships, for example -- could defray the cost of entering a new market.

"One of the big challenges channel firms have today is talent -- trying to find the right people," April explained. "If you are struggling to find the right people and it's too expensive to retrain, consider partnering with another channel company that might be nontraditional."

Software developer mindset graphic
IT channel companies planning to hire developers should note that job candidates value work-life balance and professional growth.

IT channel companies edge into software

While some firms will decide to partner, others will take a page from the new-look partners and adopt some of their business models. Software development, in particular, seems a ripe area for expansion in 2019. Traditional IT channel companies are already cultivating software as a growth opportunity.

"Many channel partners are codifying their IP and jumping into this market themselves," McBain said. "It doesn't mean building a software company to take on the likes of Microsoft or Oracle. It means paving the last mile for customers in a specific subindustry, buyer line-of-business, geography, sector, segment, size or piece of the technology stack."

Vendors such as Cisco are encouraging this direction. Cisco, itself, is undergoing a transformation toward software and subscription-based revenue. The software shift lets IT channel companies address customers' specialized needs, offering opportunities for higher margins.

Nirav Sheth, vice president of partner solutions, architecture and engineering at CiscoNirav Sheth

Nirav Sheth, vice president of partner solutions, architecture and engineering at Cisco, said partners that build their own software stack on Cisco's technology platform could see margins in the 70%-plus range, compared with margins in the 30% range for professional services.

Sheth said partners have a range of options available for entering the software space.

"You can get started with basic scripting and take advantage of data feeds from APIs," he said, noting partners can also "move up the stack" to offer vertical market-oriented custom solutions.

"We believe software and APIs give you an opportunity to differentiate your business," added Susie Wee, senior vice president and CTO of DevNet, Cisco's developer program.

Some IT channel companies are moving ahead with software.

Jason Parry, vice president of client solutions at Force 3Jason Parry

"As Cisco transitions more and more to software, the service offerings have to transition with that," said Jason Parry, vice president of client solutions at Force 3, an IT solutions provider and Cisco partner based in Crofton, Md. "So we, as a partner, have made the investments in the Lifecycle Advisor [program]."

Cisco's software-oriented Lifecycle Advisor program will be folded into Cisco's customer experience specialization, which will launch in 2019.

The software change has led Force 3 to introduce a software-licensing expert role in the company and hire personnel with a software development background, Parry said. Force 3's software approach, he said, isn't exclusive to Cisco -- it applies to other vendors as well.

"We hired a lot of software expertise," Parry said, noting the company probably would not have considered that move three years ago.

Dig Deeper on MSP business strategy

MicroScope
Security
Storage
Networking
Cloud Computing
Data Management
Business Analytics
Close