Checkup Time: Channel Chiefs Examine The Financial Health Of Partners


Channel chiefs of top vendors in the industry say the collective health of the channel is the strongest it's been in years.

In fact, some channel executives say the move toward professional services and recurring revenue models has made solution providers healthier and more valuable than they've ever been.

At CRN's channel chief roundtable during XChange Solution Provider 2014 in Los Angeles, much of the discussion focused on the financial health and valuations of solution providers. The channel executives broke down a number of trends and factors leading to better profitability and higher margins for partners, as well as challenges facing many partners moving toward cloud and managed services models.

 

The roundtable featured Edison Peres, senior vice president of worldwide channels at Cisco; Tami Duncan, IBM's vice president of global business partners for North America; Frank Vitagliano, vice president of North America channels at Dell; Jesse Chavez, vice president of worldwide channel strategy and Operations at HP; Cindy Bates, vice president of Microsoft's U.S. Small and Midsize Business (SMB) division; and Frank Rauch, vice president of VMware's Americas Partner Organization.

Here are excerpts from the conversation:

What's the health of the channel? Is it a good time to be in that business? What are you seeing?

Peres: We do profitability surveys every year and kind of check on the health of the partners. 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.  I think that the other thing that we look at is not only their profitability, because that kind of comes and goes depending on how they invest, it's what their valuation is.

When you actually look at the valuations today of the partners versus the valuation of the partners 10 to 14 years ago, it's very different. They're getting eight, 10 times sometimes EBITA versus years ago you were doing great if you got two to three times. I think a lot of that is because the IP and the gross margins that they're getting for their professional services is differentiating them and allowing them to be able to do that. So 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.

Chavez: I don't think they're giving away their services the way they used to. They've learned that, in a lot of ways, that they have to charge for their services. I think that is helping their profitability. We do a lot of joint business planning with our partners across the board, and this year we've seen that all our top partners are predicting growth in the double digits and that their profitability is increasing. So the landscape that we see is that profitability is definitely increasing, especially this year and going into the future.

Duncan: At our PartnerWorld event, which we just had a month ago, we had 1,600 CEOs there. The general feedback we got there wasn't the things that we heard five or six years ago: not enough margin, not enough opportunity. We heard a lot of very good feedback. What they're saying now is that we're in the right space, and we're moving to the higher value. What they're saying is we need your help to move to this next evolution. Help me invest. I'm doing OK now, but I see where the market's going and I'm not looking for your help in making that transformation. Because they want to keep growing.

And I would also say that there's a bit of a split. The partners that are big enough that they've kind of gotten it and they've made the shift, they're doing fairly well. 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. They've probably got a couple of years left if they don't make that change. So we're actively looking at our mix of partners and trying to determine who's got the appetite. Who wants to move?  Where should we make those investments? Who's moving with us?

NEXT: What's The Health Of The Channel?