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.

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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?

Vitagliano :

There is always some hesitation, however, on the part of a lot of them, and that's one of the reasons we're having these discussions relative to how do I really make a major change? In other words, how do I make a major transition and drive my business from 25 to 30 percent services to 50 to 60 percent services because that's the only way I'm going to get seven-and-a-half to eight times EBITA, which is at minimum what everybody's looking for. To Edison's [Peres] point, the good ones that differentiated themselves, where they've got some unique cloud-based offerings and some unique services, are approaching eight, nine, 10 times EBITA. With the other guys that are running around still in the old model, it's significantly less. But, overall, from my perspective I think it's very healthy, and the only discussion we're having is how we can help them continue to grow.

Bates: The vast majority of the partners I talk to are seeing strong growth. The interesting thing is though I think more than any time in my history in the channel, the spread of our partners in their evolution is the widest. So if you look at the partners and our data, we say about 13 percent are fully cloud-transformed. That's companies like Nimbo, who are Azure-focused and doubling their business, and Palmetto [Technology Group], an Office 365 partner that's off the charts with growth as well. Those guys have figured the model out, and they've got rockets on them.

Rauch: There’s a lot of money in the channel right now. There's definitely a lot of money. I'm looking at the same things these guys are looking at. Valuations are great. There's a lot of cash. There's lots of opportunity. But I agree with the comments made earlier about the lifestyle guys. They are probably not going to survive. You're not going to survive today without a demand engine. You're not going to survive if you don't do the right type of marketing. I believe that it's our stewardship and our charter to be able to help them do that. We're not going to be able to do it for them. But we need to be able to get better use of MDF. We need to be able to get them better campaigns. We need to be able to give them better install-based data to be able to go after the market.

NEXT: Is It Tough For Partners To Gain Access To Capital?

Do you see them having any issues trying to get access to capital at this point? Is it tough for MSPs and cloud services guys that don't carry a lot of product to use as assets?

Vitagliano:

Peres:

Rauch:

So are you changing the metrics of your channel program? What kind of recurring revenue are we getting from our guys, and is it going fast enough?

Chavez:

Peres:

We do have a program that is a managed-services and cloud-based program that tries to motivate partners to move in that direction. But I think they're doing that naturally. Once they understand the value of managed services and the fact that it's more profitable and you lock your customers in a longer period of time, they want to go there. So we're seeing actually a faster growth in these managed services than necessarily in the cloud-based services to be honest.

NEXT: Are You Changing The Metrics Of Your Channel Program?

Duncan:

Bates:

Vitagliano: