Channel Chief Roundtable: Cloud And Managed Services Demand A New Partner Approach

It's no secret that solution provider business models are changing. And, as a result, how vendors work with and compensate their partners is changing as well.

As traditional VARs increase their services mix and move to more of a cloud/managed services model, vendors are scrambling to evolve their partner programs and compensation models to better recognize that shift. And as vendors look to go deeper and build more strategic relationships with their top partners, they're also coming up with new ways to incentivize them and help them expand their businesses. But are the strategies working? Are vendors keeping up with pace of change?

At XChange Solution Provider 2014 in Los Angeles, CRN sat down for a roundtable discussion with some of the top channel chiefs in the industry to find out how vendors are changing the way they do business in the channel. The roundtable featured Edison Peres, senior vice president of Worldwide Channels at Cisco Systems; 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 Hewlett-Packard; Cindy Bates, vice president of Microsoft's U.S. SMB division; and Frank Rauch, vice president of VMware's Americas Partner Organization.

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During a wide-ranging discussion about the state of the channel today, the executives discussed how the cloud has changed their approach to partners and why the shift from product reselling to services is actually a good thing for vendors. Here are excerpts from the discussion.

CRN: What are you seeing from partners as they move to cloud and off-premise services? Are they asking for different things from vendors, and are they working with fewer vendor partners?

Tami Duncan: What they're asking for depends on what their heritage is. So if they're coming in as a new partner, they may be asking for very different things than if you've got a partner who is trying to do the transition. So partners that are transitioning from vintage in that proactive state want something a little bit different than someone who doesn't have that back history. They're accustomed to different margins, they're accustomed to different business styles, documentation. So we're trying to adjust both of those things and find the meat in the middle so that we can serve the needs of both kinds of partners.

Cindy Bates: One interesting thing in terms of the cloud and how that really changes the relationship is the importance of even more close connection between the vendors and the partner and the importance of transparency. They are representing our services, let's say, for example, Office 365, to their customers. And it is important that they have visibility as an example and service status, things like that.

So we recently launched our partner admin center, which is a step forward in that regard to arm our partners even more deeply to be able to represent, in this case, the public cloud. And really, the symbiotic relationship between the partner and the vendor is even deeper. That's our intent with something like that, where they can see all the customers, they can see the status of the service reports coming back from our data centers.

NEXT: Why Are Solution Providers Going With Fewer Vendor Partners?

CRN: If it's that solution providers are going with fewer vendor partners and going deeper with the ones they keep, is that driven by what you, the vendor, is doing or is this being driven by market trends?

Jesse Chavez: I think it's both. It's definitely both. Obviously we're working from an HP standpoint to help them through whatever pathway that they're taking because every partner evolves in different ways. Some are not going to evolve all the way through. Right? So providing the overall programs from a vendor perspective is part of that overall. But it's really the market conditions that are driving this. So as long as the vendor can provide the tools and the assets to help them through that journey and keep connected to their partners, I think that's what they're looking for.

Frank Vitagliano: I would also say it's going both ways. From a vendor standpoint, we're doing the same thing. We're going wider and deeper with fewer partners. It's not a comment about the number of partners or capacity. It's about getting strategically engaged. I think what the solution adviser's probably saying is that as this thing rolls out, and it's still a little bit uncertain as to exactly how it's going to roll out, I've got to get comfortable that I'm linked up with somebody strategically and I don't make a mistake. Because if I make a mistake, it sets me back two years.

Edison Peres: What we're seeing depends on the roles that they play. So we see partners playing three different roles. They're either builders of cloud and they spend a lot of their energy on private as well as hybrid clouds, but it's pretty much in that building infrastructure kind of reality. Then you have the providers, those that are actually building out infrastructures and actually being a provider of the service. They have a different requirement and need than the builders, if you will. Then resellers -- and resellers are those that don't actually build out the infrastructure but resell someone else's cloud, it could be ours, it could be anybody sitting around this room and they're just reselling it.

Those business models for all three are very different. A lot of times what we find is partners have more difficulty trying to figure out which role because many of them want to play multiple roles. When you have multiple business models all competing with each other, then you start to get, I think, a lot of the conflict that we hear. Therefore, the need to then start to identify partners in different areas of your focus is an opportunity for them to start to simplify a little bit more of the model that is, I think in many respects, competing with each other.

Frank Rauch: I don't think most of the people that roam these halls [at XChange Solution Provider 2014] really want to go a sharp left or a sharp right. They want to build from what they've already built. And that's kind of what the VMware is about right now. So having 40 million virtual machines out there in the universe, the partners want to be able to mine the installed customer base.

They want to be able to have fewer vendors on their line card. So we're offering them cloud and a hybrid cloud. Same thing with mobility; we acquired AirWatch, and we acquired Desktone. Partners are taking the VMware brand and they're extending from where they are right now.

So we're seeing that really resonate and it's kind of giving partners a new life. It's giving them new energy, because I have a new story to be able to tell the market. And the story is, whether you want federate out of data center, whether you want to do it in the data center, whether you want to have software-defined networking, software-defined data center, mobility or device management, you can do it with one brand, but you don't have to do it in a monolithic stack. You can do it in a very open way.

NEXT: How Do You See The Needle Moving Over The Next Three Years?

CRN: Three years from now do you think the percentage of partners who are doing 70 percent or more of your product will be greater, and how much greater will that be? How do you see that needle moving over the next three years given the pressures that we're seeing in the market?

Chavez: I wouldn't put a number to it, but I do see that the partners in our Platinum partners that sell the breadth of our portfolio are the ones that are exhibiting the most growth right now from an HP perspective. It's double-digit growth and we're seeing that this year, and we expect that to continue to grow over the next three years.

Peres: I think the majority of the partners that see the most value with Cisco are the ones that see the value on the breadth of what we sell vs. an individual point product.

Vitagliano: At the end of the day, the way we look at it is we want to be strategic with as many partners as we can. If I only have 35 [percent] to 40 percent of the partner's business, I'm not strategic -- I'm a line card.

CRN: One of the levers to get partners to sell more was always that you just get a better discount if you sell higher volumes. Has that changed today? Do partners need more certifications across a bigger set of the product line, which shows that they're willing to sell more of what you have?

Vitagliano: Just because I look like I'm from the '70s or '80s, do you think we have to have a '70s or '80 model in place?

[Laughter]

Because that's what that is. The whole idea of just stacking on better rebates and more on the back end, I don't think that scales. I really don't. I think for those of us that have tried it know it's a race to the end. I think what it's about is becoming more strategic. And what I mean by that is, for example, we outsource a lot of our services. So when I go to one of my partners and I use them as an outsourced service provider like for us, we become more strategic. They don't necessarily, as part of that services transaction, generate any more hardware revenue for us. But they're becoming more strategic with us, becoming more dependent upon us. You're getting a much deeper, strong relationship.

So I think it's those types of things that will continue. Now at the end of the day, make no mistake, they've still got to make a return on the investment and the ones in this room that are more profitable for them will always be at the top of the list. But that profitability piece includes a lot of stuff, ease of doing business, how are your direct guys to engage with? How can I work with you? All that factors into it. At the end of the day, they develop a profitability view and you're either at the top of the stack or you're not. So I think a lot of it is that. It's not just about the rebates and the price, but that's a piece of it.

Rauch: First of all, you're not going to twist arms to be able to get there. And going back to Frank's comments, you're not going to be able to buy it either; you're really not. There's no margin program in the world that says, 'Hey, you're going to sell this monolithic [product] stack.' It's been tried before. It's kind of the old news. What you need to do is be able to make it easy for partners and make it intuitive [for them to expand their business with you].

Peres: We don't use volume at all as a condition to any discount that we sell. We're value-oriented and the value starts with what we call specializations. It's like degrees. Within that specialization we not only have the condition of technology competency, but also services competency. So what we've done is we've added professional services as part of the foundation of those specializations. The more specializations you have, then the more of a certified relationship you can have with Cisco and, the higher the certification level, the more discount you get, but it's not volume-oriented. It's based on how many degrees you have or how many specializations or how broad you are in your commitment to Cisco. And we're going to continue to evolve the program to be that way and add more and more content both in applications as well as in services.

NEXT: Are Partners Born In The Cloud More Attractive?

CRN: We are at a point in the market now where we're actually seeing solution providers that were born in the cloud that have come along. Is that partner more attractive to you because they're the future? Or are they less attractive to you because they may not be interested in some of the legacy products?

Duncan: I think it's a mix. We need both right now. One thing is not going to shut off what the other starts. And so I think finding that balance between those two kinds of partners is really important for the vendor to prosper. And for the entire ecosystem of the partners to prosper because right now they need the skills that the others have because the clients are looking for a mix of both of those things.

Chavez: I think also for those partners that are born in the cloud, from an overall ecosystem perspective if you include them as part of your ecosystem, and you actually have that as an offer for your channel, that they can now offer those [cloud] services to their clients -- which I think we're seeing a lot more of that as far as these brokerage services -- then I think you can build that ecosystem. Certainly, I think it's a mix. I completely agree with that. But I think you can bring those partners into your ecosystem and then point your channel to actually sell those [cloud] services. You can actually build an ecosystem that is going to be productive for not only that particular partner, but your channel partners that are trying to evolve into the new style of IT and hybrid IT.

Peres: One of the things that we've been working on with our partners for years is to grow their service capabilities. And they've been doing that, which is great. We think that's going to be the foundation for where this new future is going.

Where there's mystery, there's margin. If you think about a lot of what we're talking about, the majority of the opportunity in the foreseeable future is still going to be in the private cloud space, not in the public cloud space. So for customers trying to rationalize the type of workloads that they want to put in the private environment vs. in the public environment, how do you make sure that the infrastructure allows the movement of those workloads in a seamless way? That's going to be where the partners are going to make a lot of the money, which is going to be professional-services-based.

So I think that the professional services capability they've been growing for the last number of years is going to set them up for being able to be able to bring a lot of value in the future, which is their IP and their value, and I think that's is going to make them even more relevant going forward. That's in the cloud world.

NEXT: Are Partners Moving Too Slowly With Professional Services Moves?

CRN: Are partners moving too slowly for your liking with their professional services moves?

Peres: I don't think so. Actually, if I look back 13 years ago when I came to Cisco, the average partner had about 5 [percent] to 10 percent of their mix in services. Today we're seeing as high as 50 [percent] to 60 percent. So we've seen a dramatic change in the last 10 to 14 years with partners evolving their business model to be much more managed services- and professional-services-related. I think we're probably all experiencing that.

Chavez: I completely agree with Edison that services are where the margin is. That's the way that our partners are getting to differentiate themselves -- through services -- whether it's professional services or the services of maintaining and managing these environments. We also work on specializations. That's what we promote to our partners -- that they should specialize in services; it's embedded into all of our programs to make sure that partners know that when they do become specialized there is a services component and that, in fact, they get compensated for delivering on those type of services. So we're also seeing an increase in our partners on the services piece and have dramatically started seeing that going from 10 percent to 20 percent to 30 percent for those partners that are actually going through the programs and taking advantage of those programs.

Now the key thing is advising and transform. You know that takes a lot more for some of these partners to make the transition to the advisory type of capabilities. But I think as they start focusing more on software and these cloud services and implementation services, that drives them more to kind of being the advisory component that delivers more margins to these partners.

Bates: We do see the MSP business model as one of the most rapidly growing business models for our partners. Whether it's here at XChange or [other events], we really talked with partners about how that model enables them to build that recurring revenue stream, that annuity base stream. So at the end of the day when they retire, they have value in their company. So I think that that is definitely the direction that we're seeing significant strength in.

Rauch: With us, it's fairly simple: we really don't have bodies. We need our partners to be more engaged than ever in services. So when you look at what we're doing in the market right now, whether it's software-defined data center or any of the other things, basically it's all about services. And we believe there's a window of opportunity right now. We want to be able to accelerate through that window of opportunity.

Duncan: You asked the question earlier about 70 percent of a partner's business being with a single vendor. Where we're seeing that not be the case is our partners that have really grown their services arena. And so we support that. We cheer it on because, again, that's what makes a really healthy partner and I think everybody up here has said that. So we want to offer as many opportunities as we can for those partners to cultivate their own professional services around the things we bring to market.

Also, as we see the partners that have shifted from traditional hardware into a bigger software mix, we see the amount of professional services go up with that. So each one of those things offers an opportunity for them to customize. We'll provide guidance, we'll provide education, we'll provide all kinds of enablement for them to get the skill, but we're also a little bit careful that we don't get too prescriptive in that because that's really where their differentiation and their competitive advantage is.

Vitagliano: I couldn't agree more. We as vendors have to be really careful about how we're driving that or not driving that [expansion]. Because at the end of the day, the thing we've got to remember is we're spending a lot of time talking about what the vendor thinks, what the solution provider thinks, but it's really important what the customer thinks. And when the solution provider is sitting there trying to figure out what their model looks like and what they need to do, it's all based on how do they satisfy their customer. And if we forget that, none of us needs to be in this room.

The two things that I've seen over the years that have caused partners to totally screw it up is when they've either gotten too aggressive in the acquisition space and kind of gotten themselves in a position where they weren't capitalized properly and they couldn't manage it, or they got away from their core competency. And when you get away from your core competency because we as vendors might force them in a certain direction, that's when they are in trouble. So I think what we have to do as vendors is we have to recognize what's out there. Recognize sort of the trends and then help them as much as we can but not prescribe certain directions where they go or how they go.