Channel Chiefs: New Business Models Forcing Legacy IT Firms to Master Cloud, Recurring Revenue

The emergence of born-in-the-cloud partners and convergence of the telecom channel mean that traditional VARs and MSPs must place more aggressive bets on emerging technologies.

The legacy IT channel has, in recent years, shifted from aggressively making investments in one-time leading-edge technologies that have already hit the market to trying to get out in front of the latest technology trends, said Frank Rauch, vice president of VMware's Americas Partner Organization, during a channel chiefs panel Tuesday at CompTIA ChannelCon 2016 in Hollywood, Fla.

"When you forward invest, you're not going to be able to put chips on every number on the roulette board," Rauch said. "You're going to have to make strong bets, you're going to have to make bigger bets, you may have to narrow down the line card."

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Traditional on-premise solution providers often find themselves in for a rude awakening as they attempt to adopt a more cloud-centric business model, said Neal Bradbury, co-founder and senior director of business development for Intronis. That's because their born-in-the-cloud counterparts have already mastered the high-volume, low-margin ways of the cloud.

"They have to learn to be efficient. They have to learn to automate," Bradbury said. "They have to have less employees and service more customers."

Private equity firms and larger solution providers have played a pivotal role in increasing the visibility of new channel models, Rauch said, as both have taken to acquiring born-in-the-cloud, born-in-mobility or born-in-security partners and consolidating them into their existing IT services practices.

"You can buy the attributes," Rauch said. "You don't necessarily have to build them."

VMware needs to lower its barriers to entry to make it easier for channel partners of all shapes and sizes to become part of the vendor's ecosystem, Rauch said.

Today's born-in-the-cloud partners are coming to market with a deep understanding of subscription-based models and experience in generating recurring revenue, said Rafael Garzon, managing director of Citrix's Americas channel organization. But given the complexity of the Citrix offering, Garzon said end users still need traditional partners to help them address pain points.

Garzon said Citrix's new partners need to become more savvy and technically adept at addressing customers' existing problems, while the vendor's legacy partners need to adapt to more of a subscription-based business model.

Of the 6,000 new channel partners brought on each year by Ingram Micro, the distributor has found that they're increasingly either born-in-the-cloud or have steered their business toward cloud services through mergers and acquisitions, said Kirk Robinson, Ingram senior vice president of commercial markets and global accounts.

Robinson cautioned that born-in-the-cloud partners typically can't fulfill all of their end users' needs since they tend to focus on one technology area such as security or mobility, meaning that traditional on-premise partners are usually also needed to address the clients' broad array of needs.

Although a cloud specialist can fulfill a customer's need on some occasions, many customers are in need of a more comprehensive solution, according to Marq Cerqua, an IT services consultant for All Covered, No. 110 on the 2016 CRN Solution Provider 500. Cerqua believes a partner would likely provide superior consultation or advice if it understands the brick and mortar side of the business.

"Everything has a backbone," Cerqua told CRN in an interview following the panel session. "I think you'd miss a lot [by focusing just on the cloud]."

The IT channel has additionally been challenged by increasingly frequent encounters with the telecom channel, which Garzon said has a leg up on its IT counterparts since its financial model and expertise has long been built around selling subscription-based services.

Pure IT solution providers benefit from a trusted relationship with clients thanks to their many years of consulting and advisory work, Garzon said, but are just now coming down to offer recurring revenue-based services.

Garzon expects the IT and telecom spaces to converge within the next three to five years as the telecom channel expands its ability to become a trusted advisor and the IT channel figures out how to successfully monetize services. Acquisitions could also help drive a convergence of the two spaces, Garcon said.

Short of an acquisition, partnerships between telecom and managed services firms can help both grow their installed base, thanks to all of the additional services they're now able to offer, Bradbury said

"If you're an MSP, find a telco partner that makes sense and offer your services to them," Bradbury said. "And vice versa."

The telecom channel opens up a whole new ecosystem, Rauch said, making it possible for VMware to work with vendors such as Apple and Samsung for the first time.

Rauch praised the scalability of the telecom channel, and said vendors might benefit from expanding their channel from two tiers – a distributor and an IT service provider – to three tiers – a distributor, an IT service provider and a telco provider.

"The trick to dealing with telcos is to really be able to define the guide rails," Rauch said.

Cerqua – who has a telecom background – has found that IT customers frequently turn to All Covered for telecom consultation, due to the existing trusted advisor relationship. Lots of opportunities exist for legacy IT firms in the telecom space, Cerqua said, particularly as it relates to unified communications or cloud-hosted solutions.

"If you're looking past the telecom," Cerqua said, "you're leaving money on the table."