Channel Economics and Technological Disruption
December 5, 2018
The opportunity for IT services companies in today’s market is huge. According to Gartner, worldwide IT spending has now risen to a whopping $3.8 trillion and global IT services spend has broken through the $1 trillion barrier for the first time ever. However, as buyer behavior continues to transform in a cloud-first world, and the subscription model becomes more prevalent, reaping the rewards from this potential gold mine arguably requires revised business models and fresh approaches.
- How a move from a sales-oriented model, to a services-based can set your IT business up for greater profitability in the future
- What’s changing in the channel and why transformation for IT businesses is becoming an existential necessity
- What steps your IT business can take today to begin the process of transformation
A changing channel
Today, spending is being switched from technologies we all know and love today, towards new technologies such as AI, Machine Learning or IoT. These developments provide the opportunity to serve more customers, more quickly, with a faster sales cycle and a lower cost of sales. The way we serve these customers has changed too. As we move towards subscription business models, the lifetime value of customers being greater than ever before. This also means that there is a greater services opportunity than ever before.
However, not everyone feeling the upside yet. The cloud subscription models mean that partners are no longer getting money upfront and businesses are increasingly feeling the squeeze. This reduction in margin and upfront cash is putting pressure on partners to adapt traditional business models, sooner rather than later. Arguably, the M&A activity in the sector is indicative of this.
Challenges for today’s IT companies
To make the most of technological disruption, IT businesses need to ensure they have the necessary capacity to deliver service based solutions. That means having the right people with right skills, to deliver the right solutions, whenever and wherever they are they are needed.
Yet, right now, the consensus view is that companies are lacking capacity in the appropriate skill sets. Some of the possible explanations? An ageing IT workforce, decreasing birth rates and alternative graduate career options are all suggestions for this skills gap. Even so, forward-thinking IT businesses have already created initiatives to try and meet the demands of an evolving market:
- Vendors are starting global initiatives to fill skills gaps and ensure capacity. For example, Microsoft is driving the Cloud Society where they teach skills in Azure.
- Partners are starting graduate programs to guard against future capacity deficits.
- Partners are taking advantage of this shift towards a service-based business model by building individual IP at partner level and developing unique, tailored solutions. It’s one way to improve margins and create a USP in the market.
Does a ‘Sell-Thru’ Model still work?
Channel capacity has historically been defined by sales resource: the number of salespeople we have on staff and the ratio between the number of customers those salespeople look after has always fascinated us. But does this model still fit the way customers buy and require tech products?
This “Sell Thru” model is built around the product and optimized for up-front sales, and implicitly, vendor convenience. A product push mentality dominates: vendors ship to distributors, distributors ship to resellers who had sales professionals on staff. However, what started with software, grew to carry software but is now being asked to carry cloud services. The nature of cloud, and the way customers buy in today’s market means that this Sell Thru model is no longer appropriate.
A services-based model for the Cloud
With all the changes happening in the market, we could argue that it is also time to change the way we look at the IT supply chain. Primarily, this shift means that were are moving away from pushing products to customers but the extent to which customers choose to consume more of the stuff we have to offer. To cater for a cloud-based model and a world where services dominate, everything we do should be optimized for adoption, active usage and real business value for the customer.
This switch from ‘product push’ to ‘consumption pull’ changes the way we should think about the IT services supply chain. Arguably, it’s the Customer at the top and the Vendor at the bottom. IT partners should now be concerned about what services skills we have in our companies and pushing for higher levels of certifications. Arguably, we might now want to measure our capacity by services resource rather than sales resource.
Take action sooner rather than later
At the core of what IT services companies need to do to meet the demands of today’s market , is managing services skills. But, a core question remains: “do we have a clear view on what skills exist in our organization?”. The answer at the moment is no. It is only when we know what we have on staff that we can make a plan to take advantage of the opportunity ahead of us.
Here are some suggestions to help you rebalance your organization for a services-focused industry:
- Develop a skills inventory to keep track of the skills that exist within an industry. This way, we be can confident that we have the capacity to the deliver the appropriate services to our customer. It can also help when allocating resources to projects and planning investment for staff training schemes.
- We should reflect on what we’ve historically spent on driving sales productivity and ask ourselves whether we should be doing more for our services staff. The people development and incentives we have traditionally offered our sales teams, there needs to be an emphasis on the effort we put into offering similar schemes to services staff.
- We need to assess whether our consulting business model – which relies on maximising chargeable days on a project – is consistent with maximising lifetime value and consumption in a services-centred industry.
- We should review the role of the Practice Manager, (i.e. the person who manages an IT business), since it is now one of the most important – and toughest roles – in industry. In a Sell-Thru world, Sales Managers and Sales Directors are the most important in industry. Yet, in a services-led industry, Practice Managers should be upgraded to that status since their role is so much more important in delivering value, and ultimately, profitability.
- Offer customers simplification and real digital transformation value, instead of maximising consultant billability. Consultants should decide whether they live in a business analysis world, or technical . Saying yes to the Customer, and delivering what a customer thinks they want, may no longer be the right approach.
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