Is There a Place for Solution Providers in the Parallel Channel?

A common saying in our little corner of IT is “it’s a big industry, but a very small community.” Despite the fact that the channel is comprised of thousands of businesses (including providers, vendors, distributors and others), most tend to keep in rather tight circles. They operate primarily in their own core comfort zones and, based on the vast number of success stories coming out of this space, that seems to work fairly well. As with most industries, those who network and collaborate actively with other members usually have an advantage over those who don’t.

What we tend to forget is that the tech industry is much broader than the IT channel. Much of our attention is focused on vendors and distributors that support our community, and with the providers who develop and support end customers. That’s been a recipe for channel success as long as there’s been an IT channel.

But the times are changing. Today’s channel involves a lot more than hardware and software. The advent of cloud solutions and managed services is shifting and accelerating the industry dynamic. There is more complexity in a typical business than ever before, whether those customers are enterprise or sole entrepreneurs, and security and compliance needs continue to climb. For providers, that means offering comprehensive support for their customers, either on their own or with peer partners, or specializing in particular areas. To say that channel firms have a lot on their minds (and plates) is an understatement.    

That may explain a lot of the disconnect between those in the traditional IT channel and the SaaS community. Solution providers dabble in this space, but few have active engagements with one or more vendors on “the other side” of the tech fence. Of course, to be fair, few of the SaaS developers who make up this parallel channel seem to understand (or acknowledge) the value solution providers bring to the tech delivery equation. Some feel this lack of cooperation and collaboration is detrimental to both groups.

One of those visionaries is Sunir Shah, CMO of Olark and Co-founder/Director of the Small Business Web Association. After working with a number of companies with various delivery models over several years, he understands the concerns of both communities. He has studied the unique go-to-market strategies used by SaaS business application vendors, and knows the opportunities IT channel companies present. At this month’s CompTIA Council and Community Executive Board 2017 planning meeting in Kansas City, MO, Shah shared his insight on the parallel channel in a joint session.  

The Small Business Web Association was created several years ago, when a few SaaS companies decided to join forces to improve their customer service options and strengthen their sales opportunities to small businesses. “Everyone thinks they are selling SaaS apps directly to users but, in my view, it’s more about developing components and anchors. Organizations need core software to run the business (the anchor apps) with a variety of peripherals to support them. For example, our live chat plugs into a company’s website.”

Shah emphasized that the number of available cloud connector services is growing, and some of the largest companies driving this innovation don’t play much in the IT channel. “Salesforce is clearly the most powerful player in the market today, and they can do whatever they want. There are some recurring revenue opportunities, around installations and training since it’s not an easy program to use. There is money in their value chain if you have the right customers.”  

One major problem with the SaaS model is the margins are often low. Unlike managed services and cloud solutions with a rich partner program to support them, the ecosystem is much smaller and the value proposition is still undeveloped. In addition, the business model for SaaS suppliers is rarely conducive to third-party players like Value-Added Resellers and Managed Services Providers. “The problem is these vendors disintermediated all of you (channel professionals). They want to own the customers directly, from the sale and customer services relationship to the brand being delivered.”

The issue many SaaS vendors run into is that, with only about four million businesses in U.S., they are somewhat limited in their growth potential, especially those who focus on small verticals or specialized customer segments. Customer churn is another factor many fail to account for, which is an area where channel partners can really help.

It’s important to understand the reasons behind the parallel channel’s reasoning for going direct. Most of these companies were built or expanded using venture capital, and the number one objective for those who invest in these firms is growth. How many users did they add this month? Are the sales increasing? Most SaaS vendors don’t focus as much attention on the total user experience as VARs and MSPs do. They provide everything they believe their customers need and hope to rack up as many sales as possible. That’s not to say they don’t care about long-term success. Many simply don’t know the value the channel offers or feel they need it to be successful.

Disconnect or Opportunity?

So how do solution providers get more engaged in this parallel channel? First, they have to identify the best fit solutions for their customer base; those SaaS apps that a real business case can be built around. In some cases, the vendor may already have a channel program in place, or be developing one. But that shouldn’t be the limiting factor. The vast majority of vendors start out direct. They develop their offerings and build demand based on end user feedback, and if and when it makes sense, they create channel programs.

Not all see the need to follow that path. “The people who buy SaaS are used to working with technology, they will go find an app to fix the problem they have,” says Ron Culler, co-founder and CTO of Secure Designs and Vice-Chair of the CompTIA IT Security Community. “They won’t call a managed services provider. Buyers inside many companies don’t think of the IT channel when an app will solve the problem.”  

On the flip side, there are opportunities for the channel to prove its value to SaaS vendors. As always, the relationships and business conversations VARs and MSPs cultivate on a daily basis are extremely valuable in the long-term. “In a direct model, the churn rate is typically 20-30% on an annual basis,” explained Jason Bystrak, Executive Director of the Americas for Ingram Micro Cloud and Chair of the CompTIA Cloud Community. “In a one tier distribution model turnover is between 15-20% and with two tier it drops below 5%. Enhancing the value proposition in the middle is a great way to keep customers happy and drive channel revenue.”

One final point that came out of the meeting was that as the Millennials take over, solution providers will have to adapt to survive. The latest generation has grown up on apps and is quite proficient when it comes to IT. They are more willing to experiment on their own and question IT decisions. The channel has to come to terms with these changes and design value propositions that attract new SaaS vendors and new clients.  
“You may as well throw away the terms VAR and MSP; you are small business consultants,” emphasized Shah. “It doesn’t matter what happened in the 80s and 90s; you need to make businesses aware of the value you, as partners, can bring to the table.” 

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