Channel Conflict Growing in IT Services Business

By Gary Kim November 09, 2010

Channel partners foresee a collision with technology vendors over managed services and application hosting, a survey by Forrester Research of 165 value-added resellers, system integrators, managed service providers, resellers and other partners suggests.

The big potential problem is that many of the new managed services products might be more suitable for delivery by telco partners than by the historic channel partners, say Tim Harmon and Peter O’Neill, Forrester Research analysts.

To be sure, managed services are widely viewed as the technology hardware, software and services industry’s hottest growth business. The problem is that just about every contestant can envision a key role in providing such services, and that inevitably means sales outlets might envision becoming technology suppliers, while technology suppliers might envision becoming sales channels. That always is a recipe for channel conflict. 

As a practical matter, that means many technology suppliers supply, or plan to supply, their own managed services on a direct basis. You can see the problem: a product that can be sold and provisioned totally online might, or might not, benefit too much from on-site sales and support. 

But business customers still appear to be looking for channel partners to provide the configuration, security, and provisioning management functions in support of vendors’ cloud applications and computing resource offerings. 

About 97 percent of channel partners are interested in providing managed services. In fact, the bulk of channel partners have an MSP offering today, are planning one, or are interested in doing so.

Also, channel partners offering application hosting will more than double in the next two years, if respondents follow through with their stated intentions, the study finds. 

Technology suppliers, on the other hand, are creating their own managed services and selling them under their own brand names as a way of protecting their reputations, the analysts say.

To a large extent, there remains confusion about where channel partner and technology supplier roles are clearly demarcated, or the roles do not allow channel partners much of a role. 

The other angle is a change in technology supplier channel preference. Technology vendors are in many cases favoring distribution by the large telcos, the analysts say. For example, Microsoft is making its Windows Azure Platform Appliance and Office 365 available only to select telcos. Cisco Systems likewise is relying on telco partners to sell its managed service products.

That's a significant switch from much past behavior. 

Forrester Research estimates that more than 60 percent of technology product revenues are generated through channel partners. But that might be changing. Cloud technology options, including software-as-a-service (SaaS), therefore are poised to significantly alter channel structures. 

Distributors and implementation-oriented VARs might be in special jeopardy because the cloud delivery approach vastly simplifies the installation and support process, eliminating a good deal of the on-going business VARs have made a living on.

With software no longer being physically delivered and implemented at the customer’s site, the need for implementation services is waning. A quarter of VARs’ revenues come today from professional services, including software implementation and configuration services. Cloud services promise to reduce that revenue stream. 

The physical logistics business also might take a hit, as profit margins in that business likewise contract, pushing many towards services. 

Distributors also appear to be evaluating their potential role in assisting resellers to become managed service providers. Some will invest in their own physical data centers to serve as cloud centers that the partners can leverage; others will retail infrastructure-as-a-service (IaaS) to partners but deliver it through wholesaling cloud providers like the telcos.

As with most other businesses touched by Internet Protocol, disruption of established relationships and business models now looms in the channel business. 

Gary Kim is a contributing editor for TechZone360. To read more of Gary’s articles, please visit his columnist page.

Edited by Tammy Wolf

Contributing Editor

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