Neil McMurchy doesn’t mince words.
McMurchy, who is Gartner senior vice president and part of Gartner’s technology go-to-market research group working with vendors ranging from IBM, HP and Microsoft to small start-up vendors on go-to-market issues, says the channel must work faster to change their business models, in order to survive.
While technology by nature is always changing, the current move to as-a-service, and annuity models is bringing dramatic change to business models essentially unchanged in 30 years.
“Small to mid-sized resellers have been able to get away with reasonable, albeit declining, margins and make a reasonable living, without having to pursue volume,” McMurchy says.
With as-a-service and recurring revenue, that all changes.
“As soon as you move into as-a-service, by definition it implies a level of volume. In order to create a sustainable cashflow, a sustainable level of profitability, you need a certain volume.”
What was once a $1 million sale with a $100,000 upfront margin for a reseller, for example, is now a $1 million deal – with all the same work required upfront – over three years with a $33,000 return each year.
“Vendors are trying to front-load commissions and things like that, but it’s a pretty significant difference to what it means in terms of how you fund your business,” McMurchy says.
“There is a practical reality where the returns are not coming in on that single deal at the same rate, but the relative cost of getting that business is almost as great, if not equal.”
So what’s a reseller to do?
McMurchy says to create volume, resellers need to get ‘a whole lot better at marketing’ themselves.
“Traditionally, resellers have been generally pretty good at selling, but when you start to move to anything approaching a volume business, you need to get better at marketing.
“You need to have better positioning, you need to have an inside sales team, you need to have much more effective outgoing marketing, those sorts of things,” he says.
“It’s not just moving from an on-prem product to an as-a-service offering, it’s really challenging from the business model perspective.”
McMurchy says as-a-service brings with it the need to think more about moulding the business.
“You can’t afford to triple the number of sales people, so you have to invest more in proper marketing.
“You need to be a whole lot better about who you’re really targeting, what your differentiation is, what your value proposition is, and targeting more effectively through things like outbound communications.
“And that’s something the traditional reseller channel has been really poor at.”
His comments are backed by the ‘fairly well established view’ that around one-third of the $12 billion of MDF funding available globally each year is unused.
“It’s unused because the lower end of the channel don’t have their own marketing budgets and therefore can’t match one-to-one, which most of these programs rely on.”
But McMurchy, who is forecasting ‘quite a significant reduction’ in the numbers of resellers locally over the coming five years, says the tech sector is also ‘sort of backwards’ when it comes to a crucial area.
“The IT industry is so very far behind in terms of starting with the customer experience – the notion of customer intimacy and really understanding your target customers and delivering against their expectations, which is the starting point for success going forward,” he says.
“The IT industry is still largely build it and they will buy it.
“Yet when you look at financial services, consumer products, ost other industries which might be considered more boring and less innovative, they’re building products and propositions from the customer backwards.
“It’s interesting when we talk about the notion of digital business and about how businesses are transforming themselves – the IT industry is the enabler of digital business in other industries, but if you think about the extent to which technology companies are themselves digital businesses, they are sort of backwards.
“They still have large sales forces, particularly at the enterprise level, they have long sales cycles, they have products people don’t understand intuitively that require a complex sales process and they spend vast amounts on sales and marketing.”
A key messaging mistake often made by both vendors and resellers is the ‘product feature function orientation’ which sees speeds and feeds continuing to take priority over details about how a customer’s business problem can be solved.
“It’s rooted in the technology as opposed to saying what the problem is that we solve from a customer point of view.
“No one wakes up in the morning thining they need a new business transformation platform. They do however, wake up thinking they have a particular problem around customer engagement.
“It’s a fundamental disconnect, and it hasn’t got a whole lot better in 30 years.”
However, McMurchy says that doesn’t mean it’s always about selling the business buy.
“It’s about starting from the buyer perspective, whether that’s a business buyer or a technical buyer.
“It’s an industry problem and it’s also from a product development perspective, with technology products rarely developed from a customer perspective.”
McMurchy is equally blunt about the pain the IT channel will need to endure in order to come out of the current changes stronger, citing a conversation he had with one vendor who is looking to release an as-a-service release of their traditional on-prem product, but are concerned about cannibalising their existing revenue base.
“My advice is that this is going to be like root canal surgery without the benefit of anesthetic.
“You need to do this as fast as you possibly can. It is going to cannibalise, it is going to hurt your existing customers, but you know you have to do it so you’ve got to do it as quickly as you can.
“That’s my key message to resellers: keep working on changing your business model and do it faster than you want to.”