Techaisle Blog

This is a two-part blog article. The first part below deals with “SMB IT channel reaching an inflection point”. Second part is on “New wave of SMB channel conflicts in building a cloud practice”.

SMB IT channel has reached an inflection point. In some sense, this statement appears to be just another observation of a recurring phenomenon: the SMB channel is constantly in a state of flux, responding to changes in the underlying industry by adding (or deleting) products and capabilities to its portfolios. The SMB channel’s situation in 2016, though, is different. Changes in the ways that IT is used within SMB organizations, the relationships needed to build solutions addressing these needs, and the skills required to support these usage patterns and solutions are fragmenting the channel into discrete (if overlapping) communities.

Rewind

To put this into perspective, let us rewind a decade, or two, or three. In each case, we see a channel that is reliant upon relationships with customers and suppliers, and which forms the connection between the two groups. Looking first at the customer relationships, the SMB channel organization works with SMB firms in a defined market – generally, a regional market, but in some cases, a market defined by region and industry, and in fewer cases still, a market defined by adoption of a particular type of technology (e.g., a specific type of software – content management, design, etc.) or a specific vendor’s products. The SMB channel firm deals with a tightly-defined contact or set of contacts within the customer organization: in most cases, the IT manager where this role exists, or a senior executive/partner/owner in firms too small to have in-house IT staff. And it provides management services for installed technology, support for users, and analysis and recommendations for new technology.

This position as a “trusted advisor” (or at least, regular supplier) to a defined customer base makes the channel a valuable partner for IT vendors. The vendors can work with the channel partner to introduce new technologies to a target market. The channel benefits by having access to products that shape future analysis/recommendations to customers, extending the channel/end-user connection. The channel also benefits from obtaining margin from the vendor and from vendor investments in channel marketing activities, as well as from a degree of co-investment in skills development. The channel aggregates new vendor offerings to extend existing customer infrastructure, completing the connection between buyers and new products.

For decades, this model worked largely because most new products could be added to most existing infrastructures. IT followed an incremental and relatively homogenous path; companies deployed servers and storage and a set of core financial applications in the back office, PCs and productivity software for individual workers, and upgraded to keep current with interoperability and maintenance requirements. Towards the end of the 1990s, web servers became a core component of this corporate compute portfolio, and firms would occasionally add capabilities (such as IP telephony) in advance of competitors, but like the upgrades and extensions, the progression of new technology was more deliberate than disruptive.

Today

In recent years, IT adoption has become more diffused.

A strictly “by the numbers” review of the state of the SMB channel in the US paints a portrait of a well-balanced but fragmenting industry. Techaisle’s survey of SMB channel partners finds that revenues from products and services are approximately equal, and that services revenue are being derived from transactions that do not include products as well as from product-inclusive deals. SMB channel respondents report that 58% of revenue is attributable to services-led contracts and that a similar proportion of revenue is derived from recurring sources, vastly different from 2012, 2013 and 2014.

It is worth noting that while measures of this type provide a very useful benchmark for channel partners, some interpretation of the benchmark data is necessary. For example, the proportion of business attributable to services is only part of the issue that SMB channel management is wrestling with: what kind of services (for example, managed PCs or device maintenance?) is an important consideration in evaluating the impact of a channel services revenue stream.

Similarly, growth in services revenue is not necessarily a proxy for progress, as it can result from simple reductions in product revenue rather than effective transition to a business model properly aligned with the market as a whole. Techaisle believes that SMB channel partners that are looking to be part of the “managed services” channel should be targeting just over 20% of services revenue derived from managed services in 2016, and more than 40% by 2018.

The revenue growth expectations are also interesting. Although 63% of SMB channel partners are expecting revenue increases in the next one year, the scenario is quite dismal for VARs as compared to MSPs. 54% more VARs than MSPs are expecting their revenues to remain flat and a percentage of VARs are expecting their revenues to decline by an average of 30%. Even some MSPs are expecting their revenues to decline by an average of 20%.

However, the overall optimism for growth provides some insight into how and where the channel is growing.

Techaisle’s SMB and Midmarket Managed Services Adoption Trends research shows that contrary to popular belief IT Staffing within SMBs is growing and the percent of businesses with full-time IT staff has increased for 50-999 employee size businesses and even the average no. of IT staff has tripled for midmarket businesses in 2015 from 2010.

Today’s SMBs are heavily invested in an ever-widening portfolio of technology initiatives. For example, on average, US SMBs have current active initiatives in 5.1 technology areas, and midmarket businesses are working in an average of 10.3 different areas – each of which (like cloud or mobility) involve multiple discrete activities.

Techaisle’s SMB survey trend illustrates the IT staffing impact of this expanding IT solution activity. Figure below presents statistics on full-time IT staff from 2010 and 2015. It demonstrates that small and midmarket businesses have sharply different approaches to coping with IT solution sprawl. In businesses with 50 or more employees staffing levels are increasing dramatically. In this segment, not only percent of businesses with full-time internal IT staff has increased in the last five years but the average number IT staff has tripled.

In microbusinesses with 1-19 employees, the trend is exactly the reverse: these firms are unable to keep pace with IT expansion through internal IT staff, and have moved to other approaches to cope with sprawl and complexity. Data indicates that only 4% of microbusinesses have full-time internal IT staff. In the next tier of small businesses (20-99 employees), 28% of firms have outsourced IT, vs. just 23% relying on full-time internal IT staff; the balance report that they depend on part-time internal IT staff (18%), internal non-IT staff (14%), or that “nobody manages IT” (17%). It is easy to say that this last group is courting disaster in an increasingly IT-centric world, and there is certainly truth to that assertion – but the findings are reflective of the cost and complexity associated with delivering a corporate service that is proving to be very cost- and labor-intensive.

The trend towards increased IT staffing levels also reflects the growing importance of technology within SMB operations. As Figure below illustrates, nearly 75% of businesses with 1-9 employees, and nearly 100% of those with 500-999 employees, consider technology to be “somewhat” or “very important” to their business success, and this importance is rising. 26%-47% of SMB respondents believe that their companies are more dependent on technology today than they were a year ago.

IT is trying to move away from implementations to more strategic roles. But for that SMBs require expertise, skill-sets, time to research and identify appropriate technology. When IT vendors mention simplifying IT for SMBs they couch it as a means of helping SMBs because they lack IT staff (which data demonstrates is far from actual reality). The growing number and penetration of SMB IT staff themselves are asking for simplification of technology due to inherent sprawl and complexity of technology.

The phrase “sprawl and complexity” describes two linked problems for SMBs. Sprawl is apparent in the wide range of technologies included within current solution portfolios. The compounding issue, though, is that SMBs are not just dealing with more technology, but with more complex technology. This in turn is driving SMBs to hire more IT staff.

Consider the figure below, which reflects the attitudes of IT-responsible managers (ITDMs) within SMBs. Asked to describe their opinions regarding IT complexity, the most common response is “IT vendors should simplify technology.” Frighteningly (or embarrassingly) for suppliers, the second most common response is “we are ignoring” potentially-useful technologies, followed by observations that technology-related pain points are increasing, and current technology is more difficult to understand than previous-generation solutions.

There is a clear set of messages for suppliers in this data.

• There is no status quo of "lack of IT staff"
• IT staffing within SMBs has undergone a change. “We have simplified technology because SMBs do not have IT staff” is the wrong messaging
• Simplification is required to ensure that SMBs actually embrace new products and their growing IT staff is freed-up to focus on strategic business issues

The SMB IT channel has hit a point of fragmentation. Today, channel can be all things to all people but not in 2018 unless channel finds a way to generate more than 150% of revenue. Faced with an expanded SMB buyer community and requirements for specialized skills to support different solutions, the SMB channel is beginning to segment by focus area. Although the different specialties are starting from a common point today, Techaisle expects to see each develop unique characteristics over the next several years.

Highlights of Techaisle’s report on State of SMB Managed Services Channel include:

The business of the SMB channel: migrating to specializations

• Overall, currently, the SMB channel has a reasonable balance between product and services revenue and engagements.
• There is no ‘silver bullet’ leading to financial health in the SMB channel. Execution, not time allocation, is the key to sales success.
• Sales cycles vary with several factors, including solution expertise. SMB-focused MSPs have relatively long sales cycles overall, but channel partners that are “very comfortable” with managed services have superior time-to-revenue results.
• Four key specializations are emerging in the SMB channel and this fragmentation will accelerate in the 2015-2018 timeframe.

Managed services in the channel: pervasive as a delivery vehicle, becoming more of a specialty

• MSPs are hardly the only source of managed services: more than 60% of VARs, SPs and SIs sell managed services today, and there has been an increase in managed services activity in all of these channels.
• The variety and depth of managed services will make it difficult for non-specialists to keep pace with MSP specialists.
• SMB preference for a single source of managed services will have an impact on managed services market and channel development.
• SMBs have a definitive view of pricing and per user/ per device is not the way forward 

The role of the vendor in the managed services channel

• Vendors must navigate a mix of generic channel requirements and requirements that are specific to managed services partners.
• Generic requirements for end-to-end solutions are less important in managed services (where best-of-breed is paramount) than in other areas.
• Vendors must understand and address the challenges faced by partners migrating to managed services specializations; this course will be complex and expensive.
• Vendors will benefit from aligning with managed services partners’ value propositions, which are in turn well aligned with business outcomes (and business buyers).

Working with the SMB managed services customer: managed services addresses key buy-side imperatives

• SMBs are more dependent on technology than ever before.
• Since 2010, IT staffing has dropped in microbusinesses, and increased in small and midmarket firms. Accordingly, managed services acts as a substitute for IT staff in firms with 1-19 employees, and as a means of augmenting IT management in larger SMBs.
• SMBs are struggling with IT complexity, and turning to managed services providers for support.

The survey data shows that channel partners struggle to transition from delivering some managed services to building viable businesses on a managed services model. To be successful, vendors will need to set objectives spanning a three-year period over which managed services specialization will emerge.

Many IT vendors will struggle with simply understanding this fundamental change in the market, and more will fail to understand the focus and investment required to grow with partners through this transitional period.