It can sometimes feel that the speed of change is unprecedented and that we live in an age of accelerating disruption. Sure it feels that way but how much is down to the way news is disseminated through commercial and social media? Impatience and greed spur on Davidianesque cult-like followers who broadcast how the latest technology will transform businesses. Business ideas which maintain the status quo are sidelined as boring and are not given the same level of exposure.
Whether we are living in the fourth industrial revolution or in the age of acceleration; one could argue there was more technological change in 1903 when the Wright Brothers had their first flight, or when man first stepped on the moon in July 1969. When framed against those achievements where would you place that great disruption – Cloud Computing?
Motivated to make sense of my own, often conflicting ideas, my aim is to debate the changes taking place in the IT channel. Through my work helping partners, many of my peers are asking the same questions about how to thrive, and not just survive, the next five, ten or twenty years in business.
7 Channel Forces
Cloud Computing
The rental of infrastructure by a relatively small number of large suppliers such as Amazon, Microsoft and IBM, is one such force. This rising IT oligarchy and it’s impact on the channel has been talked about extensively but there are many other factors in play.
Business investment
Levels of business investment in the Western world have been in decline despite companies generating record levels of cash. In the UK, according to the Office for National Statistics (ONS), from 2010 to 2015 the average growth in investment was 5%. In 2016 it fell by 1.5%, the first annual decline since the financial crisis. Business investment consists primarily of buildings, IT, plant and machinery and in a heavily services based economy, such as the UK, IT spend represents a large percentage of the total.
Businesses will invest capital if they feel it can deliver a better return than leaving it to accrue interest but investment is clearly important to improve productivity and drive wage growth. Productivity, as measured by GDP per hour worked is 22% lower in the UK when compared with the USA which has seen higher levels of business investment in recent years.
With base interest rates at historic lows (0.25% in the UK) you would think investment would pick up unless perhaps leaders’ compensation plans make it personally more beneficial to inflate the stock price, through cash buy backs and/or increased dividends.The EY Item Club forecast for business investment in the UK, shown below, does not make for especially happy reading.
Technology Slowdown
This may seem contradictory to the prevailing sentiment about digital acceleration and transformation however from a hardware perspective, there is evidence to suggest this is the case for IT infrastructure. A report by MIT in 2016 suggested chip maker Intel had put the brakes on Moore’s Law citing delays to the new 10nm silicon. It appears the reduction from 14nm is testing the laws of physics. So while some pundits have talked about “entering the second half of the chess board” around 2007, until Quantum computing becomes practical (and that may still be a decade or more away) we may not be going too far, or as fast, into the second half of that chess board.
Enter the Dragon
In China, over seventy million manufacturing jobs have been created since 2000 – vastly more than the combined total of forty-two million manufacturing jobs recorded in Europe and the USA in 2012. Leaving aside Foxconn’s meteoric rise, another company which has risen from #46 in the world’s largest hardware companies in 2009 to #12 today, is Huawei. Its revenues have grown organically from $6B to over $60B in less than ten years. The figures do not state the percentage of revenue generated outside of China but when you consider IBM’s published revenues in the UK fell by 8% between 2013 and 2015, it could be a contributory factor.
Despite the EU’s protectionist stance, will China’s new “Belt and Road” initiative make it more or less likely, we will see Chinese companies take more market share in western markets, that for so long have been dominated by US tech giants?
Do you feel old yet?
According to a research report published by CompTIA in January this year, 40% of traditional IT channel people are expected to retire over the next ten years. When you last attended a big vendor’s conference, what did you see looking around? Even a recent Blockchain expo I attended in London felt like “daddy dancing” with a sea of grey haired people trying to hang out with the cool kids.
Software is eating the world
From software defined everything to software as a service (SaaS) there is a big shift away from commoditised hardware. When software is either a piece of paper or an online licence, is some part of the channel’s role reduced? It is a changing picture but for the traditional vendors IBM and HP, the percentage of software sold via their channels have been significantly less than their equivalent hardware businesses. Fortunately the impact of this force can be offset by the higher margins available.
New kids on the block
There are a new breed of channel players arriving to take your business. Non traditional partner types with SaaS only business models or “cloud-only” solutions, are on the march. In 2016 over 100,000 partners attended Dreamforce, the conference representing Salesforce. Many of these partners are small but they are nibbling around the edges of your business and they are growing in size and volume.
Channel Symptoms
What is the impact of these forces? An analogy is to compare it to the debate about climate change. For some people, there is no evidence of significant impact, for others massive. I know resellers that are having record years selling hardware infrastructure. Like climate change the forces at work are varied in their impact. They can be resisted by great execution or sheltered from by geography.
1. Squeezed margins. Predominantly hardware-based resellers seem to be making net margins in the low single digit figures, 2-3% being typical for a well run company. There are very few pure hardware resellers still around so I suspect some of the margin created is boosted by professional services revenue. When talking to channel players the talk is often of having to run harder to stand still with evidence of a greater number of transactions required for the same level of revenue. I’m also hearing of longer sales cycles which although not immediately apparent, have a negative bearing on the bottom line.
2. Slower revenue growth. With supply outstripping demand the channel in the last few years has started to get serious about marketing. There has been a boom in marketing agencies and marketing roles within the channel. Countless magazine pages and blog posts have extolled the virtues of generating demand through marketing led campaigns with less emphasis on the sales process. Suffice to say many of the business owners I have spoken to, have been left frustrated by the lack of measurable results.
3. Higher staff turnover. This one is harder to measure and single out for the IT channel since there are macro trends which are changing the world of paid work, everything from the “gig economy” to changing employment laws.
4. Business consolidation. In 2016 we saw one of tech industry’s largest acquisitions, that of EMC Corporation by Dell Inc. It is the subject of debate how this will impact the channel but surely any competition upstream is likely to increase competitive pressures in the channel.
Evolutionary Responses
Darkling beetles of the Namib Desert, located on the southwest coast of Africa, live in one of the driest habitats in the world. But some species of Darkling beetle evolved to get the water they need from dew and ocean fog, using their very own body surfaces. Early humans who started farming domesticated animals evolved the ability to digest milk beyond infancy; pretty useful when you have a ready supply of food literally on-tap. The IT channel when faced with the disruptive forces discussed earlier, need to evolve a a little bit quicker than the Namib beetle, or early human settlers.
For those wanting to accelerate the Darwinian process the possible responses are many and can depend on such factors as:
- What is the core competence or even DNA of the business?
- Personal preference or interest; what do you like doing with your money and time?
- Available resources and skills
- Life cycle of the business and exit plans
In another article I will be delving more into the evolutionary responses taken by partners. It is worthy of more coverage than I can give it here.
To leave you all on a positive note we at Predatar believe the rise of cloud computing presents more opportunities to the channel than it takes away. My twelve year son, who clearly demonstrates far more aptitude for technology than I, is able to build his own unique creations using game engines that I could hardly imagine with my junior Lego set #BITD.
The cloud with its open source software and freely available APIs, allows channel players to create something truly unique to them. The opportunity to build sustainable competitive advantage, not based on labour arbitrage or size but on how quickly a business evolves and adapts to market demands, is at the heart of this debate.
