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Sun 2 May 2004 04:00 AM

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Climbing the value-add ladder

Sometimes it seems easier to avoid change and continue with the habits of a lifetime. But for channel players stuck in a boxshifting world, the need to adapt and evolve their business model becomes more pressing every day. There is a channel evolution underway and the time is right for distributors, resellers and integrators to find the best way to climb the value-add ladder. ‘Services’ is the new channel rallying cry as product margins continue to erode.

Channel evolution|~|mainmaslen.gif|~|Jeff Maslen, storage channel development manager at IBM Middle East and Pakistan|~|When channels mature, boxshifters either adapt or die. The process has already happened in the US and is now nearing completion in Europe. Savvy channel players with one eye on the future would do well to learn the lessons handed out to less fortunate resellers along the way in these regions. Margins on shifting tin are eroding fast and it is those players able to leap the fence and become bona fide systems integrators and IT services providers that will survive and prosper. Major vendors have seen it all before and many are poised and ready to help resellers climb the value ladder. It is time for the partner community in the Middle East to evolve, boost their skill sets and build survival skills.

IBM is one vendor taking an active role in helping partners develop future proof business models that no longer rely on product margin as the main source of income. Following on from its recent PartnerWorld channel programme launch in the Middle East, Big Blue has run a series of events to explain in more detail the avenues open in specific business areas such as storage and middleware software.

BJ VanDewater, manager of distribution channel management for the IBM Software Group in central and eastern Europe, Middle East and Africa, says: “I explain to partners how they can be profitable selling IBM middleware through the various value propositions that exist in IBM’s partner programmes. IBM has resources that enable partners to sell faster, reduce the sales cycle and identify more sales opportunities. These events inform existing and new partners how they can make more money working with IBM.”

IBM Software’s event attracted some 25 resellers with only 20% of these existing partners. VanDewater explains: “All business partners need to look at what it takes to be profitable. Many of these companies were previously hardware partners. Now they know they need to look at the value-add of the IBM software portfolio in areas such as marketing funds, education, enablement and the chance to move to solution selling.”

The Middle East channel is rapidly reaching a point where resellers know they have to take tough strategy decisions. “We are not driving this trend all the way,” says VanDewater. “We are getting partners coming to us and saying ‘these are the activities we used to do and this is where we want to go’. They know the days of pure box distribution are over. What happened in Europe in terms of the development of solution selling is now starting in the Middle East.”

The numbers attending IBM’s channel-focused storage events are equally impressive. Jeff Maslen, storage channel development manager at IBM Middle East and Pakistan, says: “In the last three months alone I have trained 25 companies looking to build up their revenues from storage projects and the number is going up every quarter. When business partners see the commoditisation of the hardware space, they know that they have to look for alternative revenue streams including services. Storage enables them to get a handle on this side of the business and also start to own the customer relationship. Skilled storage resellers are not just shifting boxes.”

Roland Leins, manager of storage solution sales in central Europe, Middle East and Africa at IBM, adds: “We show them the business advantages available and help them move towards a new model. If business partners want to remain successful, they need to move in the services direction. The days of pure box moving — even at a vendor level — are more or less over.”

“Everyone knows that the margin is shrinking on the hardware components supplied into the IT environment,” he continues. “The discussion between partner and vendor is no longer about how much margin do we give on the hardware. Now it is all about how we give partners the tools that allow business partners to create a sustainable business model, create profitable revenue streams and differentiate themselves from the competition.”

Climbing the value-add ladder does not mean merely diversifying a reseller’s activity base. Unless there is a true commitment to the service arena picked and meaningful investment in skills development, a reseller runs the real risk of becoming a jack-of-all-trades and master of none. This process has already started to occur with some resellers turning themselves into hybrid operators and trying to combine a variety of activities such as retail, consumer resell, sub-distribution and SME solution provision. Specific channel programmes such as HP’s latest SMB initiative are now attempting to reverse this trend and persuade resellers to specialize their business on one particular area of expertise.||**||Customer needs|~|mainVikramSuri7.gif|~|Vikram Suri, country manager Southern Gulf and Levant at Symantec|~|It is the changing nature of customer demands that is driving channel evolution. Increasingly, customers and end-users want to be working with partners that can sell them a company-wide solution and provide them with a roadmap for future IT development. Those companies looking to sell point solutions that solve an immediate IT problem but do not address the wider strategic direction of a company, will find it is an increasingly tough task closing deals.

Vikram Suri, country manager southern Gulf and Levant at security software vendor Symantec, reckons partner skill levels are becoming a top priority: “The differentiation of partners is related to their skills. To sell Symantec products, information is power — not just through customers’ security awareness, but also the readiness of the channel to deal with that awareness and suggest the right products and solutions. We are pleased with the way the channel has scaled up in terms of skills.”

Skills development in the channel is not just confined to those partners interacting directly with end-users. As part of a wider transition to solution selling comprising a mix of hardware, software and services, vendors are also turning to distribution partners and asking them to develop in a way that enables them to provide new levels of support and assistance for resellers.

“In distribution, we have witnessed an investment in technology skills to assist the VAR community configure solutions properly,” continues Suri. “They are now in a position to support a value-added services channel-to-market.”

Vendor partner programmes are structured in such a way as to encourage partners to climb the value ladder and boost their skills and services portfolio. Typically, metallic schemes of bronze, silver and gold partnership status offer partners preferential pricing, improved rebates and incentives as well as access to more marketing funds as they progress up the value ladder.

Despite this stairway of perks on offer, deciding which vendors to commit to and how aggressively to pursue skills development remains a tough call for partners to make. Typically, this form of transition requires significant up-front investment to build up a pool of skilled services professionals. Once the services team is established, partners also have to start worrying about utilisation rates for these staff and building a decent order pipeline. Unless professional services staff have projects on the go and can bill clients for their time, they are in danger of becoming a loss-leading business activity for partners.

Vendors can go some way to easing these concerns by helping partners finance the education of their staff and assisting in the professional services development. IBM’s PartnerWorld channel programme offers various reimbursement packages for part of the costs incurred. Vendors also need to sit down with partners and physically show them the opportunities that exist to boost margins and profitability through detailed explanation and relevant case studies.

It is a skill that has been carefully honed by IBM’s software division. “Specifically, I can tell partners where their sweet spot lies,” says VanDewater. “Selling the licence is just something partners have to do to make the solution work. We have done studies at a worldwide level that shows every US$1 of IBM middleware licence sale produces US$20 of related hardware and services sales. We are just an initiator to make that value chain work. Partners I speak to in the region already say that the ratio of hardware and services to licences is around 8:1. They understand that their ability to make decent money and margins lies in the services arena, not in the licences.”

These are important figures for vendors to communicate to partners. The vendor landscape remains competitive in areas such as storage and persuading business partners to commit to a particular vendor can be a challenge. It is not just about communicating claims of technical superiority to the channel.

“It is very much about informing business partners of the services revenues too because hardware prices only mean so much,” says Maslen at IBM. “We enable partners to drive and control their own service revenues in areas such as response, system optimization and integration. This can be a pure source of profit for business partners and many have suddenly woken up and said I want that revenue.”||**||Get big, get niche or get out|~|mainladder.gif|~|Partners need to start climbing the value-add ladder to build a future-proof business model|~|While the evolution of partners up the value-add ladder is widely seen as a positive development by vendors, the need to make this transition path real and tangible remains a challenge. “It can be quite a cliché to talk about resellers and distributors moving away from pushing boxes towards selling solutions,” admits Suri at Symantec. “But it is easier said than done. In Symantec’s channel, it is important that when a VAR goes back to the distributor about a project, he not only gets a quote but also gets advice on how to configure the solution — ideas that educate the VAR and prompt him to request even more information from the distributor.”

The Middle East channel will increasingly segment and consolidate during the next year. Boxshifting will become the preserve of those with the most relevant characteristics to perform this task efficiently — namely scale, logistics expertise and market reach. Those companies lacking these characteristics need to minimize their exposure to this thin margin world and consider teaming up with larger players and using them as a third party fulfillment and logistics services provider.

The message being pumped out of vendors advising partners to climb the value ladder can end up sounding like a stuck record. But it is a message that needs to be heeded by partners to ensure their long-term survival in the market. Focus and specialization will be the name of the game as the needs of the customers become more sophisticated and vendors begin to roll out solutions as opposed to point products.

It is the partners that develop the ability to wrap hardware, software and services together into a seamless package that will truly dominate the Middle East IT channel in the years to come. Vendors will be anxious to work with them and will devise attractive channel programmes to lure them on board and build long-term channel relationships.

For those still stuck in the world of boxshifting, the old adage that characterized the evolution of the European channel applies equally well to the Middle East markets: get big, get niche or get out. It is that simple.


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