What the Channel Tea Leaves Say: The Era of Volume Sales Is Over

Let's read some tea leaves together, shall we? We're seeing sizable force reductions at many of our favorite partners' companies. We didn't really expect them, but still we don't really find ourselves surprised.

We also see very talented people in our channel suddenly seeking new opportunities. Some are high-ranking executives, but many are simply superb engineers and technologists. And some of those executives are superstar heroes of the channel. We wonder why anyone would ever let them leave.

This past summer we saw Microsoft split the channel chief role into three people. They say two, but few of us missed the fact that three people got new jobs. Many may have missed that the very top role in partner management went to someone, Nicole Dezen, who started out in device sales.

What To Watch Out For
If you're a very talented specialist at a large channel company, here are some other tea leaves worth reading. How much does your company still depend on product sales to achieve their profit goals? And don't confuse profit margin with profit; they're not the same thing. Margin refers to how much you get to keep out of every dollar you earn as a percentage of that dollar. If you achieve a whopping 50 percent margin on $10 in sales, you've still only made $5.

As they got to keep less and less of each dollar -- as their margins fell -- some companies made the shift to become IT service providers. They dramatically reduced their dependence on product sales and instead drove profits up by finding more and more engagements for their professional staff. Others focused their efforts in increasing the volume of their sales, reasoning, "If margins are cut in half, we have to double our sales to stay in the same place." Uh-huh.

I've written for both kinds of partners and it is incredibly easy for me to tell which one I'm dealing with. Those who believe product and licensing sales are their path to glory constantly had me write about how wonderful their partners' products were. Even when writing customer success stories, emphasis had to be on the vendor or vendors. In only some cases was that because the vendor was paying for the marketing in market development funds (MDFs) or other funds. For most of them, it was my observation that they really didn't understand their own value proposition, or how to promote it.

What the Tea Leaves Are Telling Us
Read your own company's marketing materials. If they're about what you do, you're most likely in a very, very good place. If, on the other hand, they're all about the manufacturers or developers of the products you integrate, your company is very likely on the track that ends up going over the cliff.

Here's why I say that. When our industry was very new, back in 1981, IBM first called us their "reseller channel." The "channel" went from manufacturer to distributor to reseller to customer. Channel partners made every effort to push products to their customers from manufacturers they had decided to partner with. Manufacturers pitched in to help, rewarding sales with MDFs in an incredibly backward strategy that offered funds to help promote sales, but only to those who had already sold. Potential was ignored.

Almost immediately, some "channel partners" saw discounting as their best (maybe only) available competitive strategy. Smarter partners who had invested heavily in servicing these products let them have those sales to hasten driving themselves out of the business. That worked extraordinarily well. When margins had cratered as completely as they possibly could, many "resellers" transformed themselves into "managed service providers" (MSP), an unfortunate label we'll deal with in another post. Some of those former "resellers" truly pursued a transformation. They hired people with new and better skills. They trained their existing people to provide more sophisticated services. They truly became providers of services.

The others had "MSP" printed on their business cards. This second group continues to make life difficult for those who took the change seriously. All too many customers fear "MSPs" because they've been burned by incompetence and unfulfilled promises. This second group also continues to believe that product sales will deliver sufficient profits to keep the lights on. This is why I say to read your own marketing and see where your company's emphasis really is.

Where Do We Go from Here?
When a specialist from a truly service-focused firm recommends a particular server, storage, router, switch or other product, they're no longer looking to "sell" those products to you. They're including them as part of their project recommendation.

In fact, a large and growing number of MSPs no longer sell products at all. Instead, they partner with another company to procure those products for their customers. They know that any profit margin that might be available on any given product sale will be eaten when they extend credit to the customer, or they run operations to order, receive, prepare and ship those products. It's a waste of their time with little or no return. At worst, it's a cost center to them.

If you're working for a company that promotes the products of their "partners," it's a good time to start looking at the marketing put out by other service providers.

There was a time when we had to drive volume sales to earn real partnership. Those days are gone. Today, smart partners create relationships with certain vendors around what they can do with their products. Vendors, in turn, look for those smart partners who drive excellent, and often large, projects that include their products. They look to partners to pull their products through in projects, rather than expect them to push them. Some even approach superior service providers with suggestions for new services they can wrap around their products. That speaks far louder to them than "margin" falsehoods.

Ask yourself why so many service providers no longer sell products at all. Do the math they did. See how much you actually lose when trying to resell products yourself.

You Cannot Successfully Do Both
There are still several companies making money selling products, but they have long ago abandoned trying to also provide the services that go along with them. They focus intently upon making product sales profitable for themselves by purposely not including "resellers" who would need a portion of the meager margins. They also continue to negotiate the back-end deals that have always enabled large distributors and catalog houses to keep their doors open.

Let them have that business. In fact, help them have that business. Help your customers buy from them. They may see fit to start referring services business to you in return. At the very least, they'll prevent you from reducing your own profits.

We started this column, The Evolving MSP, because we knew our readers couldn't stay still in one place for too long. You know you need to evolve. You need to focus. You need to specialize. Ultimately, "MSP" is pretty meaningless. You manage services, but what services do you manage?

As you accelerate your growth, we see you specializing in technologies you're great with. You're becoming known as the leader in your area of expertise. Much as medical doctors go from "primary care physician" to any of a large number of specialties, you're specializing, too. You will soon find yourself referring business to other partners with other specialties, and forming relationships with the generalist partners whose customers will ultimately need you.

You'll become cloud service providers, data service providers, artificial intelligence service providers, Internet of Things service providers, and many more. This is where we go from here. This is the way that's not only clear, but very exciting.

And we'll continue to suggest more new ways for you to grow here in The Evolving MSP. Perhaps you want to share some ideas with us for great growth directions that you'd love to see your companies move in. If they're RCP readers to begin with, there's a good chance they'll see your suggestions.

Posted by Howard M. Cohen on February 21, 2023