The Rise of the Channel Toolsmith: How Vendors Became MSP Enablers

Many think the statement, "Every company is a software company," was first said by Satya Nadella. However, he was quoting Watts S. Humphrey, widely considered "the father of software quality," from his 2001 book Winning With Software: An Executive Strategy.

It's never been a mystery that great software drives all computing. When IBM first introduced its IBM PC in 1981, it made sure to publish the popular VisiCalc software under its own label. This is the software that launched Apple Computer's first success. For hardware sales to grow, you needed software sales to grow.

It took very little time for the available gross margin on hardware or software sales to evaporate. The IT reseller channel itself was to blame for its own greatest problem. By discounting heavily as their only competitive strategy, the lowest of the channel made it a race to the bottom. As a result, any software channel representative who told you about the high margins you could get on their software was laughed out of your office. It wasn't even 1990 yet and there were no margins to be achieved on most any computer product.

By the way, this is the reason that most of you first became managed service providers!

Software Developers Become Enablers: The Toolsmith Method
The transition of most channel partners from the reseller model to the MSP model was not lost on software developers. They quickly realized that MSPs would benefit mightily if they could provide them with products around which they could wrap their services, which always generated much higher margins than products ever could.

What they used was actually an older process wherein some software companies sold what they called a "consultant's license," which would allow a service provider to license their software for use on behalf of a specific customer. Servicers purchased another license for each customer they used the software with, but the customer seldom if ever knew anything about the software. They just knew they were enjoying the services consistently.

Enterprising software developers began proactively offering consultant's licenses to more and more of their channel partners who very innovatively created new services and even whole new categories of services that simply called for them to transparently use a vendor's product to provide it. Since they were service sales, not product sales, there was no way customers could "price out" the offering, so the margins remained healthy. I have long referred to this as the "toolsmith" model.

The Early Toolsmiths
The first wave of vendors to embrace this new model were those who made and infrastructure management products such as remote monitoring and management (RMM) platforms, virtual device infrastructure (VDI) and security providers. An MSP could contract to use their software to run those services and enjoy the bonus of having the software developer to support them.

Utility software came next, including migration tools, optimization, high-availability and more defined security tools. Then came the PSA. Professional service automation software shifted to a posture in which it became significantly more critical to MSP businesses who ran their entire business on the platform.

Hardware Vendors Step Up
To show how far down the market this can reach, there's a maker of robot vacuum cleaners that offers a subscription model. Their customer gets a new unit and whatever parts the unit tells home base it needs. Periodically, they take the unit back and provide a brand-new model. The customer isn't buying the hardware; they're just leasing the use of it with an unlimited allowance of parts and consumables.

Why not do the same thing with servers? Why not do the same thing with firewalls? Why not make whole network operations centers (NOCs) and security operations centers (SOCs) available by subscription? Today's vendors go ever further, offering the assistance and support of their professional engineers to help the MSP deliver a broader, more solid set of services.

Today's MSP needs fewer professional personnel and more diverse vendor partnerships to be successful. They can outsource most of the services to toolsmiths, keeping enough of their own people on board to maintain a continuous customer presence, and simply sell and provision the software, hardware and services they obtain from vendor partners. And here you thought vendors wouldn't love you anymore.

The Future of Your Business
So, good news: Hardware and software vendors will be the enablers of your business going forward. They will be heavily incented not just to get you to sell for them, but also to assure that customers enjoy great success using their wares. That is all goodness -- and it's how you should be talking with them from now on.

Also, growing your business will become, at least in part, a function of finding new and innovative technologies to wrap your services around. Don't look now, but that sounds like you're going to have a lot of fun.

Posted by Howard M. Cohen on March 10, 2025