Stay 10 steps ahead of big vendors before they steal your lunch

Emerge from data centres with pockets laden with gold

So far the data centre channel has been reasonably resilient to the economic downturn, but news of a double-dip recession will send many resellers scrambling for their tin helmets.

The reality is that value-added resellers (VARs) are being squeezed like never before, and a most unlikely threat has emerged: big vendors offering pre-configured all-in-one data centre products. How did that happen? Is time about to be called on VARs and what will the post-recession channel look like?

Overall, the number of reseller insolvencies rose 17 per cent year-on-year in Q1, according to credit reference agency Graydon. The worst hit were small independent resellers and those existing on wafer-thin margins at the transactional end of the value chain. By comparison, data centre VARs have fared better as demand continues for server virtualisation, which allows customers to do more with less and reduce costs.

Of course, vendors were quick to spot these trends and now offer pre-configured data centre products comprising virtual machines, storage and networking.

VCE led the way with its Vblocks, which use gear from VMware, Cisco and EMC. Rumbling over the hill came competing heavy iron from NetApp, Oracle, HP, IBM, Dell and others. Ironically, these combined products are eroding the value of VARs, whose main margin is in integrating the various components.

Learning to deal with it

Most VARs are waking up to the new market reality and adjusting their strategies. They don’t want to find themselves in the comparable position of pushing the separate pieces of a hi-fi system when customers are demanding an integrated Bose system.

Different solutions have different levels of integration. For instance, EMC’s VSPEX, aimed at the SME market, is modular so that VARs can select the most appropriate hypervisor, server, network, storage and data protection technologies to meet a customer's needs. But this is an exception rather than the rule.

This squeeze on margins is here to stay and it will change the way VARs set themselves apart from the competition. Not surprisingly, they are responding by finding new places to add value, investing in training and building out their consultancy practices. This is fine if you know where to place your strategic bets and possess the capital to make the transition, but not all do.

One VAR told me that the breadth of what IT means to people today is a problem. “It’s becoming increasingly difficult to be that safe, trusted adviser because customers expect us to be experts on everything from desktop virtualisation to cloud computing,” he said.

Theirs is a balancing act with one eye on the present and one on the future. “The trick is to continually look for new higher margin, niche markets while retaining the bread and butter services that vendors can’t take away, like providing a 24x7 service desk,” he added.

Cloud computing: threat or opportunity?

Another pressure point is cloud computing. According to analyst TechMarketView, the UK market will be worth £6bn by 2014 and account for 15 per cent of software and IT services. For your average VAR, just filtering the hype and getting your head around this disruptive technology can be daunting.

Yet there is no cause to fear the cloud and every reason to embrace it, for it represents a new IT infrastructure model with huge opportunities to wrap services around.

For VARs the business fundamentals don’t change; the “value” they add is the decisive factor. Some don’t get it and are busy investing in data centres and building their own cloud products, when partnering with telecommunication companies, data centre providers and distributors will prove more effective. As Scott McNealy, co-founder of Sun Microsystems, once said: “I drink water, but don’t have a reservoir in my basement.”

Again, selling cloud services calls for a different approach. Some VARs have barely got used to selling “business benefits” rather than “speeds and feeds” and then suddenly a whole new conversation is needed. Furthermore, they are used to large capital projects and chunky commissions. A cloud sale, which takes longer and has a smaller sales value, looks far less appealing. New mind-sets are required.

In the future, expect to see compensation plans that recognise annuity streams and VARs earning significant revenue by acting as aggregators – by providing cloud providers with wraparound services and applications developed for one client for onward sale by the provider to others.

This post-recession market will be challenging.

Time is of the essence. Once the recession ends and companies expand their IT needs, cracks will emerge as vulnerable VARs buckle under the pressure. Those failing to make the right strategic bets will find themselves increasingly isolated.

One obvious strategy will be to partner with other specialist VARs to develop an ecosystem offering broader, more comprehensive capabilities. Also, expect consolidation as strong niche players are acquired to fill the gaps. Like any industry in transition, there will be a degree of pain. There will be winners and losers. However, for those smart enough to read the early warning signs, there will be rich rewards. ®

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