Channel Changes, Bring us to Tiers

In the weeks following my last post, The Channel Is Changing, I found myself immersed in dozens of fascinating conversations with individuals consisting of a diverse representation of the channel. I had great dialogue with the likes of C & V-level leaders in the reseller community, ranking officials at distributors, service provider stakeholders, and owners, and a very large contingent from within the OEM’s. Even a few of the respected voices from the channel marketing firms and members of the press shared their thoughts on the topic. I thought it much ado about nothing that hadn't already been said. But, as my good friend and colleague, Marcie White, reminded me, “timing is everything.”

This topic was clearly top of mind for a lot of people in the channel – all of whom are watching closely to see how it will impact their future or how their own role might impact the outcome. 

I have spent some time sifting through the various interactions I was privileged to encounter. What I found were some very interesting commonalities among the various speculations:

• The need for a multi-tiered channel, that includes a distributor-like role and a reseller, will live on for the foreseeable future {whew}
• The volume and market share impact of the mid-tier channel of service providers, VAR’s, systems integrators and ISV’s is – and will remain – significant enough that no segment of that population can be summarily dismissed as irrelevant. For now.
• We have a nomenclature problem – the terms reseller, partner, and customer all have the same and different connotations, depending on the role of the person who uses them. It’s maddening.

Allow me to dig a little deeper into the item regarding “multi-tiers”. This is where most get stuck - because the math doesn't work. The new consumption-based world of cloud-based offerings has dramatically altered how those in the supply chain have made their profits. Up front margin-rich engagements have been replaced with the long-game of thin margin, pay-by-the-drink, recurring annuity streams. In this model, it takes a lot of volume churning through a well-oiled and transaction efficient machine for the middle-men to make a dime. That's easier said than done. Especially on the coattails of a market that is crowding with plenty of commoditized cloud-ware that is pricing a path towards free. So how do all the hands in the traditional multi-tiered supply chain make their lunch money? They don’t. The flow of product from OEM, to distributor, to reseller, to end user cannot be sustained off the slim pickings of fractional margins. Not in anyone's math.

So, if the collective consensus of those in my sampling of the market agree that there will still be a need for a distributor layer and a reseller, how will that work? What will that new supply chain look like? How will it impact the channel?

Well, I have a theory and I would like to throw it out there for consideration - and debate.

I envision a future where the major distribution players (not naming names, but you all know who I’m talking about) and the major tier-1 resellers (the usual suspects) morph into a single tier. It’s already begun. Distributors have added professional services to their portfolios to offset the impact of lower margins. Many tier-1 resellers are purchasing more and more directly from OEM's and bypassing distribution, while at the same time expanding their own managed services offerings. It's becoming difficult to distinguish the difference between these two, once distinctly unique, channel roles. It's become an interesting competitive dynamic. I believe, in time, as those roles continue to morph, this new resulting blended tier-1 becomes the eventual supplier and support partner to the sizable service provider and reseller market. They will act as an augmentation layer to the mid-tier providers, who will leverage those larger partners for their ability to provide them:

• Ability scale in a more agile and strategic manner
• Expanded solutions offerings through white-label agreements for those solution sets that are outside their core competency
• With the ability to navigate global reach and logistics
• Access to, and support with, financing options
• With greater buying power and influence over the OEM’s on their behalf
• With best practices guidance on sales, marketing, and operational efficiency

To further contribute to the nomenclature mess we have in the industry, I decided to give a name to this new top-tier layer: Managed Services Distributors (MSD). No? Well, let's see if it sticks. Remember, you saw it here first!

This is all conjecture, of course, and certainly doesn't represent a unanimous perspective from the sampling of individuals I spoke with. So to keep things interesting and get some more perspectives, I think I will use one of my lifelines and do a shout-out to people on the street:

• How do you see all these roles in the channel changing?
• What do you see the supply chain looking like 5 years from now? 10 years from now?
• Will the growth of the mid-tier eventually eliminate the need for a top tier (gasp)?
• Whose cuisine reigns supreme?

I would love to continue the discussions and hear your thoughts. Please do jump into the mix and add your own visions on how this all unfolds.

If you want to explore this topic from the perspective of the distributor community, I highly recommend you visit the Global Technology Distribution Council (GTDC) website. There is some great research material there on how they view these changes will impact the wholesale distribution market: https://gtdc.org/rootsquared-report/