As a senior executive of a systems integration company, I noticed two emerging trends in the software industry structure over the last decade that have led  me to question the very future of the traditional channel.

The first trend is towards a closer relationship between the Software Vendor and the end customer (often demanded by the customer), and the second is the reducing returns for channel partners caused by discounting and reduced margins. Channel partners have traditionally consisted of Value Added Partners (who add value through the installation, integration and maintenance of the Vendor’s products)  and in some cases, Distribution Partners (where Vendors try to remove some of the administration in dealing with smaller regions or higher volumes of customers).

Both trends are exacebated by the Software as a Service (SaaS) trend of software delivery to customers (be they corporate or consumer), enabling a monthly payment pricing model with customers spreading their cash flow through the year. Annual payments are inherently much larger, and perpetual license purchases can be around three times the annual license cost, making these models much more difficult to sell due to the quantum of money involved and the annual budgeting process of customers.

Industry today requires the ability to move to or adapt to new business models which in turn have to be supported by new software, as few legacy systems can adapt quickly any more. As more and more systems move to the cloud, the integrations are less on-premise and more vendor specific, using new cloud technology. The old “partner” model promised close customer interaction, looking at their evolving needs. But as the margin available for partners shrinks and customers demand direct exposure to the vendor, this model is breaking down.

Further, Software Vendors are facing increased pressure to deliver the desired service reliably and consistently. In order to accomplish this, the vendor needs to know what is happening at the customer level. There is increasingly more availability of third party software that enables just this for the Vendors. Being able to anticipate and fix problems that customers experience in a SaaS world is a growing need. This means that the Vendor typically identifies a problem before the customer.

Again, the question grows – what is the purpose of a channel partner? This question was one that challenged me, particularly given the cost of that team which enabled sales, presales. A huge cost which one struggles to recover in software sales margin. Many channel partners are now looking to providing only services and not attempting to be reseller partners, deriving some profit from the sale. However this business model is very vulnerable to peaks and troughs and the toughest of assets to handle – people. To mitigate this the companies use short term individual contractors, which complicates pricing since prices vary with demand fluctuations.

Looking at this restructuring, one has to look at the growth of the industry called Managed Services, or outsourcing as it is known in some guises. The cost base of a managed services business is mainly salaries of well qualified people, however the positive side of this is a long term contract with margin enough for learning and improvement in cost base. In my mind the managed services industry is taking over the gap that will increasingly be left by channel partners as they are forced to restructure their businesses.

Of course the extreme irony of this change is that this is where the IT industry started – large bureaus providing services from very expensive equipment that no company could afford to own themselves. Except that these days the large bureaus are the Software Vendors offering their services out of impossibly expensive premises directly to the customer through something that no one had anticipated in 1980 – the Cloud! It goes without saying that many industries are still heavily reliant on expensive mainframe systems that they own – financial services, airlines and telecoms companies.

What does this mean for a channel partner today? I believe that many are already going down the path of specialising in a solution set and focusing on being a leader at that specialisation into their customer base. Others are embracing managed services off this solution set, i.e. taking on a small element of the service being delivered with the software solution. Obviously the large outsource operators are expanding their footprint with their clients, trying to establish themselves in the cloud solutions, perhaps making their role indispensable to the client, again as a managed service.

Their challenge will be to keep themselves relevant as their customers gain greater visibility of the end solution and its costs. We are about to enter a very interesting decade; certainly the landscape in “the channel” will shrink and focus.