Channel goes in search of stability

We all know that times are tough. The constant sense of unease in the eurozone has everyone swinging from relief after another crisis management summit, to crushing disillusionment with the realisation that, actually, nothing much has changed. This year doesn’t look likely to be any better than 2011. There is already talk of the government having to introduce emergency budget measures of even more austerity in the summer if, as seems likely, GDP slips even further (ironically, partly as a result of those very same austerity measures and the eurozone crisis). We asked a number of professionals in the IT channel to give us their perspective on their biggest challenges in 2012.

Neil Wisdom, sales director, Complete Telecom 
Wisdom says one area of difficulty likely to continue in 2012 is longer waiting times for product because distributors aren’t stocking as much as they used to. It’s a trend that extends to vendors too, with a number of them almost manufacturing to order. This presents a challenge when customers expect the product they order to be available tomorrow and the IT channel is unable to deliver it for six weeks. He accepts it’s hard to build up stocks because products can change so quickly. The issue is likely to be amplified by currency fluctuations, especially if the euro starts to be adversely affected by the ongoing economic situation. In most cases, vendors price product in dollars and distributors and resellers have to change from dollars to euro or sterling to euro.

At the moment, the trend is going the wrong way as the euro falls against the dollar and sterling. The difficulty is customers have a set budget for products and channel partners have to set prices to meet those budgets. However, the tender and order process can take several months and fluctuations in exchange rates can have a serious effect between the time of tender and the order. "It’s a big business risk and a continuing challenge," Wisdom says, especially in a very competitive market where margins are tight and it’s "hard to build in fat to cover currency differences".

As a consequence, resellers could end up losing money if the currency goes the wrong way. It’s unlikely they will be able to get customers to pay extra to cover the currency change, so in some cases they may have to "renege" on the contract if they win it at a very low margin. But if they do renege, it could damage their reputation and count as a black mark against them at a time when business is difficult to win. Sometimes, Wisdom acknowledges, they might be forced to go ahead with the deal as a matter of politics, but this can only happen a few times.

Reluctance
The other big concern in an already challenging business environment is whether the business will actually be there in 2012. Customers "aren’t spending or upgrading as much as we would have hoped", Wisdom admits. The economic climate is reinforcing the reluctance of people to spend. A lot of technological advancements that can help people be more profitable and more productive require them to spend money but unless suppliers can demonstrate an immediate saving, "it can be hard to get them to sign off". It’s a great time to be a customer because they are "getting fantastic value" as so many resellers move out of their niche and start selling into more areas, generating more competition. But Wisdom warns that some people are going out of their recognised zone and selling products and services that they haven’t invested in properly to be able to support them. Another challenge is finding good quality, established senior sales people and engineers.

One reason is that if a salesperson moves job, it can take a year to 18 months to build up his or her earning potential. Too often, good sales people aren’t looking for another job because they won’t earn what they are currently earning for quite a while. As for engineers, they might be concerned whether they will still be challenged and learning at their next employer. If good people are available, they are generally snapped up pretty quickly, Wisdom says. Many of them will probably have several offers before they even get to a recruitment company.

Kevin Bland, channel director UK, Ireland and South Africa, Citrix 
Consolidation is the big challenge in 2012 according to Bland, as the channel tries to respond to the increasing popularity of bring your own device (BYOD) policies and cloud computing. As users bring personal devices into the workplace, "partners will witness less desktop devices being purchased under corporate-wide contracts. As the number of purchased devices decreases, it will become more obvious there are fewer discounts available in the channel and rising pressure on margins". He warns resellers that haven’t started responding to "the explosion of cloud offerings" will see customers slipping away.

SMB is establishing itself as a "hot space for cloud services" with the ability to make decisions quickly and deliver obvious cost efficiencies from renting services. "Those SMB resellers that haven’t started building or buying cloud offerings will struggle," Bland predicts.

He believes there will be a trend of generalist resellers acquiring specialists to maximise market trends: "Large organisations that are used to building solution stacks for customers will acquire small to mid-sized resellers that have successfully specialised in markets such as desktop virtualisation."

Justin Owens, managing director, Commtech
Addressing the issue of currency fluctuation, Owens says resellers may not be used to dealing with it, but distributors are and they spend a lot of time and effort trying to reduce the currency risk, for example by hedging. He also suggests that if IT companies suffer because they have to purchase equipment in dollars and sell in euros, they might find customers don’t have objections to dealing in dollars. One concern for 2012 is that demand could reduce across the board, as it did in the first quarter of 2009.

"If the same thing happened again, it would be a bit of a tough one for the channel," Owens concedes, "but there’s a lot partners can do about that." A lot of partners will have lost money last year and the year before because they took a short term view and didn’t adjust their costs to suit income and it’s very important to focus on staying profitable.

He reveals Commtech has had "huge issues" trying to recruit staff. "Looking for sales people is nigh on impossible," he claims. "Even if you’re paying a reasonable rate, it’s very, very difficult to get reasonable people. We’ve spent a large amount of time recruiting and interviewing people." With salespeople their track record is paramount and it’s always a challenge to get people with the right experience. It’s time-consuming and risky, especially for the person moving. Customers are more loyal to companies than people might think, so even if a good salesperson can be poached from his or her current employer, they won’t bring all their customers with them and it can take a couple of quarters to fill the pipeline. In the current economy, it’s a big move for them to make.

"If you can grow your own, you’re better off," Owens says, but it’s not easy or cheap, for instance to bring on technical people where they might take six months to be certified for certain vendors. So while it might be easier to start with, it can be very slow and not necessarily cheaper.

Edel Creely, managing director, Trilogy Technologies
According to Creely, the challenges for the channel in 2012 will mirror those of 2011: availability of credit and the confidence-sapping effect of the ongoing economic uncertainty. The ongoing emergence of cloud computing solutions will also lead to more confusion in the market as to where those solutions apply for a company. "Organisations considering cloud need to understand the suitability of their business processes for delivery through the appropriate cloud model," she states. This can be a benefit for resellers in their position of ‘trusted adviser’. Creely suggests they should seek to position themselves as a ‘trusted cloud adviser’ as soon as they can.

A big challenge she shares with Wisdom and others is in finding suitable technical staff. "As an industry we need to support initiatives to develop the skill-sets we need across all levels," Creely says. Trilogy is offering internships under the Job Bridge scheme and sponsoring the Smart Futures campaign which encourages second level students to consider careers in the IT industry.

"It will be some time before these students arrive at our doors," she admits, "but as an industry it’s important to encourage development of the next generation." 

Michael Conway, director, Renaissance 
Like Creely, Conway thinks 2012 will be more of the same compared to 2011, although it could be even tougher. The channel needs to focus on delivering more value, acceptable and sustainable margins and supporting the needs of clients and customers. But it’s difficult when margins eroded in 2010 and 2011 "to the point where it is unsustainable for the channel to survive in its current guise". Businesses have gone under and, like Bland, he predicts more consolidation in the channel over the next 12 to 18 months. At a commercial level, businesses will merge to generate the scale to offer effective and profitable services and solutions.

There will also be consolidation at a technological level as the channel focuses on delivering the services required at a more effective cost. "This will drive towards more delivery of cloud-based services," Conway predicts. Proactive channel partners have already moved toward cloud-based technologies and will continue to do so. "It is up to the others to follow in order to survive," he warns, "unless they have a specific opportunity to differentiate."

He agrees with Wisdom that there will be some issues around currency over the next year. But while currency fluctuations create a lot of uncertainty and confusion in the market, Renaissance tries to maintain pricing at stable levels because the market can’t absorb price fluctuations to any significant extent. And most important of all, "when a price is quoted it must be delivered, irrespective of any changes which may take place".

Declan Van Esbeck, managing director, PFH Technology Group 
From a technological perspective, Ven Esbeck agrees with those who suggest cloud computing is presenting a challenge because the model is quite different for customers and service delivery partners. He also points to the management challenge presented by "the enormous appetite for digital storage" because the solutions "are always a step behind the curve". Virtual sprawl is another issue, particularly when it comes to software compliance.

From a commercial perspective, the economic situation and the expected reduction in public sector spending are challenges, as is the short term shortage of hard disk drives which is "causing significant disruption and is likely to continue to do so for at least the next three or four months".

Andrew Miller, head of sales and marketing, Unity Technology Solutions 
The industry is still "challenged" to communicate to companies what exactly cloud computing is, Miller argues, in terms of what it means for organisations in minimising costs and optimising efficiencies, and which solutions are right for a particular company – a private, public or hybrid cloud solution. He says IT security professionals will benefit from the increasing focus on security as organisations look to protect themselves against unauthorised access to sensitive data, and information systems security moves beyond the office and extends to the mobile workforce.

The biggest obstacle for all organisations in 2012 is the uncertainty over the economy, the lack of credit and the shortage of IT skills as graduates continue to emigrate. The ongoing speculation regarding the possible collapse of the euro is also a cause for concern.

Companies that have under-invested in IT may also face a challenge, Miller argues, as they won’t be able to take advantage of the ‘lower cost’ operational expense model, which "presents challenges in terms of how we can help these companies move to the cloud".

Peter O’Rourke, channel and corporate division manager, Sage Ireland 
O’Rourke says that even if cloud is the way forward everyone is still trying to get their heads around how it works. Channel partners are accustomed to making margin on services as well as doing capital deals. But with Sage’s range of cloud solutions, the challenge is how to entice partners to engage with a model where the vendor is hosting their business solutions and using a subscription model where revenues trickle in over time. Trust is a big challenge.

A direct selling vendor wouldn’t have problems hosting the systems it provides to customers, but channel partners might feel uncomfortable handing over their customer systems to a vendor. Who owns the client and the relationship and who provides the support to the client? Given support is usually included in the cloud-based model, how do partners maintain an ongoing interaction with the client and create opportunities to upsell or cross-sell? With some products in the market, partners are probably selling the software or licences to get access to the service revenue.

The big question then is where does the margin come from in the cloud model? What model needs to be put in place and how does the vendor reward the channel partner? One benefit of moving to a cloud-based model is that credit becomes less of an issue and for transactional business partners used to entry-level deals, it’s actually not too alien a concept. At the higher end, enterprise partners are opting to concentrate on larger enterprise resource planning style solutions where the on premise option is likely to survive for some time to come.

"Moving to the cloud is not an overnight thing for the entire market – it’s a multi-year transition that could take three to five years," O’Rourke suggests.

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