Channel Co. Exclusive Research: Strategic Service Providers Are Driving A New Era Of Business Outcome-Based Cloud Services Growth

Strategic service providers, which are driving a higher percentage of sales based on solving business problems , have $1 million more in annual revenue and nearly double the percentage of cloud and managed services sales than solution providers that have not moved to the new business model, according to a new The Channel Co. research study.

"These best-of-breed strategic service providers have separated themselves from the pack by solving business problems with services-led solutions," said The Channel Co. CEO Robert Faletra, who over the past three decades has helped power the channel transformation from reseller to VAR to solution provider and now strategic service provider. "They have made the jump to solving business problems with cloud services and generating recurring revenue."

The minimum criteria to meet The Channel Co. strategic service provider research benchmark is 20 percent of annual engagements from business problem-solving rather than procurement, 34 percent of overall revenue from services rather than products, and 55 percent of total services sales from recurring revenue rather than IT project-based services, according to The Channel Co research.

Approximately 20 percent of the 170,000 solution providers in North America meet the minimum strategic service provider criteria and includes systems integrators, consultants and ISVs.

The Channel Co. research, which is based on an annual census of more than 600 solution provider respondents, is being presented in a six-city nationwide road show titled "Surviving & Managing The Shift To The Strategic Service Provider Model." The road show kicked off March 23 in Irvine, Calif., and concludes April 26 in Austin, Texas. In addition to the strategic service provider research, the road show includes exclusive The Channel Co. research on the partner’s buying journey.

Faletra called on technology vendors and solution providers to think through necessary changes based on The Channel Co. research in order to thrive in the new era. "This data is crucial for vendors and solution providers trying to survive the shift to the strategic service provider model," he said.

For solution providers, the shift means benchmarking themselves against the minimum strategic service provider criteria, said Faletra. For vendors, it means profiling partners for the three dimensions of the strategic service provider model, providing strategic consulting guidance for partners, and then providing channel programs and sales policies to support the new model.

The changes between the emerging strategic service provider population and the rest of the solution provider universe are striking. The new strategic service provider channel elite with 40 percent of their annual engagements coming from solving business problems are driving 68 percent of their median $4.29 million in annual sales from services, with cloud services accounting for 17 percent of sales, according to The Channel Co. research. That compares with 55 percent of $3.2 million in median sales from services for other solution providers, with cloud services accounting for only 9 percent of sales.

’But this is a balancing act,’ said Faletra noting the more traditional model isn’t being erased any time soon so suppliers need to manage both sides of the channel model equation.

Strategic service providers have a higher level of services and product growth because they are solving business problems at the very outset of the client engagement, said Rauline Ochs, a channel strategist for The Channel Co.'s IPED Channel Research Consulting & Training Business, discussing the data compiled from the in-depth census.

"Customers are literally betting their business on these strategic service providers," said Ochs. "They are trusted advisers driving the business problem resolution before the commodity hardware and software purchases are made. They have greater control of the technology sale and, with their influence, they are getting the follow-on product sales and consulting services."

Fifty-five percent of the strategic service providers, which sell more often to SMBs, classify themselves as MSPs (managed service providers/hosters) compared with 23 percent of solution providers who do not meet the strategic service provider criteria. The utility-based consumption pricing model, meanwhile, is being used as the primary model for 42 percent of strategic service providers versus 34 percent for the overall solution provider population.

"These best-of-breed strategic service providers have cracked the code and figured out how to solve business problems in a recurring revenue model for midmarket and SMB customers," said Ochs. "It's a very profitable model for them so they are selling in that manner at a higher rate."

WBM Office Systems, a $55 million, Saskatoon, Saskatchewan-based strategic service provider, has driven double-digit sales growth in recurring revenue for the past seven years by adopting the strategic service provider focus on business outcomes, said Chief Technology Officer Travis Weber.

WBM is beyond the minimum strategic service provider criteria in the three key benchmarks with 80 percent of all annual engagements based on business outcomes, 40 percent of annual revenue from services rather than products, and 75 percent of total services sales from recurring revenue, said Weber.

WBM is selling "business outcomes" focused on strategic planning rather than technology products, he said. "We are delivering practical results for the business, not just technology product speeds and feeds and model numbers," Weber said. "This is a really big shift. The organizations that figure it out are going to be the big winners in an era where we are going to see lots of consolidation in the managed service provider market. The ones that figure it out are the ones that are going to be around in five years."

[Strategic Service Provider Era Is Here: 10 Changes Solution Providers Need To Start Making Now]

Ultimately, Weber said, solution providers must become strategic service providers to thrive in the cloud services era. That means investing in sales and technical talent that understand business and focus on business outcomes. "We are vendor-agnostic and don't have a data center," he said. "All our bets are being placed on our relationship with our clients, making sure we are doing strategic business planning and helping them work backward toward the technology that is going to solve their business problem."

One of the predominant characteristics of the strategic service provider model is indeed that they are investing heavily in business problem resolution consulting rather than building their own data centers, according to The Channel Co. research. In fact, 53 percent of strategic service providers have a relationship with a global or national cloud service provider such as Amazon Web Services, while 42 percent have a relationship with a local cloud services provider such as Markley Group, Boston. That compares with 46 percent and 32 percent, respectively, for the rest of the solution provider population.

"Strategic service providers are investing most of their assets and money into strategic business guidance services rather than building data centers," said Beth Vanni, a senior consultant for The Channel Co.'s IPED Channel Research Consulting & Training Business. "They are all-in service providers who are designing and architecting business solutions, telling customers which gear to buy and then managing it for those customers. They are building apps and repeatable services with presales consultants that can have a business conversation. They may look small to some vendors, but they are very influential."

That consulting includes IT asset rationalization or return on investment of IT assets. Eighteen percent of strategic service providers are providing IT return on investment consulting versus 13 percent of the rest of the solution providers, said Vanni.

Top of mind for solution providers in 2016 as they move to drive top-line sales growth is focusing on enhancing their sales methodology or approach. In fact, 36 percent of solution providers surveyed said they are going to increase their focus on enhancing their sales methodology. "That means shifting the sales motion from project-based, product sales to recurring revenue sales," said Vanni. "It means continuing to sell beyond IT and changing out salespeople who don't know how to sell services."

As for driving profitable growth, the focus is on increasing the percentage of recurring revenue services, better utilization of existing technical staff, and charging differently for services, according to The Channel Co. research. In fact, 46 percent of the solution providers surveyed said they intend to increase the percentage of recurring revenue services in 2016, 44 percent said they intend to get better utilization from existing technical staff, and 26 percent said they intend to charge differently or more for solutions and services.

The shift to the new model is putting pressure on technology vendors to identify strategic service providers, enable them with business outcome-based intellectual property, and then follow through with channel program changes such as longer deal registration time frames and rules of engagement designed for the longer, more complex sales cycle. "Vendors need to get their mind around this shift and create systems that track and reward it," Vanni said. "That is no small feat. This is heavy lifting."

Key to making that happen is implementing service utility consumption models for partners, said Vanni. "Vendors that don’t have a utility-based pricing model for IT hardware and software are behind the times," she said. "The first call to action for vendors is know who your strategic service providers are. They need to profile their partners around the three dimensions of the strategic service provider model."

Solution providers, for their part, say one of the biggest obstacles in working with strategic suppliers is pricing models that do not support an IT-as-a-service delivery model. In fact, that is leading to sales conflict in the field between solution providers selling managed services and vendors selling product. "That is the new flavor of channel conflict," said Vanni.

The shift to the strategic provider model is a major one for both vendors and partners, said Vanni. "The combination of the three dimensions of the strategic service provider is a perfect storm," she said. "Vendors need to cultivate strategic service providers. These partners are solving business problems, designing IT architecture, providing scalable cloud services, and then managing IT."

Frank Vitagliano, vice president of sales and global distribution strategy for Dell, Round Rock, Texas, said he sees the strategic service provider model as a natural evolution of the channel. "These partners really understand customer requirements and are solving customers’ problems utilizing the most relevant technology," he said. "As the solution provider solves these business problems, the services they provide are becoming extraordinarily sticky. They are becoming more important from a business consultancy standpoint versus just a provider of technology solutions."

The vendors that will lead the strategic service provider era will be those that aggressively embrace the new model with new training, certification and recurring revenue sales models, said Ochs. "It's not OK to offer sales and technical certifications the way we used to," she said. "The new business model requires operational training. It's all about how to meet services levels."

For solution providers, the call to action is to measure yourself against The Channel Co. benchmarks on solving business problems, services mix and product mix to see how you stack up against the best-of breed providers, said Ochs. "As these partners write their business plans for 2017, they need to decide how they are going to take their company into the strategic service provider era," she said.

The future is bright for those that embrace the new model, said Ochs. "This is where we see the market going now that recurring revenue is widely accepted," she said. "The vendors that embrace the model will grow their population of trusted advisers and the solution providers that move to the new model will continue to be growing and profitable based on a services-led delivery model for how IT is consumed versus the old project-based model."

Technology vendors interested in attending the "Surviving & Managing The Shift To The Strategic Service Provider Model" road show must register due to limited space. In addition to an in-depth review of the strategic service provider and partner’s journey research, vendors will learn what will be important in building a bridge from today’s channel model to the future.