DLT's Alan Marc Smith: Solution Providers Must Prepare For The Inevitable Rise Of Subscription Services

Solution providers that don't prepare themselves now for the dramatic economic changes that come with selling subscription-based software and services will find themselves in a dangerous position, said Alan Marc Smith, president and CEO of DLT Solutions Sunday at the XChange Solution Provider 2017 conference.

This emerging IT landscape will be mostly made up of cloud and software-based services sold on a subscription basis, a trend that's already showing itself in force today, Smith told an audience of solution providers during a keynote address at the conference, which is being hosted this week in National Harbor, Md., by CRN parent The Channel Company.

Many solution providers are well-versed in "selling boxes," but even historically hardware-centric vendors -- like Cisco -- are starting to shift toward software and services-based offerings, and this is changing the channel landscape as partners know it, said Smith, who joined government-focused DLT, No. 39 on the 2016 CRN Solution Provider 500, two years ago.

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"It's a very different business model. It's a longer-term return for a higher value, and you're going to have to change your business," he told his fellow solution providers.

To start with, the shift toward recurring revenue means a change in cash flow. Solution providers should expect to see a drop in revenue in the short term, a shift they might need to incorporate into their banking covenants, Smith said.

"You're revenue is going to drop, but it will come back over time," said Smith, a 20-plus year channel veteran who at one point served as the CEO of distributor Westcon Group for seven years.

Smith said one challenge is that services-based sales require the same amount of work from the sales team as hardware sales requires. "You're getting less revenue for it right away, but you still have to sign the [payroll] check," he said.

Sysive, an audio/visual systems integrator that is focused on hardware today, is just starting the journey toward offering managed services, said Rich Kay, CEO of the Reston, Va.-based solution provider. Sysive hasn't made any adjustments yet to its financial model to accommodate recurring revenues, Kay said.

"It's a learning curve for us right now, but we're excited," said Kay, who attended Smith's keynote.

Large hardware-based IT spends have historically earned sales staff a generous commission, but services-based offerings that are purchased on a subscription basis changes the compensation model. A solution provider's sales team must be prepared for potential changes to compensation as the company prepares to take in more recurring revenue.

Kay isn't worried about his sales team handling the change in commission, or selling services as opposed to hardware. "Our [sales team] will be fully on board when the time comes," he said.

Making the shift to recurring revenue is critical for every solution provider organization, especially as their customers' legacy infrastructure begins aging out, some of it beyond patching or repairing, Smith said.

As businesses modernize their IT environments, they are moving to the cloud. While there are still three distinct cloud offerings today -- public, private, and hybrid -- hybrid cloud is going to ultimately win because some companies, like government agencies, will never use public cloud for all its data, he said.

"[Cloud computing] is going to become prevalent and there's nothing that's going to stop it at this point," he said. "IT revenues are going to be driven by the move to the cloud."