Jay McBain's Top 5 Channel Trends, Part 4: The ‘Shadow Channel’ Is Coming into the Light

The VAR Guy is coming to you from Austin, Texas, where this week we’re attending the Channel Partners Evolution conference. Vendors, traditional resellers, managed service providers and all of the “new” types of channel partners are represented and engaging in energetic discussions about how the traditional channel is changing and how to “skate where the puck is going.”

The conference kicked off with a keynote speech from channel guru Jay McBain, who recently joined Forrester as a channel analyst. McBain’s talk encompassed all of the high-level discussions the channel is having today as it navigates the digital transformation and tries to build a successful future. The VAR Guy will be bringing continual coverage of Channel Partners Evolution, but will dedicate a daily article touching on one of the five main discussion points McBain touched on in his keynote: the aging channel, the rise of the line of business buyer, the need to “hyper-specialize” in order to solve for business outcomes, the new types of partners comprising what McBain calls the “shadow channel” and how to navigate the increasing level of complexity partners must figure out in today’s IT landscape.

Look for a new piece of this series each day this week, as well as coverage of the panels, workshops and keynotes from the thought leaders in our industry.

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It goes by many names: the new channel, the emerging channel and, as McBain calls it, the shadow channel. Whatever you call it, there are new types of partners coming out of the woodwork and changing this space.

McBain has been talking about this new type of partner for years, but he missed the mark on one prediction.

“One thing I got wrong as a futurist is that the 162k channel firms in the U.S. would move into this new space. For the last 18 months I’ve been predicting the channel would move into the opportunity, and it hasn’t.”

When he set his mind to trying to figure out why, he came to three conclusions:

  1. Marketing and sales has never been a strong suit with our current channel. Traditional partners are technicians, especially those that service the SMB market. In the past, the channel hasn’t needed to focus on marketing, but as we talked about earlier this week, the rise of the line of business (LOB) buyer means there are now 10 decision-makers for every prospect. Partners have to be able to scale 10x in order to keep up.
  2. The channel is aging, as we deep-dived into in the first installment of this series. There’s a certain lack of will to change among partners who’ve maybe been in the channel for decades and are edging toward retirement. While there still is (and always will be) a need for traditional infrastructure, all you have to do is look at the vanguards of the IT industry to see which way the wind is blowing. IBM, for instance, has had 22 quarters in a row of declining revenue. The distributors and partners who work in this area are reflecting that. There’s still room for success in the traditional networking and infrastructure business, but it’s not exactly the sexy place to be…unless you’re heading into retirement and in seven years will be sailing into the sunset on your yacht.
  3. The channel is an industry that for decades has been comprised of excellent generalists. Historically, a good channel partner is all things to all customers. But the buyer’s needs are changing, and in order to survive, partners need to specialize. Traditional partners can talk tech all day long, but they aren’t comfortable having the business outcomes conversation with LOB buyers. The five levels of hyperspecialization we covered in this series yesterday make it very difficult to learn the language necessary to make the sale.

So who are these new competitors that make up the shadow channel? Indulge me one more list:

  1. SaaS ecosystem consultants: McBain says these new partners have really won big in an era of cloud. We’ve winnowed down to about five big CRM providers like Salesforce and SAP. The rest of the approximately 300 SaaS competitors have moved up the stack to build on top of the CRM. Salesforce, for instance, has about 695 partners that drive billions of dollars in revenue. The demand for their product is so big that there’s a backlog of customers they just can’t service, and partners who specialize in customizing and integrating Salesforce with other SaaS applications are writing their own tickets.
  2. Industry-based professional services firms: Every company in every industry is now a tech company. Three years ago, McBain said about half of these professional services firms said they were doing tech services or had plans to. Today, that number has risen to over 80 percent. These partners have long specialized in specific verticals and subindustries, and they know their customers’ pain points intimately. Today, they’re taking over many of the services traditional partners have offered, such as integrations, implementations and business continuity.
  3. Independent software vendors (ISVs): These shops add value by taking generic sales platforms and customizing them for a subindustry, segment or geography. There are about 100k ISVs today working in the app exchange to build “last mile services” onto existing stacks like Salesforce—and raking in the bucks doing so.
  4. Born in the cloud firms: These shops provide back end integration, security, backup, disaster recovery and other critical services. They’re chasing the $4 in SaaS downstream revenue and don’t deal at all with resale and its small margins. But McBain says they’re suffering from not “having an adult in the room,” partners who know the tech stack and can advise on probable pitfalls in these firms’ go to market plans.
  5. Startups: There are about 5k startups every year that get VC funding. These young, energetic organizations are looking to disrupt traditional markets and provide a competitive advantage to business leaders looking for “an edge.” For startups, only the software revenue is worth anything. Going after that services revenue is just too complicated for them, and often in their eagerness to just get the software installed, they wind up providing the back end services for free.

If you’re looking to make a graceful exit from the channel in the next few years, odds are you don’t need to be too worried about the emerging shadow channel. But partners that want to build a successful practice in the channel of tomorrow would do well to look to these new types of partners and take a page from their books.

TAGS: The VAR Guy
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