Has the ‘Golden Age’ of the Channel Passed?
When Arlin Sorensen started his first break-fix shop, Heartland Technology Solutions, in 1985, the channel was like the Wild West. Business technology was a wide open, unsettled frontier, a land of opportunity for anyone who cared to stake a claim. There were few rules, little structure and no limitations for someone with an interest in computers and the gumption to strike out into uncharted territory.
Sorensen seemed, on the surface, an unlikely tech pioneer. He ran a farm outside Harlan, Iowa, a business he still owns today, and had bought his first home computer in 1982 to help with the accounting heavy lifting. But he quickly found an affinity for machines and systems, and learned he had a knack for teaching his fellow farmers about the wonder of computing. After a few years of driving back and forth to Omaha, helping friends choose a machine and software and get their operations up and running, Sorensen decided he wanted to get paid for it. He started Heartland as a “hobby” business.
There weren’t a lot of software tools in those early days, but those that came out did so with a purpose. Business operations moved from handwritten to electronic processes almost overnight: accounting, communication, databases. He stayed focused solely on AgTech through the ’80s, building his shop on training a population of farmers with zero exposure to computers what technology could do for their business.
“In those years, lots of people had never even seen, much less used, a computer,” he says. “If I could get them in for a training session, they would buy it. That was our whole marketing strategy. We’d have a class with three or four students, sell them a computer, spend weeks delivering and configuring it, then do it all over again. You created relationships with companies to resell product, and that’s all we were doing — reselling product.”
When networking came on the scene in the early ’90s, it took the game to a whole new level. Computers could share information now, and the general populace was gaining a base knowledge of how the tech worked. The computer went from something people had to learn to fight their way through to something they could generally use on their own, freeing up Sorensen to pursue more clients and build out his customer base. Business exploded, Sorensen’s staff nearly tripled in one year and he was off to the races.
The mid-1990s saw the modern channel really start to take shape, helped a great deal by the rise of distributors who brought some order into the space. Toward the end of the decade, the “Big Three” disties emerged, each with their own version of channel communities where partners, for the first time, were provided an opportunity to learn from one another. Sorensen says those communities were critical to the formation of the channel as we know it today, teaching him and other resellers how to turn their ad hoc shops into actual businesses.
“Ingram and a number of the early folks there were really invested in partners. A lot of us were in tertiary markets that didn’t make sense until they helped us grow,” Sorensen remembers. “John Fago from Ingram became my field rep, and he and I tried a lot of things together that helped me understand how to market and sell.”
In 2000, Sorensen founded HTG Peer Groups to facilitate this sharing of ideas. Resellers were reeling a little from the Y2K hubbub and wanted to hear what other partners were experiencing. Today, HTG has dozens of peer groups and hundreds of members working together not just on how to package offerings or create pricing strategies, but how to create a business plan, professional-development programs and even how to attain a healthy work-life balance and create an exit strategy. There are vendor education sessions and meetings where members present their strategies and receive feedback. It’s been HTG’s model since the start.
These peer groups, says Sorensen, changed the game when it came to partner expectations. They began to understand the value of going deep together, even sharing things like financial information business owners normally keep close to their chest. It was a golden age of sorts, with partners, distributors and OEMs working to shape what had quickly become a big business in enterprise tech. A shift away from break-fix to proactive managed services started to happen in the early 2000s, something Sorensen says was enabled by partners being able to swap ideas and figure out this new market together.
Perhaps one of the greater ironies in the channel is how quickly the role of those distributors changed when cloud came into the marketplace in a meaningful way. Distribution organized it all, creating stable, predictable offerings partners could turn around to their customers quickly and at a low cost. But that lower cost of entry means that new players can more easily enter the channel, often able to bypass traditional distributor channels. Sorensen says that in many ways it’s come full circle, with distribution trying to teach these shops things that vendors had to learn 20 years ago, like how to communicate and structure repeatable, scalable offerings.
Distribution was slow to adapt in the early stages of cloud, and now it’s trying to scramble to once again tame the chaos as new business models flood the channel. Sorensen isn’t sure disties can get it done. Cloud applications don’t look much like the traditional products and services that distribution built its fortune on, and as the internet of things continues to drive an explosion of connected sensors and devices, he says there are a lot of things coming down the pike that distribution doesn’t know what to do with yet.
Some things haven’t changed between the mid-1980s and today. In most cases, a partner’s job is to identify their customer’s business needs and try to fix them with technology. But it’s a surreal kind of familiarity. The speed of change is vastly quicker, and the changing buyer’s journey has upended everything.
“Back in ’85 and clear through the mid-90s, most people didn’t know how to turn a machine on, let alone how to use the thing. When the mouse came out, it threw people for a loop again. Today a two-year-old can run a mouse and do things most adults couldn’t back then. You’re not educating [customers] on computers and technology today. It’s all about outcomes and how tech can help you get there.”
Pre-internet, resellers were the keepers of all the information. There was simply nowhere else to learn it. It isn’t like you could look up “how to set up a network” in the encyclopedia. There was no rating system where prospective customers could see into partners’ service levels; VARs and MSPs got their business from recommendations, testimonials and referrals. In 2018, most buyers have already done their research. They have control of the information they need.
It’s a dynamic that has played out across the entire channel in recent years as the funnel of information completely turned upside down. It wasn’t long ago that the products and services people used in their business were essentially dictated from the upper levels of big vendors. Vendors told distribution what to push, disties told partners how to package it and partners told customers how to use it. Today, most customers come to MSPs with a good understanding of what they want.
But while the flow of revenue is growing more fragmented, Sorensen says the traditional channel model still has a lot of life left in it. There will be change to be sure, but the channel he helped shape isn’t dead yet. Still, vendors and disties are rattled by how quickly the power dynamic has changed. Alternate channels and engagement models are springing up to enable providers to get to market without all of the overhead that the traditional model carries, and which distribution historically financed.
“The reality is that without financing through distribution, the channel would be dead. Distribution funded the channel and made everything possible for decades. But with monthly revenue models … in a lot of cases it takes the financial play out of the market, which allows companies to spring up to deliver channel-like services with cloud. You look at Pax8, or a lot of the MSP companies doing PSA or reselling cloud products to their users.”
In January, Sorensen sold HTG to ConnectWise, staying on as head of the new business unit. ConnectWise, which provides remote monitoring and management (RMM), professional services automation (PSA) and other business management software, is a prime example of the new ecosystem Sorensen describes. The company connects partners with vendors in a platform, similar to traditional distribution, but in a different model that delivers solutions outside of what disty has historically offered.
“We’re going to see a fragmented go-to-market,” Sorensen says of the next few years. “People are still going to buy computers and networking gear and traditional things, and disty is the model that will continue to thrive there. But new things that don’t fit in the traditional disty box will find new routes to market. It will be interesting to see how much flows that way.”
In many ways, it’s not as easy for partners to hitch up a wagon and claim a stake in the channel as it was 30 years ago, but the space is still far from defined. Independent software vendors (ISVs), born-in-the-cloud service providers and IT consultancies are following the previous generation into what had begun to be a somewhat settled frontier, and their refusal to play by the rules set by vendors and distribution is once again introducing chaos. But where there is chaos, there is opportunity.
Has the “Golden Age” of the channel passed? Maybe for those resellers and service providers determined to cling to the idea of “the good old days.” But those willing to embrace a new channel reality will find that a lot of the Wild West mentality Sorensen saw in the early days is still around. For partners with gumption, there’s still plenty of room for pioneers.