Download How Services Evolution is Changing the Nature and Composition of

RESEARCH REPORT
THE SERVICES ERA:
THE TRANSFORMATION
OF THE IT CHANNEL
How Services Evolution is Changing
the Nature and Composition of
the Reseller Channel
APRIL 2013
A 2112 GROUP STUDY IN CONJUNCTION WITH
RESEARCH REPORT
CONTENTS
DAWN OF THE SERVICES ERA
1
EVOLUTION HAS NO COMMON STARTING POINT
3
SERVICES EVOLUTION COMING IN STAGES
6
SERVICES EVOLUTION CHASMS
8
INITIATING SERVICES EVOLUTION
10
DEFINING A TRANSFORMATION STRATEGY
11
TIME: THE ESSENTIAL TRANSFORMATION ELEMENT 13
THE DANGER OF COMPLACENCY
15
SERVICES RESHAPING THE CHANNEL
16
BIFURCATING CHANNEL
18
REDEFINING THE SUPPLY SIDE 19
EVOLUTION’S WINNERS AND LOSERS 20
ELEMENTS OF SUCCESS
20
THE FORTHCOMING SERVICES ERA
21
ABOUT THIS REPORT
22
Information contained in this publication has been obtained by sources and methodologies of The 2112 Strategy Group LLC,
D/B/A The 2112 Group, and is considered to be reliable but not warrantied. This publication may contain the opinions of The
2112 Group, which are subject to change. This publication is copyrighted by The 2112 Strategy Group LLC. Any violation of the
limited terms of reproduction or redistribution of this publication, in whole or in part, whether in hard-copy format, electronically or
otherwise to persons not authorized to receive it, without the express consent of The 2112 Strategy Group LLC, is in violation of
U.S. copyright law and will be subject to an action for civil damages and, if applicable, criminal prosecution. Any questions should
be directed to The 2112 Group at (347) 770-2112 or [email protected].
©2013 THE 2112 STRATEGY GROUP, LLC.
RESEARCH REPORT
DAWN OF THE SERVICES ERA
We, the technology industry, are standing on the threshold of an entirely new era in computing and value
creation, which we’ll call “The Services Era.” This period goes far beyond the current transformative
paradigm of cloud computing, in which IT products – software, infrastructure and platforms – are
delivered as services or virtualized for more efficient and effective consumption. The defining difference
of the Services Era is not just the delivery of technology as a service, but effectuating an outcome as a
result of the service delivered.
Some people may say that cloud computing is the goal of channel transformation. In actuality, “cloud
computing” is a vastly overused term used to describe the evolution of technology from a static,
on-premises deployment of hardware and software into a virtual, managed delivery of platforms,
infrastructure, applications and staffing to fulfill business technology needs. For the IT industry, cloud
computing – or “the cloud” – encapsulates myriad approaches, meanings and IT services into one easily
understandable phrase.
The day is coming when the “services” model is the primary technology consumption and economic
paradigm. Infrastructure, applications, management and support are all provided on an outsource basis,
in which the service provider is responsible for maintaining and operating business-critical services on
behalf of consuming enterprises. This is a vast evolutionary leap from the current construct, in which
services is a secondary offering or adjunct to the hardware or software product sale.
The Services Era is about business models in which platforms, infrastructure and applications are
delivered as a service. Cloud computing – or simply “the cloud” – is often marked as the destination of
the services evolution in IT and the channel. As enterprise consumers of technology adopt more cloud
services, channel companies – technology vendors, value-added resellers, managed service providers,
systems integrators and service providers – will deliver increasing volumes of hosted (entirely cloud
based) and hybrid (a mix of on-premises and cloud-based services) products.
For the IT industry, the cloud offers a bounty of benefits. Cloud computing and IT services are as
scalable, flexible and agile for service providers as they are for enterprises. Remote and automated
services change the equation of IT sales and revenue from a one-to-one transaction between the
vendor and enterprises to a one-to-many framework in which the provider can service and support
more customers with fewer human and infrastructure resources. Moreover, cloud vendors and service
providers can reach many more customers and market segments with greater speed and lower costs
than they could with conventional product sales.
Despite steps taken by the channel to adopt cloud and other services, few technology vendors
and solution providers are looking far enough over the horizon when developing cloud
computing transformation strategies.
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The IT channel – the community of services providers, systems integrators, managed services providers
(MSPs) and value-added resellers (VARs) – is part of this evolution. As standard hardware and software
products commoditize, the “value-add” opportunity declines. Services, either delivered or resold, are
opening new and sustained revenue- and profit-generating opportunities for solution providers. As of
January 2013, more than 90 percent of the channel offers some form of cloud service as part of their
service portfolio. However, the average channel company earned 15.5 percent of its revenue and 12.5
percent of its profit from cloud services. And most channel companies say cloud computing profits are
unevenly distributed as some products are already commoditized. Moreover, many channel companies
are still developing cloud services, describing their strategies as “implemented, but immature.” The
trend, though, is services will rapidly mature over the next 24 to 36 months.
Despite steps taken by the channel to adopt cloud and other services, few technology vendors
and solution providers are looking far enough over the horizon when developing cloud computing
transformation strategies. Traditional small VARs and MSPs are struggling to adopt cloud services as
they lack the capital and acumen to manage the technology and business models. Larger systems
integrators and service providers, though better equipped to adapt, are taking measured approaches
to services evolution, focusing mostly on virtualizing legacy technologies for the cloud context.
Where all channel companies fall short is looking at the potential of full business automation, in which
applications are not just delivered, but managed and operated by the provider.
90% of the channel offers some form of cloud computing services; but average
cloud sales as a portion of gross revenue is just 15.5 percent
The 2112 Group and CA Technologies studied the evolution of services in the channel, identifying
ways solution providers are engaging these technologies, business models and opportunities. The
presumption: Every business will adapt to the services era. The reality: Not every business is or will. Our
study found that technology businesses are taking measured approaches align with their risk tolerance
and business acumen for defining their services future. While many will adopt “cloud” or “managed
services,” relatively few are looking beyond service delivery to the business automation as a service, or
as some call it “everything as a service,” era.
This report presents trends and scenarios for how services will transform the IT channel, change the
relationships between suppliers and resellers, and reshape the composition and dynamics of the
channel community. This report is both predictive and prescriptive. It paints the services opportunities
available to all solution providers with the recognition that not all will evolve to an optimal state. The
future of the services-based IT channel is one of re-stratification in which value is being redefined
based on service-delivery capabilities, technical acumen and business models.
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EVOLUTION HAS NO COMMON STARTING POINT
The natural world is replete with examples of evolution taking plants and animals on different
evolutionary paths. Environmental conditions, food supplies, predators and other factors influence
development and change. The same is true in the Services Era: Each technology company’s starting
point is as unique as its local market conditions. Evolution and transformation in the Services Era is
driven by two common factors: the individual starting point and future ambitions.
Solution providers approaching services are doing so in the context of five factors:
VISION
An idea or goal of what a solution provider business will look like, in the form of capabilities and
value proposition, at the end of its evolutionary journey
CAPABILITIES
Technical and business acumen that describe how legacy experience is translatable into a
service context
MARKET
Customer demands, or the ability to see future success in expanded markets; the potential of
converting or capturing customers with services
CAPITALIZATION
The ability to invest in new infrastructure, supplier relationships, skill sets and market
development
RISK TOLERANCE
A willingness to expend capital and resources to develop services
Of these factors, risk tolerance determines the extent to which a solution provider will evolve. Every
business has the potential to grow beyond its roots; where and how are reflections of how much the
business chooses to invest. It’s easy to assume only the largest solution providers with mature technical
practices, broad vendor relationships and high incomes are transforming to the Services Era. The 2112
Group finds that many smaller and mid-tier solution providers are investing in services transformation
rather than risk disintermediation. Larger service providers and systems integrators are implementing
more ambitious transformation efforts as they seek to not just create incremental growth, but also
replace revenue lost to the commoditization of standard hardware and software products.
The Services Era is different than previous services ages delivered by the channel. Solution and service
providers are assuming far more of the operational responsibility rather than just supporting on-premises
infrastructure. More mature services, such as those delivered by telecommunications carriers and
hosted service providers, include software and custom applications, which require far greater degrees of
skill to operationalize.
Complexity is the limiting factor to transformation: The more complex the service offering and business
model, the more time it takes to operationalize the strategy to a revenue-producing and incrementalbusiness level. Nearly all businesses reviewed for this study use existing cash-flow from conventional
product sales to pay for future investments. Consequently, businesses with lower risk tolerance are
engaged in services transformation with short migration paths. Larger systems integrators and service
providers with higher risk tolerances are engaged in protracted transformations, as their cloud products
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are more complex. In both cases, the goal is to manage cash flow so cloud revenues reach an inflection
point where by they can replace and exceed the revenue of the legacy products paying for development.
Economics is the chief driver of services transformation. Since cloud computing took root as a viable
technology delivery option, the channel’s primary motivation for adoption was either being prodded by
vendors to accept a new product, or the customer demanding a service option. That changed in 2012,
when solution providers started recognizing the cloud as a means for driving substantial incremental
growth (see Figure 1, ROI Expectations for Cloud Investments).
FIGURE 1: ROI EXPECTATIONS FOR CLOUD INVESTMENTS
Incrementally increase total revenue by at least 5 percent
14%
Incrementally increase total revenue by at least 10 percent
21%
31%
Incrementally increase total revenue by more than 25 percent
9%
Replacement revenue for declining hardware/software sales
4%
Partially replace legacy revenue by at least 5 percent
Growth
Steady State
Guessing
7%
Partially replace legacy revenue by more than 25 percent
7%
9%
Opportunistic, no return expectations
0
5
10
15
20
25
30
35
According to research by The 2112 Group, one-third of solution providers expect their investments in
cloud computing and automated services capacities to result incremental growth of at least 25 percent
annually. Two-thirds of solution providers say they expect positive incremental growth from cloud
computing products, compared to just 27 percent that see cloud computing as replacement revenue
for conventional, commoditized products. Only one in 10 have no expectations of cloud services.
Cloud computing in the channel is maturing. Half of the channel has implemented cloud practices;
only 10 percent of the channel has no cloud strategy, but less than half of such solution providers have
no plans to enter the cloud (see Figure 2: State of Cloud Channel Development). Notable is the yearover-year shift of solution providers developing cloud efforts to those that have established foundations
for cloud programs. This shift accounts for the increasing revenue generated by solution and service
providers from cloud products and services. While the majority of the channel makes less than 20
percent of its revenue from cloud computing, fewer companies are falling below the 10 percent level.
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FIGURE 2: STATE OF CLOUD CHANNEL DEVELOPMENT
50
2011
2012
40
30
20
10
0
Implemented
and mature
Implemented
and evolving
Developing
Nascent and
needs work
Don’t have a No cloud strategy,
cloud strategy, no plans for one
but looking into it
Just as no two solution providers will start their services journey from the same place, none will reach
the same end point. More savvy solution providers recognize the Service Era is not a destination, but
a process for continual change in which they become the driver and fulfiller of technology value from
beginning to end for their end customers by effectuating better business outcomes.
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SERVICES EVOLUTION COMING IN STAGES
Cloud computing and the Services Era are not happening all at once. Enterprises have been and continue
to wade into cloud computing and services, increasing their depth and pace as they gain confidence and
see return on investment. Over the last five years, businesses of all sizes have gone from experimenting
with services to the point where more mission-critical applications and infrastructure are transferred to the
services context.
The services evolution has four distinct stages of development in the enterprise-consumption market and
the supply side, whether they are technology vendors, service providers or solution providers:
FIGURE 3: FOUR PHASES OF SERVICES EVOLUTION
Phase I:
Experimentation
•
•
•
Basic SaaS
Hosted e-mail
Dev/test hosted
•
servers
Backup
Phase II:
Confident
•
•
•
•
•
Hybrid clouds
Mission-critical
hosted servers
Cloud communications
BYOD/mobility
complement
Phase III:
Managed
•
•
•
Management &
administration of
hosted & on-prem
assets
Infrastructure
auditing &
optimization
Phase IV:
Automated
•
Business analytics
& intelligence
applications
•
Big data &
storage in cloud
(operationalizing
non-productive
•
Merging of BPO
and cloud services
3rd party business
services
•
data)
Operational,
workflow &
logsitics
applications
Outcome-based
managment
Self-Service
Collaborative Services
Tech Services
Business Services
2008-2013
2011-2013
2012-2015
2015-
>> EXPERIMENTATION: End-user organizations tried cloud, SaaS and hosting services for nonmission critical applications and resources. Businesses could familiarize themselves with the
capabilities, economics and benefits of services without jumping in feet-first.
>> CONFIDENT (CURRENT PHASE): Businesses are moving beyond experimentation and adopting
mission-critical applications and resources through cloud and service providers. Confidence doesn’t
mean commitment – businesses are shedding low-level infrastructure and applications that are
expensive to maintain, but produce little value.
>> MANAGED (NEXT PHASE/ALREADY DEVELOPING): Solution and service providers manage
infrastructure and applications on behalf of their customers. Since they host the asset/application,
they provide the expertise and scalable resources to administer it. This phase is evolving as businesses
in the “Confident” phase look to capture more value from their cloud and services investments
>> AUTOMATED: Over the five years, service providers will offer back-office applications and
management functions to further assume the traditional management and business functions of
client organizations. This phase will be driven by the need to accelerate access to applications and
operational, non-revenue and unproductive data assets. If each phase is an order of magnitude
more complex than the last, the “Automated” phase will be nearly insurmountable by the majority of
solution providers because of the level of investment, expertise and scale required.
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Each stage marks a new level of confidence in the services model and its capabilities, as well as a new level
of complexity that the service provider must master to deliver the platforms, infrastructures and applications.
In the “Experimentation” phase, service providers could essentially sell basic, do-it-yourself or self-service
applications and infrastructure, such as secondary storage or hosted e-mail. In the “Confident” phase,
service providers must provide greater levels of reliability and more sophisticated applications, such as
online billing applications and CRM. In the “Managed” phase, service providers are not just providing
access to a cloud-based resource, but management of the infrastructure/applications as if they were
the customer’s staff. In the “Automated” phase, service providers are acting as customers’ employees,
providing full business process management.
Today, few solution or service providers are near the capabilities of the “Automated” phase, and many are
just beginning to see the potential for offering managed cloud services. Service providers and systems
integrators with visions for evolving into the Services Era are making investments in platforms, resources
and talent that can build, deliver and support cloud resources with high degrees of reliability, integrity
and manageability. Such investments go far beyond virtualized data centers; they include platform
management, service catalogs, application development and testing resources, and integration with
multiple third-party commercial-off-the-shelf (COTS) applications. Moreover, they’re investing in people
who can interpret enterprise business needs and desired outcomes and translate those expectations into
manageable cloud solutions.
While average solution providers say it is progressively easier to achieve cloud goals and meet market
demands, they are finding that enterprises expectations are increasing, as each new innovation raises the
potential for what is possible in the Services Era. Solution providers are struggling to find sales, technical,
engineering and administration talent suited for the Services Era. As the market progresses toward
full business automation, the channel’s ability to keep pace will be stunted by the talent shortage and
competition for a qualified, expert staff.
FIGURE 4: CLOUD CHALLENGES
Lack of expertise
Customer concerns over security
Customer concerns over SLAs
Too many suppliers
2012
2011
2010
Other
Protracted ROI/High investment
Business model unclear
Not offering desired services
No presence in target market
Unsustainable commissions
No relationship with cloud vendors
0
10
20
30
40
50
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RESEARCH REPORT
Those solution and service providers that build the infrastructure, acquire the resources and retain the
right staff will find their services equation highly valuable. Providers of managed cloud and business
automation outsourcing will have high degrees of value for relieving their clients of the mundane
complexity of IT infrastructure and application operations. And, they will have high degrees of welcomed
entanglement with customers, as the services they provide will be an integral part of the business fabric
– uneasy to extract once engaged and essential to growth and profitability.
SERVICES EVOLUTION CHASMS
Market expectations change with each evolutionary phase. As enterprises become more comfortable
and confident in the services model, they expect higher degrees of performance and lower failure
rates. They question what more they can do through services, which leads to the demand for more
sophisticated infrastructure, application and management offerings. This pressures the market – vendors
and solution providers, alike – to expand and mature their services capabilities.
Not every solution provider can traverse all four phases of services development. Some will remain fixed
in basic cloud services, such as hosted e-mail, PBX/VoIP/collaboration and backup. Many will become
service providers, able to host and support third-party applications, mobile endpoints and missioncritical assets such as servers and off-site storage. The number of solution providers to reach the
highest stages of managed and automated services will be relatively few.
Even among solution providers creating their services development strategies, we found relatively
few are thinking beyond the “Confident” phase. Their approach is about extending existing hardware
products from an on-premises delivery model to a service. Few legacy solution providers look beyond
virtual infrastructure to provide business applications, such as ERP, supply chain logistics and Big Data
analytics as-a-service.
Each phase is monumental leap in capabilities, focus and business model. Being successful requires
solution providers to invest beyond the extension of their current capabilities and redefine their
businesses. Tremendous planning, focus and risk – often in short supply in the channel – are inherent.
Compounding matters is ongoing success: Many solution providers delay transformation because
they continue to enjoy high returns with lower-level services and are not planning for the eventuality
of their commoditization.
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RESEARCH REPORT
FIGURE 5: DISRUPTION POINTS
Phase I:
Experimentation
•
•
VARs
Agents
•
•
•
•
•
Resellers
DMRs
Vendors
Carriers
Aggregators
Conventional
Phase II:
Confident
•
•
MSPs
System
•
•
integrators
Service providers
Hosting
•
•
Distribution
Aggregators
Phase III:
Managed
•
•
GSIs
Advanced hosting
•
Vendors
Phase IV:
Automated
•
•
Vendors
BPOs
•
System
integrators
Services Evolved
Born in the Cloud (BIC)
Some solution providers skip evolution all together. Born in the Clouds (BICs), for instance, have simply
appeared on the scene. These service providers and resellers have no legacy experience in conventional
hardware and software sales and support. They are young and focused on delivering technology through
a services model. Unlike solution providers of yesteryear, BICs have greater levels of business maturity
Services Evolved
and acumen. They are structured like suppliers and vendors, operate with the same fiscal planning and
discipline as enterprises, have defined go-to-market strategies and dedicated sales resources (some
even have their own indirect channel), and are hyper-focused on growth by way of account volume,
revenue and profitability. This is a tremendous contrast to the average solution provider reliant on vendor
products and support for sales and business development, with no formal sales organization and little
strategic or operational planning.
BICs’ arrival, early success and potential for disruption should not be seen as based purely on cloud
computing and services evolution. Their structure and discipline is proof that business acumen, strategic
planning and managerial governance make a difference in organizations’ success.
The result of this uneven and fragmented development of channel-delivered services is mass disruption.
Over the next several years, The 2112 Group predicts the channel will bifurcate into two major groups:
those capable of high-value services that add value to customers’ business operations, and those
providing commoditized, rudimentary products and services. The bifurcation will not be equal, with as
much as 60 percent of the channel disrupted or disintermediated; another 30 percent or so will fall into
a middle ground of either evolving up or churning down, and the remaining 5 percent to 10 percent will
reside in the high-value level.
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RESEARCH REPORT
INITIATING SERVICES EVOLUTION
The cloud and IT services markets continue to grow, providing ample evidence and justification for
solution providers to evolve their business models and value propositions to meet customer demands.
Getting into services, though, is more than just setting up a reseller model or building a data center for
services delivery. True services evolution means recognizing the fundamentals of a solution-provider
business must change.
Unplanned change is a recipe for disaster. The 2112 Group finds that most solution providers engaged
in services transformation started with a strategic plan for phasing in services capabilities and capacity.
Strategic plans are, by definition, ways by which to control business development and are governed by
milestones and expectations. They are essential to ensure organizations acclimate to new ideas, models
and technologies.
The trigger for initiating services transformation isn’t cut and dry. Too many solution providers
interviewed by 2112 describe a haphazard approach to cloud adoption; only a select few consciously
chose to embark on a transformation strategy. These six trigger points prompted the change to a full or
partial services model:
MARKET TRENDS
Transformation is inspired by shifting market dynamics and indicators – not necessarily
spurred by customer demand, but what’s indicated by the analyst community and
vendor forecasts.
CUSTOMER DEMAND
Customers asking for cloud services and strategic support have prompted solution
providers to shift attention and resources.
TECHNOLOGY
COMMODITIZATION
Legacy products and services decline in value and jump start the search for new sources
of revenue with high, sustainable margins. Experience with managed services offers small
solution providers the impetus to evolve.
MACROECONOMICS
The inability to fund or support advancing technologies and infrastructure needs
starts these solution providers on the path to transformation. Through contracting and
outsourcing, they gain experience and confidence in services.
NEED FOR GROWTH
Progressive companies are constantly looking for new revenue sources. They are
likely larger, support more distinct operating divisions and have a history of product/
services development.
SIMPLE NECESSITY
These companies wait long past commoditization tipping points to make the change.
They are transforming their businesses out of a pure need to survive.
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DEFINING A TRANSFORMATION STRATEGY
A transformation strategy is similar to a business plan. The exception, according to solution providers
engaged in such processes, is that a transformation strategy defines the development of services
capacity while planning and controlling the decline in conventional products and services. The goal: Use
the revenue from legacy products to pay for the services transformation. A plan will plot the increase in
services revenue and decline in conventional sales, marking the inflection point where services become
the focus and foundation of business vitality.
Solution providers fall into two categories when it comes to services: They stagnate in their approach
to business development, performing only to stay with the status quo; or they are actively evolving with
structured approaches to transform their businesses and redefine value and sustained viability.
There are three approaches to transforming solution provider businesses for services:
PARTNERSHIP
Working with vendors that offer service solutions to and through solution providers, such as
hosting and SaaS
ORGANIC
DEVELOPMENT
Developing unique applications and service delivery capabilities; the most control and highest
potential return on investment, but also the most costly and risky, as money and time investments
are borne by the solution provider
ACQUISITION
Buying companies that have the foundational elements of a service program; acquisitions are
costly and assimilations don’t always achieve goals
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The essential elements of a transformation strategy and plan are simple:
DEFINE CURRENT &
FUTURE VALUE
What a solution provider does well today and what they aspire to do tomorrow define their
services value to customers. Solution providers do not stray from their core competencies
and will leverage as many resources as possible.
IDENTIFY PRODUCTS
& SERVICES
After defining a vision, solution providers need to identify the products, services and
resources required to achieve transformation goals.
PINPOINT REQUIRED
RESOURCES
Many services transformations require solution providers to enhance their capabilities with
infrastructure, applications and support. These are attained through new/expanded vendor
relations, acquisition of assets from peers and the organic development of applications.
SCHEDULE
INVESTMENT
Transformation requires investment in technologies, training, staffing, marketing and
certifications. Solution providers need to determine a transformation budget, identify funding
sources and schedule investments against milestones.
ASSIGN TASKS &
RESPONSIBILITIES
Solution providers should not leave transformation to chance. Many form task forces or
steering committees with executive sponsorship responsible for the general plan, while
delegating assignments to develop specific parts.
ESTABLISH
GOVERNANCE
Accountability is essential. A transformation plan must have goals, milestones and
performance reviews. Every person involved in the process must be held accountable for
their role in the transformation.
MEASURE PROGRESS
No plan is effective without taking stock of the volume or quality of progress. If a
transformation program isn’t working, the management team must reexamine the plan
before investing more money and time.
The biggest transformation mistake solution providers can make is blindly leaping into the model without
understanding what they’re getting in terms of revenue gains, performance and market potential.
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TIME: THE ESSENTIAL TRANSFORMATION ELEMENT
Crash-transformation efforts rarely work. Solution providers say they have watched many businesses try
to rush through a transformation, only to see their investments and efforts fail. The term “transformation”
should come with a caveat: It takes time to plan and implement. Solution providers must pace the
transformation, balance resources, moderate risks and allow for breathing room to make adjustments.
According to solution providers, a well-rounded services transformation program requires three to
five years, with some running as long as seven. Extending the process spreads out the costs and
allows for the diversification of revenue streams, from which most solution providers pay for services
transformation.
Avoiding the disruption of existing revenue is the goal of any transformation. Solution providers say
they still enjoy strong sales, revenue and profit from legacy products and are spurred to transform by
commoditization trends and market demand for services. Preserving existing sales means solution
providers have the financial resources necessary for current operations and future investments.
The evolution of business culture, staffing and resources is a significant reason to phase transformation.
Many solution providers say they face tremendous hurdles in convincing their staff to accept the
services model. More challenging: reassigning staff to new roles or hiring professionals with the skills
needed to fulfill the services plan. In many cases, solution providers need to rebalance their staffing
structure through layoffs, which also require time to plan and execute.
Time is a solution provider’s ally. Some may feel pressure to launch into services quickly, given the hype
and rapid market adoption. Solution providers need to define their own timeline to go after the market
opportunity on which they want to capitalize. Planned, balanced and consistent transformation over
time will result in a healthier and more productive technology services business than any crash course.
Services transformation is time-consuming and expensive, and there’s no guarantee of success. The
steep obstacles solution providers must overcome in their services transformation deter many from
attempting such substantive change.
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RESEARCH REPORT
The following are the chief barriers to transformation, as defined by 2112 research:
TIME
The average services transformation takes three to five years to complete, while the average risk
tolerance – the maximum time a solution provider can expose itself to investments without a return
– is 12 to 18 months.
CAPITAL
Most solution providers self-fund their services transformation through revenue generated by the
sale of legacy products, paying for their future development and current operations exclusively out
of cash flow. With total growth of the average solution provider below 15 percent annually, that’s not
much to work with.
STRATEGY
The majority of solution providers do not have strategic plans or tactical goals, which inhibits them
from appreciating the need for change and setting things in motion.
RISK
TOLERANCE
Transformation returns begin in the third year, while tolerance ends in 12 to 18 months. This lack of
immediate return discourages transformation and causes solution providers to abandon efforts
BUSINESS
ACUMEN
Many solution providers do not measure performance or appreciate trends, mistakenly believing
increased business in declining products/services is good.
GENERAL
APATHY
Some solution providers are not engaging in the services evolution, or are only partially participating,
because they believe it is not their role or within their ability. They wait for vendors/suppliers to
initiate change.
TALENT
SHORTAGE
The top cloud computing challenge is finding the right technical, operations and sales staff to
complete services strategies. The talent pool is shallow, and solution providers are competing with
vendors, distributors and BICs for the same people.
Solution providers already engaged in transformation programs say long-term strategies afford them
time to find and develop the talent and resources while minimizing risk. Time, most of all, provides them
the opportunity to develop services, test their markets and make adjustments before they make a full
commitment to any one offering.
Not every solution provider will attempt a real transformation effort, as these obstacles prove too much
risk to assume. While they recognize the trends unfolding around them, they often feel powerless to
make the necessary changes to maintain their long-term viability.
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RESEARCH REPORT
THE DANGER OF COMPLACENCY
In the face of mounting obstacles, many solution providers choose to do nothing. While it’s getting
harder to make money on legacy products and services, their businesses are performing well enough to
convince them change is not necessary, or is deferrable. In some cases, solution providers simply do not
see how to transform their businesses and make the conscious choice to ride out the services trends.
Apathy is not really a choice, though. It can leave a solution provider vulnerable to rapid and irrevocable
disruption. Given that cash flow is how most solution providers fund their operations and business
development, a sudden loss of customers or shift in buying patterns could hobble their ability to respond
to competitive and market dynamics. In other words, waiting to change can eliminate the option of
changing.
Another reason to change: Cloud computing and services are weakening the bond between solution
providers and their customers. Solution providers have enjoyed being their customers’ “trusted advisor.”
A 2006 VARBusiness study found IT buyers would make purchases or strongly consider a technology
based on their primary solution provider’s recommendation. While the phrase “trusted advisor” is still
bandied about, it no longer has the same strength because of the shift in buyers having more control
over the service-purchasing process. Solution providers say their customers are researching cloud
computing and IT services without their consultation, which could lead them to a third-party with both
cloud services and legacy products. The result: a disrupted or lost account for the incumbent.
Well-founded exceptions to transformation do exist. We uncovered a few solution providers that have
made the choice to remain firmly focused on legacy products and services. In their niche, their strategy
is to target verticals traditionally slow to adopt new technologies and services, and customers not
convinced they need/want services. Once such company believes this strategy will propel its growth
from $25 million to $100 million in gross revenue by 2020.
The imperative for solution providers may not mean partial or total adoption to a services model.
However, solution providers put themselves at risk of disruption or devaluation if they do not make
logical choices for how they will operate in the Services Era.
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RESEARCH REPORT
SERVICES RESHAPING THE CHANNEL
The ultimate question: How will services change the channel’s composition and value? Services
evolution is just one force driving change; technology commoditization, over-distribution and
convergence are eroding the value of once-profit-rich products and services that were the underpinning
of the average solution provider.
No channel segment is immune to evolution. Seeing their conventional wired and wireless data and
voice transport services commoditize, telecommunications carriers are expanding into hosting and cloud
application services. IT hardware vendors are developing channels to support their service-provider
partners; they presume redirecting channel sales to service providers will result in more hardware and
software consumption by service providers. And solution providers have evolved from straight product
sales to a mix of managed services. Few solution providers follow just one discipline; most are hybrids of
product, automated and professional services.
Adopting and augmenting business models with services do not represent how the channel will evolve
over the next five to seven years. Market demands for more automation, higher returns on IT investment
and measurable outcomes will drive solution providers to take on different roles that address advanced
technologies and service delivery.
FIGURE 6: CHANGING CHANNEL COMPLEXITY
High Complexity/Automated
Systems Design
& Integration
Applications
as a Service
Annuity Work
Project Work
High Complexity/Manual
Professional
Services
Hardward Sales
& Deployment
Infrastructure
Services
Low Complexity/Manual
Low Complexity/Automated
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RESEARCH REPORT
This trend will fundamentally change the channel’s composition into four distinct groups:
>> APPLICATION-AS-A-SERVICE: Solution providers can use advanced business applications and
administration to deliver SaaS and business governance. This goes beyond Big Data as-a-service;
solution providers will offer human resources, logistics and facilities management.
>> INFRASTRUCTURE DESIGN & INTEGRATION: Integrating complex systems allows solution
providers to create value through their technical acumen and project management capabilities.
>> INFRASTRUCTURE SERVICES: Today’s managed and basic cloud computing services include
hosted e-mail and backup as part of the infrastructure fabric increasingly delivered as automated
services. Their low complexity, low barrier-to-entry and high availability, though, make them
less valuable.
>> HARDWARE SALES & DEPLOYMENT: Conventional product sales and basic installation
services make up the lowest segment. Solution providers in this category derive value from their
labor and technical acumen.
Each set of high- and low-value services are divided into two groups based on the work they perform.
Application and infrastructure services are annuity-based engagements, meaning they are billed as a
service, generate recurring revenue and compel high entanglement between the provider and customer.
Product sales and systems integration are project-based, finite engagements that produce revenue
through capital expenditures.
The common element of these categories is professional services, which take on different meanings
depending on the type of engagement. A solution provider selling PCs may call its installation and
support a “professional service.” The business-process outsourcing or expert-staff insourcing provided
by large integrators such as IBM Global Services, CSC and SAIC, for example, are what enterprises
and government agencies call professional services. Each channel category has its own professional
services flavor to act as the catalyst for customer interactions and the core value driver.
Evolution is a matter of moving along different paths that take solution providers away from their legacy
in pure product, price-oriented sales to either systems integration or infrastructure services. Each phase
has its own version of professional services. The challenge facing solution providers is that many will
progress to only the upper left or lower right in Figure 6; few will make it to the upper right (applications)
because the degrees of complexity in technology and business model will prove too difficult. Each
quadrant will have value for the solution providers operating within them; but the true, sustainable value
will flow to the upper left.
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RESEARCH REPORT
BIFURCATING CHANNEL
The services evolution is and will continue to be disruptive to the conventional channel paradigm.
Solution providers will find their legacy value diminished, while the cost of advancing into new
technologies and services only goes up. Solution providers can expect more competition as channel
ranks thin through market consolidation, a wave of company shut-downs and vendors taking more
business direct.
We believe services will disrupt and disintermediate a majority of the channel population.
By 2112 estimates, as much as 60 percent of solution providers could be forced out of business –
some through mergers and acquisitions, and others just shutting down – or marginalized into
low-volume, low-value services. The majority of the channel will subsist on product sales, installation
work, infrastructure services and technology integration. Only a fraction of the channel will matriculate
to automation services.
FIGURE 7: CHANNEL BIFURCATION
Application management,
business processes and
operational automation
Business
Automation
VALUE
Conventional
Channel
VOLUME
Infrastructure
& Support
Hardward (on-premises or
hosted), local support,
arbitrated labor pools
The result will be a bifurcation of the channel: A small portion of the solution provider population will
move to business automation services, while the remainder will stay in lower-level commodity services.
The infrastructure and support solution providers will act as arbitraged labor for the business automation
providers. The potential for mass disruption and disintermediation of middling solution providers is high.
The distinctions that automation services will be more about value and the infrastructure and support
services more about volume are misleading. The value of automation services is found in the return
provided by the IT investment. They will command higher prices and sustained margins, whereas
infrastructure services, by definition, will be broad and commoditized, making for a lot of available work
at low margins. The volume of work for both levels will be nearly equal at least in terms of addressable
accounts, as businesses require automation and infrastructure support.
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RESEARCH REPORT
In practical terms, the bifurcation effect on the channel will make it difficult for smaller, less-servicesoriented solution providers to maintain relevancy. As more capable solution providers move into
advanced automation services, they will pressure the channel’s middle class to either evolve or sink to
the infrastructure level.
REDEFINING THE SUPPLY SIDE
The services evolution among the vendor and distributor ranks cannot be ignored. Where solution
providers lag in market demand for services, vendors lead the charge by developing and fielding
services. Distributors are following suit, providing vendors with go-to-market, technical support and
channel enablement services.
Solution providers tell us they are concerned with their supplier vendors engaging in more direct sales
of services. They’re encountering more channel conflict with vendors over services sales than with
conventional hardware and software products. Moreover, end customers are more apt to buy services
from a vendor than a solution provider, as they perceive a higher level of performance and reliability from
the vendor source.
Vendors justify their direct sales in services by stating the channel has neither the infrastructure nor
capabilities to host or deliver modest services. Channel immaturity goes beyond technical capabilities
to include billing and accounting, sales and marketing capacities. Vendors want to retain sales rights for
services they have developed to expedite the recouping of their investment.
This vendor positioning in services is not universal. Several major vendors have syndicated or opened
their services products and capabilities to channel partners to accelerate sales and enhance revenues.
Even in the Services Era, where applications and resources are delivered over the Internet to any location
on the globe, the channel will play a vital role in reaching and managing accounts outside vendors’
capacity.
Distribution is adapting its “pick, pack and ship” model to support cloud computing and other
professional services. In many cases, distribution is treating services like any other product: It is adding
financial and technical resources to developing infrastructure on which solution providers can host their
services. Some are developing sophisticated aggregation platforms, enabling solution providers to buy
and resell infrastructure and applications through a consolidated portal. And some are developing and
acquiring professional services teams ready to augment solution-provider resources in building virtual
data centers and integrating technologies into productive systems.
While distribution has the capacity to take services direct, most maintain channel neutrality and pledge
not to compete with solution providers for accounts and revenue. This is not likely to change in the
services era, as solution providers are distributors’ customers. If anything, distribution may become the
moderating force that slows channel evolution by providing services to solution providers that cannot
afford independent capacity development.
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RESEARCH REPORT
EVOLUTION’S WINNERS AND LOSERS
Who will win and lose in this services evolution? It’s difficult to say. Many of the constructs for profiling,
evaluating and categorizing partner performance and potential break down in the services world.
The 2112 Group’s research finds several large solution providers making protracted strategic investments
in the development of cloud computing services, and several modest-sized solution providers making
consistent shifts in developing services capacity along the same lines as their enterprise counterparts.
Nearly every telecom carrier and hosting provider reviewed for this study is working on or has plans for
expanding capacity to include managed cloud and automated application services.
Conversely, data shows many more solution providers are resting on their laurels. The majority of
channel companies are following their vendors’ lead in services, relegating themselves to an agent
sales model or engaging in low-level, unsophisticated offerings. They see the challenges of developing
services – from technical to monetary – as being beyond their means.
Winners and losers in the Services Era won’t be defined by their technology or vendor relationships.
Viability, competitiveness and success will be based on the outcomes they deliver to their customers
and the perceived value of their products. Every solution provider has the ability to evolve into the
services model and find success in the Services Era. The critical first step is making the commitment to
evolve and defining the state of where evolution will bring their business.
ELEMENTS OF SUCCESS
Transitioning to services is more than converting customers to a
subscription-based fee model and offering applications over the
Internet. Services, especially in the beginning, require planning and
commitment to progressive evolution. Solution providers undertaking
a services transformation share these seven tips for ensuring success:
1. LONG-TERM PLANNING: Services transformation doesn’t happen
overnight. It requires careful planning and consistent execution
over an extended period. Planning provides direction and
control; consistency is a reflection of setting goals and focusing
on execution; and time disperses costs and mitigates risk.
2. MANAGED OVERSIGHT: The most successful solution providers
transitioning to services are those with executive sponsorship
overseeing the transition. Making the services transition a part
of the overall business development strategy and operations
ensures the whole organization remains focused on achieving
transition goals.
3. MANAGED CASH FLOW: Solution providers transitioning to
services pay for investments with the cash flow generated by
legacy product and services sales. Managing the cash flow
to ensure services develop at the right pace and don’t siphon
resources from current operations is the challenge. If done
correctly, a services business will hit an inflection point around
the same time legacy sales reach a declining tipping point.
4. DEFINING VALUE: Solution providers cannot rest on the
value proposition of being a cloud provider. Technology
will no longer be the provider of value, but the enabler. In
services, solution providers need to define their value by the
business outcomes they offer on behalf of their customers.
5. RETHINKING PARTNERSHIPS: Services will change the
relationship between vendors and solution providers. In some
cases, a solution provider is the vendor’s end customer, using
technology products and services to further its own offering.
Solution providers need to be proactive in defining the roles of
vendors in their services strategies.
6. MEASURE PERFORMANCE: In making the services transition,
solution providers need to set goals and milestones.
Moreover, they must measure progress toward these
goals and the quality of the results. Performance data is
essential in determining which services are working and
where to make adjustments.
7. AVOID PRICING TRAPS: Setting a price for services isn’t easy;
neither is defining their value in terms the customer will
understand. Too often solution providers compromise prices
to close more deals. This will erode transition efforts and
long-term viability of services products. Maintaining price
integrity ensures fruitful services futures.
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RESEARCH REPORT
THE FORTHCOMING SERVICES ERA
As rapidly as services are transforming the IT landscape and changing the composition of business
technology purchasing, the services trend is still nascent. The IT industry is building the infrastructure
capacity and capabilities to meet the market’s current and future market expectations, even as business
consumers get more comfortable with having mission-critical applications in a hosted context.
At its zenith, cloud computing will reach $250 billion in annual global sales, by some analyst forecasts.
This is a staggering sum, but still less than 10 percent of total global IT spending. These numbers don’t
tell the whole services story, though. When the supporting hardware and software that make up the
infrastructure and management layer of services are factored in, the total services market value soars.
Services represent a fundamental shift in the way technology is produced, delivered, consumed and
supported. Services provide end users tremendous economies of scale, and provide vendors, service
providers and solution providers the ability to do more with less – and with greater fiscal certainty
than ever before. The technological and economic benefits in the services model make its dominance
inevitable.
The channel will experience huge amounts of disruption by the services evolution, especially among
solution providers that fail to plan for their future in this paradigm shift. The services unfolding in
the market today represent an opportunity for solution providers to experiment and gain experience
delivering and adding value. It requires risk acceptance and capital investments, as continued viability
makes investing an imperative.
The alternative, as 2112 research shows, is stagnation and eventual irrelevancy. Solution providers that
fail to invest yet survive the services disruption will find themselves relegated to a low-value, low-growth,
localized labor role in the Services Era. They will sustain themselves as small businesses, but will have
far greater exposure to economic undulations and competition and an even more difficult time evolving
than those that have already made the services leap.
Solution providers thriving in the Services Era will be those that invest today in infrastructure capacity,
infrastructure and application management, advanced business automation solutions, data integrity and
security, and business consulting services. The companies that evolve services to operationalize more IT
assets toward better business outcomes and take administrative burdens off their customers’ shoulders
will find value and sustained viability over those that remain stuck in legacy or even hybrid models.
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RESEARCH REPORT
ABOUT THIS REPORT
Cloud computing, Big Data and mobility are transforming the way businesses consume technology.
This transformation changes the nature of technology development, delivery and support.
Hardware is commoditized, client-side and on-premises software is losing value, and cloud and mobile
applications are changing the nature by which users create and process information. This requires a
shift in the channel, which has traditionally been a community of product resellers that provides
rudimentary support.
In the Services Era, solution providers will evolve from product sales and support services to the
operationalization of nonproductive processes and assets through Web-based and/or hosted
applications.
The 2112 Group interviewed executives from two dozen solution provider organizations, most based
in North America, to identify current and future value propositions, business models and transformation
states. 2112 incorporated data from its proprietary research, case studies and third-party reports to
extend and validate the findings of the original research.
The findings do not represent a statistically valid sample; but rather are indicative of general trends
and reflect what is considered to be the state of the channel with regards to current and future
services adoption and delivery.
THE 2112 GROUP is the premier provider of channel development, market research, partner
communications and strategic content to IT vendors, distributors and solution providers around the
world. Based in New York, 2112 is dedicated to helping all members of the channel community achieve
greater and sustained levels of success through strategic planning, market intelligence and smart
decision-making. Our clients span the Fortune 500 to startups, distributors to next-generation cloud
providers, and value-added resellers to managed services providers, all sharing a common view that
the indirect technology channel is the best route to market. Our premier publication, Channelnomics, is
an analysis Web site devoted entirely to providing the channel community with insights into the trends
impacting the IT marketplace. Together, 2112 and Channelnomics provide the most comprehensive set
of strategic, analytical and actionable products and services in the channel.
>> Visit The2112Group.com
>> Visit Channelnomics.com
>> Follow @the2112group @channelnomics @lmwalsh2112
CA TECHNOLOGIES (NASDAQ: CA) provides IT management solutions that help customers manage
and secure complex IT environments to support agile business services. Organizations leverage
CA Technologies’ software and SaaS solutions to accelerate innovation, transform infrastructure
and secure data and identities from the data center to the cloud.
>> Learn more about CA Technologies at www.ca.com.
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