To the moon and back

Rocket science: Resellers will have to change their orbits in order to do well.

CRN’s Channel Universe survey has performed the most comprehensive health check on the UK channel for a decade and found it to be in surprisingly good shape. The tough economic conditions of the early 2000s seem to have given the channel a thorough workout, leaving it slimmer but fitter and better equipped to cope with the challenges to come.

The research has been welcomed by resellers themselves. “It is an excellent idea and long overdue,” says Ash Hussein, sales director of VAR Axial. “It is important for a VAR such as ourselves to understand the general landscape of the market and the competition. More knowledge will lead to better understanding, better strategies and more success.”

In 1998 CRN’s predecessor, PC Dealer, commissioned NOP Research to conduct a similar survey. As far as possible after a decade of upheaval, the latest Channel Universe survey followed a similar line of questioning to allow comparisons to be made.

The most obvious difference between the two surveys is numerical. In 1998 there were an estimated 23,500 companies in the channel, whereas now the total has fallen to about 17,000. This could be a blessing in disguise for the survivors, says James Burckhardt, associate director of ICM Research, who designed and managed the latest Channel Universe project.
“The worst period for business closures is probably over now and it is the toughest players who are left,” he says. “They have experienced the difficult times and learned how to cope and adapt, although there are still some traditional resellers who may go under if they remain overly reliant on product sales.”

The shrinking size of the channel brings home some basic truths that all channel companies should be aware of, says Kevin Collins, joint managing director of VAR ComputerWorld Wales. “Too many companies failed to adapt to changes in the market, believing that if something has worked for the past five years it will continue to work,” he says. “A major impact has been the demise of many tier two manufacturers. The increase of purchasing consortia means that tier-two has been edged out of the market by an aggressive tier-one, although tier three still exists to service micro company users.”

VARs accounted for about a quarter of the channel in 1998 and they still do, although actual numbers have fallen from about 5,200 to 4,100. Their business model has stood the test of time and in headline terms it remains basically similar, with heavy reliance on consultancy and services, a willingness to develop their own software and a focus on selling to purely business customers. Within this framework, however, successful VARs have continued to innovate, with increased emphasis on growth areas such as managed and outsourced services.

“Over the next two to five years the channel will continue to lean heavily towards software and applications,” says CRN’s editor, Sara Yirrell. “More and more VARs will attempt to transition their business into consultancy and services. Also with the expected rise in voice over IP this sector is sure to take off.”

Traditional resellers have also maintained much the same business model as a decade ago, relying on third-party product sales for most of their revenues and selling predominantly to micro-businesses and SMEs ­ for example, firms of a similar size to themselves. In 1998 they reported that sales of infrastructure services were growing, but these have not replaced product sales as the traditional reseller’s core business.

The one striking difference from 1998 is in numbers. Then there were nearly 5,000 traditional resellers in the UK, now there are fewer than 800, so perhaps keeping that business model was not such a good idea.

System houses and system integrators have prospered in the last decade with numbers increasing five-fold to almost 1,000. Although, back in 1998, they regarded product sales as a key foot in the door of their predominantly corporate and public-sector clientele, they were already making 80 per cent plus of their revenues from consultancy and services. Today they continue to keep themselves at the leading edge, with more than half planning to focus on managed services, identified by Channel Universe as one of today’s key growth areas for resellers.

Time has been surprisingly kind to direct response resellers, who have seen only a small decline in numbers from around 1,600 to 1,400, despite a continued reliance on third party product sales for 50-70 per cent of their revenues, backed up by support and other services. Telesales remains their principal sales medium, but their tactics for reaching customers have shifted with the times, with less emphasis on print media and more on direct mail, email, exhibitions and lead generation.

Internet commerce was in its infancy in 1998 and the number of online direct response resellers has grown by more than 400 per cent from a base of fewer than 200. Products still account for the lion’s share of revenues, but their provenance is changing. Ten years ago internet resellers were not developing software or manufacturing or assembling kit. Today nearly half say they manufacture or assemble, and a similar number offer e-commerce services.

A number of new categories have been added to the Channel Universe survey to reflect changes in emphasis within the channel, notably several segment specialist categories­ SME, public sector and consumer specialists, ISVs and consultants ­ which now account for around 30 per cent of the entire channel, or more than 5,000 companies.

“I think [the rise of the specialists] shows that, as much as the market expects change and improvement in technology, it also expects innovation from the channel,” says Collins. “Virtually all significant businesses are constantly adjusting their approach to the market, and successful resellers are doing so as well, seizing a proposition and marketing to that.”
“Resellers tend to be reactive so I suspect customer demand has driven a lot of the changes,” says Burckhardt. “But the best resellers also want to keep one step ahead in developing solutions that fit their customers’ problems.”