A piece of channel cake

Which ingredients should go into a recipe that makes more margin and sees your profits rise? Fleur Doidge reports

If you speak to vendors, most simply say their resellers are very satisfied, if not delighted, with their offering and that the margins VARs can earn are generous. Clearly, to anyone who has thought about the subject for longer than two minutes, this is - at least some of the time - pie in the sky. The wish, as they say, is often father to the thought.

How to concoct the right recipe from the diverse array of ingredients and complex flavours available in IT today and ensure ongoing profitability and margin is an ever-changing challenge. As soon as the technology evolves, everything in the mix must be reassessed to ensure it functions well as part of the whole, and that everyone's piece offers sufficient nutrition.

Many channel companies are understandably tight-lipped about their cuisine. Big-ticket items may not offer as much percentage-wise as little add-ons - but the latter require economies of scale to show up on the balance sheet.

However, Avnet was happy to offer CRN readers some tips on achieving today's perfect recipe for a more satisfying slice of the action.

Sukh Rayat (pictured, right), senior vice president for the north region, components, and integrated solutions at Avnet, says the best opportunities and margins tend to be in areas of high growth, such as services, software, converged solutions and storage.

"To benefit from maximum margins, some business partners will need to rethink their current approach," he adds. "In terms of software, a shift away from simply fulfilling requests for software licences is required, along with the ability to take a look at the bigger picture. What is the customer doing? Why are they deploying these licences? What other components are there to the offering?"

Vendors' pre-sales support and distributors' technical resources can help partners expand their share, and profit, not least by helping reduce risk and speed-to-market, he says. Services too are an obvious area of differentiation and thus improved margin - but this is not all icing.

"Finding skilled resource and ensuring full utilisation can be challenging and very costly if you do not get it right. And nowadays, finding new services to maintain a point of differentiation can be tough," warns Rayat. "However, get the model right and the rewards can be great."

Rayat points to the expanding need to manage IT through the entire life cycle. VARs can max their margins by providing and advising on estate management services, including end-of-life replacement and disposal of old equipment.

Converged offerings can be complex but are worth the effort for both channel and end-user customer. Again, distribution can spice things up for the reseller by offering access to multiple technology vendors, he says.

"Customers may lack the relevant in-house knowledge. Distributor accreditations overcome any short-term skill gaps and profitable sales are there to be made," Rayat finishes. "This type of mixed-vendor approach is particularly valuable for storage and virtualised solutions. Introducing capacity planning or monitoring solutions can also pay dividends."

Of course, none of this is new - however, the channel must keep thinking differently to ensure its approach stays fresh, not to mention palatable and attractive. This will add value, especially over time, and should cook up reliable profits.

Bob Tarzey (pictured, left), analyst and director at market research specialist Quocirca, says security, and addressing today's increasingly pressing concerns such as targeted attacks and the like, is an area where there is potential for margin expansion.

"Security organisations need advanced defence capabilities," he says. "Quocirca research shows there is an understanding about this and a willingness to invest. VARs need to expand their portfolios to encompass advanced capabilities including the detection of zero-day malware, advanced correlation, network access control, patching zero-day vulnerability and so on."

Targeting training

These products tend to offer higher margins than firewalls and anti-virus, which most organisations already have and are simply maintaining or updating. Training is another value adder that can expand reseller margins, he says.

"VARs must of course focus on services. One area they may not have thought of, though, is security awareness training. There are services out there designed to do things such as launch a planned phishing attack on an organisation and see which employees are taken in, then single them out for awareness training," suggests Tarzey.

Big data and cloud possibilities should also be evaluated, he says.

"Data management and discovery is a big product and services opportunity," Tarzey explains. "Margins on selling servers for internal use are low and sales are declining. Cloud is cheaper. This is not a direct opportunity for resellers - they will not get much margin on selling AWS virtual machines - but they can reduce the overall cost of an application deployment, leaving more budget for value-add."

CRN's Vendor Report 2013 has confirmed that some vendors do offer programmes that genuinely help resellers earn richer margins and are not always trying to cream off all the profits for themselves. But the data, anonymised from UK channel respondents across the industry, looking at 40 suppliers, revealed that resellers are finding some vendors less than understanding of the VAR's ultimate, relatively dependent position in the food chain.

Some of the biggest names in the industry are spoken of with little relish by their reseller partners in the 108-page in-depth analysis. Others - even some hardware players - work harder to sweeten the mix with back-end rebates as well as front-end margin potential, resellers said.

According to a recent report from Forrester Research, cloud vendors need to get behind the channel to ensure they help VARs, SIs and others to profit sufficiently from cloud, which everyone knows is not going away any time soon.

In fact, Forrester has projected a partial exit from professional services by channel partners finding the current cloud margins unpalatable - which could be a disaster for the whole market, since many cloud vendors must rely on channel partners to integrate, configure and customise their offerings for individual customers.

In the report, Cloud Channel Trends, 2013 to 2014, Forrester warns that most SIs have invested in cloud skill sets, but many VARs have not.

"Channel partners face a multitude of challenges in getting into the cloud reseller business: smaller margins, radically different cashflow, and marketing and selling of a service as opposed to a product. [Vendors] need to step up in order to rework the margin model."

That, coupled with "financial engineering" and "marketing enablement" should ensure the move to cloud services bears fruit for customer, channel and vendor, it says.

It seems a hungry channel must peruse the menu with care.