Adapt to low margins or sink

Channel players must change their model to avoid being squeezed by both vendors and customers, says Derek Warry

Each week yet another vendor is forced to cut costs, retreating into a role that encompasses both manufacturing and selling. This is all very well, but the IT industry demands value-add, in the shape of support and facilities for demonstrations, proof of concept and similar benefits.

All of which has a price tag, and it is clear that this is being absorbed by the channel at the moment. But for how long?

The benefits of taking such value-add as a service provided by the channel, rather than permanently employing extra staff, are clear. But the message from the channel to vendors is, use it by all means, but be prepared to pay for it.

Vendors are expecting more from the channel, but in many cases are giving less. On the other hand, end-users want to pay less and expect more. The channel seems to get the worst from both sides.

While analysts have been predicting that street price of servers, networks and storage will diminish, many channel businesses have been hoping for a massive increase in revenues to offset diminishing margins.

It is clearly not going to happen, with too many sellers operating in a buyer’s market. Many businesses face a radical rethink and painful re-alignment. Some will stick to the comfort zone of selling storage, networks and servers. However, as these rapidly become commoditised, the model has to change. Gone are the customer-facing sales and account managers, and in comes the low-cost model of selling by telephone to published specifications.

Inevitably, at the other end of the scale there will be companies focusing on complex applications and software-backed propositions. These command the highest skills, and also the highest potential margins. Some of these applications are platform-dependent, although the trend now is for platform/storage independence.

This leaves a third wave that will try to attack at both ends of the spectrum. These firms will have not only a high-cost model to deal with the potentially high margin business, but also a lean, mean cost structure to fulfil commodity requirements.

The future is bleak for those businesses that try to continue to operate without any change. Selling commodities with low margins using a high-cost model is a guaranteed recipe for disaster. In this game there appear to be few winners.

Derek Warry is strategic alliance director sales at InTechnology.