Why these resellers are flying into software development
In depth: With RedstoneConnect set to offload its MSP business in favour of their own intellectual property, CRN investigates this emerging trend in the channel
RedstoneConnect's decision to sell its MSP and SI businesses to focus on its software development has thrown an emerging theme further into the channel spotlight.
An unprecedented number of resellers and MSPs are turning to software development as a way to differentiate themselves from their competitors and boost ailing margins.
While some channel mainstays are still thriving with their traditional reseller business, others have found themselves in a position where they need to adapt quickly. Research conducted by CRN earlier this year found that over one in five resellers are planning to develop their own intellectual property (IP) by the end of 2018, with a quarter already doing so. Based on these figures, nearly half of resellers in the UK will be utilising their own IP by the end of this year.
Software development would have previously required vast capital expenditure on infrastructure just to get started, but the cloud infrastructure offered by the likes of Amazon Web Services (AWS) and Microsoft Azure means SMB suppliers can now explore building their own software products at a fraction of the cost.
Partners can also build on top of the solutions already developed by vendors and tailor them to specific customers and verticals.
But this change in direction cannot be achieved overnight and requires a change in mentality.
Many channel partners will still be prospering selling hardware and the associated services.
Others, particularly smaller VARs and service providers that cannot survive on the same slim margins as the market leaders, are looking for ways to stand out from the crowd.
Marc Chang, CEO at Cisco Gold partner Block Solutions, cited this as the main reason for the firm developing its own IP.
Block's flagship intellectual property is its WiFi product Luminosity, which targets NHS organisations.
The software allows these organisations to set up one network, through which they can provide both corporate internet access and guest internet for patients.
"You have people who will be able to sell based on cost, so some of the larger players," Chang said.
"When we look at that, we can't compete with some of the big ones turning over half a billion pounds.
"We have to look at areas where we can add our value, so I think it's increasingly important for organisations that fall into our category to be looking for ways in which they can develop their IP and differentiate."
This extra value comes at a cost. Resellers need to build out the platforms needed to develop the software, and also bring on board a different type of IT professional, with the capabilities to create software, rather than service it.
"It will be really important for VARs to mix up their revenue stream so they're not relying just on professional services," Lars Malmqvist, Arcus Global
But the upfront investment may not be as steep as it would have been five or 10 years ago.
Chang said that the attitude of some of the world's largest vendors has changed over recent years, with a number of key players embracing the open source approach and opening up their software to third-party developers. Because of this, partners can use software already developed by vendors as a starting point for their own software.
"Generally, technology is changing," he said. "At hardware level things are becoming more commoditised and moving more into software, and things are becoming a lot more open through APIs.
"Cisco is one of our main vendors and their products now come with open APIs in a lot of the portfolio, so we're able to exploit that.
"A lot of the organisations have opened up their infrastructure to be programmable by partners such as ourselves and they've actively encouraged that, so we've developed those things to be able to take advantage of what's possible."
Because of the open nature of these vendors, partners can take the generic applications and tailor them to customer needs. A number of channel firms are taking advantage of this to create bespoke products in industry verticals.
TSG, for example, has built on top of Microsoft's Dynamics platform to create a bespoke system for rail franchises that were already TSG customers.
Fleur Parker, group applications director at TSG, said it now makes more sense to use software from established vendors as a building block, rather than build out a product from scratch.
"Part of our strategy is that IP is a clear vision, because it differentiates us and what it allows us to do is take our market knowledge into the industry," she explained.
"We have great experience in dealing with the train operators and in the membership space, so being able to tweak the system and know what they need allows us to be able to deal with it really easily."
The majority of organisations are moving to only a handful of public cloud providers, with AWS and Microsoft Azure currently the clear market leaders.
This trend can make it easier for partners to build out deep expertise, because they're only having to focus on a handful of vendors rather than dozens of on-premise infrastructure players.
Mark Skelton, head of consultancy at Microsoft partner OCSL, said this has made it more viable to invest in specific vendor technology.
OCSL has built a range of services around Microsoft Azure, branded "Fast Start", which provide quick migration services for organisations wanting to move workloads from on-premise infrastructure to the cloud.
"The move to common platforms is a big thing," Skelton explained. "If you're talking about cloud datacentres, you're really only talking about AWS and Azure.
"Because we're standardising on platforms it makes it a lot easier to deal with IP around those, because you're not dealing with the weird and wonderful things that you would deal with in a customer's datacentre - so standardisation has delivered that from a solutions perspective."
Five tips for starting IP development:
- Validate the market
- Don't start developing without a customer for the product
- Build the product for an industry, rather than the specific customer
- Use technology from a vendor as the foundation
- Leverage the partner ecosystems of vendors
But along with the opportunities that come with the public cloud is a potential problem. Because the vast majority of channel firms playing in public cloud will be doing so with just two vendors, there is a strong likelihood that partners will be building out capabilities that are very similar to each other.
The danger here is that differentiation may become harder to achieve.
Lars Malmqvist, CTO at public sector supplier Arcus Global, claimed that VARs might struggle if they are placing all their bets on providing services around the cloud. IP, he explained, is a good way of mitigating this risk.
"It will be really important for VARs to mix up their revenue stream so they're not relying just on professional services," he explained.
"Even managed service offerings on top of cloud platforms - that feels like it is more commoditised.
"More people are building those management layers, so while you still need those things, you also need something else. That can only be an investment in proprietary IP."
Arcus Global was traditionally a public sector reseller but made the decision three years ago to transition away from professional services as its main revenue driver, focusing instead on its own software products.
These products primarily target the public sector and build on generic software from vendors including Salesforce and AWS to create bespoke solutions for local government organisations.
Arcus Answer, for example, builds on Amazon's Alexa AI to provide bots to local authorities. These bots can interact with customers to resolve a number of typical queries, therefore freeing up employees to focus on more complex tasks.
Malmqvist said that developing these applications before a lot of its competitors has given Arcus a better chance of remaining a leader in its chosen vertical.
"We were differentiating simply by being the best at public sector," he explained. "Our edge in that space has been our domain knowledge, but the more we go down the direction of cloud and AI, the less secure you are in those traditional positions.
"A lot of the new platforms - like cloud and AI - are making those key differentiators easier to replicate. It's a less defendable position than it used to be."
Despite the opportunities IP presents, it cannot be produced overnight and requires a number of cultural shifts at a partner if it is to be a successful operation.
The firms that CRN spoke to all offered the same advice with regards to how to begin the process: start with one customer.
Rather than invest time and money in a product and then market it to potential customers, the first product should be borne out of a collaboration with a client, they said. This means that the resulting solution has already been validated by an organisation in the market.
Customers will most likely not buy a product that hasn't been created yet, meaning that the partner would have to invest all the capital upfront to build the product without having any pipeline in place.
"Most of these things are born out of projects," TSG's Parker said.
"So when a customer comes in and says ‘these are our requirements, can you tweak it do that?' you do that a couple of times because you get a little bit of traction in the market, and then as a business you take the decision to make it a product, rather than a project."
The risk with building the product first is that, even if the partner thinks it is relevant to a particular market, it might not meet a genuine customer need.
Block's Chang warned that partners need to make sure that they stay tightly aligned to the product's original goals, and don't get carried away trying to build something too extravagant. Sticking to these objectives - and not adding a host of extra features - will help ensure that the solution is relevant to an entire industry vertical rather than a sole customer.
"Get your ideas checked by a customer themselves," he said. "Don't just think the idea itself is a good one; do your research and checks, and make sure you go outside IT. The people who will be using the software will usually be the business user themselves, not the IT department, so go out and get sponsorship into those key people to check that.
"Also be careful that you focus in on what the core value of the IP is, because there is a tendency as you go out that the customers want everything. You have to stay true to what the core product is because you can't be all things to all people - that will never work. People try to bolt on all sort of things, but you have to build it not only for that one customer, but for the whole industry."
With this in mind, partners have to make sure that a product is relevant to an entire market vertical, rather than just one specific customer - otherwise the chances of repeat sales will be smaller.
Five reasons partners should develop IP:
- Bigger margins than reselling
- Differentiation from competitors
- The capital investment required has dropped significantly
- Vendors want partners to
- Repeatability once the products have been developed
The channel's increased focus on IP is not just being driven by partners and customers.
Vendors including Microsoft, Amazon and Cisco have opened up their software over recent years which has enabled developers to use this technology as a starting point for their own bespoke applications.
Lars Malmqvist, CTO at Arcus Global, said that vendors have softened their stance when it comes to partners sharing their recurring revenue, adding that the landscape has shifted to one where vendors need a strong partner community to be able to compete.
"Ten to 15 years ago you could sell a lot of professional services but Microsoft wouldn't cut you in on their licensing revenue," he said.
"These days they are happy for you to make additional recurring revenue on top of what they make because they see it as strengthening their ecosystem.
"The big suppliers don't think of it as product and value - they think about the total proposition as us, plus products plus services - the whole thing is the product that is being delivered."
Niko Mykkanen, EMEA partner boss at AWS, said that over the last few years the cloud giant has noticed a change in the dynamic of its partner base, explaining that the boundaries between different types of partners have started to disappear.
"If I look at our partner programme, we have traditionally divided it into consulting partners and technology partners," he explained.
"The more I look at it and the more I have conversations with partners, the limits and the boundaries are becoming much blurrier. All the companies are offering services and the services companies are building IP so there is a real transformation going on in that way; partners are absolutely expected to put other differentiating services on top.
"The way I look at it, we have the building blocks and every customer wants a castle. That castle becomes a combination of our services, our ISV partners' services and of course what they can build themselves, so we have been encouraging it from day one."
AWS is perhaps a slightly different case to Microsoft, in that it does not need to encourage its partners to adopt new skills, or recruit a different type of employee. Since AWS was spun out of the wider Amazon businesses it has always worked with ISVs that would manipulate its technology to build bespoke products.
Microsoft, by comparison, has generally worked with partners that would resell its technology and provide services.
"We have always been open about what we have been building," Mykkanen said.
"Many of these services have been built for our own needs in retail or other businesses that we have, but since then we have tried to support as many languages and protocols as needed and made those things available.
"That means partners can focus on the innovation, not the heavy lifting. Sometimes it takes time to know how we have been thinking about something, so we try to help and share what we do, but it is about having the selection available for them so they can focus on differentiation."
Like the partners quoted earlier, Mykkanen advised partners to start the IP process by focusing on one specific customer, rather than build a product and then try to sell it.
He also advised partners to utilise the resources that have been made available to them, including AWS itself and other partners in the ecosystem.
"It has to start with the customer - they have to know what they really want to get into and they have to find a way to be different.
"The boundaries are lower than ever before, there is space for niche and focus and they need to do that to make sure that they really understand the customer need.
"The other piece is to know what you are doing. Be open about it - seek help, talk to us, talk to other partners and understand what the options are so you avoid building something that is built already."
