The end of the IT channel as we know it

The current channel is beyond capacity and touching only half of the market opportunity, according to ChannelEyes' Jay McBain

While exploring the question of where all these so-called "born in the cloud" partners are coming from, a bigger and more complex issue surfaced.

Perhaps the competition isn't coming from "within" the channel, but somewhere else?

When Marc Andreessen wrote Why Software is Eating the World in the Wall Street Journal five years ago, a major shift was taking place in every industry. Infrastructure was firmly in place and technology was finally at a maturity level to start disrupting every business, across every sector.

What Marc didn't predict is that the centre of gravity for these decisions would fundamentally shift into the business units. In those days, about 80 per cent of technology decisions were researched and made in the IT department; today it is only 28 per cent. In fact, Gartner predicts that it could be as low as 10 per cent by 2020.

The BBC made quite a stir last year when it predicted that technology could replace most workers in the next couple of decades. Will Machines Eventually Take on Every Job? walked through numerous industry segments from truck drivers to farmers, from factory workers to service delivery, and from knowledge workers to professional services.

If you wrap these articles together, the irony is deafening:

Line of business professionals are busy stitching together the very software stack that will one day replace them.

I don't subscribe to Armageddon-style predictions, but I do believe it will have one of the most profound effects on society since the industrial revolution.

The biggest threat to the IT channel today (already 36 per cent down since 2008) is not cloud. Nor is it Internet of Things (IoT), consumerisation, mobility, or a host of other emerging technologies. It is the changing dynamic in how customers decide on and purchase IT.

The 72 per cent of all technology decisions that are now being made (or highly influenced) outside the IT department are not traditional IT decisions. The finance person isn't buying a router. The marketing executive is not implementing security protocols and the sales leader isn't buying new servers for the rack. They are stitching together a software stack that drives business value for their department.

This myopic view could grow to be dangerous as costs are accelerating, duplication is happening across the organisation, holistic security is nearly impossible and interoperability is challenging with the permutations and combinations of disparate solutions. However, I don't see power shifting back to the CIO any time soon. In fact, a magazine focused on CIOs was reporting a trend where they were being demoted out of the boardroom altogether.

In the late 90s, as PC and other hardware margins were plummeting, the rallying cry for the channel was to verticalise. Find that industry niche where you could get deeper into the business issues and understand nuances such as regulations, legislation and industry solutions. By bundling consulting, software, and focused services, more profit and customer stickiness would result.

By the mid 00s, managed services were all the rage where individual hardware, software and services could be creatively bundled and profit could be generated by remote access and economies of scale.

Fast-forward to today and 90 per cent of companies are leveraging cloud. In fact, 60 per cent of companies have replaced more than one third of their IT infrastructure already, according to Gartner. Only about half of that was with the assistance of some type of channel. Even worse, more than two thirds of the current IT channel report that cloud opportunities have outstripped their capacity.

Yes, you read that correctly: the current channel is beyond capacity (either underskilled or overworked) while touching onlyhalf of the opportunity.

I reported before my feelings that "verticalisation" is being replaced by hyper-focused "vectorisation". The new line of business (LOB) power centre is creating opportunities in very specific niches across 287 sub-industries, multiple segments, a multitude of technologies and different geographies.

Traditional IT providers that have verticalised are being beaten by firms or individuals that focus on the five vectors (LOB, sub-industry, segment, geography and technology). In many cases these aren't "born in the cloud" companies, but industry or LOB-focused consultants, service providers and independent contractors that have been forced into technology as the world has shifted that way.

• Transportation logistics consultants are now selling end-to-end technology solutions.

• Insurance compliance consultants are pitching big data and predictive analytics.

• Healthcare advisers are now integrating EMR solutions with customer care technologies.

• Oil and gas consultants are leveraging technology to recommend hydraulic fracking and horizontal drilling to change breakeven economics.

The difficulty is that these new technology plays leverage very little of traditional IT hardware, software and services. Today's solution partners don't have the relationships, experience, skills or capacity to engage at these levels.
Without these vector skills, IT providers are on the outside of these opportunities looking in.

Traditional vendors are attempting to position themselves for this future. It has been painful to watch IBM shrink for 16 straight quarters, HP to split up, Dell to combine with EMC and go private, and Cisco to struggle in core areas. The top-line revenue for these companies will be significantly disrupted as the days of selling tons of big iron, monster software licence deals and outsourcing are numbered.

For channel partners, it is important to recognise new battle areas for revenue growth and build, buy, partner, merge or acquire their way to success. Standing still is also OK in the short term as none of this will happen overnight.

Understanding the magnitude of vectors is mind-blowing - do the simple maths and multiply 287 sub-industries by 10 LOBs by six size segments by 20 technologies and hundreds of geographic areas (states, countries, regions, etc) and you are dealing with 50-plus million vectors.

We are nearing 100,000 SaaS vendors today and that number will continue to rise by an order of magnitude to capture the demand. I can see a world 20 years from now where more than a million technology companies compete across these 50 million vectors. Many of these companies will spawn from our current IT channel worldwide.

None of these technology companies will be happy swimming in their own lane for long. They will look at adjacent LOBs, nearby geographies, different-sized customers or similarly behaving industries for growth. They will also look for partners in those swim lanes where they can participate instead of reinventing the wheel each time.

Buckle your seatbelts.

Jay McBain is CEO of ChannelEyes. This article was first published as a blog on his website.