IT Market Tug-Of War: Get On-Board With 'Services-Led' Buying Model, Say Partners To Vendors

"If [vendors] want to sell into the midmarket, you have to come to us and play in the consumption model that we want to play in," said one longtime solution provider executive.

There's a tug-of-war happening in the IT market today between channel partners and their vendors.

Many partners are pivoting their businesses in favor of the MSP model with an emphasis on building out their recurring revenue streams. But they're being held back by vendors that still want the channel to purchase their solutions upfront, solution providers say.

"For years, we had certain hardware vendors wanting us to buy everything up front because they have quarterly numbers they have to report to the street, meanwhile, we're trying to sell on a consumption basis, so there's a misalignment," said David Powell, chief revenue officer for Corsica Technologies, a Centreville, Maryland-based MSP.

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Corsica Technologies serves SMBs and co-managed solutions for midsized enterprises. Powell said that the company wants to keep its revenue mix "heavy" on the recurring side. Anything that can be recurring, should be recurring, he added.

"It's easy to get drunk on nonrecurring revenue, but [a partner's] valuation is going to be tied to your recurring revenue, so you need a good growth story," he said.

Powell, who has spent time working for both MSPs and tech vendors, thinks that vendors have a lot of work to do to understand the consumption model.

The evolution of the channel is relying heavily on monthly recurring revenue. Leading with services is driving 45 percent more growth for solution providers as opposed to the 22 percent growth experienced by partners that led with products in 2019, according to new research from The Channel Company.

Many solution providers are already moving away from transactional to services-led revenues and it's driving partner profitability. According to the research, 65 percent of solution provider revenues in 2019 was generated by services.

FedBiz IT Solutions, a solution provider that caters to Federal government customers large and small, primarily sells IT hardware and services in a traditional reseller model, but the company is creeping toward the MSP model because of the attractive margins and recurring revenue. At the same time, customers are starting to demand a more flexible IT buying model, said Don Tiaga, president of FedBiz IT Solutions.

"Some government agencies want to pay in a monthly fashion for their IT, but not all manufacturers are ready to sell in that fashion. Some [vendors] may only accept an annual fee instead of a monthly in arrears payment," he said.

That means the financial risk falls on FedBiz. "In situations like that, we have to figure out in advance want to finance the opportunity up front," Tiaga said.

Some vendors, however, are starting to understand the MSP buying model and are offering that as a go-to-market option for partners, in addition to the more traditional reseller model which requires partners to pay an annual, or one-time payment for their products, Tiaga said.

Both Hewett Packard and Dell Technologies are are aggressively moving into the pay per use use services model market.

Just this week, Dell Technologies, announced that its highly anticipated Dell Technologies Cloud Data Center As-A-Service offering is now officially available for partners to sell in the U.S.

HPE – which has been offering a flexible consumption model for a decade- is aggressively expanding its GreenLake pay per use services portfolio. At HPE Discover in June, HPE CEO Antonio Neri pledged to transform the entire HPE portfolio to an as a service model, adding a new version of GreenLake for the midmarket and an HPE Aruba network as a service model.

This week, HPE announced that it was now offering VMware’s popular Cloud Foundation as a service on HPE GreenLake.

While products like GreenLake are a "step in the right direction," software-focused tech firms are grasping the MSP model better than the incumbent hardware players, Corsica's Powell said. The first provider to really "understand" was Microsoft, he added. Microsoft has been offering its Services Provider License Agreement (SPLA) licensing program for years, which gives service providers and ISVs that ability to lease or rent licenses of Microsoft products on a monthly basis.

But while some vendors have started to include a monthly payment option for their channel partners, these companies often still require an upfront commitment, said Andrew Bialock, co-president and senior engineer for Advanced Systems Integrators LLC. (ASI), a Holyoke, Mass.-based solution provider.

"You still have to play that growth game with vendors. You're trying to get the best price while still only buying what you think you can use and it's kind of a guessing game," Bialock said.

To combat this issue, ASI talks to a group of its clients before making any upfront purchases with vendors. "The trick is to get a bunch of clients signed up and then roll out the solution at the same time to take advantage of the pricing, but that's hard. If you're already at something like 100,000 seats it might not matter because you're already at the lowest price, but the MSPs that are onboarding now are struggling," he said.

Many large IT vendors that have focused on enterprise business have seen that segment slow down and they are turning their attention to the midmarket. But vendors are realizing that MSPs are the way to reach the midmarket, Corsica's Powell said.

"[These vendors] didn't like us back in the day. We were ugly and pimply and now that we are hot, they want to talk to us, but we are on to them," Powell said. "They're trying to flirt with us all of a sudden and we are saying, 'you wouldn’t extend us credit when we were starting out, you had bad deal registration, and you had sales people trying to poach our deals, and now you want to talk to us?'"

MSPs have leverage and vendors must realize that as customer buying habits have changed, the power dynamics have shifted between channel partners and vendors. Now, vendors should be sharing some of the "risk" associated with a monthly recurring model with their channel partners, he said.

"If you want to sell into the midmarket, you have to come to us and play in the consumption model that we want to play in," Powell said. "Who is in a better position to take on risk? It's the vendors, but who has access to the middle market? It's us."