In this Industry Buzz podcast, the UCStrategies Experts discuss changes in the Channel, and the ways the value added resellers and systems integrators in the unified communications industry can grow market share.
Transcript for VARs and SIs in 2012: Growing Their Piece of the Pie
Jim Burton: Welcome to UCStrategies Industry Buzz. This is Jim Burton and I am joined as usual by the UC Experts. Today’s topic is all about VARs and systems or solution integrators for 2012. We have seen a lot of changes in our industry over the last number of years and it is important for us to understand where this market is headed because the Channel is such an important part of that. One of the things that we have observed is that there was a time when the Channel sold boxes and today they are selling solutions; a different type of sales and a different type of approach. When they sold boxes, they had large lumps of money that would come in because they sold big solutions, as they start serving and selling solutions, we are finding that they are getting more of an ongoing revenue stream. So again, another challenge for the Channel. Our discussions today are going to be about the Channel, where they are headed, what they need to be thinking about and how this industry is evolving around UC. I think we will turn it over to Marty Parker who has written a couple of articles recently about the Channel and has some pretty interesting things to say. Marty?
Marty Parker (1:17): Hi Jim, thanks very much, my main point is that the Channel has taken the lead in Unified Communications. We predicted this at UCStrategies three or four years ago and actually have an annual conference called the UC Summit that is all about the conversation between vendors and channel leaders. We saw that this was going to happen, that the vendors were going to do a lot of the wonderful heavy lifting to create the great software and devices and network appliances – all the things it takes to make UC possible – but that it was going to be the systems integrators, solution integrators and value added resellers that brought it together for the customer. Further, the communications industry has aggressively adopted the IT model of selling through value added resellers, less and less direct vendor sales in the market. So again, we see the vendors putting the value added reseller in front of the customer and the consequence of that has been pretty interesting. Mostly I would like to comment on the revenue effect of it. Just recently in 2011, the Eastern Management Group reported on the worldwide sales of IP-PBX and UC solutions and they said there was a $59 billion industry. I did some analysis of that and what it showed was that the vendors, the traditional vendors were only taking about $18 billion of that, a little less than a third. But when you do the analysis, another third, a little bit more of 34% of the total revenues were going to value added reseller services, not the product resale, but the services: the basic delivery, the integration of the UC and communications capabilities into other elements, other application services, other databases, other network elements, the extension of those services out into the internet and to company’s clients and customers. All of those kinds of integrations are in fact representing a significant revenue opportunity. This follows as we have said before, Unified Communications is kind of the niece or nephew of our “aunt,” the call center, and the call center has this same pattern from the 90s. Now we are seeing it happen here in Unified Communications.
A couple of great examples of this happening: Dimension Data, even though they are now a part of NTT and not officially public, they did actually share their revenues and results in broad terms. Their fiscal year ended September 30, 2011 and just last September they did $5.8 billion, that is with a “B,” in revenues, and that is compared by example to Avaya who did only $5.2 billion in that same time period and that is including 50% of that as maintenance services. Cisco has said in some public forums that they did about $4 billion in about that same period; they ended July 31st of course. So Dimension Data you can now say is the largest organization in the UC and VoIP business, and they have done it because they were an early adopter of a UC practice. They defined a UC planning and adoption practice; they published their methodology and so forth about three years ago and they have clearly been able to build on that. They also represent a diversity of products ranging from Cisco on one end of the more network-centric approach, to Microsoft, they are a large Microsoft reseller, on the other end, the more application-centric approach. So you see a significant company developing around the principles that we talk about here. They had 22% year-over-year revenue growth, they say, in their reported currency, and constant currency only 15%, but still significant.
We also see these trends occurring through consolidations and acquisitions so smart money is basically saying, “hey, this is a growth opportunity and a profitable opportunity, let’s get a piece of that action.” PayTec bought a number of companies, value added resellers, before they were acquired in turn by WindStream. AeroElectronics bought SharedTechnologies recently. Strategic Products and Services has made two or three acquisitions to build their company. So we are seeing that happening, we are also seeing some Channel members being proactive in what they offer. For example, both Enabling Technologies and BT, British Telecom, are offering their own cloud-based versions of Microsoft Lync with enterprise voice capabilities, while the Microsoft Lync offered through Office 365 does not have those capabilities. So they are basically trying to lead cloud-based UC Solutions as part of their own delivery mechanism and therefore participate in the services around that and capture that revenue stream. Of course, this is all fraught with risk, and I think others are going to comment on this, a VAR or systems integrator better have their stuff together before they make claims and enter into the market. They probably are going to need to prove what their capabilities are to the customers in order to be hired to do those jobs. So with that, Jim, I would say there are a lot of signs that the Channel is a major player just as we predicted, and now it is going to be all about the style and technique, onto you.
Jim Burton: Thank you, and you did a very good job of helping to segue this into what we know Kevin would like to talk about, so Kevin we will turn it over to you.
Kevin Kieller (6:47): Thanks, Jim, and thanks Marty. What I want to share is two generalities and one specific message to VARs and systems integrators in terms of where to seek out increased wallet share. I think increasingly as we enter this year, value added resellers really need to be clear on what value add they are actually providing. I think where we are seeing the Channel and the revenues that the profession services revenue provides increasingly the vendors are looking at those margins and saying, “we would like to be in this business as well.” So VARs are going to need to be very clear in terms of what value they provide and I know my colleagues later in the podcast are going to provide some specific instances of that.
The second general point is, from a systems integration perspective, I think as complexity increases, doing what I will call “just in time integration,” sending smart people on site to a customer’s site so that they are figuring out how to put various UC pieces together as they are there on the customer’s site... That might have worked a number of years ago, but as the number of systems and different vendor systems increases, the technical risk that Marty alludes to for a systems integrator greatly increases. So systems integrators are really increasingly needing to make that investment in working out the integration, what works, what doesn’t work, and exactly the recipe for doing the integration, ahead of time.
The ultimate example of this is in fact the cloud vendors that Marty speaks to a couple examples, BT, etc., where they have figured out the entire solution ahead of time. They made the investment, they built the infrastructure. I think increasingly even for systems integrators that are delivering on-premise solutions, they are going to need to in their lab, make that investment, take their people, train them, build the deployment guide, test it several times before they are actually on a customers site.
The specific opportunity that I would like to speak to, and this is really reiterating a focus area that I brought up in last week’s podcast, is I think for both VARs and systems integrators, there is a significant opportunity in 2012 to help customers measure and monitor the technology usage and adoption. Just quickly, definition wise, from an adoption perspective it is really helping customers understand who, what number of people are using a solution, and then from a usage perspective, deciding and determining how much they are actually using that. I think that VARs and systems integrators can assist, and there is an increased revenue from implementing processes and tools to capture those metrics and then secondarily, there are additional revenue opportunities for VARs and systems integrators using those metrics to take corrective action, whether that be training or tweaking the technology deployment or perhaps deploying additional technology. I really think for VARs and systems integrators, proving that your initial technology implementation provided real business value is a great path to more engagements with that specific customer.
So the quick recap: VARs need to be clear on what value you add, and that should be reflected in all your marketing materials. Systems integrators increasingly need to make increased investment ahead of time to do solution bundling and testing before they get on the customer’s site, and certainly both VARs and systems integrators, if you could help customers measure, monitor and prove that technology is driving the business objectives of the organization, that certainly is a path to increased wallet share.
And with that Jim, I will turn that back to you and my colleagues to further expand upon these points.
Jim Burton (10:45): Great, thank you, Kevin. One of the things that we had in a discussion prior to our podcast were the challenges that everyone is facing which is part of what this conversation is all about. One of the challenges particularily is for those people that serve the mid to small market. While there are solutions for those, I believe that David Yedwab has some pretty good ideas about how those people in those markets, that is, not to exclude the higher end market as well, how they can serve the market and do well in this changing and evolving industry.
David Yedwab (11:17): Thank you, Jim, and thank you team. I am going to address an issue that has been atop of my mind for me for about a decade now and I think it is finally coming to fruition. It is the idea that all of our technology solutions ultimately become commoditized unless we are solving a specific vertical solution. Unless we are making a doctor’s office function better as a doctor’s office, or the hair salon function better as a hair salon, everything else, all of the functional, all of the generic, all of the horizontal applications and technologies ultimately become commoditized.
So my advice is that as our VARs and systems integrators are thinking their business strategies through, they need to look at where they have had successes in delivering vertical-centric solutions to customers to help them solve their problems. Whether it is making the nurses more available to patients in hospitals or whether it is doing a better job at fulfilling appointments at the automobile dealership or a whole other range of vertical specific applications, that is really where I believe VARs and systems integrators are going to have to build their practice to be successful long-term. Certainly replicating those solutions across the middle and the smaller business markets is the only way to be profitable except for within the largest organizations where solutions can be totally customized. With that, let me turn it back to Jim and the rest of my colleagues.
Jim Burton (13:02): Thank you, David. Michael Finneran always has a bent towards mobility and the challenges that are faced by the Channel with incorporating those as parts of solutions and Michael, I am sure you have some great advice for the people listening today, so take it away.
Michael Finneran (13:18): I would like to speak to horizontal as well as vertical specialization because certainly mobility represents a juicy target to the SIs. Of course, there are some areas that are clearly out of bounds – the device sales? – that is the mobile operators'. But there are other opportunities and there are three in particular I would like to point out.
The first one is ongoing revenue sources from either expense management, contract optimization, or the growing opportunity now in mobile device management. Of course as Kevin spoke to, this does involve developing expertise and certainly probably partnering, certainly on the device management side, with one of the established players, a MobileIron, Zenprise, Sybase, but certainly providing that on a software-as-a-service basis could be a real opportunity in the mid market.
The second area is wireless LAN. Now many of the VARs are already in this as they are data system suppliers, but everyone is harping on 4G. Wireless LAN technology still delivers far greater capacity than anything we are talking about in 4G in the near term. So the ability to have that performance in the local environment, that represents a true opportunity.
The third area would be, once you’ve established your credentials, basically assisted the customer in improving their own wireless infrastructure, gain credibility providing services that are clearly needed in the mobility space today, then taking the buyer to the next level. That’s when you start talking about and integrating cellular and wireless LAN services, fixed mobile convergence – cost savings based on really optimizing business processes through mobility rather than just trying to cut the cellular bill.
There are a lot of tools out there for this today but there is not a lot of use, so the revenue stream in this case I’d see coming from the professional services side rather than the hardware sales. So mobility is a juicy opportunity, and I think the SIs would do well to invest their time in developing their capabilities in that area so that they can really start cashing this check. With that, I will kick it back to you, Jim.
Jim Burton (15:21): Great, thanks a lot Michael. We have a couple of our colleagues standing by, but the last to speak is going to be Art Rosenberg. Art always has something to say. Just so you all know in the wings we have Jon Arnold and Don Van Doren who might want to be picking up in this, but let us get started with Art.
Art Rosenberg (15:39): I think we are getting focused, especially with Michael’s point, the things that an organization has not done before, for example, having a BYOD policy, and they do not have the experience, and they have to base it as Michael pointed out, not on the device or on what network they are using, but on the applications that are going to be used. In other words making this more vertical than horizontal, and so this is an area where the VAR, especially an existing VAR who knows their customer well, and knows their particular kind of business can help customize the direction of the mobile applications that can exploit the UC in the first place. Then help them with integrations with not just premise-based technology but also hosted services, because that is the direction it that a lot of things are taking, and be able to make this a graceful migration. So mobility is a big driver, and it also leads to, in the contact center, self service applications that are now mobile. So the whole idea of mobile apps that are provided to an organization’s customers is something that again the VAR can help not only with the analysis and tools as was mentioned by Kevin earlier. Because you need the metrics to say okay, we want to help you design it but then how do you prove that it works and you look at the user experience and the economies of usage. So that whole area of new ways of using communication, not just the old ways, but focusing it also on the applications, if you will, that a particular vertical organization can use is going to make a lot of sense because no one has done it before, they know their people but they do not know the details. They need to really get in there and get in with the analytics, get in there with the specific self-service applications and these areas have never been done before and this is where a VAR can grow into a great opportunities.
Jim Burton: Great, well thank you so much Art. Jon or Don, do you have any comments that you would like to add at this time?
Don Van Doren (17:56): Hi Jim, this is Don Van Doren. I would just like to emphasis the point that Art and Marty before him made and that is there is a huge shift going on in this market. The opportunity for the VARs to get in there and really take all the steps that we have learned in the early days of unified communications deployment and then operationalize those on a very specific customer-by-customer basis. I want to pull back a little bit from that, because I think initially we are going to see rather customized solutions. But then over time, as we get companies specializing in particular fields or particular areas, vertical markets as has been mentioned, we are going to see the ability for these companies to really shine. We have seen that same pattern before, Marty mentioned the call center as a good example of how this happened as CTI capabilities were coming into the marketplace, and we are going to see the same thing play out again. It is a huge opportunity for the VARs and I am delighted to see some of them really focusing on it.
Jim Burton: Great, thanks Don, and Jon?
Jon Arnold (19:09): Thanks Jim, I have just a couple things to add. I think everything we’re hearing just speaks to how much the value proposition has had to change for everybody. We have not had any discussion here about what the vendors are doing but I think everyone who has been to vendor events recently has been hearing the common theme about needed to rejig the Channel strategies and find better partners to support what is being marketed. I think that speaks to how the value of telecom is changing, but of course with the whole UC package.
And to some of the other opportunities that I think are very exciting here for the Channels, Michael mentioned some of the ideas earlier about offering new types of services. A good example of that actually was announced today by Altiva, a company that we have talked about here on podcasts before. They have just launched an add-on, now they’re not a VAR, but they have launched as an add-on Mozy, the online backup service. I think that kind of thing makes a lot of sense and we talked earlier here about wireless services and I think there is a gold mine there waiting to happen for online mobile backup services that are automated.
I think those are areas that the VARs can step in and offer different packages of add-on services that really speak to what a business needs. That also bridges over to things like white label programs, where the VARs can in fact, so private label offerings for businesses that they can in-turn offer to their customers. So I think a tech and web savvy channel can reinvent themselves by being the engine behind all of this to really customize highly brandable opportunities for online businesses, and we all agree there are new business models waiting to happen here. But I think it really is going to be the VARs who need to lead the charge here because we have to have vendor-neutral thinking coming into the picture here to really figure out how to put these pieces together in ways that business customers can understand and actually put to work. So for the right VARs, sure, great opportunities here, but I do think that private labeling opportunity could be really interesting for the guys that can figure it out.
Jim Burton (21:17): Right, well thank you Jon, and kind of in following with that and a comment that Marty made early, and this is about the UC Summit. One of the things that we have done this year is have a very detailed survey of the attendees or the potential attendees for the UC Summit, and this would be the consultants as well as the people that are in the Channel as resellers, VARs, or system integrators. Some very interesting information came from those surveys. One of them is over 90%, almost 100%, but over 90% are looking for a new platform provider. That doesn’t mean that they are going to replace the one they have, but they want to complement the ones that they already have, which means there is a lot of churn in the Channel right now where people are looking for new products to distribute. Another thing that we found is over 90% are interested in social. I am not particularity surprised that they are interested; I was a little surprised that that number would be so high, but we thought that was important.
And the final one which I was quite surprised about is the interest in cloud. Every company that was surveyed was either in the cloud already, which is above 60%, and of all those polled, no one indicated that they were not interested in moving into the cloud in the next 12 months. So we’ve got an industry and a channel that is in churn and there is a lot of exciting things going on and a lot of challenges and it is our job at UCStrategies to help the vendors and the community of resellers and consultants in these transitions. So we will continue the year with things to support the people that are making up this industry. I would like to thank you all today for participating, and look forward to a conversation with you all next week. Thanks everybody.