Comcast Business' Craig Schlagbaum on Channel M&A and the 'Riddle' of Net-New Logos
"There's a balancing act that I think has to happen, and we're getting closer to that now than we were in the last five years," Schlagbaum said.
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Channel Futures: What are you seeing on the TSD side of consolidation?
Comcast’s Craig Schlagbaum: This industry was at some point in time getting overdistributed. The same phenomenon happened many years ago with Cisco. At one time they had about 30 distributors worldwide, and they consolidated down to three. They were using their marketing dollars to drive demand, and share-shifting was occurring between the various distributors with no lift in sales. And that’s the danger when you have too many distributors involved. There’s a certain critical mass where you can’t get additional volume. And interestingly enough, we started our program 12 years ago with just three TSDs and then grew that to the teens, and now it’s down to seven. And I think that it’s getting more rationalized based on a lot of the changes that have happened.
CS: But the concern we always have is the problem of [partners] share-shifting between [TSDs] based on a better commission rate. If that happens, ultimately it drives a commissions war, where the margins each TSD makes are lower, and therefore they’re not able to invest as much money in the company to help all the partners. That’s not a good thing for the channel at all. In fact, that’s a very bad thing, because we really rely on the TSDs to become sort of a support arm for the long tail of the channel. We need them to have the resources necessary to hire technical individuals and build tools and things like base management programs, all these things that they can do with sufficient income.
But if they’re forced into a situation where they’re not making enough margin, then their appetite to invest in those kinds of services goes down. There’s a balancing act that I think has to happen. And we’re getting closer to that now than we were. But I would say until the things that have happened the last few years, it was getting a little challenging, and I think now it’s starting to get more rationalized. There’s probably some more consolidation potentially to come.
CF: That’s a good perspective on a potential commissions war. I’m trying to guage how the average for commission pass-thru is trying to change for these TSDs. It seemed in recent years that there was a movement toward 90%-10%. Now I wonder if that number is going up or going down.
CS: It’s up to every partner to decide what margin they feel is sufficient for them or not. But I think it’d be hard to make a lot of money and invest in a business if you’re only making 5% and you’re giving away 95%. You’d have to make it then on other monies – rebates and/or MDF funds – and I just don’t know if that that’s a sustainable business practice for the long haul. I know that it’s been done, and there have been aggressive campaigns to lure certain partners underneath other TSDs over time, but I’m hoping that dust settles.
I can’t speak for every service provider out there, but what we’re looking for is for the TSDs to invest in additional sales engineering resources, invest in additional tools, invest in really solid commission systems, invest in base management programs and invest in personnel. It’s not a healthy model if people aren’t making money. It’s harder to invest in those sorts of value-adds. Therefore, our brand then becomes at risk if the support isn’t sufficient.
We have to let every TSD make the decision for themselves as to what that support is, but we’ll have our own determination of what value we see in that in time, and we’ll have to decide if our partners are being well served by each TSD, or are they not? And that’s an assessment I think every service provider will have to go through on their own.
CF: I see smaller partners really leaning more on their TSD for their sales engineers and other resources, while larger, better staffed agencies are struggling to see as much value other than getting higher commission pass-thru. Do you see that too?
Craig Schlagbaum: I think as more and more vendors come around, that issue becomes more complicated. Twelve years ago, there was a different makeup of who the top providers were. And then fast forward – there are all kinds of new entrants in security, cloud, SD-WAN and other spaces that have made this channel less about pure telecom and more about solutions.
Because of that, I think we need more help. The alternative to the TSD putting that money in would be vendors having to spend that money to support all these partners. We also think it’s better for them to do it, because we’re obviously only one vendor, and the value in this channel is multiple vendors, because customers typically want solutions from multiple vendors.
So if the TSD doesn’t provide that, then who does? I think some partners certainly have the scale to do it on their own, but many others don’t. And that’s where the value of the TSD comes in. Because [Comcast Business] is actually not interested in taking on the day-to-day management directly of thousands of downstream partners. There are certain ones that we support very closely and have a program for, but the role of the TSD is to do a lot of that support on our behalf. For that purpose, we pay them what we do to provide them with sufficient margin to provide those services. Alternatively, we’d have to do it on our own. So it’s better for us for them to do it. And I think it’s more valuable too because again, Comcast will never be a place where you can get support for 150 providers, but the TSDs will be. And that’s what I think the customer needs: the ability to get access to solutions from many providers, which is what makes this channel channel powerful.
CF: Regarding the share-shift conversation, have you seen any examples of consolidated distributors that really are working to bring in a new group of agents rather than taking agents from others?
CS: Yes. There are a number of areas where partners are looking to bring a new species to TSDs, whether that’s accounting firms or commercial real estate firms or insurance agencies. [TSDs] are examining new routes to market and trying to invest in going after them and being able to support them. I have seen that.
In addition, I’ve seen situations where they’re referring leads and opportunities from those types of companies to agents if those companies don’t want to be agents themselves. It becomes more of a lead generation source. I think that is something we’ve got to continue to do, because how customers decide to buy changes over time.
And it’s interesting. In the last year, many of the sales that we have seen have come in a recipe of the traditional agent partner working with some other entity that is providing value and services to those clients. Then the two of them (or more) eventually win the deal together. I’ve seen that model, especially in the largest deals we’ve done. And I do think that TSDs are doing that. Especially companies like Bridgepointe, they are working things like that, and some of the others (including Telarus).
And we’re going to need these new entities. Just us alone – we’re powerful, right? But we’re only one area of solutions. We’re connectivity and secure networking, and that’s important. But there are other solutions these partners need, and the TSD is the best place for those new species of partners to get the whole ensemble instead of just one component, and I think that makes it more attractive.
CF: When you mentioned lead generation, I thought of NXTSYS Consulting, which has carved out a spot for MSPs to bring them business. And in the case of iTelecom, there’s a pretty transparent escalating commission structure, where the referring partner takes more of the commmission the more they take responsibility for the sale. With them and a company like Innovative Business Solutions, the commission pass-thru may not be as high was what a national TSD offers, but there’s a lot of incentive for non-traditional partners to lean on them.
CS: There are different types of distributors in the industry, and some are more about volume and some are more about value. Innovative Business Solutions is one of our TSDs and is very good at doing that model you just described. And I think a lot of companies go to them for that purpose. Telarus has some of that too from the acquisitions they’ve made with TCG and TelAdvocate, so they’re doing that and they’re advertising that. And I think it’s very valuable.
There are other relationships at Innovative that give them leads from literally thousands of MSPs. So it’s a way to access that ecosystem. And of course they use the CableFinder tool they built to help those new species of partners get quick access to pricing and contract. Innovative is definitely not a broad-based distributor in the way that some of the other big ones are, but they still provide a lot of value.
CF: Do you see increased opportunities for the smaller TSDs to land new agents? Particularly the agents that don’t want to work with private equity?
CS: Certainly there are going to be some firms where people can to get unique support. Innovative Business Solutions was not on our radar eight years ago, and then it became one of our best partners, especially in the SMB space. If you can fulfill an area that you can be really good at – and in their case it was cable – then you’re very attractive. There may be new partners that crop up, and they may fulfill a need, such as in the upper enterprise market space. And that becomes valuable because certain companies are trying to address that market. I went to Innovative for a reason: because they were really good at cable, and they also focused on this other [referral] model you discussed earlier. I think there will be new entities like that. And they’ll be able to provide a certain solution and service that the other ones may not want to do or aren’t as good at because they don’t have that focus. So there’s always going to be room for competition in these niche areas.
CF: As for the larger, customer-facing agencies, is there a growing trend of signing direct contracts with the vendor?
CS: I think the bigger partners that are out there probably have a propensity to consider a direct contract, because they can meet the obligations. Every provider is different in terms of what they require, and usually partners don’t want to sign those agreements because there’s a requirement to hit a certain revenue threshold. And if not, then you could forfeit commissions. A lot of the providers don’t don’t want to sign a lot of people up. There have been times where certain providers have signed up 500 agents directly, and it typically is a paper contract with no value. The contracts have teeth in them for a reason, because you want the partners that are very serious about it. They’ve got to hit the number, they’ve got to have operational proficiency, they’ve got to have certain staff in place. Then and only then do you assign them work. [That’s] versus the ones that are basically no commitment. It’s just a paper contract. There’s not value for either party in that.
I think the industry has moved more toward this [TSD] model. Because if you don’t have teeth in these contracts, then there’s really not as much value to them. But there will be certain partners of certain sizes that will want to go direct, and we’ll entertain that. I’m sure our competitors will too.
CF: You mentioned Cisco and how it changed its distribution strategies. I’m curious about any parallels you see between what’s happening in the traditional telecom services channel and how the traditional IT hardware channel has already evolved. For example, I’m thinking of how companies like CDW and Insight are both customer-facing, and in many instances possess direct contracts with the vendors. They sort of blur the lines between distributor and partner. Are these superagencies comparable in that aspect?
CS: Yes, and of course some of those firms you mentioned actually are agents for us and other providers as well. CDW, SHI, etc. But a lot of times they don’t want to sign these contracts to be “direct,” because it takes often over a year to get through the legal process to do that with some of these companies, and they also want access to multiple providers. For them to negotiate 50 service provider contracts would be a very daunting task, so they just opt to go underneath the TSDs. It would be different if it was the hardware or software world. They still have the contracts.
But in our world, it’s a little bit more involved in these contracts, and they don’t want to go through that process. They’re still selling for us, but they’ll go to a TSD to avoid having to sign 50 contracts. It’s a challenge for them.
Regardless of how they source the access to the commissions and the support, there are going to be more of these entities. They’re rolling up organizations and trying to create a national presence, and I think we’ll see more of that. It’s good if they acquire these downstream partners, and that’s wonderful for our industry.
CF: Folks from these combined partner entities do talk a lot about cross-selling into the existing bases. Are you seeing anyone that is doing a good job of hunting for new customers, in addition to farming existing accounts?
CS: To be fair, some companies that have acquired downstream partners still do bring in net-new customers. But the biggest deals that I’ve seen in the last year are actually from partners who have not been in this industry for a long period of time. One, for example, was a former Cisco employee who had a lot of interesting relationships with CIOs and came into this business. He’s not one that’s been acquired. Another is a fairly large consulting firm that hadn’t sold for us before and is in it for the long haul.
When you have companies that are taking capital off the table and getting bought out, you can’t really expect that they’re going to find net-new, so you have to make up for it. The question is, can we find enough new partners jumping into the industry to offset the potential losses from those who are being acquired? And we don’t know the assessment of that yet. It will take time to figure out what’s going to happen. But there’s definitely been a noticeable change in some of those companies where the funnel that once existed is not as large now as it was before they were acquired.
CS: The challenge for service providers [around superagencies] is that we all have obligations to do net-new bookings of new customers. We can’t just manage a base. The fear from a lot of channel chiefs would be: When you acquire these companies, do the owners drift off into the sunset after they’ve made their money, and who’s going to find the net-new customers?
Suppliers have no choice but to keep selling net-new, as do our competitors, and the ones who are retiring are more concerned about managing a base and not losing it. Because they’re not going to stick around, and rightfully so. They’re leaving the business. Those partners used to be great generators of new logos and new customers, but if they’re all walking away with a lot of money, who’s going to sell the net-new for them? And that riddle hasn’t been solved yet.
CF: Much of the supplier community (not-so-quietly) grumbled about rising MDF requirements in the TSD space. Any observations on how MDF is functioning between suppliers and these superagencies, or commentary on MDF in general?
CS: Of course, everyone’s gonna ask for support from their vendors. And I think they should, especially if they’re given access to unique opportunities. The question is, at what point is it still profitable for us to not only pay a commission but have additional marketing expenses? And there’s a limit to what we can do. Some believe in the argument of, “Oh, you’re like Cisco through Ingram. And you give this massive amount of MDF and support, because Ingram is your key distributor partner, and they are your reach to the market. So you need to give them X millions of dollars.”
The difference in this industry is that most of the companies have direct sales forces, so we’re not entirely reliant on the channel. And the second difference is that the channel in the IT world has to go and build their own solutions on their own dime. They have their own engineers, their own bad debt, their own billing. And this is a commission industry. So the supplier/service provider does all that for the partner. The partner is a selling entity. The notion that you should pay the same kind of MDF as Cisco does or Microsoft or IBM is a false argument, because these are two totally unlike industries. We’re always going to provide some of those funds to partners whether they be the [large direct partners] or the TSDs, but there’s a limit to what we can do.
CF: People have mixed feelings on whether a new generation of partners is entering the channel. I do see many small shops that are working to get off the ground right now. And some of them have left jobs large partners like CDW or Presidio, and even large agencies. And I wonder if we will see people branch off from some of these superagencies to start their own firms.
CS: I would absolutely agree with that. That’s going to happen. I think there will still be people leaving the suppliers and becoming agents, like they always did. That’s where most of the agents came from long ago.
But I think because this industry has moved into areas like security, networking, SD-WAN and other things beyond just traditional telecom services, there are also new species that can jump into this. How many and how quickly is another question, but we’re not the same telecom channel we were 10-15 years ago.
When we look at the mix of new partners two to three years from now, I think it’ll be a combination of the traditional ones that have always come from the larger vendors, and ones that came from some of the national partners, and then it might also be brand new species. Consulting firms, former employees of high tech firms, insurance agencies, commercial real estate people, even accounting firms. We’ll see as time goes on, but I think there’s going to be a change from the traditional makeup of this channel.
CF: Any parting thoughts?
CS: It’s a great time to be in the channel. As we’re moving into what is going to be a more challenging economy – however you slice it – companies are not going to have the money to spend on internal employees as much. So this channel is going to become more and more valuable during economic decline. Some of the largest deals we’re ever seeing are starting to happen right now, so there’s evidence of that. I’m excited for the rest of this year.
CF: Any parting thoughts?
CS: It’s a great time to be in the channel. As we’re moving into what is going to be a more challenging economy – however you slice it – companies are not going to have the money to spend on internal employees as much. So this channel is going to become more and more valuable during economic decline. Some of the largest deals we’re ever seeing are starting to happen right now, so there’s evidence of that. I’m excited for the rest of this year.
For Craig Schlagbaum, senior vice president of indirect channels at Comcast Business, M&A in the channel presents a much-needed rationalization opportunity and at the same time a challenge for the expansion of the industry.
The channel has seen perpetual M&A among its vendors over the years, but private equity and other institutional investors have moved downstream in recent years to aggressively target technology service distributors (TSDs) and technology advisors (agents). This consolidation is leading to larger, and in many cases, more sophisticated organizations.
Comcast’s Craig Schlagbaum
But Schlagbaum and other vendor leaders hope to see a new generation of partners and customers enter the channel. That means TSDs will need to make the investments necessary to attract nontraditional partners; furthermore, agents will need to continue expanding their customer bases.
“The challenge for service providers is that we all have obligations to do net-new bookings of new customers,” Schlagbaum told Channel Futures. “We can’t just manage a base.”
Schlagbaum oversees arguably the largest vendor channel program operating in the TSD channel. Moreover, he has longevity — a dozen years in the position. As a result, he represents one of the most respected sources on the state of the channel.
Schlagbaum fielded a variety of questions from Channel Futures about consolidation, superagencies, MDF and the challenges vendors face. Scroll through the gallery above to see what he had to say.
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