The Changing Face of Channel Partners

By Tara Seals

Posted: 09/2002

The Changing Face of Channel
Partners

By Tara Seals

IT
SEEMS LIKE EVERYONE’S HANGING out at the same club these days. End users are
creating a buzz around converged, IP-based solutions and technology, attracting
carriers, RBOCs, enhanced services companies and equipment vendors to rub
shoulders on the same dance floor.

The party’s just getting started,
but agents and VARs may find themselves stuck with last year’s business model if
they don’t learn to adapt to the new environment. VARs are earning commissions
and are turning to value-added services to beat the margin crunch on hardware,
while agents learn about hardware and systems integration to provide
solutions-based value to their end users. In many ways, say some, agents and
VARs will begin to share a business model as the worlds of telephony and IT
collide.

Emerging technologies revolving
around IP are beginning to appeal to end users in ever-increasing droves, and
suppliers are rushing to meet the demand. "Every major manufacturer is
planning or has already rolled out a product set, and we believe that over 40
percent of major corporations already have started to pilot or deploy IP
telephony," says Edison Peres, vice president of emerging technologies,
worldwide channels, at Cisco Systems Inc. "About 10 percent of the voice
market is IP telephony, so it’s still relatively small, but the fastest growing
segment at 40 to 50 percent a year, while TDM is declining."

Application deployments are on the
rise, such as law offices with telephones that automatically log the number of
minutes spent with a particular client into computer billing systems and nurses’
stations with telephones that record medication levels and frequency. Teachers
soon may have telephones that take attendance and contact centers will be more
efficient.

"These new XML apps open up new
opportunities to add value, and change the way people do business," says
Peres. "At the end of the day people buy technical solutions because of the
applications."

End users also enjoy productivity
gains by consolidating voice and data infrastructure into one, IP-based system.
"So now the voice system is application-ready, and you get a return on the
investment because you’ve cut out a significant amount of cost from your daily
operations," says Joe Heinzen, vice president of engineering and
professional services at value-added distributor Comstor Inc. "It’s a
double benefit for those looking for a chance to be more competitive."

Qwest Communications International
Inc. has banked on growing user demand by launching Qwest Solutions, a new
business unit created from several US West and Qwest legacy departments, which
provides bundled and customized offerings to help enterprises migrate from
legacy to converged systems via direct and indirect channels. Comprising
professional services, network and application management, hardware and software
services, Qwest Solutions offers practice areas for planning, execution and
ongoing management of the transition to IP: business applications, computing
solutions, contact center, enterprise networking, security and telephony and
convergence, all under the Qwest Solutions’ motto, "design, build and
run."

"Customers, as they are looking
at their next generation of technology, are wondering how to take advantage of
the promise of IP transformation, and that’s where we’re trying to play a
significant role — in the transformation of IP services," says Alex
Danyluk, senior director of Qwest Solutions. "People are focusing on
leveraging the ‘Webification’ they’ve gone through, and convergence is occurring
all over the place."

The Makeover

Squeezed hardware margins for VARs
and end-user pressure on agents to provide more than circuits are driving a
search for new opportunities in the converged marketplace. VARs are finding
commission opportunities and agents are adding value to their services sales.

There is no margin left in hardware,
say VARs. Mark Wagner, CEO of AllSwitch LLC, says he’s turned to selling used
equipment. "Everybody’s going for convergent systems where they combine
voice and data, that’s why the Lucent Excel Switch with a Cisco router
combination is hot," says Wagner. Even so, Wagner will go to bankruptcy
sales, auctions, Internet swap mart eBay and other sources to buy used equipment
for his customers. He has added value to his proposition by working directly
with end users and equipment sources. "We’re having immense success,"
he says.

Herb Levitin, president of Powercom,
says he’s evolved from VAR to agent in his 13 years in the industry. "We
now use the hardware as a value-add since the margins are zero," he
explains. "If there’s voice and data integration, it gets complicated;
there are all sorts of questions to add and every client’s CPE is different, and
you’re dealing with intricate details of a network, so we give the consulting
away for free to get the services."

In the VAR model, many partners make
up for poor margins by selling consulting or labor. "Customers are very
hesitant to get charged for consulting. The budget’s so tight, they just want to
know what they can do to save money," explains Levitin. "The real
model is ultimately to make residual income as an agent; I want their services
because it’s a three-year contract and it’s residual commission, and that’s
worth a lot more than a little bit of hardware."

Cisco and Hewlett-Packard Co. are
trying to make that transition easier by offering their products in a residual
compensation model, giving VARs an opportunity to break out of the low-margin,
high-volume grind. "We don’t anticipate it being the majority of the sales,
but we think there’s a niche in the market that sees an agent model as an
opportunity and it’s starting to work," says Peres of Cisco’s e-Agent
program.

"We’re finding that for the
VAR, their margins increase because they don’t have to carry the accounts
receivable for 45 to 60 days, and they don’t have to buy the equipment," he
adds.

HP offers VARs the opportunity to
buy PCs and other products in an agent model. About 10 percent of HP PCs are
being sold for commission, but the company goal is to push that up to around 50
percent. Commissions are 4 percent to 12 percent, depending on the product.

Other agreements that bring carrier
services together with equipment also offer residual compensation for VARs.
Sprint Corp. for example, has signed agreements with Cisco and Nortel Networks
Inc. that give Sprint partners access to hardware and to offer services via the
equipment providers’ VARs that would receive commissions from selling Sprint
services.

Jerry Koontz, Sprint’s market
development manager for indirect channels, says the alliances combine the
strengths of both organizations to deliver differentiated IP solutions to the
end customer through the vendors’ respective channel partners. "We each
bring strengths and competencies to the table and that leads to increased
efficiencies," he says. "The partner has the opportunity to leverage
the combined competencies of both organizations to sell the total solution to
the customer, and the partner has greater control of the account as a result of
offering an end-to-end solution."

VARs earn residual revenue from
Sprint services. "Hardware margins have continued to erode so this is a
natural fit and a good opportunity for the partners to grow their
business," says Koontz.

Ingram Micro, a value-added
distributor, has signed an agreement to offer Sprint services and Cisco hardware
to its VARs, and acts as a master agent for Sprint. "The whole thing got
started with our resellers, who mostly come from the datacom side, leaving the
transport piece up to the end user to get themselves, missing out on recurring
revenue," says Sally Stanton, vice president and general manager of
emerging channels, Ingram Micro.

"So we said this was a great
opportunity. One of the things we focus on is helping our resellers deliver a
complete solution," Koontz says.

Sprint plans for more joint
relationships. "You’ll see the emergence of more wireless solutions in the
offerings, Sprint is taking a leadership position in rolling out 3G, and that
will be integrated into the solution sets," says Koontz.

"Sprint’s efforts with these
networking giants is coming none to soon, as research conducted in 2000 showed
strong interest among enterprise (more than 1,000 employees) decision-makers to
purchase LAN solutions directly from a telco, with 65 percent of
responses," says Colin Nelson, a research analyst in business market
segmentation for In-Stat/MDR. "This sentiment likely remains true, even in
today’s changed economy."

Accordingly, other
convergence-driven deals are proliferating. Cisco launched a bundle with
AT&T Corp.’s T1 Internet access, for sale through Florida-based VAD Tech
Data Corp. It contains a residual commission opportunity on the AT&T
service. Tech Data also expanded its distribution agreement with Avaya Inc. to
include converged voice and data solutions for small- and midsized businesses (SMB).
Qwest and Nortel signed a multiyear contract to bundle Nortel products with
Qwest services in IP VPN and IP telephony areas, for enterprise customers. The
alliance gives business partners on both sides access to each other’s offerings.

"It really helps address some
of the profitability concerns in the channel as well because of the
annuity," says Chuck Robbins, Cisco’s vice president of U.S. channels.
"We’re really trying to address a market in transition from a convergence
perspective, so we’re actively trying to build these programs and
opportunities."

While VARs dabble in commission
structures, agents are finding the need to add value by becoming familiar with
other aspects of their customers’ business besides transport. "If you start
to look at this, the value of the channel partner hasn’t been so much the
technology but has been more being that solutions partner for a business,"
says Comstore’s Heinzen. "The real value is do they understand their
customer’s business, because if they do it’s a continuing relationship and part
of that continuing relationship is to apply technologies that make sense.

"You need to be adding some
value to that bandwidth in some form or another, either through managed services
or through taking a different perspective where you’re looking at your
customer’s network."

The classic agent model is a dying
breed, says Levitin. "Everyone’s trying to increase sales in this economy
and there are opportunities out there and they all involve systems integration
in one part or the other," he explains. "The agents just selling voice
are going to have a really hard time."

Craig Schlagbaum, vice president of
channel sales for the enterprise hosting business unit at NTT/Verio Inc.
counsels agents to look for something of their own they can bring to the table.
"Agents need to find a way to add value that doesn’t solely relate to the
selling of a service, but have their own managed services," he says.
"I think you’ll see in the next couple of years continued compression on
the commission payments that are being paid out by these carriers. The channel
comes in on the value-added side by being consultative in nature and being able
to provide additional value-added services that go beyond just the
infrastructure the carrier provides."

The Verio business partner program
includes agents, referral agents that get a one-time fee and resellers.
"Companies that augment our services with their own contributions are
winning," says Schlagbaum. "The value-added solution provider is not
just going to sell, but will provide other value to the end user, and agents
have been gradually adding their own solutions to make sure they stay in front
of that change paradigm."

Before and After Snapshots

As agents and VARs begin to play in
each other’s sandboxes, the creation of a converged partner is underway. The new
channel partner fits the profile of an integration expert with experience in
voice and data, but with value-added service offerings and specializations to
set them apart in a highly competitive environment. These partners become
solution providers more than a representative of any one company.

"There’s a shift in the selling
approach," says Peres. "Those that sell in a converged environment are
not your traditional voice or data people, even though there will be a
percentage of those."

The trend, he says, it toward the
development of a converged partner. "It’s someone that understands not just
data but the converged aspect of data, voice and video, the nomenclature and
application deployment and way of selling in the voice world."

Along with the technical
understanding comes a shift in business model. "Where do the margins come
from and what percentage of your business comes from what types of revenue
streams?" says Peres. "They’re going to have to change the mix of how
they make their money and have probably around 40 to 50 percent coming from
hardware, at least 35 to 40 percent form softer, professional services-related
revenue, in maintenance, support, design. Plus, it’s not inexpensive to learn
about a whole new technology base, and it’s an investment these guys have to
make in transformational activities."

Verio’s channel is populated with
several partner types, including telecom agents, managed service providers,
application developers and VARs. "Unlike a traditional RBOC or carrier, our
focus is on hosting, a solution that incorporates hardware, software, IP and
managed services," says Schlagbaum. "All of those areas consist of
value-adds, and that’s where different species of channel partners come into
play.

"Agents are going to jump into
the VAR model or partner with other VARs where the combination of value-added
services is the best solution for the customer. Partners will be looking to move
up the stack, away from the traditional telecom services and toward the more
value-added ones," he adds.

The resulting increased competition
in the indirect channel, combined with the arrival of new partner types selling
telephony services and hardware, like Web integrators and managed service
providers, will mean that some traditional partners just won’t make the cut,
industry execs say. "Not everyone will be successful in the converged
world," says Peres. "We’re trying to minimize the mortality rate, but
there’s a lot of consolidation and there will be casualties."

Cisco launched its specialization
program last year, and to date almost 4,000 partners have specializations.
"The downward pressure in the market has been immense," says Peres.
"Specialization has helped them differentiate themselves and win the
limited business that’s out there, because the marketplace is requiring more
technical expertise and specialization."

To keep up with the IP
transformation trend, channel partners have a lot to learn. The change paradigm
is challenging for VARs and agents. "System integration takes a lot of
knowledge — there are so many PBXs and key systems and carriers and there are
issues of terminology and forms and switches — even the simplest voice and data
integration takes a lot," says Levitin. "Training is the biggest issue
— but the product of the future is one pipe and it’s voice, data and video over
IP."

The Converged VAR Revenue Mix
Source: Author

The Converged Partner Model
Source: Author