Thursday, March 25, 2010

Karl's 2010 SMB Roadmap Part 1 - The Destruction of The Channel

You know, an interesting thing happens when you "live" online and put your thoughts out for everyone to share: They become public record and you are easily held accountable for what you say. No one really ever calls me on it . . . but you could keep track of my predictions and score their accuracy.

I'm going to ignore every wrong thing I've ever said. Which I can do because it's my blog. :-)

But when I'm right . . . Woo Hoo! You're going to hear about it.

This is the first post in a series on Emerging Server Strategies for SMB. I've covered this topic several times in the last few years. And I'm happy to report that my wild speculations have fared pretty well. But 2010 is a very different kind of year. So I think it's time to focus again on this topic and see if we can figure out where we're headed.

The key factors in this are familiar to you.
- Cloud services is becoming very real very fast
- Hardware and Software distribution is going to be shaken to its core in the next 12 months
- Product development (hardware and software) is going to shift dramatically in the next 12 months
- The entire channel infrastructure that we know today will essentially disappear in the next 24 months
- . . . And you better either find a way to make money in all this or go back to school and figure out what your next career is

Warning: This may be very disturbing news to you.

If you think you're going to continue selling boxes into small offices, along with a big-ass server and all the related hardware, you're going to get hit like a bug on the windshield of small business. The future is coming very, very fast. And when the economic recovery begins to pick up steam, the advances will be alarming.

Here's a prediction you can write down in your diary: MANY of the biggest companies in our channel will suffer tremendously over the next few years. Manufacturers, resellers, distributors, hardware vendors, and software vendors. Some will go out of business and some will be acquired in fun and interesting ways.

Let me explain . . .

I try to keep busy. So I travel around, I meet people, I record what they say, and I try to integrate it into my life and business. If you pay any attention here you know that I have embraced The Cloud in my business. I'm developing cloud-based offerings, I'm reselling other peoples' stuff. I'm moving clients to the cloud.

At the same time, I have a long-standing interest in how technology is evolving inside small businesses. What do Micro, Small, and Medium size businesses really need?

Hardware and software vendors have engaged us suddenly in some surprising ways. Big companies are pinging me and asking how they can help create just the right product for our space. One of them was sorely disappointed with the answer I gave them. Another one is about to be sorely disappointed.

Sometimes really big companies get things really wrong. They make one (or more) of the three primary mistakes of big business:

1) They assume that their channel will sell whatever they produce

2) They don't research enough to find out what's out there

3) They don't ask the people who actually work with small businesses what they need

Number One is bazaar. After all, big companies generally create product after product, year after year. Most of them fail and a few of them succeed. If you think about it, they're like little venture capital operations within a multi-billion dollar operation. So they fund a bunch of stuff and stick with the winners.

So you'd think they would know that stuff won't sell just because their partners like/love them. Maybe they only hire eager, optimistic people to run these development programs. That makes sense, but it's odd to sit around a table looking at the faces of a multi-million dollar dev team and tell them that no one will ever buy their product.

Number Two is inexcusable. I know the whole managed service biz came on real fast for a lot of people, but I've seen an amazing number of products that are completely misaligned with reality. One guy made a presentation to our user group about a super-cool monitoring tool that basically amounted to Kaseya 1.0 - and he wanted $1,000 per company to deploy it.

He literally had no idea what people were already doing. He had no idea how people like us run our businesses. He didn't know that there are dozens of RMM tools out there and that they are almost free in most instances. My company, KPEnterprises, is not unusual in rolling up a bunch of services into one offering. The the RMM tool essentially disappears in the mix. I can't turn around and sell the client some big, fancy monitoring system. Maybe for 500 desktops. But not for 5.

Number Three is understandable and still a very bad idea. I can't tell you how many times I've been in meetings with arrogant development and marketing teams who simply poo-poo the opinions of SMB Consultants. We don't sell enterprise licensing to Fortune 500 companies, so we couldn't possibly know how things work. These are the people who end up putting a price tag of $100,000 on a service intended for small business. And then you go to dinner and find out that none of them has a boss with spending authority over $10,000. THEY couldn't buy this product for their multi-billion dollar company but they think some attorney with 20 desktops is going to gobble it up!

The Destruction of The Channel

Kent Erickson was on the most recent Cloud Services Roundtable (which will be posted real soon). He made an extremely important statement that many people may have passed over:

There is a mis-alignment between what our channel does and what needs to happen in the future.

Think about it. What is the channel? The channel includes product development, product distribution, resellers, implementers, and feedback mechanisms for these relationships.

And what is the future all about? It's about technology simply existing without regard to hardware and software. Microsoft Azure will happily run Linux. Amazon just announced March 25th that they have a system to move enterprise Windows licenses to their cloud services.

You are getting out of the hardware and software business. At best, you're doing to see a dramatic reduction in sales.

That's bad news for Ingram, Synnex, D&H, Tech Data, and even CDW. They will try to sell to massive enterprise customers, but those customers are very motivated to go direct to manufacturers. The SMB market will all but disappear for these vendors. The primary purchasers of hardware will be massive data centers. Why would they not go direct?

I'm not recommending any stock purchases in your portfolio of hardware and software distributors.

Software will be one of the biggest industries to make the switch.

Lots of partners are pissed off that Microsoft is selling directly against us with BPOS. This is just the first chink in the armor of the channel program. Next move is to cut out the distributors.

When everyone goes online and simply clicks a box to use Windows Server, SBS, MS Office, etc. there will be no place for Ingram or Synnex. As cloud services grow faster and faster it will simply be a matter of time before sales of software through the traditional distributors will cease to exist.

The distribution of hardware and software through traditional distributors will cease to exist.

I repeat that because the ramifications for our industry are huge.

Let me introduce the 800 pound gorilla in the room. The only reason more manufacturers have not gone direct is that they believe there's more money to be made in the long run by using traditional distribution. Some of them honestly believe in the channel. I would give Microsoft, Trend, and Sonicwall as examples. Others give lip service to the channel but can't help screwing their partners at every opportunity. I'm thinking of a company that begins with "Dell."

Technology and modern software delivery make it extremely easy for software manufacturers to cut out the distributor. There is no more distribution, really. There's only keeping track of licenses. Microsoft, Adobe, and Symantec don't need Tech Data to play the role of outsourced accountants. And that's what they've become.

There is no good reason for any software manufacturer to give a piece of their profit to a distributor. Therefore, it's a matter of time before this change takes place.

So where are we?
- You're selling little or no hardware
- You're selling little or no software
- The distributors are decimated. I suspect a merger of two or more distributors by the end of this year.
- Microsoft's biggest clients are going to 1) Enterprises that buy 10,000's of licenses at a time, and 2) Google, Amazon, Rackspace, etc. This is probably already true.

And when I say "it's a matter of time" I'm thinking about a Moore's Law kind of time: Technology and the speed of development will keep doubling.

So you don't have much time.

As this earthquake begins to shake our universe, who will do well? In my opinion, the companies that have steadfastly participating in building good channel partner programs will have those relationships to rely on. Remember those big mistakes I started out with? Well, the easiest way to overcome all of them is to keep your partner relationships and feedback mechanisms healthy.

Microsoft has taken their hits, but they have an extremely powerful set of aggressive feedback mechanisms. They engage their users and resellers at virtually every level. I think they're going to take some more hits, but they'll be fine.

I'm afraid my friends at HP and Dell are in for a very rough ride. And smaller manufacturers may be in for the ride of their life - literally.

The distributors are going to be like the newspaper industry. They'll hang on long after their usefulness has disappeared. They know this. That's why they're working on offering services. Ingram is the leader in this. They'll still suffer, and I don't want to ride their stock all the way to the bottom before it starts heading back up, but I think they'll be a survivor.

- - - - -

I am not making any judgements here. This isn't "right" or "wrong" but merely the point we're at in history.

As I've said before, it's a matter of time before the phone company offers your client all the technology they need for a flat monthly fee. Thin client included. Self installation.

It is very difficult for some people to believe what I'm telling you. But let me assure you: The collection of NDAs in my file cabinet leads me to believe that this is our future. It has been stalled a bit by the economy, that just increases demand when the money starts flowing.

Today we're moving a client to a cloud-based offering that is exactly the same price as they were paying for server financing plus managed services. But now they won't have a server, and they'll never have a server, and somehow we're making more money on the deal than we did selling servers. That's our future.

Everyone I talked about today is trying to figure out what they can sell into the SMB space - it's the biggest business space in the world. But in a world without server hardware or software, what can they sell. The winners will win big.

In the next installment I'm going to give an update on the server options available today and how servers are being right-sized for SMB clients.


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  1. Karl, I think you are Dead On! Pun intended. I'm an SBSC that works with very small/micro businesses. I've been thinking along the same lines for quite some time now. Pending changes in the SBSC world only lead to support and confirm your observations.

    Looking forward to the server installment next.

    Have a Great Day,
    Rusty Lee

  2. You could have just linked back to my blog circa 2008. Would saved you losing a lot of fans :)


  3. This comment has been removed by the author.

  4. Sorry for the previous post. I hit Publish before it was time to do so.

    Vlad, I doubt that this blog post would cause any real fans to leave. If anyone leaves because of what Karl said, they are most likely the descendants of buggy whip and quill pen manufacturers :>). Truth be told, this post should be required reading for everyone in our community.

    Karl, thanks for continuing to put this message out where people can find it. You perform more public service in a single post than our government does in a single year, and you do it on a much smaller budget and with a staff of none. Truly amazing.

    Now for that stupid FTC disclaimer. I know Karl. I have actually met him in person. We work together sometimes. We like each other. We've swapped corny jokes. I'm not being paid to say this. We sometimes go to lunch together and take turns paying. Did I miss anything? If so, tough (fill in the blank with the word of YOUR choice) :>) And yes, I think that whole disclaimer idea is incredibly stupid. Thank you, Nanny State, for absolutely nothing.

  5. The secret sauce is how Karl is making just as much or more by moving people onto cloud services rather than selling them managed services on boxes. What's in the sauce? For the first time I think that IT consultants actually have to be careful sharing this information. I'm sticking to my prediction that 80% of IT firms will go out of business in the next 5 years, actually think we're down to 4 now. I would guess that 20% already have.

  6. This feels like great news. This is a crowded space, crowded with a lot of technicians who shouldn't be business owners.

    There are so many LOB app vendors who are moving or wanting to move to a hosted model, helping clients decide when the time is right and helping them with the legal ramifications of their client's privacy etc. These are good problems because we are uniquely positioned to be their technical expertise.

    We'll still be getting value helping lead clients through what's best for them, which for some time will be a mix of locally installed and web based solutions. The trick will be how we charge for what we do. Obviously, per server/per workstation doesn't do it, but there will still be value in what we do, because the client (most clients) aren't going to simply point and click and get the technology they need, they'll need help deciding which technology they need to point and click on.

    Thanks Karl, keep up the good blogs.

  7. Amy hit the nail. I am a former IT specialist who turned business owner (not in the IT field). As a small business owner, I will tell you that we couldn't care less about what hardware, software or cloud you sell us. Those are just tools. If I hire someone to build a porch for me, I don't care what kind of hammer or nails he uses - I care that I get a quality place to relax outside.

    IT specialist need to wrap their heads around the idea that they are selling productivity and efficiency. They are selling advice. Business owners will pay for that.

    I think many IT specialists need to change their paradigm to that of a consultant and begin adapting to that business model - it is a whole different ball game.

  8. This is a great post...only one notable thing missing in my opinion: An explanation of how these timelines compute with human behavior.

    I know Karl is well aware that thin client computing has been around since the first mainframe powered up...and companies like Gartner have been predicting doom and gloom for the hw/sw industry all through the 90's and 00's.

    I firmly believe in the promise of the cloud and the future you envision, however your 12-24 month horizon should be revised to 12-24 years to be more accurate.

    If you understand enterprise customers like you profess to, you will understand how they plan short, medium and long term and how breakthrough technologies take a decade to work themselves into corporate america.

    I know it doesn't make the blog as exciting....but alarmist, chicken little type rhetoric doesn't rush the future here faster.

    Let's keep the debate going...

  9. As a friend of Karl's, and ISV who plays in the SMB and enterprise space, his predictions are correct and saliant.

    We have had to adjust our business model, address the impact of the Cloud and re-evaluate what Channels and means we sell our software through.

    It's not all gloom and doom hwoever. It's merely the ongoing evolution of technology. And with problems and the loss of technologies in some areas, come opportunities in others. Some will seize it. Other will be left behind.

    Derek De Vette
    VP Global Alliances / Partner Affairs at Diskeeper Corporation

  10. Amy, why should we be careful about not sharing? I didn't think I'd every hear that from you.

  11. Jay, this discuss is about small and medium business, not the "enterprise" giants. At the same time, enterprises are moving very quickly to both virtualization in-house and outsourcing to cloud services.

    The in-house I.T. position will be under more stress for downsizing in the next five years than it has ever experienced.

    Think about it. If my little client can spend $10,000 less in capital expenditure today by turning technology into an operating expense, how easy is it for a company with thousands of serves to save millions of dollars.

  12. Karl- If you really want to share, could you kindly explain how you are making "just as much or more by moving people onto cloud services rather than selling them managed services on boxes". It just does not add up to me.
    Sean Atkinson


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