We're All Selling Software Now

Are all hardware vendors becoming software vendors? It seems like it.

There are exceptions, such as Huawei’s recent announcement that it is entering the PC market, but that’s bucking the trend. Giants like Toshiba and Sony are leaving the hardware space, and Fujitsu is looking to offload its PC division to Lenovo.

Looking at more complex businesses with a hardware heritage, such as IBM or Xerox, you see a more subtle shift than a market exit.

So what is driving this and what does it mean for partners and channels?

The IBM Shift

As you read behind the headlines you start to see similarities in how these companies are making this transformation away from dependence on hardware. It’s about changing the focus of the core business, and it’s about acquisition of new software businesses.

IBM is now a ‘Solutions and Cloud Platform’ company. IBM has been on a massive spending spree of nearly $20Bn over the last couple of years acquiring software companies. At the same time it’s been divesting commodity non-core, like the x86 Server business it sold to Lenovo, and offloading its microelectronics fabrication business. IBM is seeing a rapid decline in hardware sales. Systems sales are down 17% in Q1-17 and there is no easy alternative for replacement revenues.

Other Financial Pressures

As with all change, there are challenges. Companies having to change the way they work, and the ‘financial profile’ of a software or services business is different to a hardware business.

Yes, you get rid of challenges such as stock and logistics, but the simplicity of hardware is that once it’s sold and shipped then the transaction is done. Not so with software and services. Internal accounting and financial processes are very different, which impacts your sales behaviours and how you measure success.

Impact on the Channel

These multi-dimensional changes in portfolio, together with new financial models associated with SaaS, have a profound effect on sales channels. Without thought and planning, companies who have historically relied on their channels for business may find significant barriers to transitioning away from their historic hardware business.

We see a number of different changes to vendor-partner relationships driven by this software ‘revolution’, with the most extreme of vendors such as Adobe removing partners from the transaction altogether as they transition to a SaaS offering.

But most want to maintain and strengthen their channels, as they see partners as the route to growth. Central to this is the rise of the influence partner, who has no interest in transacting the sales of the technology and who makes their money on the service wrap they deliver.

Salesforce is a good example of a born-in-the-cloud vendor who retains the customer transaction, whilst relying on partners to create business for them. This model has been recently copied by IBM for some of its SaaS software offerings which are transacted directly, but the partner remains intimately involved and is rewarded financially through an influencer fee.

There are also questions about the role of distribution. Where historically distribution has been a major revenue stream for vendors who typically address broad SMB markets, the value-add of distribution in logistics comes under significant pressure in a SaaS model.

Often the biggest challenge is whether the existing partner channel is able to transition to these new software and solution offerings and provide the growth required by the business. Whilst hard to prove, the anecdotal evidence from our research, is a resounding ‘no’ and vendors in transition realise the need to identify, attract and engage a whole new generation of partners.

The Internal Challenge

As we engage with clients, the internal challenge is often the toughest. Typically sales organizations have built their success on the revenue streams coming from the largest traditional partners. With their focus generally being on the short term of this month and this quarter, they will naturally act to defend those revenue streams.

The expectation, incorrectly, is typically that past performance is a reliable predictor of future success. This is reflected in partner program tiering based on revenue streams. We believe these tiered program structures are becoming obsolete.

The Partner of the Future

Many of bChannels client conversations are around Channel Expansion, often code for ‘we need more partners to get us more revenue’. It’s generally driven by the discussion above, with a need to identify and activate more partners, addressing a more fragmented revenue stream as the market moves from large one-time purchases to smaller annuity transactions.

To be successful, we believe it is critical to define what a ‘perfect partner’ looks like and then compare both the existing partner base and potential new partners against this criteria.

To do this we need to look at more than historic revenue performance and start considering forward indicators, such as marketing competence, affinity brands and a range of other ‘soft’ criteria.

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