How technology OEMs can guide channel partners into XaaS

If tech manufacturers' channel partners aren't up to speed with what customers want—right now, XaaS solutions—then the OEMs must identify their "partners of the future" and help transform them.

Introduction

Technology hardware OEMs (original equipment manufacturers) face a dilemma: Their success relies heavily upon strong relationships with their channel partners, but many of those partners lack capabilities that the OEMs’ enterprise customers increasingly demand. What can tech OEMs do to bring their channel partners up to speed?

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Specifically, many customers want to shift toward everything-as-a-service (XaaS) solutions, and OEMs are responding by looking to provide new forms of value. This new value proposition often revolves around highly tailored solutions that reflect a deep understanding of each customer’s business and desired outcomes. Increasingly, those outcomes go beyond simply improving efficiency and lowering costs; many leaders see XaaS as critical to helping them harness new technologies and innovate faster.¹

The rise of XaaS is driving many tech OEMs to transform their operating models. Several have launched XaaS solutions targeted at enterprises, and in addition to delivering flexible, subscription-based customer solutions, OEMs are redesigning both customer operations and sales models.

But tech OEMs can’t make the move on their own. They have long relied on indirect channel partners to drive their business growth. And with the shift to XaaS, OEMs will likely continue to depend on partners’ domestic presence and localized knowledge to serve customers across regions.

Some channel partners are changing their business models to match tech OEMs’ XaaS transformation efforts and deliver new forms of value. But many are struggling to adapt their business approach for the new as-a-service world. Their challenges range from a lack of specialized talent to worries about the near-term financial implications of transforming their business models.

Who are OEMs’ “partners of the future”?

To remain viable in an XaaS environment, tech OEMs typically must rely on channel partners as much as ever—and that means identifying those best equipped to deliver the customized solutions and support that enterprise customers now demand. OEMs have a vested interest in helping these “partners of the future” hone their XaaS capabilities.

For example, five large US-based tech OEMs currently generate more than 80 percent of their global revenues through channel partners.² As cloud adoption skyrockets across industries, OEMs will likely increasingly need XaaS-savvy partners to help them understand customer requirements and articulate the business value of XaaS solutions. This requires a laser focus on customer experience and proven methods of measuring customer success.

Channel partners can also enable OEMs to penetrate the small and medium-sized business (SMB) market and reach emerging geographic regions. The opportunity is especially enticing among SMBs—only 30 percent have a dedicated IT staff, with the rest relying on relationships with local SMB channel partners to deliver XaaS solutions.³

For tech OEMs, partners of the future will likely be those channel players that recognize the urgency to transform now. IT solutions provider Velocis Systems is one such partner. “If indirect channel partners do not change their operating models today,” says Atul Bansal, cofounder and managing director of IT solutions provider Velocis Systems, “they run the risk of losing out to nimbler start-ups and other competitors in this changing IT landscape.”

Many early-mover channel partners are already taking action (see figure 1):

Some traditional systems integrators (SIs) are developing industry-specific solutions and capabilities, while expanding their IT advisory and integration support throughout the customer journey.
A small percentage of value-added resellers (VARs) are offering similar capabilities while providing SMB or local expertise by partnering with other channel players, such as independent software vendors (ISVs).
Select large global distributors are operating as channel orchestrators or aggregators that connect ISVs with other channel players to meet specialized customer needs.

But many—perhaps most—indirect channel players are finding it challenging to transform their operating models to XaaS.

Changing face of value delivered by channel partners

Changing expectations, new challenges

In the new as-a-service world, many traditional roles played by channel partners are losing relevance. Tech OEMs now expect their partners to add value by focusing on helping enterprise customers achieve business outcomes by delivering highly tailored solutions and by engaging in end-to-end IT management, from vendor selection through post-deployment. Channel partners should transform their business models along specific dimensions that include customer and industry expertise, deeper knowledge of OEM solutions, dealing with new competitors, bolstering employee skills, and addressing the financial impact of transformation.

Simply put, in an XaaS business model, indirect channels should move up the value chain (see figure 2). They can accomplish this by:

Keeping pace with external marketplace changes to meet the evolving IT needs of enterprise customers
Engaging more deeply with line-of-business (LoB) executives by developing a better understanding of LoBs’ strategic priorities
Using enhanced industry and regional expertise to adapt to a system that compensates partners based on how customers derive value from various technology solutions

How Xaas is changing the role of channel partners

By transforming their business approach in this way, channel partners can achieve notable bottom-line benefits. Our analysis of select indirect channel partners’ financial data suggests that as-a-service transformation could boost EBIT margins by 300 to 600 basis points over a three-year period.

While XaaS offers compelling benefits for channel partners, it can present several serious challenges:

The importance of developing a customer-centric mindset, moving from a transactional to a relationship-based approach
The imperative to address the emergence of LoB executives as key IT influencers and buyers
Threats from new kinds of competitors, including hyperspecialized ISVs, cloud-native start-ups, and accounting/legal/compliance firms offering niche technology solutions
The need to acquire talent and expertise to develop customized capabilities and solutions
Potential negative near-term financial implications of moving to a XaaS business model, such as increased difficulty in making business investments

Tech OEMs have a critical role to play in helping their channel partners surmount these obstacles. Fortunately, there are several examples of tech OEMs that are already doing this.

How technology OEMs can help develop their XaaS partners of the future

In this section, we’ll look at real-world examples of how some technology OEMs are taking the lead in helping their channel partners address the specific challenges identified above; figure 3 offers a summary.

How tech OEMs can help their partners transform

Challenge: Develop a customer-centric mindset, moving from transactional to relationship-based interactions

Because the world of XaaS places a premium on fully understanding enterprise customers’ business issues and desired outcomes, channel partners should establish dedicated teams focused on customer success. However, building such an organization can strain the financial resources of many midsize and smaller channel players.

Technology OEMs can help.

For starters, OEMs should embed their channel partners throughout customers’ IT journeys to help build sustainable relationships. In addition, to offer highly customized services that businesses demand, OEMs should assist channel partners with attaining expertise in emerging areas such as artificial intelligence and the Internet of Things. This effort should include targeted training and development programs.

And finally, OEMs should responsibly share customer data so that their partners can become more informed about those customers’ technology-usage behaviors. This can enable partners to plan and conduct more effective customer interactions.⁴ When it comes to analyzing customer data, OEMs typically have three options: jointly develop a data analytics platform with partners, help fund a platform that partners develop themselves, or assist partners in finding their own data analytics talent.

Real-world solutions: Connectivity Solutions, one of Cisco Systems Inc’s Asia-Pacific channel partners, has changed its approach to make “business outcomes” an integral part of all discussions with customers. The company sees customer success—not just sales or business volume—as a critical performance metric.

“ We impressed upon our channel partners the need to build solutions with Cisco and our large ecosystem of solution providers to address our customer needs effectively.”
—Kartika Prihadi, managing director, Cisco APJC

Hewlett Packard Enterprise Company (HPE) recently introduced the Channel to Edge Institute to help its partners effectively recommend, sell, implement, and manage the company’s Intelligent Edge solutions.⁵ The program provides training based on specific business use cases and offers research initiatives that drive commercialization of intelligent edge technologies. Through the program, HPE facilitates joint go-to-market programs with its channel and ecosystem partners.

In the area of customer data analytics, channel partner Insight Enterprises Inc. (Insight) teamed with a large tech OEM to solve several business challenges for an Australia-based mining company.⁶ After studying specific issues faced by the company, Insight designed a data science platform, then implemented an edge computing and advanced analytics solution by incorporating AI capabilities. The solution helped the mining company optimize its production rates, enable early detection of issues at its mining sites, and reduce unplanned outages at its core processing facilities.

Cisco helps partners align XaaS solutions with customer needs

When leaders at Cisco sensed a shift in business demand toward XaaS-based IT solutions, the network technology provider responded by transitioning its portfolio of hardware products to a flexible consumption-based model. However, this move alone was not enough to address the market transition: The majority of Cisco’s sales were generated via its channel partners, many of which weren’t equipped for such changes.

Cisco began identifying ways it could enable its partners to sell recurring revenue-based IT solutions. For starters, the company identified and worked with select channels to help them develop the required capabilities, such as building their own IP and enhancing the breadth of customer service-delivery capabilities. The goal was to enable channels to focus on strengthening targeted customer relationships rather than large-scale, transactional deals.

The company helped its partners create integrated solutions encompassing infrastructure hardware, software, and services. “We impressed upon our channel partners the need to build solutions with Cisco and our large ecosystem of solution providers to address our customer needs effectively,” explains Cisco APJC managing director, Kartika Prihadi.

Further, Cisco educated its channels on the new role sales executives should play, as well as emphasizing the need to incentivize them differently. It encouraged its channel partners to create their own IP, provide efficient professional/consulting services to end customers to support the sales cycle, and engage with customers in a more digital manner.

Having implemented the indirect channel transformation plan, Cisco is convinced that its channel partners are well-positioned to increase their EBITDA margin by 600 to 800 basis points over the next two to three years. These efforts can enable it to create partners of the future that can deliver integrated solutions and value-added services to customers.

Challenge: Address the increased role of LoB executives in making technology buying decisions

With LoB executives increasingly making IT buying decisions in the as-a-service world, tech OEMs and their channel partners should be able to prove the business value of their solutions. However, many channel partners are accustomed to dealing only with IT departments; engaging with LoB executives often requires a nuanced understanding of the business’s needs.

“A key expectation from us was to align our services with the business outcomes of our customers, raising the difficulty bar for us,” explains Atul Bansal, cofounder and managing director of Cisco channel partner Velocis. The company made business-outcome alignment its top priority.

OEMs should consider launching initiatives that provide pathways for channel partners to self-assess and build their LoB-specific solution capabilities.

Real-world solution: To support its objective of becoming a major player in IoT technology, Hitachi Vantara (Hitachi) significantly upgraded its partner program—and the partner base itself.⁷ The company worked to identify partners that could drive value, not just margins.

To help meet its goal, Hitachi developed the Stairway to Value, a framework designed to show the incremental value delivered at each stage of Hitachi’s business model.⁸ The framework has four competencies: storing and protecting data; enriching the data by applying metadata and context, including legal compliance frameworks; activating the data to drive business value; and monetizing data through effective decisions aided by visualization and automation. These four “stairs” lead to the successful monetization of IoT investments.

The initial goal of the program was to get partners beyond the first step, with a focus on elevating the customer experience. According to Hitachi, as of September 2018, about 30 percent of its partners had achieved the Stairway to Value’s first three competencies.

The program also emphasizes the importance of collaboration to success, with multiple partners and vendors all contributing part of the solution. In the hypercompetitive world of XaaS and IoT, this sort of collaboration is critical to delivering highly customized LoB solutions in a timely manner.

Challenge: Tackle new competitive threats driven by changing market dynamics

Demand for XaaS solutions is fueling channel partners’ competitive concerns about threats, not only from other channel players but from the tech OEMs themselves.

Tech OEMs can help lessen their channel partners’ competitive anxiety by expanding the breadth of solutions that their channel partners can take to market. OEMs can also identify specific geographic regions and customer segments for which they require a more focused channel partner approach.

Real-world solutions: The recently expanded Dell Technologies (Dell) Partner Program now enables partners to cross-sell and procure products and solutions across Dell’s complete portfolio, including its storage and next-generation cloud solutions.⁹ Through the Dell Technologies Cloud, partners can now act as trusted advisers for a more integrated and simplified customer offer. In addition, using the Dell Technologies Unified Workspace, partners with services delivery competency can co-deliver complementary onsite services.

In terms of creating regional opportunities for partners, CA Technologies engaged a local value-added distributor to more effectively target midmarket customers in India and other parts of South Asia.¹⁰

Challenge: Acquire specialized talent and expertise to develop custom solutions

As tech OEMs redesign their own XaaS solutions, it’s vital that they create targeted programs to help their channel partners gradually embrace the XaaS business model. This begins with enabling partners to develop their own proprietary IP, supported by standardized tools and training.

OEMs can take the first step by offering a common application development platform upon which their channel partners can further develop industry-specific solutions. This could involve having the partner build an additional application service layer on top of the OEM’s platform to address, for example, a retail customer’s unique business demands or workloads.

Real-world solutions: Through its AppExchange enterprise cloud marketplace, customer relationship management (CRM) provider Salesforce.com Inc. offers an industry solution framework called Lightning Bolt that hundreds of its partners use to build custom vertical applications.¹¹

Similarly, HPE introduced the “Pro” series program to help its channel partners develop their teams, transform customer experiences, and drive mutual business growth.¹² Through the program, HPE offers standardized tools, training, resources, and support mechanisms—in essence, the same learning and collaboration opportunities that HPE employees enjoy. The HPE Sales Pro Community also offers a highly interactive collaboration space for HPE and channel partner sales teams, industry-recognized certificates and digital badges, and continuous, role-based learning paths.

Challenge: Manage short-term financial impacts, including increased difficulty in investing for business growth

To minimize potential negative short-term financial impacts, OEMs and their channel partners should consider taking a phased approach to XaaS transformation. They can adopt a “bimodal” strategy by continuing to grow their business while simultaneously investing in the business of tomorrow.

To develop new capabilities, OEMs should help channel partners determine where in the value chain they want to build new XaaS services:

Presale: consulting, design, referral
During the subscription process: custom software, implementation, integration
Post subscription/sale: ongoing solution management and monitoring support, exception handling, scale and expansion support

As business models shift from products to services, OEMs are increasingly determining the optimum balance between recurring and one-time sales.¹³ This shift in revenue mix will adversely affect short-term cash flows for some channel partners. Further, this transformation can introduce revenue-recognition challenges.

To address these issues, technology OEMs should help channel partners develop new capabilities around pricing, billing, consumption-based metering, and other related financial processes and systems. OEMs should anticipate how their channels should deal with the resulting financial and tax-related implications, including the way they recognize revenue. In addition, OEMs’ continued commitment to support channel partners’ sales and marketing programs (for example, via market development funds) can help create some financial cushioning for channel partners as they adapt to XaaS.

Real-world solution: Hitachi’s previously-mentioned Stairway to Value framework provides a prime example of how tech OEMs and channel partners can manage the impact of XaaS transformation (see “Challenge: Address the increased role of LoB executives in making technology buying decisions” earlier in this section).

Most partners adopted two of Hitachi’s “stairs,” with nearly one-third of them reaching the third level, but some partners had trouble adapting and left the program. Hitachi accommodated the departures either by retaining those partners on a transactional basis (for one-time/annual deals), or as part of Hitachi’s regional distribution model. Less-engaged partners were moved to pure distribution status.¹⁴

Besides making provisions for financial incentives and rebates, Trend Micro Inc. in India has created market development funds for working with select channel partners.¹⁵

Identifying your partners of the future: Next steps

For C-level executives and senior leaders championing channel and alliance programs at tech OEMs, now is the time to start building your strategic partners of the future ecosystem.

Consider beginning by assessing your channel mix and portfolio, and then determine which channel partners are currently adopting an ecosystem approach for delivering customer solutions. Align with partners that emphasize specialization versus generalized offerings. And seek alliances with partners that have strong client bases in specific markets (SMB/regional/local) and relationships with the customers that matter to you most.

Some key strategic questions to consider as you evaluate your partners of the future:

Shared vision. Do the channel partner’s strategic objectives align with those of your company? Does the partner seem fully committed to your corporate vision and desired end state? Do the partner’s solution mix, level of customer engagement, and aspirations align with your go-to-market strategy?

Customer focus. Across offerings and customer segments, where does the channel partner possess expertise? Does the partner direct its sales force to drive thoughtful conversations with customers, emphasizing business value over simply closing the sale?

Differentiation. How differentiated are the channel partner’s XaaS value proposition and competitive advantage? Does the partner show an inclination to become a value-added “specialist” (for example, vertical)?

Capability assessment. Which capabilities does the channel partner need to bolster as it shifts to a XaaS model? Can the partner close those capability gaps in the near term? Is the partner proactively taking steps to build those capabilities?

Metrics and outcomes. Does the channel partner have relevant KPIs and metrics anchored on end-customer experiences and customer success? Which decision systems and processes has the channel partner identified to measure its overall channel transformation effort?

Once you’ve identified your partners of the future, you can take a channel-segmentation approach to determine your level of investment in each one (see figure 4). Investment in building that future ecosystem will likely be higher during initial years as you transform your existing channel partners. To help ensure success, consider using a programmatic approach for managing your channel transformation efforts, with both clear short-term goals (for example, six- and 12-month milestones) and long-term objectives.

Channel-segmentation approach for investing in XaaS channel partners

Conclusion

Tech OEMs should invest the time required to make their channel partners an integral part of the XaaS transformation journey. This includes providing a clear XaaS transformation vision to partners, as well as articulating the potential long-term benefits. At the same time, channel partners should work closely with OEMs to implement changes, learn and adapt, and build their own ecosystem to serve end customers more effectively.

This is a two-way street, where tech OEMs and their channel partners jointly work to create a value-based ecosystem, helping lead to greater joint relevance now and in the future.

Acknowledgments

Endnotes

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Technology Industry , Center for Technology, Media & Telecommunications

Flexibile consumption models

Deloitte Consulting LLP’s Flexible Consumption Models (FCM) practice has guided a myriad of companies through the transformation to flexible consumption and Everything-as-a-Service (XaaS) models. We have deep knowledge of both the value and challenges that these models present. We understand that modern businesses comprise a number of highly complex, interrelated organizational systems, which is why we don’t view any transformational element in isolation. We have helped organizations think through the implications of the interdependent business decisions they will need to make as they transition to these models.

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Jeff Loucks
Executive director, Deloitte Center for Technology, Media & Telecommunications
Deloitte Services LP
jloucks@deloitte.com
+1 614 477 0407

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