Cloud continues disrupting the IT delivery chain. End customer relationship management undergoes the greatest transformation, with Managed Services Providers (MSPs) playing a greater intermediary role between large IT vendors and end customers. Increasingly MSPs work to be the business entity that will manage end customer relationships, while traditional IT vendors have to package services and solutions to sell to MSPs and to sell through MSPs to others.
The old computing model depicted below allowed, in hindsight, for some fairly clean responsibility lines between hardware, software, and services vendors.
Corporate IT data environments no longer enjoy clear cut demarcation lines. CPUs and storage have been virtualized. Client devices undergo transformation as radical as that offered by cloud computing. The net result, in simple terms, looks something like this.
MSPs as Intermediaries
End customers look to their IT suppliers to coordinate varied cloud-based offerings. Customers increasingly want these services tied together under one management umbrella. Customers want MSPs to deliver a single, monthly invoice, and ensure the cloud services all work seamlessly from interoperability to security to disaster resistance to governance to compliance. Customers also want to make sure the cloud environment will scale as their business grows.
Brokering/aggregation will become a critical MSP differentiator that will insure MSPs stay relevant five and ten years from now. Today “pure plays” exist, but they lack little pieces of the solution set. As happened with outsourcing, the number of different suppliers/invoices/interactions an end customer will tolerate to receive their computing feeds into their business operations will contract. End customers will pay for brokerage services as they become less tolerant of multiple suppliers, invoices, and intermediaries in building out their data environments.
Whither the role of Distributors?
The scenario above sounds a lot like the role of distributors. But their value add historically comes from line card breadth and inventory management best practices. Distributors operate on razor thin margins, promise competitively priced inventory delivered in a timely fashion, and seek to differentiate themselves through value added services.
But system hardware buy points contract as more end customers provision their data environment through metered service of the compute and storage functions. In short, cloud calls into question the long-term relevance of the distributor business model.
Can Distributors Adapt?
On the one hand distributors seem well positioned to evolve into the MSP space. They understand the process of scouring the IT landscape and rapidly adjusting line card components to adapt to end customer and VAR demand. Inventory management and control drives distributor business economics.
Similarly, distributors have “permission to play” with VARs and mid-market end users to whom large IT vendors do not sell directly.
But inventory turns and cloud-driven customer service expectations of 100% SLAs and time-to-resolution tracked in minutes rather than hours or days are driven by a new set of organizational best practices. Can distributors adapt?
What are the long-term implications for distributors?
Clearly no technology trend results in an absolute transition. On-premise installations will continue to exist even in cloud-centric computing environments.
But distributors will see their market opportunity shrink. They can ride the decline, reducing inventory and learning to live on declining revenue where cost of goods sold (COGS) runs around 85% of revenue.
Alternatively, they can enter the cloud brokerage business -- an extremely difficult and risky transition. They will have to invest working capital in what is largely a subscription business akin to magazine publications or insurance sales. Publishers know to expect to run in the red for two years when launching a new publication. Insurance salesmen know they have to build a book of business over time to begin realizing significant annual earnings.
The transition will require patience and working capital and neither is an attribute commonly found in the distribution business which measures sales performance on a monthly basis and operating on 3% to 4% net income contributions.
The distributor business segment will therefore simultaneously consolidate and diversify. The larger, better-funded distributors will buy up those distributors who hit the wall as cloud permeates. Both large distributors and savvy regional distributors will build out the operating infrastructure necessary to bring to their established relationships cloud brokering services.
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