In the Trenches – VARs v. agents

by Peter Radizeski

About three years ago, service providers pivoted their channel programs from recruiting traditional telecom agents to hunting for value added resellers (the original IT shops). The theory has been that VARs are trusted advisors to their customers (true); they understand the managed services business (true); and they would make good channel partners for service providers of all kinds – cablecos, telcos, CLECs, cloud providers, cloud services brokers, et al.

At the time, telecom agents weren’t yet pivoting their business from selling network (T1s, WAN, circuits) to selling the new wave of products – managed services and cloud services. (Little did the providers understand that the market wasn’t asking for them yet, like they are three years later.) In addition, finding new agents was a challenge since not a lot of young blood was jumping into the telecom agency space. Look over yonder and there are so many VARs – an untapped market of one hundred thousand shops. (Note: At a 2013 CompTIA meeting with the Telecom Advisory Council, the size of the VAR market was discussed. Analysts ranked the size of the IT sector at 120,000 shops: break/fix, MSP, VAR, integrator and a heavy dose of one-man IT fixers. The estimated number that will survive the current industry and economic turmoil are about 30,000. MSPmentor estimated between 80,000 and 120,000 VARs in 2009.)

There are at least four things that the service providers and analysts did not consider about their pivot:

  1. VARs generally are not hunters.
  2. The VAR salespeople would concentrate on selling their own stuff (higher comp).
  3. Service providers were competing with the VARs, which make an uneasy alliance.
  4. The VAR business model is in flux, too.

Jump ahead three years after both master agencies and service providers have spent substantial time, money, travel and effort to recruit VARs. Some master agencies are doubling down on the VAR experiment right now; while a couple of other master agencies have closed the lab door on that experiment until better results occur.

Quotas for master agencies keep increasing at the same time that pricing is depressing, which means that a larger volume of deals have to be closed and processed in order to keep hitting quota (and paying commissions to the partners – agent and VAR alike). This pricing decline is wreaking havoc on the whole ecosystem, but that’s an article for a different day.

The cost to process more orders is more staff. The cost to process orders from VARs is also more staff. The master agencies have had to hire more staff to meet rising quotas – under the same margin as before. Can you spell business model problem? Also, many master agencies have hired inside sales teams to sell direct to meet quota. More staff, more overhead, but higher margin for the master agency.

While telcos, especially RLECs and CLECs, are feeling the effects of price compression and cable domination of the SMB market, they are making the expensive investment in cloud services and other revenue streams (such as TV or MVNO) to raise ARPU, get stickier and combat both competition and price erosion. It’s a vortex, and VARs are in a similar spin.

The three largest hardware vendors – HP, Dell and Cisco – and the largest software vendor (Microsoft) have been in a flux these last three years as well. Dell went software and private, while Microsoft shuttered SBS and went cloud with Office 365. HP still spins. This has had a huge ripple effect on their channel partners: the VARs.

Other components have been the decline of desktops and servers with the rise of mobile devices and cloud computing. The amount of technology that VARs must have a handle on is increasing at a pace that smokes some of them. The number of operating systems to support has doubled in the last two years (think Android, iOS, win7, win8). Wireless LANs are more pervasive and now include printing. Security is a whole other animal complicated by federal regulations such as SOX, HIPAA and PCI DSS. Like medicine, IT is becoming a specialist’s game. 

Less than half the VARs have a sales team. Typically, VARs farm their base of customers. It’s easier and it isn’t really selling. (There is a cottage industry of consultants teaching VARs marketing, sales and how to convert to an MSP model.) The VAR business model is based on large CAPEX sales through which they pay salespeople and cash flow the business. It takes a deliberate effort for a long time to transform that business model to one that can sustain itself on an MRR (monthly recurring revenue) model.

Therein lies one issue with selling T1s or broadband or even a 10MB Internet pipe – there just isn’t enough juice for the salesperson. There is more margin in selling managed services from your own shop. It also means that your business stays afloat and you continue to have employment. Selling someone else’s services doesn’t have the same sustenance baked in.

Service providers were mad at agents for not farming more, for not shifting to selling managed services, and for having lower average revenue per customer. The channel pivoted to recruiting VARs at a time when VARs were in flux, the telecom/IT sector was in a state of change, and the pricing erosion was taking effect. These factors and more are why we have some service providers and master agencies re-thinking or re-booting their channel approach.

I leave you with this: “Does signing a partner agreement make you a partner?”

Peter Radizeski, President of RAD-INFO INC, started as a VAR, then became an Agent. Now he writes about the channel and the telecom space while consulting to service providers and occasionally still selling some circuits.

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