Are vendors and the channel chasing the same business?

Vendors are looking to increase their services and consulting operations across all markets, but do expanded service operations mean competition with the channel?

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By  Mark Sutton Published  September 2, 2001

Introduction|~||~||~|As hardware margins decline, and the IT market feels the squeeze of the economic slowdown, so vendors begin to look elsewhere for revenue—and the one area that has proven to be the most attractive to the markets is services. From storage to security, if you can sell hardware or software, then you can sell consultancy, design, implementation and support along with it. Returns on services continue to grow, and unsurprisingly many of the big name vendors are looking to expand their consultancy business to capitalise on this.

IBM is the undisputed giant of IT consultancy, with 50,000 consultants worldwide, and revenues of $33 billion last year, or one third of Big Blue’s overall business. With figures like this, it is not surprising that other vendors are trying to match IBM’s offerings. HP continues to grow its services business; Compaq’s Michael Capellas has set a target to make services account for one third of the company’s revenue within the next few years, and he has stated that the company will spend whatever it takes to achieve this target.

But is such aggressive expansion of consultancy organisations good for business? Essentially, the service arms of these companies provide a number of services, but they have one key function—to boost sales of products. Which, of course, is the job of the channel. Both channel and consultants aim to provide their customers with what they want—a solution to a problem. An overlap is inevitable. Conflict between the channel and consultancy arms is becoming more and more of an issue, especially as vendors find themselves under more pressure to perform. So can the channel and the consultants co-exist?

In the Middle East, the problem of channel conflict is further complicated by the skills shortage in the region, and the scale of operations here. In the US, where solution provider organisations have thousands of personnel and a full range of expertise, there is a very real problem with vendors taking work from the channel. Here, the lack of skills and geographic coverage available means that, for better or worse, the channel and the vendors are much more reliant on each other.

“I don’t think any local company in our region can afford to have 15-20 experts in SAP, Baan, Cisco, etc. There is not enough business in the market to accommodate this number of people,” said Alyaa Alshimy, customer service manager for Compaq Global Services, Gulf & Levant.

“It is the level of skills that are necessary—a small organisation can’t get all of those skills in one place, Compaq has got 40,000 consultants around the world, and we can get hold of any of them,” continued Stefan Niemiec, Business Critical Consultant, MEMA. “The business critical community, for example, is a virtual community. All of the consultants are located in country, so they have local knowledge, but their responsibility is global.”

||**||Addressing the skills shortage|~||~||~|The need for skills brought many of the service organisations to the Middle East in the first place, and is still a driving factor. Compaq is looking to expand through acquisition—Alshimy says that there are four acquisitions in the region that will be finalised by the end of the year, where the company is buying up the services arm of large local organisations. Microsoft, a relative newcomer to the consultancy business, is also building its presence in the region to address skills shortages in software development.

“It is an investment in services in this region, the goal is really to accelerate the adoption of the newest technology by enterprises and partners,” explained Patrick Buffet, VP for Services & Technology, Microsoft EMEA. The roll out of .NET relies on the uptake of new technology, which developers in the region just aren’t ready to handle, he says. To this end, Microsoft is increasing its services staff in Dubai to 50 over the next few months. “You can invest in two ways when you have a shortage of development skills,” said Buffet. “Either throw bodies at it, or find the most effective way of knowledge transfer to existing resources. Really we are providing the whole knowledge transfer, hand-holding and sharing the risk and pain of building the new technology, as opposed to throwing software out to the market and hoping customers find the right partner to make it work.”

Microsoft is very clear about how partners should be involved at the different stages of deploying the .NET architecture. At the early adopter stage, Microsoft will lead projects, with a few selected partners involved to begin the process of knowledge transfer. As the early majority phase begins, so more partners will be drawn into deals, to build their experience, with partners taking more responsibilities. By the time the technology becomes widely adopted, a wide base of skilled partners should be in place to handle the business.

||**||Dividing the spoils|~||~||~|While the involvement of vendors is highly desirable in the early stages of a technology roll out, it is at the later stages that things become more contentious. When partners bring in their own business, or the channel is capable of handling a project itself, how does the business get allocated?

“Whenever there is a chance to engage any of our channels, we don’t hesitate to do that. If there is a skilled person locally, it is more cost effective for me to subcontract this part of the service to the channel,” says Alshimy. “Our strategy is very clear, for named accounts, we are talking about ten accounts in the UAE, it is a direct model, direct sales and delivery. SME is 100% channel. For large accounts, we engage through the channel—if they can deliver, they deliver; if they cannot, we help them develop their skills to deliver the service. We want them to sell our services, to use our service and our tools, but we want them to develop and be capable of delivering this service.”

The model of how work is divided tends to be reliant on where the project originated. When a partner approaches the vendor, then it is the partner that leads. If it is a customer-driven project, then it is the customer’s choice who leads. Compaq says that in some instances it will be able to refer the customer to an appropriate partner, in others, if the customer wants, it will take the lead and sub-contract partners, or work underneath the partners if the customer just wants to see a “corporate face” on site.

For support, vendors tend to favour using local companies, to give better coverage. Partners can also provide better coverage when it comes to certain projects. Compaq Global Services (CGS) won a global contract for a pre-Y2K upgrade of the IT infrastructure on Norwegian shipping company Bergesen’s fleet of 80 tankers and carriers. With vessels costing millions of dollars a day to take out of service, upgrading each vessel’s LAN had to be done on the fly. “CGS looked after the installation and implementation onboard the vessels—when the vessels turned up here, we had maybe twelve hours notice, to get all the equipment across to Khor Fakkan, out on a boat, winched on to the ship and taken everywhere from the engine room to the bridge, installed, implemented, tested and then get off again before the boat sailed,” said Niemiec. “We obviously haven’t got the number of people to do that ourselves, so we managed the project and used the local partner to do the delivery.”

Through cooperation, vendors hope to eliminate conflict. Rules of engagement to govern deals are also gaining in popularity. One effect of the knowledge transfer that is done is that consultants skills are moving away from the channel’s skills. “The model is certainly changing, especially after the explosion of IT last year,” Alshimy said. “What we are finding is that our own engineers and consultants are doing less hands-on technical work, and more planning, design and consultancy, because the partners are getting better skilled. There is still a requirement for our skills, but we are involved now in consultancy to a much higher degree than previously, and we are starting to do things like business continuity, and consultancy as opposed to hardware.”

Microsoft is looking to another method of avoiding conflict. “We don’t have a services sales force,” Buffet said. “Our sales force does not have services revenue on their quota, so the granular conflict of interest with the people who engage our sales force is not there. Once we are through the early adopter phase, we will have to find other ways to incentivise our sales force, but it is very important that from the very beginning we don’t have that conflict of interest in engagement.”

||**|||~||~||~|VENDOR CONFLICT CONTROLS

In the US, channel conflict has caused problems. Vendors are now having to take steps to reassure the channel of a fair deal.

Compaq: Plans to unveil Partner Engagement Principals (PEP) initiatives to retrain its direct sales force to focus on partner satisfaction

Computer Associates: Changed commission structure to compensate direct sales staff for channel originated business. Limits staff to CA-specific solution design and engineering

EMC: Plans to specify rules of engagement in the next month to define channel exclusive business

HP: Slated to roll out new “hard deck” program, under which its services organisations will play only in select accounts

Microsoft: Plans to release “partner playbook” to ease sales conflicts between Microsoft Consulting Services and channel partners

Sun Microsystems: Placed channel group under its sales unit and plans to cut the number of direct accounts to 110 from 550||**||

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