Saturday, April 28, 2012

Valley of Discontent

If you will allow me to pontificate and tell my tale about the valley of discontent and how understanding leverage is the key to business success these days.

I see a technology world polarized between very small, laser focused businesses on one hand and on the other very large businesses that can take advantage of volume. Unfortunately, the in between area (the valley of discontent) is not a place that you really want your business to be. Why? Because if you are not working to be as lean and focused as possible or growing to a large size then sooner or later you just won’t be able to compete with those that do. As the water in the valley rises, unless you are on either side you are going to get swept away.

Many technology resellers believe in the managed services (MSP) model. However, the days of good revenue there are fast waning. It is a race to bottom where price is the most important ingredient for customers. To survive you really need the advantage of size and I am not talking about a handful of good clients I am talking about hundreds, if not thousands. With those sorts of numbers you can leverage low cost items and still survive but without the volume you won’t.

Most resellers are now not only directly competing with large wholesale technology stores but also with direct Internet sales. Again, if there is not the volume then there is decreasing advantage. Most resellers are ‘jack of all trades’ which was very successful for many years but not any more. Unless you can afford to establish a help desk service, provide contracted supported (with almost round the clock support and Service Level Agreements (SLAs)) you are going to lose out to those larger businesses that can. In short, if you want to maintain the ‘jack of all trades’ model then the path out of the valley of discontent is to get bigger, much bigger. This comes with its own set of challenges.

The other pathway out of the valley of discontent is to do less, pick a niche and stick with it. This comes with its own set of dangers and challenges but essentially is probably going to mean abandoning stuff that your business now does and potentially that it does well. Only the items that generate the most profit are the ones a smaller business can maintain if they are to succeed. There is little room for stuff that isn’t profitable on this side of the valley, whatever you do you have to do better than everyone else and charge accordingly.

Those that don’t understand the fact that they need to make either of these choices are the ones who will pay the greatest price. Why? Because others are going to force it upon them. Let’s take this whole ‘move’ to the cloud paradigm we are currently experiencing. One of the selling points of Office 365 for example is the ability to earn recurring revenue through being the ‘partner of record’ for an account. This is means that the ‘partner of record’ receives 12% for sign up and 6% recurring for the Office 365 licenses sold. To make these kind of fees worthwhile, again you have to have volume in many hundreds if not thousands. There are other revenue opportunities around the Office 365 products but at this point in time most clients simply want hosted email and not much else. That will change over time but at this point in time most resellers aren’t skilled and experienced with products like SharePoint and Lync to generate revenue opportunities. Is that their fault? In some ways yes but again they are generally in the valley of discontent without enough leverage to cope to make change. Many vendors are now billing clients directly and only paying a ‘commission’ to the traditional reseller. There is certainly money to be made here and many businesses do it successfully but it requires volume pure and simple.

Another example is the recent announcement from Microsoft about their new small business competency. You can read more about here:

To me it is again aimed at the ‘bigger’ resellers. Why? Firstly, the fees for the competency are USD$ 1,850 for Silver and USD$ 3,800. That is big hike from previous small business programs. I also note with interest that the two Office 365 exams, 70-321 Deploying Office 365 and 70-323 Administering Office 365 are pretty much mandatory for both Silver and Gold levels. From my experience with these exams I would struggle to think of one other person I know in the small business technology community that would pass these. That isn’t to say they couldn’t but the expectation in the small business community is that you can more or less pass an exam if you work with the product every day. If these Office 365 exams remain unchanged from when I saw them then small business resellers are going to have to put in a lot of work coming up to speed with enterprise features they may never see in the real world. That is not really going to encourage them to invest the time. Like it or not, if they want to achieve the competency they are going to have to make that investment. They question is, are the majority in a location in which they can? If they are in the valley of discontent, probably not.

From what I also see the Gold level requires at least 2 qualified employees. Most resellers I know in the SMB space are small and may not even have 2 employees. If they do, retaining two suitably qualified employees is going to be a major challenge. Again, the advantages lie with larger business, those with the funds, those with the employees, those with the resources to get people through the exams.

In a nutshell that’s why I tell people that they need to work out a way to get themselves out of the valley of discontent, from which I can only see the two options (but there maybe more), get big or get small and fast.

A wise person knows they cannot control their environment only their reaction to it. The change in the technology landscape is certainly something many rail against but in the end it really does no good as it simply continues to change underneath you. I applaud those who are making decisions, evaluating the environment and moving their business to places where they will be successful. Likewise, I implore the others to take a serious look at what is happening around you and how little control you have over it and start making the move to either bank. Failing to do so will not end well I fear.