VAR’s, MSP’s and Integrators…Are We There Yet?

I remember in 2016 when ScanSource announced the acquisition of Intelisys. It was the first time I realized that the telecom channel and the technical distribution model were made for each other. A match made in heaven. ScanSource and Intelisys obviously thought the same thing as well. We all believed at that time that we would be one big happy family. But here we are, 7 years later, and we are not. There is still a very distinct line drawn between the distribution side and the channel.

So why has this convergence taken so long? Why don’t the VARs and MSPs realize that there is so much money in this channel and come flocking to compete with the telecom channel? The real answer is that there were and are still too many obstacles for them to adopt this new mindset and structure. We didn’t have the answers back then, and we didn’t realize there were going to be any obstacles. I think we are getting closer to bringing these two groups together, but is the timing right? Here are some of the major obstacles I see that we still need to help with.

Capital Expenditure vs. Operational Expenditure

Typical tech distribution companies are used to a capital expenditure model (commonly called CapEx). This means they are used to selling a product or service and capturing all the revenue at the time of purchase or very shortly after, depending on terms. Even if the company leases or has other payment terms, the technical company will get paid from the leasing company right after the installation of the equipment. Most technical companies ask for a down payment to order the equipment and the rest of the money when the installation is complete.

These technical companies have large staff and a bi-weekly payroll and have to pay employees and their families. When you take a product and sale which they usually receive the revenue up front and change it to getting paid over the lifetime of the service, it makes it difficult to pay bills and make ends meet. Cashflow begins to be a problem. Cash in hand versus opportunity/expected cash and that change to cash flow can make it very difficult to run a business.

For example, a company with 100 people needs a phone system. To purchase a phone system from a VAR for 100 people would be around $30,000. About 25% of that is profit or around $7,500 to the VAR, and the other 25% is operational expenses to pay for installation techs and project management. If you sell them a hosted phone system at $15/user, it's around $1,500 per month. With a commission percentage of 25%, that is $375/month to the TSD, and an 80/20 split would give $300 to the VAR. $300 for a 36-month contract would ultimately give $10,800 to the partner. But it's over 3 years, and the VAR needs to make payroll tomorrow.

The TSDs are starting to have the answer. With the deep pockets of the private equity groups, TSDs have access to cash now. Front-loading commission and giving 24 months of cash now (at a small reduction, of course) and starting the residual commissions at month 25 will give them the operating cash needed to keep their company above water while also building a promising future of residual revenue.

Sales Heavy versus Technical Heavy

Most technical companies have a high ratio of technical staff to sales staff, meaning that the majority of their employees are responsible for installations, project management, adds, moves, changes, and break-fix type work. A large portion of their revenue comes from service calls, maintenance agreements, and installations. For instance, a company with 15 employees would typically have 1 or 2 people focused on sales (usually the business owner), 10 technical staff, and a few administrative staff.

Service-oriented companies often experience busy and slow periods. When sales are slow, the technical staff may not be very busy. Business owners keep them on staff because they do not want to go through the pains of finding new staff and training them up to be efficient employees. Technical staff usually have a wealth of knowledge about customers and their unique needs, which helps them handle ups and downs in resource demand.

As a company sells more Software-as-a-Service (SaaS) services, the ratio of sales staff to technicians needs to completely flip. SaaS providers handle all the technical work, while their the partners are responsible for sales. Business owners often develop familial relationships with their employees, many of whom have worked for the company for extended periods. Letting go of these employees is very difficult for them and will cause cash flow issues by having unnecessary employees on payroll.

Some suppliers offer partners the ability to provide installation and ongoing support, allowing them to recoup their expenses through additional customer charges on the supplier's paper. These suppliers are mostly found in the Unified Communications space, where there is still a need to place phones and fix wiring and cabling. However, it is only a matter of time before these needs go away as the desktop phone goes extinct.

Expert Generalist or Supplier Specialist

In order for technical distribution companies to sell a manufacturer's product, the manufacturer required companies to become experts on their product. They want to ensure that their brand was sold and managed well, and that a positive viewpoint of their product was created. As a result, most companies represented only one product, and very few would sell two brands. This usually only happened if they were a big enough shop to hit the expected quotas for two suppliers.

This caused a few issues. Firstly, companies became super believers in the single product they represented. Cisco was the most infamous for this situation, where only one brand was ever good enough to be sold, and anything else was never good enough. Sales and technical people would live and die by the brand. Secondly, companies would often sell a round peg in a square hole. Even if the product wasn't the right product, the salesperson would position it to be the only solution, and the technical people would have to do a workaround to make something fit, even if another product would be better. Therefore, salespeople quickly became product salespeople instead of solution-minded problem solvers.

The channel sales model is quite the opposite. Channel people do not want to live or die by any supplier. They are very quick to be "supplier agnostic" and work on fixing the problem and not get stuck on selling a product. . Many partners will bring in three or more suppliers and not tie their brand to any of them, allowing the customer to choose which they think would be best, distancing themselves from the supplier.

So what's the answer?

From my perspective, the ones that have done it well are bringing in an overlay, someone who understands the channel business model and has them work hand in hand with the tech distribution salespeople. This allows them to uncover additional opportunities within the existing client, as well as sell what has kept that company in business and successful for years. It's the icing on the cake, not completely changing how to bake a cake. This allows for a slow burn change instead of ripping off the band-aid. The question is, will they make the transition fast enough? With many channel sales companies now building out a VAR practice just for the residual revenue, they may find it very difficult to be competitive in pricing and the ability to provide the right service level to their customers.The body content of your post goes here. To edit this text, click on it and delete this default text and start typing your own or paste your own from a different source.