ERP071- Evolution of the IT Channel in 2021

No one has claimed yet the orchestration of all of that. And I don't think customers want to go to six different marketplaces and have to go click six different buttons. And that's where distributors can play a major role. And there's an advantage of smaller, more nimble companies that can invest in automation and AI and really drive that for MSPs. But we're in the maybe the first or second inning of a long decade of a long baseball game here in terms of who the winners and losers are going to be. Welcome to Evolved Radio, where we explore the evolution of business and technology. I'm your host Todd Kane. Today on Evolved Radio, I'm chatting with Jay McBain, principal analyst at Forrester Research. Jay is a well-recognized and trusted voice in the IT channel. He lives and breathes this stuff. He's super passionate about the industry trends and our industry future. Today I get Jay's insights on the evolution of the distributor and the role of community in the channel. I also get his perspective on potential regulation of the IT industry. It's a great episode, so enjoy. If you enjoy the show, please consider leaving a rating and review in your favorite podcast app. It really helps to spread awareness and bring more listeners to the show so we can share the message with more of the community. Now, on with the show. Joining me on the podcast today is Jay McBain, principal analyst with Forrester Research. Welcome, Jay. Thank you so much for having me. Great to have you. So, we'll get right to it. You're a recognized voice in the channel. Uh, appreciate a lot of the insights that you provide for us on things that are happening and the goings on in the future of the channel. Couple of things that I wanted to get your insights on that you've been speaking a little more publicly about lately. Is the change around distributors. And I'm curious your thoughts of how MSPs should think of distributors. I think traditionally it's just been, you know, I have my tech data, I have my Ingram or my Synex and this is where I get my my gear from and some of my licenses. And there's been some disruption in the model, I feel like with the introduction of, I guess non-traditional distributors like Pax 8, more the electronic distributor, I guess is maybe a way to put it. Do you want to give us sort of your thoughts on the future of the distributor and how things are potentially changing and and how the MSPs should view them as partners? Yeah, absolutely. I've been around distribution for 27 years. My years at IBM and Lenovo, 17 years of obviously selling billions of dollars through the the large broad lines. And then obviously hundreds of millions through others as well. So, I've been involved a long time. I think as we moved out of client server into multi-cloud hybrid cloud. A bunch of forces started to change. You know, we have a different buyer, we have every company in every industry going into subscription and consumption models. You think about a big part of their revenue is companies like IBM, Dell, Cisco, HPE. All four of those companies have committed 100% into subscription models. So it's not about the product and skew much more than it is about the every 30-day recurring forever. MSPs know about this business, this is how they run their business. You know, Telco agents know about this business. But to these companies, this is new. And they're spending a lot of time trying to figure out how this is going to work and how they're going to work with partners. Where the actual procurement side of the equation maybe starts to move over to some digital marketplaces. It gets into product led growth, subscription consumption models. It gets into some direct to consumer consumption models. There's a whole bunch of things happening. But last year during the pandemic, marketplaces grew more in three months than they did in the last 10 years combined. Wow. So distributors themselves are transforming and and they've been on this journey for a number of years. You'll recognize that Tech Data and Synex came together just recently. But before that, we've had a number of big acquisitions. You're at a point now where DNH is the third largest broadline distributor. And you've got a very, you know, tight market. And then you've got these disruptors coming up like a Pax 8 or Sureweb and and models like this that. They grew up in a cloud world where you're shipping bits and not atoms. So they're not building warehouses, they're not building credit and capital facilities. They're not building, you know, marketing models in the same way. And they're understanding that they're becoming this digital connective tissue. To a customer that might be buying seven things and looking to an MSP to procure and provision that in one place at one time. And then, you know, when you add a user, it's basically a click of the mouse. And that's just a different model and you obviously saw Ingram with Cloud Blue, you've seen Tech Data and and Synex. All investing DNH with Jason Bistrack have all invested heavily into distributing bits. But it's very different than distributing physical products and and how their business model. Has evolved over the last 40 years to where it's going in the next 10 years. Do you feel like it erodes their position in kind of the direct versus indirect model? Like if you're just buying software, especially if it's subscription-based. What is the role of the distributor in as a sort of the middleman? Like some people would just assume, well, can we cut out the middleman? Shouldn't I just be able to go direct to Microsoft for this licensing? What's the role in sort of of the distributor in that new electronic model? It is difficult. And if you look back to the client server era, about 80% of the business flowed through a linear supply chain. You bought through an MSP or back then you bought through a VAR or an integrator or somebody who then bought it from distribution, who then bought it from the the vendor. Well, that 80% has now shrunk to somewhere between 20 to 30% in multi-cloud hybrid cloud. So, when you're watching, you know, Azure report 50% growth, 50% growth, 48% growth and 47% growth in the four quarters inside the pandemic. They're only doing that for a company like Microsoft who is 95% partner assisted. They're not reporting anymore that, you know, a much lower number is partner sourced. And if you look at AWS, if you look at Google Cloud, if you look at the big SAS companies, Salesforce, Service Now, Workday, Marquetto, Net suite, they're all in that 20 to 30% range. A company like Salesforce has actually shut down their resell program. They're funneling all money through the marketplace at this point. They're bringing on 250,000 partners. But none of them are going to resell a Salesforce license. So yeah, it's it's a definite disruption. Where distributors play a critical role though, is a company doesn't just buy Salesforce. On average they buy six other things. And there's 175,000 SAS companies. There's now 800,000 emerging tech companies like IoT and AI and automation and blockchain and quantum. All these things are coming into that, you know, seven layer cake that the customer's buying. The distributors have to do a couple of things, one is they have to become a platform for distribution. So again, it's less about forklifts and distribution centers and credit capital facilities because you don't need credit and capital facilities when it's sold by the month. Now it becomes this orchestrator of an ecosystem of, you know, perhaps millions of moving parts. And helping the MSP not go chase down all these stars and moons and celestial movements and really make that happen. That's at a level of scale, it's not as much human-based as it is AI and automation-based. And I think that's the critical challenge to become a platform. Is these companies, it's not about, you know, opening up new centers or hiring flocks of new people. It's investing in the technology to make this really work for MSPs. Yeah, as you said, the the one click advent is I think a huge piece of that. Where, you know, a lot of the distributors have integration into the PSA platform and if you add a new user. Then if you have all the plugins, then, you know, this is my tech stack and I add one of these, two of this and four of those. And and all of those are are I guess orchestrated through that that that central distributor. Rather than having to have multiple ingress or egress points for all of the different vendors that you're utilizing, right? Yeah, and you start to think about the permutations. So it's not just multi-cloud where 80% of companies use AWS, Azure, Google and others concurrently. So you're not buying through one marketplace owned by that vendor. Second is the hybrid cloud. Much of the future emerging tech is out at the edge. So if you're buying through Dell Apex, which was announced last week, or if you're buying through Cisco as they're going full as a service or HPE Green Lake. You're adding hardware, software and services on a monthly recurring basis. And that multiplier effect, that $5 that gets generated for every dollar of actual product sales. All comes together. No one has claimed yet the orchestration of all of that. And I don't think customers want to go to six different marketplaces and have to go click six different buttons. And that's where distributors can play a major role. And there's an advantage of smaller, more nimble companies that can invest in automation and AI and really drive that for MSPs. But we're in the maybe the first or second inning of a long decade of a long baseball game here in terms of who the winners and losers are going to be. So maybe by the sixth or seventh inning, do you expect that there's going to be more players involved? Or are we going to see sort of more consolidation? Because I I guess part of what my thought process is is differentiation becomes really difficult. In this model, like if you I guess if you have the largest platform and you're the single place for, you know, hundreds if not thousands of these products. Then you have a pretty good story. But, you know, as you said, the innovation will likely happen with the smaller players. Do you see this as an expansion or or a consolidation opportunity? Yeah, I can see layers, many more layers than we have today. You know, if you look in the Telco space, you've got a master agent layer that adds value that is different than distributors. You know, you've got Pax 8 or Sureweb that add a different layer of value than a broadline distributor. In Europe, you've got 150 VAs, value added distributors who are more localized. In terms of language and tax and accounting and culture that can shuttle in as an orchestrator. So here comes the deal, is there any one company that can grab. What will be a million companies by the end of the decade, software companies. What will grab today 800,000 emerging tech companies. Every company in every industry is becoming a technology company, technology services company. You know, 78% of marketing agencies, 81% of accountants. So you've now got millions of different kinds of partners sitting at the table with the MSP in front of the buyer. And what you're asking somebody to do is orchestrate when you start adding or multiplying a million times a million times a million times a million and then you get the 35 million potential buyer conversations. Your calculator has got to the error, you know, pretty fast. So you're talking in the trillions of permutations. And no stack is going to be the same. And if you're asking a marketplace to go and find a million pieces of software and millions of partners to wrap around it. It's a big task. So where the layers come in is I can see where the industries break down. The buyers break down, so you may have a marketing buyer, for example, who today many companies, the marketing buyer spends more on technology than the CIO. You then got an industry or a sub industry like a mid-sized clinic with 50 doctors. You know, very specific, HIPAA, high-tech compliance, but that changes as you move from New York to New Jersey. Changes big time if you go north into Toronto or into London or into Singapore. So you got a geographic element. Number four, you've got the sector size, you know, it's different than a small dentist office or a small hospital, large hospital. There's 12 sub segments right into health care. That have different cakes that they're going to buy to solve a problem. And then the products, I mean, we're today, it's not hardware, software and services, we're watching 250 categories. So to secure the threat vectors and the zero trust around that mid-sized clinic. There's seven layers of conversation and then 17 layers below that. So if I add all that up, that's the 35 million across those five vectors. I see layers there where there could be a mid-sized clinic specialty, it's too narrow to have that in New York, but it's probably not too narrow to have that nationally. And there could be 197 countries where an MSP could play a critical role. Of running a marketplace and all that connective tissue. And curating all of the critical compliance and governance required for that very specific last mile. And becoming the digital connective tissue for that client. Which adds a layer between them and maybe a distributor. Because that, you know, those these hundreds and then thousands and maybe tens of thousands of orchestrators are not all going to go out to Dell and HP and Lenovo and everybody else. And, you know, sign up as distributors. So that's where the layering happens. And I think there might be five or six layers as you get into these millions of permutations. Interesting. Okay. So the margin is in the complexity. So the consultative and entrepreneurial opportunities abound in in that future for sure. Actually, I'll correct you there. There is no margin. There is a multiplier. So in the if you watch the Salesforce model. There is no ability to sell and make 20% or 30% margin and then, you know, a kickback of 3 to 5% on the back end. MDF funds, volume rebates, market development funds, new customer bonuses. That formula kind of goes away. The multiplier though, all the big companies now are throwing out their multipliers. Google Cloud is $5.32. Salesforce, which is my example, is $4.65. Microsoft came out in the press a couple of weeks ago talking about trillions of dollars for the channel that can be unlocked. None of that trillions was through programs. You know, IBM announced a billion dollars of ecosystem investment. None of that is going into extra margin or extra incentives. So in a subscription model, the actual transaction is the first 30 days with the client. And in that model, they're going to be investing in who gets them to the dance in that early part of the journey. Who translates vendor selection into the transaction, whichever way the customer spends money. And then the fund starts and MSPs know this. Every 30 days forever. Driving better adoption of those vendors, they're going to pay you for that. Driving deeper integrations and stickiness, so they get long-term value or lifetime value, they're going to pay you for that. Getting upsell and cross-sell across bigger parts of their portfolio, they're going to pay you handsomely for that. Every 30 days forever. So the dollars available in margin are going to get spread like peanut butter. Into actual value items. The transactional revenue because you're not dealing with million dollar deals anymore. Like on HPE Green Lake, that million dollar deal is now $9,000 a month forever. So, like back 12 years ago when we went to Office 365. Trying to pay your mortgage on 20% margin on $6 a month. There was just no math. The only thing Microsoft said at the time is, well, you should sell more. Right. That wasn't the right thing and now they're kind of saying the right thing. Is every dollar that that kicks out, kicks out somewhere between five and $9 for MSPs. And system integrators and ISBs, emerging tech companies and 16 other types of companies to go and grab the multiplier. That multiplier will be spent by the customer. Either internally if they try to tackle it themselves. But it makes more sense to outsource some or all of that to companies that can do that at scale. And that's why managed services is growing by double digits and will continue for the next decade to grab that opportunity. Right. Next topic I wanted to cover with you is the evolving role of community in the MSP channel. This is something that's always existed. It's one of the things that I really appreciate about the MSP channel is that people are very open, it's not a it's not a terribly territorial and closed ecosystem where people keep secrets, people go to conferences and are very willing to share insights and what works and what doesn't with each other. Which has bred a lot of different types of communities in the industry. And what we're starting to see now is a lot of the big vendors acquiring some of those more prominent communities. Like HTG being acquired by Connectwise, they also scooped up service leadership and now C level has been picked up by Pax 8. So what's what's sort of your insight on the role of community and and this consolidation or the the vendors picking up some of these communities as their own? And by the way, True Methods was just picked up by Kaseya. Correct, yeah. I love community and it's something that. Even if I didn't work for Forrester and get paid to do this. I wake up every morning when I work for Lenovo, when I work for Channelize, I wake up every morning thinking about this. If I wrote a book, that would be the title of the book. Because when I moved from Canada to the US about 11 years ago, I didn't know anyone. I was running channels for IBM, I could tell you, you know, people in Winnipeg and Vancouver and Halifax. But when it got south of the border, I didn't know anyone. So the first thing I did is started to map out, you know, I went out to Joe Penry and I went out to CRN magazine and I went up. And I tried to start and if you see over my shoulder right now, if you weren't listening, if you were watching. You'd see a logo chart with 54 magazines that MSPs read. There's no MSP with the time to read more than one or two of them. But the fact is is there's a nice spread of magazines. There's 150 events that MSPs are invited to every year. Those are big events, not including road shows. So how many invitations do you get to Vegas and Orlando every year? There are 100 podcasts of which you're one of the top podcasts. But there's 100 of them and I published that a few weeks ago. There are 24 associations, like Comtia, you know, being the largest in the world. But there's 23 others that serve, you know, value in the layers that I talked about, that are more, you know, specific. But there's 99 LinkedIn groups, there's 25 Facebook groups, there's a subreddit now with about 105,000 MSPs in it. There is a clubhouse room as we speak going on around MSPs. So the vehicles available, if if you just kind of think about all those logos, is vast. But I made the conclusion 10 years ago that there was 31 core communities. You just mentioned three of them, I added one, so four of them that just got acquired. But, you know, Robin Robbins just got done her event last week. She has not been acquired. You know, Carl Palachuk is still doing fighting the fight and doing great work. You got Dave Cyber, you've got Harry Brizel. A lot of the people from 10 years ago are still doing their thing. You got the ASCII group stronger than ever. You've got. So I could rip through all 31 communities. That MSPs connect to. And they connect differently, some of them are on slack channels, some of them are proprietary. News rooms and newsletters, events and things like that. But there's 30 ways to connect inside a community. But there was 31 master communities. My theory at Lenovo was. And after working for 17 years at IBM who never got SMB or never got MSPs. My theory was that if Lenovo got into the conversation. Not to sell, but to, you know, be what Arland Thorson said back then. As a go-giver at HTG. If I could participate in those 31, if I could add value, if I could. Get into the conversation. And then it had ended up working as 100 of the super connectors started talking about Lenovo on all these things. As we started participating in these social groups and all these events and things like that. We ended up converting $365 million of new revenue in a community strategy that cost us about $150,000. And a bunch of plane tickets. So I had to fly to China a bunch of times to meet with the CEO. To walk through how a farmer in the Midwest who spends 50% of his time farming and who gave us a marginally good recommendation. In a barn in front of a thousand people could turn into 600 MSPs signing up. And $10 million in revenue in the first year. This farmer by the way, was on HP and Compacts advisory council. Carried an HP laptop and I think, you know, he said one time, you know, when he dies, he's going to be buried with his HP laptop. Like a raving fan of our competition created $10 million of opportunity because all customers don't choose HP. Lenovo and Dell and others are a viable choice. But because we became part of the community. It was a serious return on investment and the biggest return that the company had ever seen. And finally, IBM and now Lenovo was winning in SMB. And that's what cracked the code. It wasn't a product, it wasn't a price, it wasn't a promotion and it wasn't a place. It wasn't what you learned in college. It was rolling up your sleeves and understanding all these logos and understanding the go-giving from the grassroots. And I created a list of top 100 people years ago that were the absolute top 100 people you needed to know in MSP based on how visible they were. Based on COVID, I would change that list slightly in terms of who's really topped out in the last 14 months digitally. But the fact of the matter is, it is critical for vendors, it's critical for distributors and it's critical for MSPs to understand these communities and the value that can be pulled from them. And obviously, the vendors like Connectwise and Kaseya, I think soon to be Dato and Solar Winds and others. Even Atera and Tigerpaw and others, they're they're all kind of clamoring into this community world and understanding the power that comes with that. That's 100% true, just the the power of the community is just untestable. My question in the in further in this is, what's the vendor's interest in having their own community versus having influence in the broader community? Any insights there? Yeah, it's about valuation. It's money. So in the end, if you look at the $5 trillion tech companies who are all in court right now for anti-trust one way or another. But if you look at them and look at their business model, their ecosystem friendly platform companies. And they run really strong communities. You know, Microsoft is 355,000 strong in their communities. And they've all kinds of events and all kinds of ways and magazines and social networks. They've all kinds of things to plug together the MVPs and everybody in that community to get them going. AWS and Google have had to build this in the last five years to compete. And you look broader, the power of having a great partner ecosystem is actually correlated with having great community and community leaders. And so as companies look to grow to be a unicorn, like a Dato did and now worth four and a half billion. I worked for Autotask, you know, 10 years ago with Bob Gotgard. On those early with Lendy Castanzo and, you know, in those early community plays. But the idea is how does that translate into Rob Ray at Dato and then go public and now be worth four and a half billion dollars? I credit the community work that Rob and others did and Land and others more than I credit the direct sales and direct marketing that that company did. Keep in mind, 100% of what they do is through the channel, it's not direct to the client. But it's this idea of it wasn't a sales and marketing story when you write the book on Dato. It was a community strategy. And it's one that they had, they weren't in first. Connectwise already had IT Nation. Arnie believed in this. And others, you know, Janine Edwards back in the day, like this is how they grew that company to be a unicorn itself. And Autotask had to catch up. And then Dato just put that on steroids and and showed how you could build a a four to five billion dollar company on the back of community. And so. For any other company, you know, whether you're Microsoft, whether you're Dato or whether you're just a little startup in security. It's about valuation. It's about serving your ecosystem. And it's servant leadership from the grassroots up. It's not dictating down through your channel program. It's not dictating through your channel portal. It's actually being a go-giver at scale. And those people who engage in community, you think of Zoom, you think of some recent, you know, Slack and others that are have become, you know, insanely high valued companies. Have done it through ecosystem and community. That's cool. That's awesome insight, I I that really crystallizes it for me. Last one I wanted to hit on, get your insights on is compliance and regulation. So. This is something that's been kind of battered around a little bit with HIPAA regulations and some companies looking at SOC certification. But now really kind of amplified by DHS suggesting that there's going to be regulatory compliance for pipelines and critical national security infrastructure. So what is sort of your thoughts on the potential of regulation and compliance in the IT channel? Yeah, so the IT channel is going through its GDPR moment. And when I say GDPR was the marketing privacy thing that really affected everyone in marketing. Out of Europe and now got into California and then Canada and now it's absolutely global. That takes about a decade to happen. As it moves through state houses and federal houses and country by country. You know, there's work being done in Louisiana right now. So when you talk about GDPR and take it to the very beginning. If you took this new era. It's not going away and then in the next decade, the work that's kind of been flushed through in Louisiana and now a couple of other states right now. Because MSP is really a North American phenomenon. It's growing Europe quickly, it's growing more slowly in Asia Pacific, but it's really centered here in the US. And that's the first states. You don't have to be reminded about, you know, solar winds or even the the Connectwise and others being threatened. And it they're right, it becomes a national security issue. And again, we get to read different stories every day. But the fact of the matter is, one of the surface threats is through 23% of companies outsource some or all of their IT. And the risk, the governance, the compliance and all the layers of that. And how that gets legislated and regulated is all in motion right now. And the idea is at the end of the decade, this will be a regulated industry because it has to be for national security purposes. It has to be. And the idea is, you know, Larry and the white van and MSP in Witchta, Kansas. How much risk can Larry take on? Right. You know, the first time there's a breach and they don't report it on time or if there's, you know, a fiduciary. Like a ransomware or something that has to be paid out. The first lawsuit, you know, Larry claims bankruptcy. It's an end of company event. So they have to understand that of the 75,000 MSPs today that run about 30% or more of their business recurring. That 99% of them are small businesses, very small businesses. And this isn't, you know, you're not suing a crowd strike or a trend micro or a Palo Alto here. And you're not suing a Connectwise or a Solar Winds. You're basically taking a local business, you know, paying their mortgages and, you know, struggling to break even and putting them into litigation risk. It changes the fabric of this industry. And I think, you know, as we go through the decade and as it goes through its first, you know, views on judges and and appeals and things like that. They're going to settle on something that recognizes the difference of this industry versus marketing and other governance has happened. But exciting to watch for the next decade. But again, talking about being in the first or second inning, we're there. Yeah. I just find it really difficult to regulate such a broad industry with millions of different companies. Compliance and enforcement of this seems nearly impossible. But I guess on a decade scale that that gets figured out somehow, I suppose. It does and it has to be done in a way that, you know, in the end. You know, protecting us as people, protecting businesses, rolling that up to protecting services business wrapped around them. And then the vendors on top of that and the distributor, like this whole three and a half trillion dollar industry. Is not a silo anymore because every company and every industry is becoming a tech company. And if you're running a forklift that has an IoT device in it. You're now part of the surface threat of perhaps, you know, taking down a building. Right. You know, right at that, you know, base level. So, you know, every company and every industry now has this on their front burner. And how it's protected is we're very early. And you know that legislation, regulation always lags by at least a decade. And over the next 10 to 20 years, I think that that'll catch up. And by that time, I think as an industry. We'll have consolidated more and we'll. We'll we'll have better ways to to manage all of this and, you know, perhaps risk mitigate a lot of this as well. Yeah. Awesome. Well, I appreciate your time and insights as always, Jay. Anywhere that you would point people to, your blog is an amazing resource, any other socials that you would direct people to if they want to learn more and follow you more closely? Yeah, love to connect on LinkedIn or or Twitter. Pretty well anywhere. I've got blogs and everything else. So it's probably everywhere that you like to consume information, I might be there in one way or another. But best way is to connect and I'm happy to. Now, I listed off a lot of numbers and research here. If you're more interested, I could probably point you to a resource or a article or or or something behind the scenes if if you want to learn more. I can play a little bit of that connector role to connect the dots digitally. So, happy to do that. And thanks for having me on. Excellent. Thanks, Jay.