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Preparing for the great SME software shift

In a couple of years more software and services will be sold than hardware and the channel is already getting prepared for that moment

While IDC has predicted continued healthy growth in IT spending in the SMB sector over the next four years, the big change will occur in 2019 when spending on software and IT services will both overtake hardware. So what are vendors and partners doing to ensure they make the most of the SMB opportunity and how prepared are they to support SMBs as they shift spending to services and software?

Dwayne Earl, software business unit manager at Tech Data, says he has already noticed software and services revenues are growing “as resellers switch their margin focus away from product sales and onto subscription models for solutions and services.” Tech Data has been been changing its own business model to support that transition, working with SMB resellers on the Microsoft Cloud Solution Provider (CSP) programme for example.

He says most of the distributor’s vendor partners “are well-prepared for the shift that is taking place right across the market to as-as-service delivery methods and business models that are based more on recurring revenues than product sales”.

Tech Data has “already started to see SMBs shift their spending to solutions and services, so in a very real sense, we are already adapting to that change”, but Earl warns: “It’s important to look ahead and prepare as early as possible, because the change is happening already.”

Rupert Collier, senior channel manager UK & Ireland at Paessler, says SMB customers try to avoid deploying complicated, time-consuming infrastructure wherever possible because of their small teams and limited resources. “Channel partners that purely facilitate orders and are not in a position to provide solutions as a service, either hosted by themselves or the software publishers themselves, may struggle,” he warns.

He highlights another potential danger: “Supplier loyalty is not as strong in this space and cloud-based products lend themselves fairly naturally to a direct customer relationship”.

David Turner, EMEA senior director at NetSuite, believes SMBs are “leading the way” in moving to cloud to handle business operations. Cloud software companies are adapting to the shift, reducing the need for SMBs to invest in hardware by rolling out cloud services specifically tailored to the business critical functions of smaller businesses, from financials to CRM to HR. 

But he warns that vendors “need to work closely with partners through the transition from selling on-premise to cloud-based solutions”. They need to help partners shift their selling and implementation approach to meet the changing expectations SMBs have of their IT. SMBs expect to be up and running on the cloud more quickly, so vendors like NetSuite offer partners a quick implementation methodology to meet that expectation, minimise costs and build a repeatable revenue business.

Phil Jones MBE, managing director at Brother UK, says “adaptability is critical” for partners, but changing to become more service oriented “does not happen overnight”. Nevertheless, adapting to provide services “can secure long-term revenue and help safeguard profit margins”, he believes. “It’s mainly a matter of investing in the right skills and drafting in talent with expertise to deliver services.”

Jones adds that “making changes sooner rather than later will allow resellers to adopt viable business models more resilient to economic shocks”.

Jonathan Whitley, sales director for Northern Europe at WatchGuard Technologies, says SMBs face the same challenges and risks as larger enterprises “and demand the same convenience, flexibility and level of security”. To get the same benefits at a price they can afford, “SMBs are increasingly looking to pay for what they use through a managed service model”. Vendors need to help channel partners embrace this new business approach and “seize the opportunity to build predictable and recurring revenue streams”.

In the security space, Managed Security Services Providers (MSSPs) can offer virtualised services, allowing firewalls and pre-packaged security services to be spun up or disabled in real-time. “But it’s not just about an integrated technology ecosystem,” he stresses. For example, WatchGuard offers channel partners flexible payment options to eliminate up-front contract costs, as well as a pre-pay facility to allow MSSPs “to quickly allocate services across their distributed managed appliances”. Education and support are “essential to help the channel transition and harness these new SMB spending opportunities”, he adds.

Carlo Longhi, UK & Ireland director & general manager for Indirect Channels at Xerox, says the SMB market is “highly significant” for the channel. “With over 80% of SMBs planning to improve their current workflow processes and the way in which they are managed, there’s a definite growth opportunity for vendors and their partners,” he claims. “It is an exciting time to be targeting SMBs – the opportunities are numerous, and are only likely to multiply as more and more businesses look to ready themselves for the future of work.”

While product expertise is essential for channel partners, Longhi says they also need to understand their customers’ business as a whole and identify where software solutions can be implemented to streamline processes if they want to make the most of the SMB opportunity.

Vendor support is “absolutely essential” for channel partners to build lasting, profitable customer relationships. It is important that vendors recognise how busy channel partners are and how often they might have dual-roles, with the same person handling everything from sales to service to social selling. “Vendors need to put themselves in partners’ shoes,” he suggests, “and consider how they can play to their strengths to deliver the best possible value to customers and prospects.”

Ian Kilpatrick, EVP for Cyber Security at Nuvias (incorporating Wick Hill), identifies “the shift to software (and by implication utility billing and services) as a great opportunity for channel partners to benefit from a much more sustainable revenue stream, increasing the value of their businesses”.

While he questions whether IDC’s prediction is entirely accurate. he accepts that “the direction towards software is clearly happening”. In Nuvias’ cyber security portfolio, the majority of vendors have moved to support SaaS. “This is also driven by the increasing complexity of security challenges and, by implication, the desire of SMBs to outsource that in one way or another so they can focus on their own businesses,” Kilpatrick notes.

He says support for SMBs usually takes place in “a number of separate but associated areas”, highlighting solution positioning and delivery, the service wrap around that, as well as training and business repositioning.

“The latter is particularly important for smaller partners that need to migrate their businesses from a big hit, deal-based approach to a more annuity-based model, where there are challenges about how to manage the migration,” Kilpatrick adds.

NetGear vice president SMB product line management, Richard Jonker, suggests SMBs aren’t necessarily looking to buy software and services instead of hardware. “They are most importantly looking for something that is reliable, affordable and easy to use,” he argues. “Once they find out certain cloud based services are more expensive and don’t perform as well as some on-premise hardware, they will choose the solution that is the most cost effective.”

For example, he claims there has been a revival of network storage “because of the hidden costs in public cloud. This is why it is important for partners and vendors to closely support SMBs and listen to what their preferences are without assuming that spending on hardware will dwindle completely”.

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