The Canadian channel is making a major move into the as-a-service market, but it involves significant changes to their business model, and thus new costs.
A new IDC special study report, Canadian Channel in Transition 2022, has found that the transition to the as-a-service consumption model is a dominant trend in the channel today. The report also found that while this transition is creating new channel opportunities, it also involves major and potentially expensive changes to partners’ channel strategy and sales model, and requires more support from the vendor community as a result.
While the transition to cloud by the channel has been ongoing for several years, there is now an increased focus on as-a-service specifically, beyond the general cloud mode.
“The new deployment models from OEMs are emphasizing consumption-based services, replacing their traditional infrastructure,” said Dave Pearson, Research Vice President, Infrastructure Solutions for IDC Canada. “As a result, the resale of hardware and software by the channel as a percentage of business has fallen from 45% to 30% since 2019, and has been replaced by as-a-service.”
As a result, Pearson said that a major focus of the survey was specifically on X as-a-service [XaaS].
“30% of partners say that they now sell consumption-based offerings, while almost half [44%] say that they intend to sell them,” Pearson noted.
These numbers fit within the context of other data from the survey. Canadian channel partners are now 1.5x more likely to be providing digital transformation solutions now than before COVID-19.
“The 1.5x number refers to the number of channel partners who are participating in this market, an increase of 50%, Pearson said. “The increase from a revenue standpoint over the same period, from 2019 to 2022, is even greater, at 200%.” Similarly, while the revenue percentage from resale product and services for the typical channel partner in Canada has remained the same post-COVID [47%] as it was pre-COVID [48%], recurring revenues have become a bigger component of revenue – growing from 29% in 2019 to 42% in 2022 for the typical channel partner.
While the Canadian channel is clearly moving to fill what they see as a clear opportunity, those opportunities bring new challenges as well.
“This transition involves major changes to Go-to-Market strategy and to the sales model,” Pearson said, noting that some partners may be underestimating those costs.
“Those expensive changes in changing the Go-to-Market model require telling new stories on behalf of the vendor,” he added. “These are long, complex deals, where the long sales cycle is still an issue, and it is typically harder to reach real decision-makers.” Consequently, partners are investing in tools to simplify the sales process and sales training more than they do in other potential investment areas.
“In order to make these changes to their sales model, which is critical for success, they need more support from the vendor community,” Pearson stressed.
The survey also found that, as in many other regions, M&As are on the increase in the Canadian channel, with specialized players merging as equals to scale up in the ecosystem, and publicly traded IT providers consolidating independents.
“A lot of companies are looking to expand across channel business models,” Pearson said. “Many partners who are one-trick ponies are getting picked up by others. An earlier study found that only a third of partner companies generated income from all three business models, and increasing that is driving a lot of the M&A activity.”
36% of the channel partners have a vertical specialization. IDC’s Channel Partner Ecosystem database indicates that the Canadian channel partner ecosystem serves over 20 different industries, including distribution and services, finance, infrastructure, manufacturing, resources, and public sectors.
“We gave some leeway to partners in defining what constitutes a specialization,” Pearson said. “It may refer to a product that’s key to a vertical or to establishing a practice area.”
While vendor partnerships with channel members and customers are numerous, many of these are under the table, and not discussed publicly. IDC Canada estimates that over 85% of the partnerships are of this type.
“We don’t have a clear breakdown of the co-creation of partnerships with vendors and customers because most aren’t announced, and many partners have multiple connections to them,” Pearson indicated. “Everyone behind the scenes has a list of partners a mile long.”
Pearson noted that the 200 responders to the survey made up a good representative sample of the channel.
“It’s got a pretty good spread, with about a quarter of them MSPs, 17% VARs, 14% internet companies, 14% cloud service providers, and 12% ISVs, before dropping off to smaller groups, of which Master Agents at 5% were the largest,” he said.