Conflicts between IT Vendors, Channel Partners on the Rise

Featured Article By Carolyn April, CompTIA

The number of companies filling the IT channel numbers in the tens of thousands. The U.S. Economic Census says there are about 125,000 IT employer firms that could potentially be considered a channel company – a VAR, solution provider, managed services provider. Industry insiders commonly use a smaller number – about 75,000 firms involved in the flow of technology products and service from manufacturers and distributors to customers. Together, these companies are responsible for $400 billion-plus in annual sales, or about 75 percent all IT products and services sold to businesses in the United States.

With so many firms generating so much business, opportunities for conflict between vendors and channel firms are bound to occur. Indeed, channel conflict isn’t anything new. For as long as there’s been an indirect channel for technology products and services, there’s also been a push-and-pull commitment by vendors to being “partner-centric” or direct sales oriented or a combination of both.

But new research from IT trade association CompTIA suggest that the level of channel conflict is on the rise, driven largely by major shifts in the IT landscape, including the continued adoption of cloud-based solutions and the emergence of new business models, diversified competition and non-traditional routes to market for technology.

CompTIA’s Third Annual State of Channel Study: Channel Conflict & Deal Registration Trends found that six in ten channel firms believe the incidence of channel conflict has increased over the last two years, including 21 percent that say that it has risen significantly.

Conflict takes many forms:

• * Competition between a vendor’s direct sales force and its indirect channel partners.
• * Partner-to-partner conflict among channel firms aligned with the same vendor.
• * Lack of adherence to established rules of engagement in the field.

The result of channel conflict is lost business for many firms. More than three-quarters said they lost one or more deals in the last 12 months due to channel conflict.

Yet despite the upheaval, classic relationships between channel firms and vendors remain strong.

From the vendor perspective, companies are increasing the percentage of their sales that are done through the channel.

As part of our study we interviewed 11 well-respected channel chiefs in enterprise companies. The company with the lowest channel sales is currently using a 70 / 30 direct / indirect ratio. Their goal is to move to at least a 50 / 50 split. Some of the channel chiefs stated that their companies are using 100 percent channel.

Three main factors drive the desire for more reliance on the channel:

1. Organizations feel that they will never have a large enough sales force to cover every geographical area.

2. They feel that they will have the deep industry expertise needed to sell their solutions to every specialized industry.

3. They feel that their solutions increasingly depend on the added value that the channel provides or on integration with other vendors’ products.

Consider these comments from two of the channel chiefs we spoke with:

“I could spend a ridiculous amount of money and sign up one customer, or I could spend the same amount of money and support a partner who can sign up 50 customers.” (Vice president of channel development for a software company)

“Our partners have world-class professional services organizations and they provide a far-reaching breadth of services that go way beyond the business communications services we offer.” (Senior vice president of sales and business development for a communications company)

Despite their grumbling, channel firms are also inclined to maintain and expand their relationships with vendors. Roughly seven in ten channel firms are enrolled in between one and four partner programs, a percentage similar to the prior year. Nearly half (44 percent) reported a net gain in the number of partner programs they participate in compared to a year ago.

The primary reasons cited for adding a new vendor included the ease of doing business and communicating with that vendor; the quality and availability of technical and business training; superior products to sell; quality leads and demands generation; and a program diverse enough to cover the needs of a wide variety of channel firm types in the market today.

So while channel conflict may be a perpetual issue, it may not always be a bad thing. From the supplier’s point of view, if there were no conflict between the channel and the direct sales team or between different channel partners, significant gaps in market coverage might exist.

A significant number of channel firms are responding to conflict by reinventing their business – improving their own service capabilities, specializing in vertical markets and making the move to a managed services business model, which cements them to a customer.

But both parties also recognize the negative effects of channel conflict – margin erosion, damaged customer relationships and churn and discomfort in the vendor-partner relationship. As a result, both sides agree that the level of conflict might be reduced by implementing predictable rules and systems such as simplified deal registration processes; compensation for partners who register a sale, but lose the deal to a direct sale or have it poached by another firm; and clear rules of engagement to spell out which accounts are managed by the direct sales team and which are available to channel firms.

Carolyn April is the director of industry analysis for CompTIA, a non-profit association for the IT industry.