By Larry Walsh
Artificial intelligence is changing everything in technology, including how quickly innovations reach the market. Anthropic and OpenAI release new models several times a year. Software companies roll out new features and capabilities every quarter. This pace, unprecedented in the tech industry and the channel, is threatening to break the economics of partnership.
The promise of channel partnerships has always been that partners make money from what they do with a vendor’s products, not from the products themselves. Vendors provide incentives and compensation for selling their goods, but the real money is in the professional and managed services that partners deliver to customers.
Partners earn, at most, 10% to 15% above their cost on a vendor product sale. Most earn less than 10%, and that margin must cover all of their sales and operating expenses. Managed services, by contrast, often deliver margins of 20% to 40%, and professional services 30% to 50%. The money is in the value-add.
Those margins are showing signs of erosion. While profits are under pressure from rising operating costs, product price increases, and competition, the real culprit is the pace of change. Channelnomics surveys have found that more than 90% of partners are struggling to keep up with the rapid release of new technologies and models. One-quarter say the pace is hindering their growth.
At a workshop I facilitated in Bangkok last week, partners described the challenge as wandering around a forest at night with no light source. One Australian partner used the analogy to summarize bluntly what’s needed from vendors: “Just give us the damn flashlight.” In other words, partners want more direction and transparency from vendors on where the real opportunities are and how big they might be.
The pace problem is one of negative economics and uncertainty. Vendors want partners to invest in the services and support that surround their products, and many leave it to partners to work out what that looks like. While there’s logic to that — partners that conceive their own value-add differentiate themselves and find more success — at this pace of change, leaving partners to figure it out alone no longer works.
Partners need direction because value-add capacity, whether professional services, managed services, project or change management, or other support, requires a team of trained professionals. People are expensive. Experts are more so. And keeping people on a bench without knowing what work is coming, or how much revenue it will generate, is a high-risk proposition.
Now add the pace of change. Partners are slow to adopt the new technologies and opportunities vendors introduce, lingering on legacy products and models because they need time to recoup their last round of investment. They’ll invest in something new once the model and market opportunity are clearer.
That pace also creates a scaling problem. A partner must maintain an expensive professional services bench and keep it current on new technologies, while new innovations hit the market every quarter. Costs escalate dramatically. The bench requires redundancy — that is, the team in the field must cover for the team in training, and people must rotate in and out frequently to stay on top of what’s next, all while meeting customer demand and expectations. That costs more than partners currently have revenue to cover. As one partner told me, “I need to know the pipeline will be there before I invest in developing my bench.”
Vendors understand this. It’s a big reason many relegate professional services to channel partners. The margins are high, but the pipelines aren’t always there to justify the capacity, and the last thing any vendor wants is a non-revenue-producing team waiting around for the next project.
That’s why vendors must do more than hold out the promise of value-add revenue. They must define the opportunities, help partners plan for them, and reduce the risk of asking partners to invest ahead of revenue. Without that clarity, partners will be slow to build the capacity and capabilities that vendors need to deliver the right customer experience with new products and services. It’s up to vendors to redefine the economics and future-proof the partner model.
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Larry Walsh is the CEO, chief analyst, and founder of Channelnomics. He’s an expert on the development and execution of channel programs, disruptive sales models, and growth strategies for companies worldwide.