Heading Toward An Unbalanced Channel

Consolidation among solution providers is on the rise and will accelerate over the next few years. If you believe history repeats itself, we may be heading toward a channel that has a dozen or more very large channel players. This could be significant for you. If the future means the rise of a number of national and multinational solution providers, how do smaller regional players compete?

Big doesn't always mean good. Just think of all the multibillion-dollar channel players we had in the 1990s that are all gone now—ComputerLand, Computer Factory, BusinessLand and a number of others.

But there is a lot of private equity entering this market, attempting to roll up services-oriented solution providers and build larger, stronger players. It's something you need to watch.

There are some other reasons I believe we will see more consolidation in the market based on demographics. The owners who were at the front end of the high-tech value-added channel are now in their 50s. Some of that group will want to cash out of the business over the next five to 10 years. Moreover, a study we just completed as part of the CMP Channel Group's effort to keep abreast of the market shows that more than 37 percent of the channel is either not focused on growth or only interested in keeping pace with the market. In other words, they have made some lifestyle choices and decided they are not interested in adding more employees in an effort to grow faster than the market.

Now consider the fact that a number of vendors only want to be engaged with those solution providers that they believe are in the 20 percent category of the 80/20 rule. The vendors themselves are also consolidating rapidly, with three significant buyouts occuring just recently.

I believe we are heading toward a collision that will be painful for some vendors that don't rethink their recruitment strategies as they will find themselves too heavily concentrated with a set of partners that may have very different objectives than their own.

For instance, let's just suppose that a vendor is concentrating on the 20 percent of the channel that is doing 80 percent of its channel business. Those partners are more likely than not to be longer-term players that have found a successful model or they wouldn't be around.

Now let's suppose that 20 percent is highly concentrated in the 37 percent population I mentioned earlier that doesn't have a whole lot of interest in growing faster than the market. Already as much as a third of a vendor's channel is not interested in growing fast, and that doesn't include those that want to grow but don't execute well. All this bears some watching on both sides of the aisle.