Digital transformation is the elephant among the daisies, stomping on traditional channel models and creating capex havoc.
The Margin Channel Survey 2019 offered up interesting insights into the trends and issues affecting the channel in South Africa, highlighting the areas where local business is taking names and where it remains stuck in a recession-shaped swamp. One of the predominant issues examined by the survey was, of course, digital transformation. It’s the topic of conversation that paves the way for the Fourth Industrial Revolution and changes business potential and priorities. Digital transformation is more than just hype, but it is equally not a quick fix or an overnight sensation. The Margin Channel Survey found that it was in building suitable business models that the channel was lagging behind (54.1%), that only 33.9% of companies had made the switch to recurring annuity, and that few programmes were fully adjusted to the new dynamics of cloud (5%).
“The channel knows that digital transformation is here and that it needs to transform; the challenge isn’t the knowing, it’s the ‘how’,” says Gary Pickford, CEO, Tarsus Distribution. “There are so many traditional business processes entrenched in existing systems that are related to the traditional ways of doing business that digital transformation requires a reinvention of the business. People are struggling with that step from traditional to digital. A lot of people seem to think it’s as swift as a light switch when, in fact, it takes years.”
There are numerous issues affecting the channel’s effusive embrace of digitalisation and the transformation of the business, but one that stands out for its comprehensive shift in both relationship and perspective.
Dale Hurwitz, GsolutionsTis the end-user. In the past, the business looked to the channel to provide the weighty technology and the advice that supported their investment. Now, the channel is expected to listen to the end-user, to understand what they need from a solution perspective, and to provide innovative technology platforms and skills that allow for deeper market integration.
Beyond technology
“The end-customer doesn’t need the channel’s advice on how to use and buy technology, it has become commoditised,” adds Pickford. “What they want is a partnership with the channel that shows them how to use their solutions, what can be taken from the technology, and how to leverage this investment. They don’t just want the technology itself.”
It’s a shift in operating models across the board, not just for the end-user, but the vendor, distributor and reseller. Every component of the value chain has to establish how their business will adapt to the elephant in the room. Traditionally, the channel has structured the business using the transactional model, which results in high volumes of revenue with a manual sales force and face-to-face interaction. The vendor delivers the technology to the partner and the partner sells it to the end-user and, suddenly, the latter wants to engage in a completely different way. They want to work with partners that can travel the journey with them, that can shift from the transactional capex model to the ongoing opex one.
“Digital channels allow vendors to get new clients, convert them, train them, and use them to use their software or deliver the hardware,” says Nevo Hadas, managing partner, DXDX. “This feels threatening to the channel. It means a rethink of their operating models.”
This change in the operating and cost model is primarily being driven by the rise of the As-a-Service model that’s dominated in software, but has evolved to include hardware solutions as well. The key market players have changed the ways in which they structure their services and solutions to adapt to the ways in which end-users consume them. There are also numerous players in the South African channel market and they don’t all share the same views or ideas when it comes to operating models or how digital transformation can be commoditised within the channel.
Merging into the market
“The responsibility for digital transformation lies with all links in the chain,” says Dale Hurwitz, MD, Gsolutions. “A distributor’s role is no longer just to move boxes. A good distributor should be merging the requirements from partners who are taking the product to market with those from the vendor, with the goal of blending the requirements on both ends as seamlessly as possible. The best results will be achieved when there is collaboration between everyone involved in the process.”
Looking back at the sad statistic of 5%, the number that survey allocated to those vendor programmes fully adjusted to the new dynamics of incentivising distributors and partners to sell cloud, it seems collaboration is a priority. The channel needs to try to focus less on survival and more on innovative business models that allow for shared risk and combined revenue.
Tall orders
“The channel is primarily made up of techies – highly skilled experts in technology; the new focus is on business models enabled by technology that drive business growth," says Guy Duncan, CEO, ChannelCenter. “Look to the massive global consultancies and auditing firms that have entered the space; they own the problem, opportunity, implementation and success. The new XaaS models of technology enable dynamic, highly innovative opportunities and yet the South African channel is focusing on keeping their existing businesses and offerings running.”
As Pickford mentioned, changing entire business models from transactional to the annuity one is not exactly a walk in the proverbial park. For one thing, the elephant’s ruined the daisies; for another, the business is juggling numerous balls as it shifts its focus.
“It’s frustrating. The business has to manage the return on investment for the digitalisation of its own company, investing into its own future, and then it has to simultaneously ensure that the incoming and invoicing levels are maintained from a cash flow perspective while moving to the opex model, and, at the same time, forming a business that can leverage the new style of IT,” says Pickford. “And all this has to be done in a down-turning economy. It’s a bit of a challenge.”
Technology isn’t cheap. It requires layers of spend and strategy to achieve the levels of digital transformation that are required for true competitiveness on the local and global stage, and it is changing everything, from how employees engage to how businesses sell to the parameters of investment. As swamps go, the channel is navigating a complex one without a handbook or a proven pathway to success.
“Place another factor, like recession, into this scenario, and the growth in spend becomes even more daunting,” says Thomas Pays, CEO, Ozow. “Yet by implementing such transformation to a business, there is the opportunity to earn back that spend. It comes down to one phrase – high risk, high reward.”
So, as South Africa stumbles into a recession and an increasingly complex business landscape, is digital transformation in this channel lagging behind the rest of the world? Are the inherent limitations in spend, infrastructure and education pulling the potential of the digitalisation down into the dark? The short answer is – maybe, yes, no.
For Pickford, the channel is on par with international counterparts as companies adapt and shape their offerings and approaches to match the digital imperative. For Pays, the channel isn’t lagging insomuch as finding ways of operating within the South African landscape. And for Duncan, it’s not as if the resellers are still building on tin and look at cloud as just another low-cost way to implement technology without capex margin.
“The way through is to have brave leadership that needs to reshape and adapt business models and skills. It’s a big ask, but the companies that are getting it right are owning the market,” he concludes.