Where's the Value in Value Added Resellers

For the past three decades, corporate data centers have been built from appliance-based products—sometimes referred to as “software wrapped in tin”.  These appliances are highly optimized for a particular function—routing, storage, security, etc.  The companies that make these boxes typically have 65% gross margins, allowing for a relatively high-touch, but costly distribution channel, which is usually a combination of direct sales people, distributors and Value Added Resellers (VARs).  It’s a mind-bogglingly big business: Every year, enterprises around the world spend more than $100B on data center gear with this revenue flowing through the ecosystem of VARs and vendors.  However, all of this stands to change radically with the onset of the public cloud.

The role of the VAR was to provide coverage in places the direct sales team couldn’t reach, to help with logistics such as warehousing, stocking, and credit checks, and to provide valuable integration and advisory services as an extension of IT teams to make all these complex boxes actually useful for the customer. But, in this brave new world where the cloud is changing the economics of tech, where there are no boxes, where credit is less of an issue, and where the customer can go right to the public cloud and launch a server benefiting from high levels of automation and reduced complexity, where does the VAR fit in? Why does anyone need a reseller?

I posed this question to Hayes Drumwright, founder and CEO of a very successful VAR called Trace3.  “The answer is simple”, he said.  “The Traditional VAR is dead”.   Holy guacamole! That’s a strong and surprising statement for a company that started at zero and grew to over $400M in revenue as a traditional VAR.

Hayes, whose father was a turnaround CEO, tells me that his team came to this stark conclusion in 2009.  “It wasn’t that hard to see.  Our clients were telling us we’d be out of business in 18 months if we didn’t add more value”.  Hayes took the initiative and began to dramatically re-shape the company.  The team realized that in order to add value, they needed a different staff profile and mix.  They moved from 2:1 engineering to sales ratio to a 5:1 ratio today.

Driving change of this magnitude across an organization that is already successful is not easy.  The imperative for change is not yet clear.  As Hayes says, “My job as a CEO is to drive change three years ahead of when it’s obvious—because then it’s too late”.

The present obvious step for VARs is to embrace converged infrastructure and private clouds.  But that’s not the right long-term move. Appliance manufacturers are all pushing converged infrastructure, where storage, networking and compute come in pre-loaded blocks that can be assembled into a private cloud.  Future-focused CEOs see it differently: “Converged infrastructure is a stepping-stone to hybrid and public cloud,” Hayes noted.  “The future is in public cloud where the traditional needs of the customer are dramatically different”.

The Trace3 team worked hard to engage its employees and customers in the change.  They publish a detailed playbook each year that outlines the major trends and what Trace3 needed to do to capture these trends—focusing on big data, mobile and cloud applications.  They created relationships with top VCs in Silicon Valley to help identify new vendors that are driving radical change in the industry. To help their customers lead change, the Trace3 team constructed an offering with Patrick Lencioni and the Table Group, noted leaders in organizational behavior and change management.  This is a non-traditional offering for a traditional VAR and it appears to be generating results, with more than 100 customers engaging in comprehensive change programs through Trace3.

Paradoxically, the Trace3 focus on new technologies and change has bolstered the sale of traditional boxes too.  “Customers trust us to lead them to the new world thus they are willing to engage us for their current world needs which are still very large.”

The public cloud is a major shift that will redefine a major part of the technology industry. As companies demonstrate that the public cloud can meet the highest enterprise standards (shameless plug: this is what we are working on at Bracket and this is my life obsession), senior executives at all corporations will ask their teams why they are investing in complex, home-grown clouds when they can plug in to a highly efficient, highly secure and highly elastic public cloud infrastructure.

Predicting change is hard. And implementing change at scale is harder. Look at the cautionary tales from the last shift: companies like RIM; it went from market leadership to irrelevancy in three years. Now, I predict that this wave of change will happen much faster than people generally expect, driving sweeping changes in the vendor landscape, the VAR landscape, and the IT practitioner landscape.  Smart organizations will embrace this change to their advantage, others will be left behind.

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A plagarized blog from Sudheesh Nair of Nutanix..an amazing read..

Five hundred dollars fully subsidized with a plan! I said that is the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good email machine”, said Microsoft CEO Steve Ballmer in an interview following the unveiling of the iPhone in 2007.

David Pogue of NY Times famously complained; “Typing is difficult. The letter keys are just pictures on the glass screen, so of course there’s no tactile feedback.” 

“The BlackBerry keyboard is an engineering wonder” wrote Paul Boutin of the Slate.com. He continued; “I have a model with a full QWERTY keyboard rather than a downsized phone pad, and I can thumb-type my editor with one hand while hanging off the side of a San Francisco cable car with the other. iPhone’s virtual on-screen keyboard is a whole lot cooler, but it loses its luster as soon as you have to meet a deadline. After hours of practice—the trick is to tap the virtual keys lightly with your fingertips, rather than trying to press down—I still mistype my own name”

The year was 2007 and almost everyone, except perhaps Steve Ballmer, agreed that iPhone was a cool gadget. But there was also universal trepidation that the touchscreen keyboard was a step too far. After all, companies were coming out with phones copying RIM’s keyboard models and thriving all over the world. Why go and spoil a perfectly good thing and risk the future of a company that already almost went under once?

But, risk it all was exactly what Steve Jobs and team did. They believed in their invention and that the world was wrongly assessing their device and its input methods. Such was their conviction in their people and in their capability to innovate, that they changed the face of computing and communication forever.

A thought experiment

Let’s do a thought experiment together. What if in 2007, Apple released the iPhone with all the present features, but had full QWERTY keyboards just like Blackberries. What do you think would have happened to RIM?

I believe that that the following scenario may have played out:

1. Apple still would have been a dominant player in the phone market.

2. But, the strong validation and direct competition from Apple would have caused RIM to thrive as a better company.

Instead, Apple changed the game. It moved away from the closed eco-system and rugged, business centric user experience of RIM to more of an elegant consumer-friendly design and user experience. They captivated the world by showing it new possibilities.

Now, look at what happened when Google followed Apple’s path and released an OEM-friendly version of iOS. Android competes directly against iOS; every time a new version of a Samsung phone or iPhone comes out, people on one side scream death at the other. It is of course, exciting and fun to watch and participate in.

But let’s not pretend that the loser of this battle is going to be either Google or Apple. The losers are the phone handset makers like Nokia and RIM. And as iOS and Android continue to extend their reach into tablets, they are in the process of wiping out PC makers as well!

Competition is not just validation, it’s a necessity in business world. Companies with disruptive cultures use competition as fuel…and thrive in it.

Meanwhile in the datacenter infrastructure world

In 2011, when Nutanix released the first version of our Virtual Computing Platform, the world primarily either ignored us or ridiculed the notion of running enterprise applications without the help of mighty datacenter manufacturers and their SANs.

As we fast forward to 2014, Nutanix has a 2-year lead and has built a passionate company and community around our vision for Web-scale IT. We have amassed hundreds of passionate customers running their entire businesses on Nutanix infrastructure. Now that most of the large manufacturers in the space are coming out with their own versions of SAN-Free Data centers, we are hearing the usual commotion from the gallery. It’s expected.

But, it’s misguided to assume that the immediate causality is going to be Nutanix. The first bunch to feel the heat will be the old, long-in-tooth legacy SAN vendors (think: “old flip phone makers”). The second bunch will be the “new age” hybrid and all-flash vendors (think: “QWERTY peddlers”) because, let’s face it, once you remove the marketing hype, they are also a bunch of fibre channel or iSCSI connected SAN or NAS vendors.

The real question is whether Nutanix can keep up its technical superiority and market dominance. It’s a legitimate question. Let me just say that you ain’t seen nothing yet when it comes what we have in store for the world!