Industry Insights

Executive Q&A with Channel Futures: Embracing the New TAM

By Ideas @ AppDirect / Nov 19, 2018

Embracing The New Tam Blog Post

Every company that touches the technology sector is experiencing unprecedented change, and MSPs and VARs are no exception. According to CompTIA's recent “7th State of the Channel” report, 54 percent of channel partners expect the technology ecosystem to grow rapidly over the next two years, while 64 percent expect their mix of offerings to change to new types. “The channel ecosystem is expanding, which is either good news or bad news for traditional partners,” the report states. “Mostly it depends on perspective.”

Recently, AppDirect sat down with T.C. Doyle, Senior Content Director for Channel Futures, the VAR Guy, and MSPMentor, to get his perspective on the expanding market for MSPs and VARs. Here he describes how channel partners can take advantage of the new opportunities the changing market will bring.

Q (AppDirect): What is the new TAM, total addressable market, and why is this such an important topic?

A (T.C. Doyle, Channel Futures): When you think about the market and the traditional spaces where solution providers—IT consultants, systems integrators, VARs, MSPs—sell to, it's typically the IT departments of small to medium‑sized businesses, commercial enterprises, and very large organizations.

Now, a big shift is occurring: The rise of the line-of-business (LOB) buyer is creating new opportunities and challenges for channel companies. As a result, these organizations are trying to regroup, rethink, and figure out the ways in which they can differentiate their businesses and go after these new buyers.

Q: How are MSPs and VARs tackling these challenges?

A: They're going small to get big. What I mean by that is they're narrowly defining their go-to-market propositions while they're trying to simultaneously expand their offerings. It sounds a little counter‑intuitive, but by doing that and differentiating themselves in the market, they're resonating better with customers.

Channel partners are going small to get big—narrowly defining their go-to-market propositions while expanding their offerings.

For example, some providers sell only to small businesses. Some sell to midsize organizations. Some differentiate themselves by their business model, whether it's an agency model, a resell model, or managed services model. Are they the high-volume, low‑cost provider, or are they more the boutique, more expensive provider?

They're also getting into IP development and they're differentiating themselves by target customers. Here’s an example of what I mean. I was at a partner event talking to providers and I asked one, “Tell me about your marketplace and your opportunity." He said, "Well, I'm in Southern California and I sell to the beauty market, beauty salons." I said, "Really? That's a market?" He explained that there are 155,000 beauty salons in the state of California. They generate $6.6 billion of business. That's a big total addressable market.

Let's break that down. What can he provide to these shops? They need all kinds of tech support. There's salon management software, point of sale software. They want CRM capabilities so they can connect with their customer. They also have needs for scheduling, inventory. Many of them sell products on premise.
There's regulatory compliance, employee onboarding, payroll, social media to help promote their organizations. There's customer WiFi, personalization experiences, and of course security and increasingly new innovations such as virtual imaging.

There are so many ways to differentiate and expand, even in a market like beauty salons.

Q: How do MSPs and VARs develop enough vertical expertise to be successful?

A: To play ball in these vertical markets, you really need subject‑matter expertise. You need world‑class thinking. That's very different than just having partners that cluster around a particular vertical. Forty-four percent of partners that specialize in a vertical do so to differentiate their organizations. Many just happen to sell to education customers, or they happen to sell to a cluster of manufacturing customers.

But what we're starting to see is real deep subject‑matter expertise, the kind that LOB buyers are really looking for. They're looking for a partner who's more than a supplier of goods and services, but someone who's a true partner to help them better execute on their business or organizational objectives.

Buyers are looking for partners who true partners with deep expertise, not just suppliers.

We're starting to see more partners hire outside experts and we're starting to see them develop real, true offerings. It's not just about managing and monitoring the horizontal technologies that are keeping the lights on. It's also participating in those applications that are unique and differentiated to a particular vertical.

Q: What role do emerging technologies play in the new TAM? Should MSPs and VARs make new technology a part of their go-to-market strategies?

A: A lot of studies have revealed that solution providers aim to have anywhere between 20 to 30 percent of their business coming from activities that are less than two years old. That is one measure of a healthy organization. That's a high bar, 20 percent to 30 percent. In the main, they want to be sure that their businesses are evolving, showing some vibrancy, maturity, and growth in the market.

What's really interesting is the growth of innovative emerging technologies. Today, for example, IoT products are used by as many as 30 percent of the top MSPs, while AI is used by over 25 percent. These numbers have come up quite sharply in the last couple of years.

IoT products are used by as many as 30% of top MSPs, while AI is used by over 25%.

Whether it be SaaS, IoT, VR, AR, or AI, you're really starting to see some healthy growth in those markets. That's very encouraging.

A: What about competition in the new TAM? How is it changing?

One of the faster growing segments of companies delivering tech solutions to end customers are what we call specialized partners. These might be organizations whose nexus isn't so much the traditional IT channel, but more of a vertical market take or a specialized market. Take certified public accountants, for example, that are selling accounting solutions to their customers. CPAs are now being asked to provide a lot more than just, say, accounting solutions. Their customers want whole security solutions.

Whether it's an accountant, an HR broker, someone in the legal field, for professional organizations like these, some of the fastest growing parts of their businesses are the technology delivery services arms that they have.
That's adding another layer of complexity as these organizations come into the channel. In some instances, these organizations are competing. In some instances, they're partnering with traditional channel partners.

Business models will continue to fracture as people experiment with different combinations.

The bottom line is that I don’t think we're going to see business models get more simple anytime soon. I think they're going to continue to fracture as people experiment with different combinations.

Q: Changing a go-to-market strategies is no small task. Why is it worthwhile for MSPs and VARs?

I'll leave you with one stat. There's a gentleman by the name of Gary Pica. He's a technology market advisor. He helps solution providers with their businesses. One of his findings over the years is he likes to look at sales per employee.

The average MSP shop sells about $100,000 per employee. The best in class sell $125,000. It doesn't sound like a big difference, but in reality, it is—in terms of their competitiveness, in terms of their overall profitability, and in terms of what that business is worth if and when the principals go to sell it.

By really taking the time to understand the new TAM, and figuring out how your organization can seize the opportunity it presents—be it the business model, participating with new technologies, or getting more deeply involved in a vertical—it can spell the difference between a healthy managed services shop or channel company and one that is really thriving and knocking it out of the park.

To learn more about the latest trends in the channel, watch AppDirect’s on-demand webinar, “CompTIA's 7th State of the Channel Report: Trends in the Technology Ecosystem,” featuring Carolyn April, Senior Director of Industry Analysis at CompTIA.


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