Strategic Intelligence for IT Partners
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July 2009 ArchivesIBM (NYSE: IBM) knows a thing or two about profitable business models. About a decade ago Sam Palmisano began the transformation of IBM, downplaying its emphasis on hardware and bolstering its software, consulting and services businesses. IBM has spent more than $20 billion since 2003 on more than 80 acquisitions. Fifty of those acquisitions have been software companies, all of which were profitable. IBM’s latest results have shown how this strategic change has preserved its profitability, even in these hard times. IBM recently announced a year over year 13% drop in sales but a 2.3% increase in gross profit margin and 12% increase in net income for the quarter ended June 30 2009. IBM’s results look pretty good, if not downright impressive, when compared to its competitors. Others in the industry haven’t fared as well. Microsoft recently announced a dismal 18% drop in revenue and 30% drop in operating income for the quarter year over year. And Cisco recently warned that it expects an 18% drop in sales and deep drop in earnings for the current quarter. The result is that even now, despite the economic downturn, IBM still has the resources to expand its business. It also has the where-with-all to offer aggressive discounts, as it goes after SUN’s customers. And it recently made a stellar acquisition with SPSS. The SPSS acquisition promises great opportunities for IBM and its partners. It’s a high end predictive technology which is well established and well regarded. In addition, there could be opportunities to expand SPSS capabilities into full-blown vertical solutions. SPSS fits nicely with the rest of IBM’s portfolio and reinforces the emphasis on consulting and selling complete solutions. As IBM Chief Financial Officer Mark Loughridge noted, "We look for the consulting arm to lead our entry to the client," driving sales of other products. So, leading with consulting has been key to client acquisition. The demand for business intelligence solutions has remained strong even during this downturn, and IBM partners are in a position to reap the benefits. Indeed, channel partners should also take note of IBM’s profit model. The portfolio and sales model have worked out well. Leading with consulting, offering business solutions and emphasizing higher margin products such as software have all worked in IBM’s favor. These can boost profits for channel partners, too. "Historic", "unprecedented", "dismal", "shocking", "nasty quarter"-These were some of the words heard in response to Microsoft’s earnings announcement July 23. Indeed the news was startling, as Microsoft (NasdaqGS:MSFT) reported its first annual revenue decline in its history. In addition, year over year revenue declined in all five business segments. Quarterly revenue decreased a whopping $1.2 Billion (17%) for the quarter when compared to the previous year. Moreover, operating income declined a significant 30% year over year for the quarter. While Windows sales have dropped off overall, sales of lower end netbook SKUs have been growing. This helps with revenue but is a drag on margin. Microsoft’s results have been strongly affected by the contracting PC market. Although Microsoft has enacted cost cutting measures and has taken $750 million out of its operational costs for the quarter, the market’s reaction has been negative. What can Microsoft’s partners expect, in light of this news? They have already seen Microsoft’s aggressive plans to revamp its partner program. Going forward, it’s likely Microsoft will strongly favor partners who bring in both strong sales results and higher margin business. Program incentives and rewards could be richer for those that are in this elite set. In addition, it would not be surprising to see partner margins shrink as competition intensifies and Microsoft focuses on increasing operating revenue. A re-alignment and restructuring of Microsoft’s own field sales and support would be expected. Microsoft CFO Chris Liddell told analysts on an earnings conference call Thursday that 2009 is a "reset" year, and he was encouraged by Microsoft’s prospects in 2010. More than ever, partners will need to decide where they fit in the new structures, make the appropriate investments and step up their competitive game. Microsoft may elect to downgrade or terminate non-performers. Those Microsoft partners with loyal customer bases, who can deliver unique value beyond price and maintain strong customer satisfaction ratings, have the best chance of success in the future. Microsoft’s Partner conference last week was fascinating. Each presentation was well scripted, and the messages were consistent. The energy was high and much of the content was exciting. Steve Ballmer and Kevin Turner’s keynotes were electrifying, yet it was Allison Watson, Corp. Channel Chief, who had a crucial message to deliver. Her presentation on Microsoft’s partner restructuring was both highly relevant to this audience and detailed. These changes will shake up the channel partners, and those who have been with Microsoft long term may find it tiring to revisit certification requirements and re-establish their “value” in the Microsoft Partner Network hierarchy. Yet the changes are needed and the sooner the better. Things have changed a lot in the last several years. Microsoft’s partner ecosystem is quite diverse and there was much feedback that the “Gold Certified” partner moniker wasn’t creating differentiation. In addition, Microsoft has changed. Now, more than ever, its market share leadership is being challenged by a multitude of competitors, and its partner base is a key strategic ally in this fight for market share. As Kevin Turner COO said, partners need to "leverage the R & D roadmap". And Microsoft needs to motivate and mobilize this large mass of partners now, more than ever. To this end, the new Microsoft Partner Network’s goal is to drive market share gains through "quality and commitment". Its three pillars are: 1. Capabilities which offers rewards for partners who invest in competencies early 2. Customers which rewards partners who deliver net new customer business 3. Connection which encourages leveraging other partners and collaboration for complete solutions Julie Benanni, GM of the Microsoft Partner Network, has said "We wanted to change the way we qualify partners. One of the key things is that of the 640,000 partners worldwide, not all can, should or would be in Advanced". Clearly better differentiation benefits both partners and Microsoft. But is there an “ideal Microsoft partner”? As one partner noted, “Previously the emphasis was on selling seats, not solutions. As Microsoft comes to grips with the ever changing economics of software sales - will Microsoft begin to value system integrators as do SAP and Oracle?” IBM (NYSE:IBM) seems to have a good idea of what it values as exemplified in solution provider Enterprise Information Management, who recently saved the Army $1 Billion. Microsoft would do well to have a clear picture of its ideal partner and cultivate them as it moves forward. A recent ScriptLogic survey reported that 60% of IT professionals have “no current plans to deploy Windows 7”. Of those who plan to deploy it, 5.4% said they would do it by end of 2009 and 34% by the end of 2010. This sounds like unfavorable news, but is it really?
Globally, corporations may not be ready to upgrade now, but almost 40% of those surveyed said they’d do it by end of 2010 and most haven’t even seen the final released version yet. That’s a pretty good indicator the early betas and trials were effective in creating positive feedback in the IT community. And ScriptLogic further pointed out, this is actually a stronger adoption rate than the 12-14% rate for XP in its first year.
Partners are critical to driving and sustaining Microsoft (NasdaqGS:MSFT) Windows 7 upgrades. During Bill Veghte’s (Sr. VP of the Windows Business Group) WPC09 keynote, a large number of partners indicated they were working with Windows 7. Microsoft has over 600,000 partners, and they produce 95% of company revenue. If all 600,000 of them were to “get on the latest release” as Kevin Turner, Microsoft COO, exhorted, that would create quite a bit of momentum in and of itself. In fact, once Windows 7 becomes the channel standard, more corporations will become familiar with it, and take a serious look at it.
The 40% plan-to-adopt figure doesn’t surprise some IT veterans: "What right minded IT decision maker is going to disrupt a working technology infrastructure just because there is a new OS available? " "Feature sets and costs drive upgrades." So, there’s some selling to do, both for Microsoft to its partners and for Microsoft's partners to their customers. Even if they only capture the 177M unit sales IDC has forecast by the end of 2010, it’s still a big opportunity.
So, is the glass half full or half empty? Half empty if the channel expects a big revenue pop from Windows 7 in 2009. But half full if the predictions for 2010 come true.
IBM (NYSE:IBM) has notified Synnex (NYSE:SNX) they will no longer be authorized to distribute IBM software as of October 1, 2009. This decision was not surprising to some, considering IBM's deauthorization of Synnex on x Series servers in January this year. Last fall, Ayman Antoun, vice president of Business Partners, Americas, at IBM, hinted at IBM’s direction when he noted that IBM wished to become "more relevant more quickly” to partners. Some VARs have indicated Synnex didn’t have overall traction. And IBM channel chief, Sandy Carter has commented that the recent change “was really in the best interests of our partners and our customers.” So, it looks like IBM was over-distributed. Is this a good move for IBM? Clearly, yes, because it cuts out the low-priced leader in distribution, and may well result in overall higher distribution margin for IBM. How about Synnex? It may, in fact, be good for them too. It looks like Synnex was spread too thin. But, according to the agreement, Synnex can still distribute IBM software in Canada and Asia Pacific. The company may be better off focusing on these geographies, which would leverage their global business unit. Analysts have indicated that this unit is doing well and strongly influenced Synnex’s exceptional Q2 results. In addition, Synnex has been aggressively expanding their consumer electronics division. Since their IBM practice was small (at least by IBM standards), it’s unlikely they lose much distributor value-add investment. Overall, there are probably other lines of business, (like consumer electronics) Synnex should be focusing on, and IBM has helped them narrow down the options. There were less than 100 (65 according to some sources) IBM solution providers who did business with Synnex. And now, these VARs have a wide choice of other distributors to work with: Arrow Electronics, Avnet, Ingram Micro and Tech Data. Wasting no time, those other distributors have already started the recruiting calls. The danger is, these IBM partners may be even more open to wooing from competitors like HP and Dell. The bigger question is: Is this a picture of what’s to come in the IT channel? Can we expect other industry titans to cut back distribution in the wake of this economic downturn? It’s another trend to watch. Microsoft (NasdaqGS:MSFT) just confirmed Windows 7's release to manufacturing for July 13th. It looks like the launch is on track for October 22 as planned, and the Windows 7 retail pre-orders seem to be doing quite well. Both Amazon and Best Buy have reported a surge in orders since the promotion was launched. There’s a long list of retail locations carrying the promotion: Amazon, BestBuy, the Microsoft Store, Office Depot, and CostCo, Staples, Walmart and select regionals such as Fry’s. This is a great start. But, since retail sales typically account for less than 5% of windows sales, they aren’t the final predictor of market momentum. A large proportion of Windows sales are typically done via OEMs like HP, Dell and others. HP, Dell, Toshiba and Fujitsu are already prepped and have the pre-order retail promotion available on their online storefronts. It’s likely some consumers will purchase an OEM copy online or in-store, but most will get Windows 7 with their next PC purchase. Microsoft is offering a free Windows 7 upgrade for those who purchase a PC with Vista between June 26, 2009 and January 31, 2010. It’s a global program, and OEM’s can choose to cut it off before January 31, 2010 if they so desire. Also, OEM’s can decide which computers will be eligible for the upgrade offer, so it’s uncertain, and perhaps unlikely, that low end models such as netbooks or PCs on sale will qualify. Technically speaking, it’s a good idea to find out if a clean install will be required. XP users in particular need to be aware that if they plan a Windows 7 upgrade, a clean install is going to be necessary. Ouch! Ars Technica is a great source of information on this. Microsoft is also speeding up the international launch. A special “E” version of the software with the browser removed will be sold in Europe. Microsoft 7E will be sold only in full versions; there will be no upgrade versions available in the EU. On October 22, the OEMs will be able to ship all languages simultaneously. The retail software will be available in 14 languages on launch day, Oct 22 and in 21 more languages by Oct 31. According to Brad Brooks, Microsoft VP, "People wanted it faster and we’re giving it to them". The VAR community still has lots of questions:
Microsoft will give it a big push with a whirlwind of Windows 7 publicity. But, at this point, not even Microsoft can answer that last one.
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