Techaisle Analyst Insights

HP has split into two – HP Inc. and Hewlett Packard Enterprise (HPE). Almost all SMB relevant products and solutions (except PCs and printers) now reside within the HPE organization. The global small and midmarket businesses, SMB (1-999 employee size) market has been the growth engine for the IT industry at large. The reason is quite simply that SMBs account for over 80 percent of businesses in any country – developed or developing. As per Techaisle, SMBs are forecast to spend US$597 billion on IT in 2015. Their IT requirements range from servers, networking and storage to cloud, mobility, analytics, managed services and collaboration solutions. Today, most SMBs are looking towards IT suppliers that offer appealing value propositions in either of three IT delivery models – traditional infrastructure built on-site from hardware and software components; hosted solutions and/or applications most often purchased on a “pay as you go” model; and, cloud infrastructure delivered on-demand.

HPE – the new incarnation of HP and its focus on SMBs with Flex solutions

Since the launch of its “Just Right IT” portfolio (September 2010) for SMBs, HPE has been striving to better serve its SMB customers by consciously lowering cost of solutions, improving agility in deployment and enabling faster time to value in managing IT assets. Just Right IT includes products, services and solutions specifically engineered for SMBs. The portfolio offers management, data protection, communications and connectivity solutions that are designed and priced "just right" to deliver affordability and value to SMBs. These solutions revolve around HPE’s core offerings of servers, storage and networking which comprises of:

• Servers: ProLiant MicroServer, ProLiant 10 Series Servers, ProLiant 100 Series Servers, ProLiant 300 Series Servers
• Networking: 1950 Switch Series, R100 Wireless VPN Router Series, Cloud Managed Networking, and 2920 Switch Series
• Storage: Solutions for the virtualization, SQL Server, Exchange, File sharing and Backup

In November 2015, soon after the split, HPE announced a new portfolio of ProLiant Generation 9 (Gen9) Servers (ProLiant DL20 Gen9 and ProLiantML30 Gen9) that are specifically engineered for SMBs to help reduce cost and complexity to run the new style of IT, web, collaboration, and business workloads. HPE is hoping that the new server portfolio advances its vision for compute and the future of data center technology.

HPE also announced its Flex solutions which bundles various services around its server, storage and networking products including support services, financial services, ISV software, distribution services, and management. It is specifically targeted at three different segments of SMB market at the low end of which are the SMBs who are “starting out” and at the high-end are the SMBs who are “expanding their business”. This does align well with what Techaisle analysts find in Techaisle’s SMB & Midmarket IT Sophistication Segmentation as shown below.

This is a two-part blog article. The first part dealt with “SMB IT channel reaching an inflection point”. Second part, below is on “New wave of SMB channel conflict in building a cloud practice”.

Turning a supertanker

Building an effective cloud practice within a channel business is a complex undertaking. Using an old metaphor, it has been compared to “turning a supertanker.” This is an inapt comparison, and not just because the vast majority of channel businesses are far smaller than a large ocean vessel. The real problem with the comparison is that turning a supertanker refers to an exercise whose success rests on an anticipation of future change. Certainly, this is part of the problem for the channel – what is the best time to invest in ramping up cloud practice resources? – but the issue has a much greater scope.

A successful cloud business practice requires new management metrics, new financial models, new sales processes (and generally, compensation models), new vendor relationships, new marketing activities, new consulting capabilities and new technical support capabilities. To use a nautical analogy, creating a cloud practice within an existing channel business is like building a second boat within your ship, sailing it off in a different direction, and maintaining alignment between the two courses in order to maximize synergies and benefits and reduce expensive discontinuities.

Abundantly Complex

If this sounds difficult and complex, well…it is. However, there is abundant reason to believe that the exercise is necessary for future viability and success. Roughly 80% of channel firms either offer some type of cloud solution today or are planning to offer cloud solutions; of these, more than 60% expect cloud revenue increases in in next one year (Techaisle’s SMB Channel Partner Trends study). This is not a single-year issue, though: the business impact of cloud within the channel is expected to continue to increase over time. Techaisle expects that over the next several years, the position of the generalist channel firm – the “one stop shop for solutions” – will become untenable, squeezed by market forces requiring higher degrees of specialization. Some channel firms will specialize in cloud, while others will link cloud with one or two other specialties, such as mobility, virtualization and converged infrastructure, and/or managed services. But very few channel businesses will remain viable without having a credible cloud business practice.

This is a two-part blog article. The first part below deals with “SMB IT channel reaching an inflection point”. Second part is on “New wave of SMB channel conflicts in building a cloud practice”.

SMB IT channel has reached an inflection point. In some sense, this statement appears to be just another observation of a recurring phenomenon: the SMB channel is constantly in a state of flux, responding to changes in the underlying industry by adding (or deleting) products and capabilities to its portfolios. The SMB channel’s situation in 2016, though, is different. Changes in the ways that IT is used within SMB organizations, the relationships needed to build solutions addressing these needs, and the skills required to support these usage patterns and solutions are fragmenting the channel into discrete (if overlapping) communities.

Rewind

To put this into perspective, let us rewind a decade, or two, or three. In each case, we see a channel that is reliant upon relationships with customers and suppliers, and which forms the connection between the two groups. Looking first at the customer relationships, the SMB channel organization works with SMB firms in a defined market – generally, a regional market, but in some cases, a market defined by region and industry, and in fewer cases still, a market defined by adoption of a particular type of technology (e.g., a specific type of software – content management, design, etc.) or a specific vendor’s products. The SMB channel firm deals with a tightly-defined contact or set of contacts within the customer organization: in most cases, the IT manager where this role exists, or a senior executive/partner/owner in firms too small to have in-house IT staff. And it provides management services for installed technology, support for users, and analysis and recommendations for new technology.

This position as a “trusted advisor” (or at least, regular supplier) to a defined customer base makes the channel a valuable partner for IT vendors. The vendors can work with the channel partner to introduce new technologies to a target market. The channel benefits by having access to products that shape future analysis/recommendations to customers, extending the channel/end-user connection. The channel also benefits from obtaining margin from the vendor and from vendor investments in channel marketing activities, as well as from a degree of co-investment in skills development. The channel aggregates new vendor offerings to extend existing customer infrastructure, completing the connection between buyers and new products.

For decades, this model worked largely because most new products could be added to most existing infrastructures. IT followed an incremental and relatively homogenous path; companies deployed servers and storage and a set of core financial applications in the back office, PCs and productivity software for individual workers, and upgraded to keep current with interoperability and maintenance requirements. Towards the end of the 1990s, web servers became a core component of this corporate compute portfolio, and firms would occasionally add capabilities (such as IP telephony) in advance of competitors, but like the upgrades and extensions, the progression of new technology was more deliberate than disruptive.

Today

In recent years, IT adoption has become more diffused.

India is witnessing unprecedented growth driven by favorable demographics, a young working population, rising income levels, urbanization and growing brand orientation. India’s retail industry has emerged as one of the fastest growing industry and is projected to grow almost to US$1 trillion by 2020 from the present market size of US$600 billion in 2015 driven by income growth, urbanization and attitudinal shifts.

However, it must be said that Indian retail is still dominated by unorganized sector. Organized retail penetration is just 8%. The biggest challenge facing the Indian retail sector is the lack of efficient supply chain. Within retail, India's IT hardware market includes many product segments such as desktops, laptops, phablets, tablets, printers, and other peripherals.

Techaisle team has been tracking the channel market and specifically sales out of various IT products in India for a decade. At last count, Techaisle India channel census data shows that there are over 30,000 channel partners in India. Supporting this vast channel network are eight national distributors and 159 regional distributors. Techaisle research shows us that there are typically four types of retailers.

With a country so large with varying maturity of IT adoption and number of distributors and retailers/resellers it is but natural to see a very complex PC distribution flow. Techaisle team tracks the percent units that flow through various intermediate channels from the OEM to the end-customer.

It is common knowledge that India’s e-commerce market India is still in nascent phase, yet it is growing rapidly but IT hardware sales through e-commerce websites or through the company's own website are still in the single digit-range as percentage of total sales because most of laptops, desktops, and tablets sales are still sold through bricks and mortar shops. In order to expand in India, large technology companies have been increasing their focus on smaller towns and non-tier 1 cities. For example, by end of 2015, Dell plans to more than double the number of its stores (named Dell Exclusive) in India to 825. In 2014, Dell had already doubled its number of stores to 400 from 2013.

Organized retail started more than a decade ago and significant growth has been achieved. However, most of the retailers have struggled to achieve a desired level of profitability. Leading retailers are now putting profitability at the top of their agenda. Croma was the first multi-brand store to sell consumer electronics among other retail products. Today, major retail players include Reliance Retail (Reliance Digital – 151 stores), Pantaloon Retail Ltd (eZone – 92 stores and Electronic Bazaars), Videocon (Next Retail Ltd – 144 stores), Tata Sons (Croma – 101 stores), Sumaria Appliances and Vijay Sales (54 stores).

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Table of Contents

• Indian IT retail landscape
• Major IT retail hubs in India
• Distributor and Retailer count
• Increasing focus on OEM branded stores
• Leveraging distribution and sales networks through strategic partnerships
• Types of Retailers
• Complex PC Distribution Flow
• Pain points of smaller retailers
• Explosion in E-commerce and M-commerce retail channel
• Overcoming inefficient supply chain management
• Overcoming logistics and warehousing challenges of Indian e-commerce
• Organized retail sector competing with online retail
• Brick-and-mortar retailers warming to E-commerce