​Examining the rise of the shadow channels…

​Examining the rise of the shadow channels…

Uncovering the broad and diverse group of companies who engage, influence, recommend and even resell technology to lines of business.

I have written extensively this year about the changes happening in the traditional IT and telecom channels.

Here are some of the major industry trends that have accelerated these changes, such as a 30 per cent decline in the number of traditional channel partners since recession of 2008, or reports that 40 per cent of partner owner/principals plan to retire in the next eight years.

Furthermore, 75 per cent of technical professional services will be delivered by millennials at that time, with 72 per cent of all customer technology decisions led by Lines of Business (growing to 90 per cent).

We know that millennials are not joining leadership/ownership roles within traditional channel companies in sufficient numbers.

Business models based on managed services, client/server management, hardware sales, and break-fix do not seem to be enticing the next generation.

Channel margins have been challenged for over a decade, with eroding hardware, software and services resell opportunities. Further, increased competition and more efficient tools and processes has commoditised the delivery of IT and telecom.

There is also a degree of consumerisation that threatens traditional cash cows with the rise of Apple, Google and the like.

Millennials are joining the broader technology industry and other industries that are radically transforming themselves into tech companies. Read the annual reports of the Fortune 500 and you would think that they are all technology companies.

The changes in how companies make technology decisions, led by the lines of business, used to be called “shadow IT” or “rogue IT”, but today is the new normal. This change in the customer buying journey has been heavily influenced and accelerated by several “shadow channels”.

Who are these shadow channels?

The shadow channel is a broad and diverse group of companies from all backgrounds who engage, influence, recommend and even resell technology to lines of business - it’s useful to break them into categories:

  • SaaS ecosystem consultants and integration partners
  • Independent Software Vendors (ISVs)
  • Industry-based professional services firms
  • Born-in-the-cloud IT and telecom firms
  • Start-ups looking to disrupt traditional industries
Marc Benioff - CEO, Salesforce
Marc Benioff - CEO, Salesforce

Let’s take a closer look…

1 - SaaS ecosystem consultants and integration partners

The growth of the software-as-a-service industry since early in 2000 has been staggering. Major, multi-billion dollar revenue streams are still growing north of 30 per cent - 15 years later.

We are now seeing clear winners in each of the line of business categories. For example, 10 years ago there were over 300 CRM solutions competing in a very fragmented market.

Salesforce has now secured almost 1/5 of all CRM opportunity and competes in a more narrow, established market between on-premises and cloud offerings.

Other winners include companies like Marketo, Netsuite, Workday and many others. All of these winners have built impressive ecosystems around their products where

For example, Salesforce has 695 partners globally that drive over $US20 billion in revenue - that is $US5 for every $US1 a customer spends on the CRM licence.

Similar numbers are seen across all LOB ecosystems and this is primarily consulting and integration revenue.

The Salesforce ISV and customised developer partnerships drive billions of more dollars of value. In fact, Salesforce CEO, Marc Benioff, outlined a $US290 billion ecosystem opportunity value over the next five years for those that want to compete.

According to Goldman Sachs research, the SaaS economy drives $US106 billion in revenue this year, growing by 30 per cent CAGR for the foreseeable future.

With the opportunity of $US5 for every SaaS dollar, we are looking at a half-trillion dollar opportunity that hasn’t yet been realised. I personally don’t believe the number is that high, but anything multiplied by $US106 billion is significant.

2 - Independent Software Vendors (ISVs)

Keeping on the Salesforce example, the ISV ecosystem is called AppExchange and it has 3,000 apps, generating four million downloads, $US20 billion in ISV revenue (including a couple of billion that Salesforce takes off the top in a revenue share).

An impressive 75 per cent of their customers use apps in addition to the core software.

There are several unicorns (companies worth over $US1 billion in market value) that are completely reliant on these SaaS ecosystems.

Adding tools, workflow, customised and specialised industry solutions, and other value adds is a very lucrative environment for entrepreneurs.

The investment community of venture capitalists are also eager to back companies in these ecosystems with hundreds of dedicated funds.

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