Every savvy solution provider knows that IT is, and always will be, in a perennial state of disruption. The only thing that ever really changes is the rate at which that disruption occurs.
A survey of 300 IT decision makers published this week by AVANT Communications, a distributor that focuses on emerging technologies, suggest that the level of disruption is approaching a high point. The survey finds 85 percent of the companies polled have put some form of digital transformation plan in place.
Released at the Channel Futures Conference, the survey also reveals 82 percent of respondents noted that they rely on trusted advisers in the form of consultants, agents, and other third parties to help them make IT decisions. In fact, the survey finds organizations that work with trusted advisers have launched at least one innovative IT initiative by more than a two-to-one margin compared to those that don’t use advisers. Seventy-four percent of companies that identify themselves as leaders in innovation rely upon trusted advisers for assistance in IT technology decision making, compared to only 33 percent of laggards.
IT is always in a perennial state of disruption. The only thing that ever really changes is the rate at which that disruption occurs.
Much of the wave of disruption that is roiling IT environments these days can clearly be traced back to the rise of cloud computing. For example, the survey identifies software-defined wide area networking (SD-WAN) as the most disruptive technology being embraced by survey respondents. Rather than back-hauling all network traffic from a branch office to a local data center, IT organizations are finding it makes more economic sense to route that traffic directly to a public cloud using a standard Internet connection. Other disruptive technological shifts noted by survey respondents included shift servers into co-location facilities, the rise of unified communications services in the cloud, and cybersecurity.
While all the disruption clearly bodes well for IT services providers that invest in attaining the right skills, Forrester Research sounded a note of doom and gloom for those that don’t. Jay McBain, principal analyst for global channels at Forrester Research, told attendees at this week’s Channel Futures Conference that 70 percent of IT services providers are looking toward the exit.
More troubling, McBain claims that the average profit margin for IT services provider is now is 17 percent and that a quarter of MSPs around the world are losing money. He adds that the average MSP is operating on break even margins. Overall, McBain notes there are 36 percent fewer IT channel firms today than there were in 2008.
What is causing these problems?
The primary reason so many IT services providers are struggling has a lot to do with the shift to the cloud. Not only does cloud computing disrupt the technology landscape, it fundamentally alters the business model on which so many IT services providers have relied on for decades.
Cloud computing relies on a consumption-based model for purchasing IT-as-a-Service. While IT services providers will pick up a percentage of the recurring revenues those cloud services generate over the course of a multi-year contract, the assumption is that IT services providers will generate the bulk of their profits from the services they provide. Given that assumption, it then becomes critical for IT services providers to focus on higher-margin innovative services.
If most of the IT services being provided are focused on commodity technologies, the chances an IT services provider will be profitable are slim to none. That is especially true as the rise of cloud computing makes it possible for rival service providers to expand the scope of their offerings well beyond a handful of geographic regions.
Savvy IT services providers that come to that conclusion are already moving rapidly to acquire smaller firms that have developed an expertise in a high margin area. In contrast, providers of IT services that focus on commodity technologies deployed largely on-premises are finding that the valuation of their company is dropping by the day.
Ultimately, there will be a smaller number of IT services providers squarely focused on innovative technologies that create the greatest opportunity for delivering either the highest margin services or address an area such as cybersecurity where demand far outstrips available expertise. Commodity IT services that are still required will be delivered at scale simply to drive down the cost of delivering technologies that enable the delivery of higher margin services
Regardless of the path providers choose to move forward, the days when IT services providers could rely mainly on sales of on-premises applications and infrastructure to drive their business are coming to an end. The challenge and opportunity for solution providers face now is identifying the customers that view IT as being core enough to their business to always want to innovate.
That may require most solution providers to considerably up their IT game. The good news is that the number of customers that are starting to realize how much of their business revolves around innovative IT solutions continues to steadily increase.
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