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Channel companies lose customer scope to incumbency challengers

Channel companies fail to retain many of their enterprise customer accounts when contracts are up for renegotiation, according to an ISG report.

New research is painting a gloomy picture of channel companies and their ability to retain their customers.

In the past two years, two out of every three ISG‐advised contract renegotiation resulted in the enterprise buyers inviting new IT service providers to compete with the incumbent provider. In one-third of cases, the incumbent provider lost some customer scope to another provider, according to ISG Research. Only 14% of renegotiations resulted in the incumbent provider retaining the entire customer scope, and only 7% of the time the incumbent provider saw an increase in scope, the firm found. ISG helps clients identify, evaluate, contract and manage business and IT service providers.

The three primary drivers for this loss of customer scope are price, performance and relationship, ISG said.

"Expectations have moved beyond simply delivering the same services at a lower price," said Stanton Jones, director and principal analyst at ISG, who authored the research note.

Customers want better prices that are more aligned with consumption, he said, as well as "improved operational performance and more of a strategic relationship with their outsourcing providers."

Why channel companies fail to retain customers

While it comes as no surprise that enterprise buyers are inviting other service providers to compete for their business, what is surprising is that the risks involving a change of providers is not a deterrent for a client to make the move, the ISG report found.

Stanton Jones, director and principal analyst at ISGStanton Jones

It is becoming easier for customers to move from one trusted service provider to another because they are buying technologies more on a subscription-based model, noted Diane Krakora, CEO of channel consulting company PartnerPath.

The internet has also changed the game, she added. "Customers are much more knowledgeable because they can find whatever they want online. There is less mystery on how a solution provider puts something together, so there is more transparency around cost and markup." This makes it "easier for the customers to be able to find somebody or engage somebody new for a new technology they're buying." Information is easily accessible through research reports, analysts, websites and through marketplaces, Krakora said, and she believes customers are doing their homework.

Diane Krakora, CEO of PartnerPathDiane Krakora

Jones said incumbent channel companies are letting their customers down, causing them to look elsewhere by "not innovating in order to drive cost reduction and improved performance into their deals [and] focusing too much on current revenue and margin over long-term customer retention and relationship."

Krakora agreed. "I think it's also the service provider's fault. They are taking more of a transactional approach when they should be taking a relational one," she said. "So they sell something to the customer rather than say, 'How do I make you successful and make sure you're happy and using the products and services I've recommended to you and solved your problems?'"

Providers are not following through on customer lifecycle management, she observed. "They're not providing enough value to the customer, so they look elsewhere."

The 'as-a-service' economy is a game changer

Krakora and Jones said a major source of the problem is the software-as-a-service space, with Krakora noting that channel companies have to compete with providers like Salesforce, Oracle CRM On Demand and even the Adobe Creative Cloud suite.

"We see this happening a lot with Autodesk when delivered as a service model," she said. "It's harder for a solution provider to have a relationship [with a customer], because the customer goes back to the vendor for the delivery of the solution rather than the provider, because it's delivered on demand through the cloud."

Expectations have moved beyond simply delivering the same services at a lower price.
Stanton Jonesdirector and principal analyst, ISG Research

Autodesk might reach out to the customer directly or another solution provider may reach out to them to help with the Autodesk renewal -- or the customer may simply decide to go to another vendor or provider, she said. A big part of the issue is that the original solution provider is not tracking renewals and not staying in close enough contact with customers to be involved in "the renewal and growth and optimized conversation," she said.

"It's that the customer remembers that the renewal is up and the solution provider may not be tracking it," Krakora added. In some cases they may not even remember who the solution provider was that sold the software subscription to them because the customer registered the product directly with Autodesk, she said.

Autodesk did not respond to a request for comment.

Competition is coming from both inside and outside the traditional channel space, Jones said. "Work is moving to as-a-service cloud SaaS and IaaS platforms like Workday, Salesforce, Amazon Web Services and Microsoft Azure."

SMB customers appear less likely to change providers

Anurag Agrawal, CEO of TechaisleAnurag Agrawal

But not everyone agrees incumbent channel companies are losing a significant portion of their business to competitors. Anurag Agrawal, CEO of research firm Techaisle, which focuses on the small and medium-sized businesses market, said he is not seeing the types of numbers ISG found. However, he said, "It is natural for any business customer to look at alternatives at the time of contract renewal, understand the cost of switching, potential disruptions, business strategy, adoption cycle and then make a decision."

Tom McDonald, president of NSITom McDonald

Tom McDonald, president of IT service firm NSI, also said he is not seeing ISG's  findings play out in his small businesses client base. "We don't see our clients making us compete at renewal time. It rarely, if ever, happens," he said. "If it does and if they do bring in other companies to bid, that is a pretty good sign you are going to lose that business."

Channel companies are focused on investing in new areas and customer success rather than only solving a customer problem, which is helping them avoid customer attrition, according to Agrawal. "In fact, 57% of successful partners have a consultative relationship with a customer, 51% of successful partners lead with industry knowledge and customers' business and not technology, [and] 48% of successful partners spend time on needs assessment rather than post-sales support."

What channel companies can do

Incumbent solution providers can turn things around by providing better lifecycle management from sale to usage to renewals and growing their services, Krakora stressed.

"Certainly, I would take this idea of customer success ... not just as a sale and it's over, [but as], 'How do I nurture and manage this customer?'" she said.

Jones concurred that incumbent partners can take measures to protect their contracts. "Focus on building relationships, understanding the client's business, and demonstrate productivity improvements and process improvement during the early and mid-parts of the contract," he said, "not only at the end, when the contract is up for renewal."

While price, performance and relationships are important, ISG advises service providers to also focus on continuous innovation. This will help them win and retain clients for the future, because those clients need to adapt to today's rapid business change, the firm noted. 

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