Techaisle Blog

On 8th February 2017, Dell EMC debuted its shiny new channel partner program, made shinier by the use of precious metal names as partner tiers – Gold, Platinum and Titanium. In addition, Dell EMC introduced Titanium Black, a subset of the Titanium tier population. In a conversation with Cheryl Cook, SVP, Global Channels & Alliances, Dell EMC, I asked her if this program could be classified as Dell Channel 2.0. She smilingly replied that it is actually Dell EMC Channel 1.0. John Byrne, President, Global Channels, Dell EMC, said that it was just the beginning, the work is not done, not by a long shot.

To be sure, Dell has been making strides in the channel community. Techaisle’s latest survey of SMB/midmarket channel partners found that Dell’s likeability was up to 61% in 2016, from 53% in 2014 and 26% in 2013. Additionally, during the same time period percent of channel partners who said Dell has cutting edge technology increased to 40% from 31% in 2014 and 21% in 2013.

Prior to the merger, channel represented more than 60% of EMC business and more than 40% of Dell’s business. Now as Dell Technologies, channel accounts for more than US$35B in revenue, almost half of the company’s revenue.

Partner tier eligibility is based on revenue ranges and takes into account larger and smaller partners as well as regional thresholds. Within the revenue ranges, a key line item is percentage of revenue derived from services. More importantly, any customer that has done business with Dell or EMC channel partner will be designated as a partner-led account, a departure of revenue-based hard deck policy at EMC and a narrow list of named accounts at Dell. Dell EMC plans to review the revenue range thresholds at six-month period to continue to evolve the partner program so that it is not onerous to the channel partner community.

The new program, built on three core tenets - simple, predictable, profitable – aims to reward partners for brand exclusivity (in North America & Latin America), sales aggressiveness, relentless execution, services selling & portfolio expansion. At the same time, it aims to foster peer-envy and create a path for up-leveling.

For the last six months, in the run-up to the program debut, Dell EMC channel team has spoken with many partners, presumably with very large partners, to seek their inputs. A majority of midmarket and SMB focused channel partners are hungry for communication and direction from Dell EMC, specifically revolving around the partners’ solution portfolio, competition, margins, discounts and sales support. There are also many questions and trepidation about the importance of VMware in portfolio mix.

Needless to say, the next few months are very crucial for Dell EMC to actively communicate with its partners, alleviate their fears, minimize ambiguity and motivate the community. Many SMB and midmarket focused partners are legacy Dell partners and do not want to be overshadowed by their larger colleagues. Any transition responding to the level of complexity resulting from the Dell/EMC deal is bound to create uncertainty. And this is the type of uncertainty and disconnect that John Byrne hopes will be alleviated when the channel partners begin to absorb the program details.

To begin with, a unified partner program should make the program participation simpler for partners. Dell EMC launched one partner portal on February 20th, with one deal registration process taking cost and friction out from the selling motion. An introduction of a simple MDF program (both proposal-based and earned) that will not change every single quarter should also help the partners. In fact, Dell EMC has committed an 8% increase on MDF YoY. The Dell EMC partner program structure is all about giving partners the runway they need to grow the business including semi-annual rebate eligibility, two paths to profit, and simplification of product categories from 26 to 9. The new partner program also includes stackable rebates and payment of incremental rebates when partners accelerate beyond their target. The rebate targets are 100% and 120% for growth rebate and additional rebate for selling services. Techaisle believes that these are powerful incentives, but would be better if Dell EMC addressed the gap between its loyalty incentive program and competitive offerings. Nevertheless, Techaisle’s channel research shows that 40% of channel partners are comparing incentive programs, especially, as channel partners have an average of 3.3 vendor partnerships. The incentive structure being offered by Dell EMC will definitely give it a leg up.

Dell EMC’s partner program is designed to reward exclusivity (albeit only in North America and Latin America) by allowing Dell-only partners to receive free training (and potentially free certification). Although Dell and EMC both have had exclusive partners, this is not (at all) the norm in the channel. It is Techaisle’s assessment that exclusivity will not be a preferred option for the vast majority of partners, and that this focus will not result in any significant bump in sales volumes for Dell EMC. SMB/midmarket focused partners see it as a conflict because their objective is to work on behalf of the customer, and providing options increases the customer’s belief that the partner is focused on delivering the best product at the best price, and not simply acting as a sales agent. Additionally, exclusivity can be challenging for partners because SMBs typically demand that the partner offer different price options, and are likely to have installed infrastructure and existing warranties that will drive them to different options in order to maintain platform homogeneity and reduce cost of integration or management complexity.

The Dell EMC partner program also encourages and rewards individual certifications – a carry-over from EMC’s program. Techaisle believes a program should emphasize ‘just in time’ rather than ‘just in case’ knowledge. At some level, certification is a cost to the channel partner company, and may well have negative downstream effects: it forces the channel partner to sell specific products to recoup certification investments (rather than aligning directly with customer needs), and may drive increases in both employee wages and turnover. Most importantly, certification has almost zero impact in sales motions within midmarket businesses. Certification gives the information and rarely SMB/midmarket customers ask for certifications. Nevertheless, certifications are relevant, even mandatory, in some government contracts, and also within large enterprises as they have all kinds of compliance requirement for certifications. In general, vendors like certifications because it increases a partner’s investment in them, but partners view certifications as an outdated requirement that is misaligned with today’s market.

John Byrne says, “services are a pot of gold”. Quite true. A “by the numbers” review of the Techaisle’s state of the SMB channel survey finds that revenues from products and services are approximately equal, and that services revenue is as likely to be derived from transactions that do not include products as from product-inclusive deals. Channel respondents report that 58% of 2016 revenue was attributable to services-led contracts. It is worth noting that while measures of this type provide a very useful benchmark for channel businesses, they require some interpretation in their application. For example, the proportion of business attributable to services is only part of the issue that channel management is wrestling with: what kind of services (for example, cloud or managed or maintenance?) is an important consideration in evaluating the impact of a channel services revenue stream. Techaisle believes that more specific measures are often more helpful to channel management. For example, firms that are migrating to a cloud model will want to understand (and build) the proportion of their overall business derived from cloud. Working with this and related data, Techaisle finds that it is reasonable for SMB channel firms that are looking to be part of the “cloud channel” to be targeting from over 20% of services revenue derived from cloud in 2015 to more than 40% before 2018.

The new Dell EMC partner program is a step forward for the company, cementing its relationship with its partners. For now, channel partners are asking as to how Dell EMC will help them in transitioning their businesses: does Dell EMC understand the challenges they face? Is Dell EMC aligned with the opportunity areas that are essential to continued channel viability? And what support Dell EMC can provide to help them grow their business? Generating new business is going to be highly incentivized and channel partners need support from Dell to acquire new business – cold, warm and hot leads. Although a channel partner has its own sales team, a large portion of their sales leads comes from IT vendors. The Techaisle survey shows that 42% of partners are planning to spend more resources on lead generation activities in the next one year. The same survey also showed that 35% of partners consider vendor’s lead generation as a top five important partnership criteria. To be fair, the responsibility also lies with channel partners to gain mindshare of the IT vendor so that when a lead does come into the IT vendor it is passed on to them. Techaisle data shows that average length of sales cycle to SMBs varies from 6.4 weeks for a VAR to 9.1 weeks for an SI. And sales support during this period is very crucial for the partners. In fact, pre- and post-sales support is the second most important partnership criteria at 42% behind training at 45%.

In the post-transactional market, there are many gut-wrenching shifts happening within the SMB channel community. Many channel businesses will be ‘consolidated out’, absorbed by firms looking to consolidate their hold on the diminishing product-oriented transactional business, or by firms who want to apply post-transactional methods to established customer rosters. It’s important to note, though, that the future is hybrid IT – a mix of traditional and cloud-based infrastructure and capabilities. Traditional channel firms may need to work to absorb the mantras associated with the new market reality, but they have existing relationships and knowledge that are also important to future success. Channel executives who can integrate existing attributes with emerging imperatives – and partner with customers who also need to span conventional and emerging IT service delivery models – have an opportunity to position their businesses for long-term success in the post-transactional IT market. Dell EMC is poised and primed to tackle the hybrid IT reality. Dell EMC channel partner program 1.0 is promising and beneficial channel partners, yet unpolished and unfinished. The next versions could be even more valuable.

On October 12 Dell took an enormous step along its new chosen path of reorienting away from a provider of low-cost PC and server hardware to a role as a more sophisticated supplier to businesses that view technology as a strategic asset rather than as a tactical necessity. Dell announced a “definitive agreement” to acquire EMC (including EMC’s ownership positions in VMware, RSA Security, Pivotal Software, Virtustream and other industry firms and joint ventures) for $67 billion – the largest-ever acquisition in the information technology industry. The deal was announced to analysts and media in a conference call that featured Dell Founder and CEO Michael Dell, EMC President/CEO/Chairman Joe Tucci and Silver Lake Partners Managing Partner and Managing Director Egon Durban, and included VMware CEO Pat Gelsinger, Dell CFO Thomas Sweet, and David Goulden, who acts as CEO for EMC’s Information Infrastructure business.

Two second Take

The acquisition greatly enhances Dell’s position in higher-margin, higher growth markets: storage is expanding faster than servers or PCs, and EMC is focused on the higher-margin software used for device management as opposed to the creation of physical devices themselves.

Revenue Synergies – the $67 billion question

While the call eschewed any commentary on staff redundancies between the two organizations, it focused its messaging on “revenue synergies that are three times larger than cost synergies,” a justification for the deal that comes primarily from new growth opportunities rather than from squeezing out costs through headcount reductions.

It can be assumed that most of this growth potential comes from expanded market rather than product positioning. In his remarks, Michael Dell noted that Dell/EMC (including VMware) have already established “leadership positions in storage, servers, virtualization and PCs,” and have strength in IT’s “most important growth vectors,” including software-defined data centers, hybrid cloud, converged infrastructure, mobility and security – and are “positioned as a leader in an amazing 22 Gartner Magic Quadrants.”

If Dell and EMC are already leaders in all of these large and/or expanding areas, then the question is where will further growth come from? It appears that the combined entity is banking on the benefits associated with increased customer account presence. In particular, Michael Dell noted that “as the data market moves to a compute-centric, converged model, Dell’s server franchise is a natural fit with EMC’s strength.” The theory appears to be that by combining EMC’s prowess at selling to enterprise accounts and Dell’s broader compute portfolio the company can increase share of wallet within major accounts; there is also some opportunity for using EMC to drive increased storage presence within Dell’s “growing commercial infrastructure franchise” in the SMB base, but this is likely to be a secondary consideration.

Security, Converged Infrastructure, Mobility, Big Data

Dell has been investing heavily in building a comprehensive security portfolio, assembling advanced threat identification services firm SecureWorks (acquired by Dell in 2011), firewall/unified threat management from vendor SonicWALL (acquired in 2012), backup software specialist AppAssure (2012) and identity monitoring and management software vendor Quest (also acquired in 2012), plus related capabilities sourced from thin client vendor Wyse (purchased by Dell in 2012) and from work done by Dell’s own engineering team. With the latest acquisition Dell adds encryption pioneer RSA Security (which became a division of EMC after being acquired in 2006) and enterprise mobility management supplier AirWatch (acquired by VMware in 2014), thus diversifying the portfolio even more. Dell has been positioning end-to-end security as a differentiating feature of its infrastructure portfolio for some time and with the acquisition Dell’s security story becomes even stronger, and even more distinct from the approaches of competitors like Lenovo, HP and Oracle.

Although it is tempting to look at a Dell/EMC/VMware combination as a means of consolidating a converged infrastructure offering capable of competing with the Cisco-led Vblock (Cisco, EMC, VMware) and FlexPod (Cisco, NetApp, VMware) offerings, it appears that Dell’s vision is broader and more strategic.

The acquisition also gives Dell a foothold into the big data deployment market opportunity where the enterprise spending is still hardware driven rather than software and analytics uptake.

And with AirWatch in the mix, Dell finally gets a mobility story in place beyond just the mobile devices.

Move to cloud

Michael Dell believes that “the combined company is very well positioned to address the move to the cloud,” both by providing infrastructure to public cloud providers and private cloud operators and through VMware’s ability to enable hybrid cloud. But in his remarks, he went further, observing that “I think what you’re seeing with the Software Defined Data Center is an ability to take the benefits of the public cloud and bring them into an on-premise data center.” He considers the complexities associated with connecting compute, network and storage as a major demand driver for public cloud, and virtualization and converged infrastructure as a means of delivering greater simplicity in on-premise environments, allowing firms to focus on optimizing for “the application user, quality of service and security.”

But Michael Dell is not satisfied by simply focusing on leveling the terrain between cloud and on-premise infrastructure, his vision is to supply infrastructure across different environments (public clouds, SaaS, hyperclouds, private clouds), providing common, connected and secure platforms to customers of all sizes, wherever their IT workloads reside.

Financial challenges

A lot has been said and written about financial challenges but due to the enormity of the deal size it is worth another read, from our point-of-view. The cost of debt may have an impact on the overall cost of operating the newly-expanded Dell entity. Dell was thought to have about $12 billion in debt prior to this deal; clearly, this figure will increase substantially after the acquisition. Michael Dell did state that observers could expect “a significant deleveraging” resulting from cost savings, increased revenue and cash flow management improvements that come with being a private company, but $67 billion represents a very high hurdle for these activities. Obtaining the funds themselves is not an issue but it seems likely that the costs associated with debt service may affect product prices and margins, and it is difficult to boost either in many of Dell’s core hardware markets. It might well be that asset sales become important to enhancing corporate profitability by reducing the cost base of the company.

Should debt reduction become a priority, the newly-expanded Dell would have a few options, starting with VMware. Although there was no mention of selling VMware as part of this deal – indeed, VMware CEO Pat Gelsinger was described as having a “very bright future” in the new organization – EMC’s 80 percent stake in VMware is worth more than $26 billion at current valuations. It will be very tempting to convert this equity into reduced debt to help the competitiveness of future hardware products, though this would be at the cost of an ownership position that (as per the terms of the Dell deal) accounts for 40 percent of EMC’s overall value. There are other avenues Dell could pursue – for example, it could combine its in-house security assets with RSA, and perhaps AirWatch, to create a stand-alone security business that could be monetized via issuance of public market shares – but a VMware sale is clearly the most direct means of raising capital to reduce debt.

Go-to-market challenges

An often-overlooked ingredient in a merger is the extent to which go-to-market staff and strategies can be melded in a single organization. This will likely be a significant issue for the expanded company. Dell and EMC customer-facing staffs have very different skills and compensation levels and may not be neatly amalgamated into a single sales force. The channel strategies of the two firms are different as well. Because EMC has focused primarily on large deals within large accounts and Dell has been more SMB (and consumer) focused, it may be that the sales staff and channel strategies can be aligned by sector but that will not erase the GTM discrepancies.

EMC sales staff work large, high margin deals, and are among the best compensated reps in the industry; Dell certainly cannot afford to reduce EMC-classic rep compensation (which would trigger a mass exodus to competitive startups) or to pay EMC rates to Dell-classic sales staff (which would consume more than 100 percent of current margins). From a channel and alliance perspective, EMC is a strategic partner to its enterprise-level services and software partners; Dell is primarily a tactical resource for SMB-focused VARs and integrators. These approaches target different partners with different programs and are delivered in different ways. Again, it is possible to align strategies by market sector, but many partners are likely to try to “shop” across programs to “Frankenstein” together blends of services and compensation structures that optimize the supplier benefits that they derive from the new Dell, and some – notably, Cisco, which is an EMC ally via Vblock – will find a Dell partnership untenable.

Final Take

While there are reasons to admire Dell’s strategy, it is very rare to find successful examples of a merger yielding a combined market presence that eclipses the individual positions of the firms involved. However, these are still early days, and the hard decisions will not be made until mid-2016, but there are still many operational issues to be ironed out between now and then. Even though Dell is not a public company, it will need to explain its expectations of “revenue synergies” to customers, analysts and the press, and Silver Lake will likely need to do the same for its current and potential investors.

There are reasons to both admire and to question the Dell/EMC deal. The answer to the $67 billion question will be found in the opportunities for “revenue synergies” that extend well beyond today’s converged infrastructure SKUs, and into the cloud and the core operating models of customers ranging from EMC’s traditional public sector and large enterprise accounts to Dell’s SMB buyers. If Dell can extend its reach across the full spectrum of IT/business infrastructure, it may build a position as the behemoth HP believed it would become, before it was bifurcated into two distinct business units. If it does not, it may more closely resemble Oracle, trying to assemble a coherent vision from a series of mismatched pieces.

The real winner though is Silver Lake. It has positioned itself as a central force within the technology industry, an unusual position for a private equity firm, and may signal that excellence in financing is joining excellence in inventing technology and excellence in technology marketing as paths to the industry’s pinnacle.