The Channel: Always Changing, Always Vital

“When people talk about the death of the channel, the death of distribution, I just sit back and go, ‘Hold my beer – give me a whiteboard and I will explain to you how wrong you are.’”

Channelnomics CEO Larry Walsh is our guest today for a wide-ranging discussion on what the channel is and why it matters for B2B companies.

He shared how the pandemic exposed both the vitality of the channel and the perils of neglecting it, how the channel serves as a salve to a recession, why talk of a “new normal” may be misleading, and much, much more.

Read the Channelnomics whitepaper discussed in the episode here: Distribution as a Recession Countermeasure

Featuring
Larry Walsh

Larry Walsh

Companies are cutting headcount and raising performance expectations. So if you're not just going to do what you were doing before with less, but you're expected to do more, then how do you that? Distribution has many of the resources that companies cut...use your distributors to insulate against the downward pressures that come with recession.
- Larry Walsh

Episode Transcript

Larry Walsh: Most people discovered the channel, or at least discovered that there's something between them and a manufacturer during the pandemic, and I call it the toilet paper syndrome. Nobody thought about where their toilet paper came from until they ran out, when they thought they were running out.

And it was kind of unnerving to go into the local supermarket and see shelves that were bare and not knowing why. It's like going, “Oh they're short.” No, there was a lot of what we were experiencing during the pandemic, even before the hoarding, was just a disruption in the logistics of getting stuff from one place to another.

Barrett Thompson: Hello everyone. My name is Barrett Thompson. I'm the General Manager of Commercial Excellence at Zilliant, and I'll be your host for our podcast.

I'm joined today by Larry Walsh, CEO of Channelnomics. Larry, welcome to B2B Reimagined. Before we get into our topic today, I understand you're quite the world traveler and I wonder what's your favorite place to visit in the world and either stories or tips you have for would-be visitors to that place?

Larry Walsh: Yeah, I do travel quite a bit. I really don't have a good answer for that because I want to say so many, I mean, I have my go-to places, which, if you want a good whiskey tasting, I recommend going to a place called The Lucky Duck in Dublin. If you want a good beer tasting, you go to the Staghead in Dublin.

Barrett Thompson: I think I'm sensing like a theme here already.

Larry Walsh: Yes, I see it coming, but [00:02:00] the place that I love for just returning to, Prague, or in Germany, there's this little town called Rothenberg, which I spend a lot of time. I spent a lot of time in Copenhagen, which is a great place, but I've also traveled through Asia and some of the things that most Americans don't get to see are like the central mountains of Taiwan, which is just spectacular to go look at or the interior of China.

And I have to say, one of the things I'm really grateful for is that I got to see Russia before it stopped being Russia. The world is a great place to visit. There are still a lot of places to go to. And there's a comedian, Steven Wright, said it's a small world, but I wouldn't want to paint it. And that just tells me that there's, still a lot to explore.

Barrett Thompson: Well, thanks for sharing that. I'm sure it's had a profound impression on your perspectives about business, about culture and many other things, so thank you for sharing that. Larry, would you also tell us a bit about your professional background and give an overview of Channelnomics?

Larry Walsh: I was hoping you were going to do that, but I guess I'll do it.

00:03:00] So let's start with Channelnomics. We are a channel analyst consulting and research firm. We work with mostly technology vendors, but anyone who's trying to get their product to market through an indirect sales model. We provide services that help understand the landscape, understand the different models, partner dynamics and relationships, everything you need to know to create the framework, policies and structures required to activate and maximize the benefit of channel models.

Me, I'm just a guy just trying to make his way in the world to make a living. I started my career as a journalist. I spent many years in newspapers, then went to magazines. Then came the internet, and from somehow from there, I started this little concern we call Channelnomics, because I'm just enamored by the day-to-day, from strategic to the tactical and operational levels of what it takes to actually get products in the hands of customers and [00:04:00] make them work in a value producing way.

Barrett Thompson: This is highly relevant to the audience that's listening to us today. And we are here to talk about if we can, let's talk about the economy, hot topic, very relevant, the impact it's having on channels. Let's talk about how channels can be, a potential salve to the slow growth or recessionary periods, if those are in fact upon us and unfolding, deepening.

As we do, let me ask for you to give us an orientation, Larry, kind of level set at the 10,000 foot level. For those listeners who may not be familiar, let's set a definition for the channel and the value that it provides just to create the framework for our discussion today.

Larry Walsh: Well, when people ask me what the channel is, because when they ask me what I do and I try to explain it to 'em, they go, what are you talking about a channel?

I'm like, yeah, well, most people discovered the channel, or at least discovered that there's something between them and a manufacturer during the pandemic. And I call it [00:05:00] the toilet paper syndrome, is that nobody thought about where their toilet paper came from until they ran out, when they thought they were running out.

And it is, it was kind of unnerving to go into the local supermarket and see shelves that were bare and not knowing why it's like going, oh they're short. No, there was a lot of what we were experiencing during the pandemic, even before the hoarding was just a disruption in the logistics of getting stuff from one place to another, and that gave me a, I hate to say the pandemic gave me an opportunity to actually help people visualize what the channel actually means. For those who are truly uninitiated and think, oh no I have a relationship with my customer and this is the way the world works.

I recently put this out is that unless you're picking up rocks, cutting down trees, growing food, or making babies, I guess your product is touching the channel. Is that there's no other way around it is that [00:06:00] somebody has to pick up that piece of ore in the ground. That piece of ore then changes hands to go to a refinery.

That refinery turns it into a raw material, into it's even still yet a raw material. That raw material then goes onto a manufacturer. That manufacturer, then really manipulates it into a new form. And integrates it or combines it with other things to create a product. That product then has to go into a logistics stream.

That logistics stream brings it into distribution. Distribution, then brings it into the reseller channel, which is either B2B resellers or retailers or some other intermediary. And then it finally gets to the end customer. And that's a whole lot of hands that touch everything.

Every time that Amazon box lands on your doorstep and you think, look, I got this new shiny object, that new shiny object has had dozens of hands on it over the course of its inception. Right? That's the challenge.

Barrett Thompson: [00:07:00] Great description, and I think relevant. We've all seen the Amazon package and maybe just thought, it showed up and didn't really think about all those steps that it went through.

Last year, you published a recession guide for the channel. And I wondered, what was your thesis there, and, with the benefit of hindsight what is your view on that thesis today?

Larry Walsh: Yes. We did, Channelnomics, did publish, actually published two, we had our channel recession survival guide. We published last summer in the fall with our partners at the Global Technology Distribution Council.

We published a distribution level survival guide on how to use distributors as a countermeasure. So there's two of them out. We, since the invasion of Ukraine by Russia, we've been bracing for a recession. In fact, even before then. I mean, let's go back. If you really want to get into hindsight, the predictions of a recession were actually started in 2019.

Before that we even knew [00:08:00] there was going to be a pandemic. The economists were really predicting the recession would hit sometime either in the spring of 2020 or at the latest September of 2020. And a lot of it had to do with the correlation between the economic downturns and presidential election years.

There tends to be that type of a cycle, and we had already gone through 10 years of virtually uninterrupted growth. So we are long overdue. And then the recession hit and that just threw everything out. But we knew during the pandemic that sometime in 2023 or 2024, there would be an economic correction and downturn.

Now what we've experienced is, that hasn't quite happened because everybody's been sitting on pent up demand and a lot of cash, and that's what caused inflation to go up. And now we're beginning to see, so we still had this expectation of recession last year and we thought it was going to hit towards the end of the year.

It hasn't. The [00:09:00] economy is far more resilient than we thought it would be, but it doesn't mean we feel good. High inflation rates and creeping up of interest rates, we're now beginning to see the stress that causes to start to fracture, and you're noting that with the number of the layoffs that are happening.

Accenture just this week announced that they're laying off 19,000 people. Tech layoffs have now topped, I think 350,000, but there's also still a lot of demand in the economy for these types of professional type of jobs. So the economy's absorbing them and that's just delaying the reception.

That's all it is. We believe what our economist friends are telling us that there's going to be a recession sometime either this year or going into next year. It's inevitable.

Barrett Thompson: I admire the courage to make those kind of guesses and then to have us come back and say, well, how does your guess from a year ago in your paper, stack up today?

Larry, are there any structural things that you see, whether it's populations, [00:10:00] demographics, skill mixes, et cetera, structural things that figure into this prediction of what will happen or what is likely to happen?

Larry Walsh: Well, yeah. There's definitely a shift in the economy, and this predates the pandemic as that we are already moving from what the economists call quantitative to qualitative growth.

What that means is, the economists have been forecasting that we will no longer have hyper growth across broad sectors of the economy. That we will see there may be growth, but it will be low steady growth. It's not going to see this big spike; that's good news and bad because that means that there's not going to be a whole lot of easy opportunities.

But we do see technology, I wouldn't say being immune to this, but it definitely has some opportunities and it's being born out. Funny, to use a word, like born. [00:11:00] We're not making enough babies. Okay. It's, well, this is a trend that's been going on for some time, but many of the major economies and, which happen to also be mature economies, which by definition are low growth anyways, going in the negative birth rates, Italy's negative birth rates, Spain's a negative birth rate. Germany is on the cusp of it. Japan's been in a negative birth rate for more than a decade. The Chinese have just slipped into one. The Chinese population is expected to decline by above 400 to 600 million people over the next century.

Which is amazing when you think that they were the world's largest, most populous country. They're no longer the world's most populous country. They had the first population decline in decades. India is now the most populous country. The United States is on the verge. We’re just at replacement level birth rate, replacement birth rate level.

And so what that means is that we are going from a period of where there's [00:12:00] currently, there's about four workers for every retiree, by 2040 will be two workers for every retiree. So that is a huge burden, which means we're going to have to do more with less. And this is going to open up these massive opportunities for digital transformation and automation that we haven't had, we haven't seen before.

And it's largely going to be born out of necessity. Again, using that word born, it comes down to the babies.

Barrett Thompson: That's a great insight about a trend that has tremendous power.

Larry Walsh: Let me just add that one thing though, is that you want to know the power of demographics. There is a strong school of thought that the reason why the Russians chose now to invade Ukraine is because this is the last time that they're going to have enough manpower to do it.

So that's the, the Russians have been in the same situation for a long time. So that's the power of demographics and it's something we all should be paying attention to.

Barrett Thompson: I acknowledge that I don't often think about something like demographics when I'm having conversations with B2B businesses on how they're responding to economic factors, but [00:13:00] there's a connection.

I see it, especially for the longer, might not describe what you do next week, but it certainly explains where you might be in several years, yeah. It's a consequence of some of these other things that are already in motion.

Larry, we mentioned the pandemic a little bit earlier, as an example. Seeing what happens in the supply chain and appreciating that and appreciating the channel, are there some specific lessons that have come out of the pandemic experience? What should be learned about the channel or that the channel itself should recognize?

Larry Walsh: Well, again, I think if you go back to the lesson we learned about toilet paper, we didn't think about it until it wasn't there. The channel actually became a lifeline through the pandemic. It's because the channel was there and the channel is not just a sales channel. Yes, that's a big part of what they do. They, whether you're a distributor that's selling into the channel or selling through the channel, or you're a [00:14:00] reseller that is selling to an end customer, the channel is more than that.

The channel is the delivery of experiences, of support, of expertise and resources, and a lot of businesses turn to their resellers and their service providers for that expert guidance on what to do. So if you think about all those restaurants that had to suddenly go to curbside delivery, they needed to change their point of sales.

They needed to change their inventory management. They needed to change their customer experience and the way that they collect information. A lot of things had to go into a kid running a bag out to you with a mask on, and that's what the channel actually did for a lot of businesses. It helped them transform and stay alive.

So that's one of the big things that we learned is that the channel, the true value of the channel is what it does, not necessarily what it sells. The other lesson that come out of this is that from our manufacturers, don't believe [00:15:00] exuberance. So during the pandemic, we would be talking with distributors and resellers, large resellers, and there was the first time I heard about.

Is that distributors and large resellers having PC reserves? When I think about reserves, I'm thinking about like, the US has a strategic petroleum reserve. In case of emergency, we got oil stored somewhere. In Canada, they have a maple syrup reserve. True story.

Go look it up. They had a theft from the maple syrup reserve. There was a big to-do in Canada. Had no idea that distributors in these large resellers, like CDW, had PC reserves and they were emptied during the pandemic, and a lot of that triggered. So it wasn't just PCs, it was peripherals like web cameras and mice and keyboards and just monitors and all this stuff.

It was flying off the shelves [00:16:00] and the, a lot of companies actually said, wow, this is like, this is triggering a trend. And then the pandemic ended and now everybody's like, what? Oh yeah, we got everything we need. We're good. And that's why you're seeing a lot of companies that forecasted long-term growth based on what they were seeing in the pandemic.

Like all of a sudden woke up and said, oh hell, this isn't happening anymore. And they're seeing their revenues just plummet when we're working with our clients. So we, a lot of the times when we're out there working with our clients, we do regression analysis to see what's happening, what's having happened before, so we can understand what's going to happen or what could happen in the future.

And we've been telling them, pay no attention to the pandemic years. Let's go back to the last known good years, pre pandemic, to actually be able to get a good idea of what your growth potential, what your growth rates are.

Barrett Thompson: If I'm getting your perspective right, it is that it's a mistake to misread the demand levels from the pandemic and consider those to be the new normal.

Larry Walsh: [00:17:00] Absolutely. The pandemic was never normal. Right. The pandemic by definition was a black swan event.

Barrett Thompson: Yeah. Do you think, however, independent from the demand levels, are there some buyer expectations or some practices coming out of the pandemic?

The pandemic drove us to a certain set of things that may be new normal in terms of the way buyers want to interact. Electronic systems or hands off or you mentioned the curbside delivery. Even though the pandemic is over, the curbside delivery still looks pretty popular in my neck of the woods. So do we have some new normal practices that have emerged from the pandemic even if we can't look at the pandemic demand levels as normative?

Larry Walsh: No, I don't think so. Everything that we see now was already happening before. It may have mainstreamed it more. And what I mean by that is that we'd already seen trends prior to the pandemic. Younger people in particular don't want to talk to salespeople. They want to buy online, and I'm saying [00:18:00] commercially as much as they do in their consumer lives.

So we know that this was already there. The pandemic made some things more real. That we can do things virtually, that there is, we don't necessarily need to be at any place in particular in order to do our jobs. There is still an adjustment that's going on in terms of work-life balance, and the business world hasn't quite figured that out.

And frankly, I don't think the worker side of the equation has figured that part out yet either. But I do think that a lot of the things that we think that the pandemic made possible or stimulated into existence was actually already there. We just became more cognizant of it and now we're very much used to it.

So I think that's a good thing. I really do. I don't want to say the pandemic was a good thing, but I think that there are a lot of positive things that did come out of it.

Barrett Thompson: Larry, you mentioned the second Channelnomics paper that you released, Distribution as a Recession Countermeasure. And in that, [00:19:00] I thought you had a great point of view there that stronger relationships with distributors maintain a kind of go-to-market effectiveness and value in a recession.

I wonder if you would expand on that theme.

Larry Walsh: Right. The work that we've been doing with the global Technology Distribution Council, commonly known as GTDC, has been based on background conversations that have been happening with a number of companies that we work with, questioning the value of distribution.

Why are we paying X points to distribution if all they're doing is moving a box? Yeah. If they're not really, they don't see the value of it. And what we put together in this guide was a gut check of you might want to think about it. We're just basically bringing out into the light, here's all the things distribution is and could be doing for you, and if you find yourself, if you are a manufacturer or a brand in fact, just before we got on [00:20:00] to record this podcast, I was on with a distribution manager for a large cloud services company, and we were talking about the role distribution plays with their go-to-market strategy.

So even the cloud companies are going through distribution. There's a lot of things distribution can do for you. And if you suddenly find yourself, the CFO comes down, taps the break on spending, and you have to cut 20 heads from your department and you know you still need to get in. This is actually the situation many companies are finding themselves in, is that they're cutting budgets.

They're cutting headcount, and they're raising performance expectations. So if you're not just going to do what you were doing before with less, but you're expected to do more. Then how do you do that? You have to defer to something else. And distribution has many of the resources that companies cut during a recession, so, it's actually, that's what we provided guidance on and recommendations for using distributors to [00:21:00] insulate against the downward pressures that come with the recession.

Barrett Thompson: Larry, can we explore that a bit and maybe enumerate some of those specific kind of resources or benefits that the channel is bringing and give some examples where those have made a big difference.

Larry Walsh: So in distribution, just think about this.

In the channel, you have resellers and you have account managers. The account managers are the ones that are out there working with the resellers to curate opportunities that result in sales and revenue. Alright? Now you go through a layoff and you have half the number of account managers that you had the day before.

Now what do you do? Right? Well, you turn to distribution. Distribution has partner management capabilities, distribution has marketing resources and marketing support capabilities. Distribution has technical support, you can actually expand utilization or defer more technical support into distribution. Many distributors worth [00:22:00] their salt have professional services arms so that they can, you can augment the hands-on touch by using their resources.

And the big thing that distribution really does is credit and financing. You still need to get stuff sold. So, right, there's two sides of this equation. Most people think about credit and financing as either payment or loans. You're going write a note for something. But distribution is a bridge, so the customer may defer on something.

Net 60 standard terms to the reseller, net 45, the vendor wants, the brand wants to get paid today. So the distributor steps in. This isn't per, extending credit, this is just financing terms. The distributor will pay the vendor net. They'll allow the reseller to pay net 60. That way when the customer doesn't pay until net 90, there's a level of insulation that goes through the system.

Yes. Right. So that's a valuable role. And [00:23:00] if that paper goes bad, who takes the hit on it, the distributor does, right? Yeah. Right. So that's the thing that people miss on the value the distribution brings to the equation. So those are a few of the things that distribution can do.

That's the point of that paper, that guide was to make it, the, you remind people distribution's already doing this for you. And when times get tough, they can do more of it.

Barrett Thompson: Those are very tangible examples. I appreciate you sharing. Zilliant works a lot with tech companies and you've used, tech examples.

You have a focus there. We also work with other B2B industries, really across the spectrum. From your point of view, are there other sectors in B2B that you think are ripe for a greater channel investment and channel engagement?

Larry Walsh: There are a couple, known as all of them.

Barrett Thompson: Just a couple. That's pretty inclusive. I like that.

Larry Walsh: No, but that's what I mean like in, again, go back to where we started with this, is that unless you're picking up rocks, [00:24:00] you're going through a channel. If you're going to go through a channel, invariably it's, depending on where you are, you're going to go to a distributor. Other sectors or other verticals that would, that are good for those are pharmaceutical, I think is probably going to see a lot of those pharmaceutical and medical equipment or medical device.

Food and I think not food services like restaurants, groceries from the food processors to the grocers of the supermarkets. They're really ripe for distribution because they, particularly here in the United States, because the Biden administration is picking up enforcement of what's known as the Robinson Patman Act.

And if you haven't heard about this, come to the Channelnomics website. We have a note about what's going on. It was a law written in 1936 about fair pricing and the Biden administration, they haven't been having a whole lot of luck with antitrust cases under Sherman. So they're now turning to unfair pricing as a way of culling or cowing some bad practices that are happening on the market.

And their two [00:25:00] primary targets are food and pharmaceutical. But there's a lot of industries out there that are primed for some increased use of channels. And I think, any durable good has a channel and a distribution to go through. So white goods we are having conversations with distributors in Europe about increasing the flow of white goods through two-tier models.

Anything in services, there's a need for those intermediaries, even in services. We then looked at cars as a service and it really is funny to go and think about this is that we're conditioned to think you go to a dealer and then you buy a car from a dealer. Well, the dealer does have a distributor. The distributor is buying it from one of the manufacturers.

But when it goes to a service, there's now a whole different channel it has to go through, not just in the facilitating car as a service, but also the recovery of that car and recirculating it back into the market. So there's a lot of things that are going out there, but when people talk about the death of the channel, the death of distribution, I just want to look back and go, hold my [00:26:00] beer.

I'm just gonna, let me, give me a whiteboard and I will explain to you how wrong you are.

Barrett Thompson: I see that. And for the points you've already made, there's nothing that gets to anyone from its original source without all of those intermediate steps and without those value adds along the way, thinking about it from the manufacturer's point of view, Larry, what guidance do you have from them about stimulating more sales activity through the channel or a greater engagement from the channel?

Larry Walsh: There's a lot of things that manufacturers need to do or can do. We do believe in channel management automation, not only because it creates more frictionless processes, but it also the expedites the flows of money and goods. But also creates better experiences. However, the thing that a lot of vendors look at when they look at automation is they see it as a means of cutting the number of heads or cutting costs.

Our advice to them is [00:27:00] that if you automate, then you should be looking at it to bring time for humans to go be more human. The thing that stimulates sales more than anything else is human interaction. And I know I said earlier that young people don't want to talk to human sales. That's true, except there is a scale by which you no longer have a choice but to interact with another human being.

So there are certain things where you can buy and consume in a self-service model without any problems. And there are things that absolutely require human intervention. And then there's this gray area where it can go either way, where you have the choice. And so that's why, you really want to drive sales, invest in people that can interact well with other people.

Barrett Thompson: Larry, is there anything else you'd like to share with our audience before we say goodbye?

Larry Walsh: There's many things I'd like to share. I'm not sure how many of them people would find interesting. I think the one thing I would say [00:28:00] to people is that the channel is easy to describe and when you describe it, it then becomes easy to understand.

Making it work is hard. And so if you want to know about what that takes and some of the nuances and what these trends all mean, this is what we do every day. People pay us to sit around and think for them, and actually I'd rather enjoy doing it. I always enjoy good conversations like this one. So, anybody else interested in having a conversation, just let me know.

I'm open. I'm always open.

Barrett Thompson: Larry, thank you for that offer and thank you also for sharing your point of view today on the podcast. It's been a pleasure to have you. I want to thank each of our podcast listeners for being with us. If you'd like more information on the topic today, check out the show notes.

We have links back to the Channelnomics white papers we discussed earlier. We're committed to your success, and if you need any assistance, please reach out to us at Zilliant. Just before you go, would you do me a favor and rate [00:29:00] and review the show in your podcast app as it helps us to continue to put out great free content. Until next time, have a great day.

Are you ready to learn how Zilliant can help you overcome your pricing challenges?

Reach out to us today to learn how we can help!