Vendor Tiering Locks Out Small Partners: Anurag Agrawal on Allocation, Not Capability

[00:00:14] The average channel partner will grow 11% next year. That's the number that goes on the slide, and it's the number that hides everything worth knowing. Because underneath it, partners doing under $10 million are projecting 8.4%. Partners over $500 million are projecting 16.8%. That's exactly double. Everyone assumes that's a capability story, that the big firms grow faster because they're better.

[00:00:42] My guest today has data saying a meaningful share of it is not capability at all. And he has a second argument I've not seen anywhere. That the channel is not one economy, but two, with opposite cash flow shapes and that most vendors are running a single program having quietly picked one without knowing which one. Welcome to the Business of Tech Lounge. This is where we break down what's changing in the IT services market, what it means for providers and vendors, and the business of tech.

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[00:01:55] Try Control Map for free today. Visit scalepad.com slash Dave to get started. That's scalepad.com slash Dave. My guest today is Anurag Agrawal, the founder and chief global analyst at TechIsle. TechIsle is a research firm with a single focus, the SMB, the mid-market, and the partner ecosystem. Anurag has been tracking those segments for three decades after building research practices of both IDC and Gartner.

[00:02:25] His 2026 Global Channel Partner Survey ran across 5,450 partner firms in 24 countries. He was last on the show in March, which by our own standing arrangement is about three months too long. Anurag, welcome back to the show. Happy to be here, Dave. I'm sure it's going to be a blast like last time. And yes, three months is way too long. Well, we'll keep doing it. We'll do it a little bit better and make sure to have you on.

[00:02:52] But I got to ask, you just remeasured the whole market. So we kind of have to start with that. You put worldwide IT spending by firms from 1 to 5,000 employees at $1.667 trillion per year. And that excludes communication services. It goes to services rather than technology products. Inside services, the composition is flipped. Maintenance support and break-fix used to define the market.

[00:03:21] And the money is now concentrating in consulting, integration, and putting AI into production. So I got to ask, what's actually growing inside that number? And what's quietly shrinking? Yes, let's start with that. That's a great question to put things in perspective. You rightly said the services is the largest block and it is growing. But not the services people picture, the maintenance, support, break-fix,

[00:03:51] the labor of keeping systems alive used to define the SME services market. This money is now concentrated in consulting, integration, and putting AI into production. And transformation work has overtaken recurring management and it is not even close. So what do you say that what is shrinking? Well, devices look healthy in dollars, but unhealthy in units. That is PCs, laptops, and so on and so forth.

[00:04:21] So volumes are down, while average selling prices are climbing on memory pricing. So the spend line is being carried by cost, not by demand. But what is also more very interesting within the SME market is the data center is in a genuine hardware super cycle. A separate study that we did called the data center adoption trends.

[00:04:48] AI workloads have overtaken hardware end of life as a leading refresh trigger, which has not been true in the entire time we have run that study for the last several years. So what is quietly shrinking is undifferentiated resale and commodity managed services. And nobody puts that in a press release. It is in the numbers.

[00:05:16] That's what we are actually seeing. That is absolutely... I'm thinking about that from the perspective of the services there. So the recurring line, what does it mean for this around the recurring revenue line? I feel like that's the most important headline to talk about. You're right.

[00:05:40] Because for the longest period of time, we wanted our partners to actually grow their recurring revenue because it increased the valuation. What is now seeing is that it's dying. It means that the ceiling is coming down.

[00:06:04] Now, the recurring line is now the smaller and slower growing half of the services market. It's not going to be a big option. Attach transformation work to the base they already own or accept that they are running a scale business, in which case the strategy is consolidation and operating leverage, not growth.

[00:06:30] So the thing I would not do is treat the renewal book as a liability. It is the single best asset a partner has for selling transformation work because it is the only... ...about how the customer actually runs. The problem is not that the recurring business exists. It is that most partners have never priced or packaged what they know from it. So failing to...

[00:06:57] ...what you learn from it is the problem. That's the new way the partner actually see, they understand their own business. Okay, that's a big deal. So let's start talking about the decisions that have to be made there, right? So under 10 million, 8.4% projected growth. Over 500 million, 16.8%. 41% of the largest partners sit in the top tier of their primary vendor program.

[00:07:27] 2% of the small... And over the last 24 months, the smallest ban is the only one that moved down in the tier while the channel as a whole moves up, right? So I thought your headline finding is that partners under the 10 million difference there and the double in the projection difference. Everyone says this would be a capability story, but you say a lot of it isn't.

[00:07:56] Walk me through what the mechanisms are here. Like, what did you find when you cut the tiering? Like, walk me through what's going on. Yeah, so that's... So, but nobody disputes partners' growth. Right. That is not the finding. The finding is why, right? Okay. The industry explanation is capability because larger partners have capital, they have talent,

[00:08:25] they have brand, and the ability to fund a longer sales cycle. All of that is true, and I'm not arguing against it. What I'm arguing is that a credible share of the gap is not capability at all, which is your question. It is allocation. It is set of decisions vendors make about who gets which inputs, and those decisions are made before any growth happens.

[00:08:54] This is a distribution of capital story dressed up by vendors as a meritocracy. The measurement, tiering, lead allocation, and support machinery in this channel no longer rewards customer value. They reward the ability to staff a program office. So, the partners who can afford program management get better inputs, and better inputs reduce the growth. And that qualifies them for better inputs.

[00:09:24] So, it's a circular mechanism, right? Right. And that is a problem, right? Now, I'm going to play devil's advocate in your own position, partly because you asked me to, right? So, a vendor, if we had a vendor on this call right now, they would say those allocations are because of performance, right? The consequence of performance, not the cause. Smaller partners get fewer leads because they convert worse.

[00:09:53] How do you know that the arrow is pointing the other way? Yes, I do not know, and I'm not going to pretend that the data shows that either, right? Okay. So, but here is the problem with which the vendor needs to answer. The conversion evidence measures the vendor's own allocation, not the partner's ability.

[00:10:22] A vendor routes its best qualified leads to its largest partners, then measures conversion, then uses that conversion to continue to justify their routing. That is a closed loop. Sure. It confirms itself forever, and it cannot distinguish between a partner who converts poorly and a partner who was handed the leftovers.

[00:10:51] So, there is one piece that does not fit the performance story at all, right? And that is also something called the concierge service, because this is what the partners want as well. If support were allocated on performance, you would expect it to go where it moves the needle most. Instead, it correlates almost perfectly with revenue concentration, and that is a coverage economics decision made by the vendor.

[00:11:22] So, my position is narrow, but I think it is defensible. I'm not claiming the gap is entirely manufactured. I am claiming that nobody has tested how much of it is, and the test is cheap. So, what I'm saying is that the conversion evidence measures the vendor's allocation, not the partner's ability, and it becomes a closed loop, and the smaller partners are caught. Okay.

[00:11:50] And this is a big challenge, both for the vendors and the partners themselves. Now, the other thing that I thought was really interesting is you wrote that a surprising number of the vendors can't even produce per partner conversion data by the revenue band, like at all. And if that's the case, that would mean the allocation never rested on any evidence in the first place.

[00:12:16] Can you give me a little bit of a sense of the ecosystem, the size of the percentages of the vendors that are operating this way, and how you have that kind of insight? Yeah. So, what we did was we actually studied both from a partner perspective and the vendor perspective.

[00:12:36] And the important point here is to understand that, you know, the vendors themselves are saying that, you know, where should I really help it, right? So, what's happening is you actually made those stats, right?

[00:12:57] So, what's happening is that, you know, the vendor perspective, right?

[00:13:25] It is measuring the size, which means a tier is not a quality signal to a buyer. It is a signal that we all have agreed to read as a quality signal. And many vendors that I have spoken with, right? Do not want to name names here, but the point here is, hey, you talk to them and say, you know what? They always come back. Anurag, it's an 80-20 rule.

[00:13:52] 20% of the businesses, 20% of partners drive 80% of my revenue. So, I will continue to talk about how many keynotes you and I have attended where everybody gives the examples of Accenture's and Deloitte's and Presidio's and all those big, big partners, right? Because that is where they're focusing their attention on.

[00:14:15] So, nobody has been able to kind of experiment with the fact that, hey, if we do differently with the smaller partners, can we do it differently? Yes, they come out with SMB competency program and so on and so forth. But again, it's not taking up the large concentration or budget for the smaller partners. Okay. So, let's do both sides of this, right?

[00:14:39] Because I think you've got to propose a concrete experiment that these vendors should run. What is it and why is nobody running it? Right. Let me think through that question because I think it's an important question. So, the way I would like the vendors to do a concrete experiment is ring fence, say a fixed share of qualified leads for partners under $10 million. Okay.

[00:15:08] And hold it for four quarters. Then compare the conversion rate against the assumption that sent those leads to larger partners in the first place. That is it. It does not require some kind of a program redesign, a new tier, or a new budget line. And it settles the question in either direction.

[00:15:30] If small partners convert worse, the vendor has evidence instead of an assumption. And I will be vocal about this. I will write that up too. But if they convert the same or better, the vendor has just found a pipeline it already owns. So, your question is why has nobody run it? Two reasons.

[00:15:54] First, it is a four-quarter test inside an organization run on quarterly compensation. Right. So, the person who starts it does not collect on it. Second, and more human, nobody volunteers to run an experiment that could show a core routing assumption has been wrong for a decade. Sure. Okay. So, let's flip it around, right?

[00:16:23] Let's help the partners out on that side. What are the four questions a small partner should push their partner account manager on their next call? Well, let's begin. One, the partner should ask the vendor, what is the formula that determines my standing in this program? Can you show it to me? Right.

[00:16:48] Two, what did tier movement look like over the last 24 months for partners in my revenue band? Not across the entire program. Three, what conversion rate did the leads you sent me actually produce and how does that compare to the program average?

[00:17:12] Four, what support is available to partners who two bands above me that is not available to me? Right. So, what I would tell the partners to pay attention to is not the answers. It is how often there is no answer. Okay. Okay. In my experience, the fourth question is the one that produces the longest silence. And the silence is the finding.

[00:17:41] Right? So... You're so right. I literally just wrote that on another pod. Sometimes the silence is the actual answer. There you go. Right? I... So, I think that this... So, this session looks like today we are doing a lot of off-end vendor bashing here. No. No. We're trying... What we're looking for is ways to improve the relationship. But we've got to talk... Absolutely. We've got to talk about customer acquisition because it's the other half. Right?

[00:18:11] Acquisition consumes 31% of first-year value on deals under $25,000. 9% on deals above $2 million. And 67% of sub-$10 million partners live in that $25,000 to $100,000 ban. So, what I want to ask then is... Is the small partner economic model structurally underwater? Or is this something that we can fix? Yeah. So, this was a question that we had...

[00:18:41] A series of questions we had in our survey. And we spent enormous amounts of time on it. And we actually had to go back to almost three-fourths of the 5,000 partners to make sure we got the data correct. So, your question is... Is the small partner economic model structurally underwater? Right? That's what you are asking. I wouldn't say it is underwater. It is thin. With almost no room for a mistake.

[00:19:09] Which is a different problem in some ways. A worse one. If acquisition costs each 31% of the first year value, the deal is profitable in year two and every year after. The business works. What it cannot absorb is churn. A long implementation or a discount.

[00:19:35] A large partner running 9% acquisition cost on a $2 million deal can be wrong repeatedly and stay healthy. A small partner has to be right every single time. That's what I'm talking about. It's not underwater, but the margin of error is very thin. But the question is, hey, is it fixable? Yes, it is fixable.

[00:20:02] But mostly at the partner end, the only real lever is narrowing the ideal customer profile until acquisition cost comes down, which in practice means vertical or workload specialization. Specialization. Right? So this is what I tell partners. Specialize or vanish. Verticalize or disappear.

[00:20:32] I think I said that in one of your podcasts earlier in the year, maybe last year. And that is the one move that reduces cost of sale without cutting price. But then you can say that, hey, a vendor can also do something, right? Yes, it can do it, which is co-selling into smaller deals.

[00:20:55] But almost no vendor does it because their own seller compensation does not adequately reward a $60,000 opportunity. Well, there's a whole bit that I want to get into next that kind of stopped me in my tracks. And it's all about the economy. But I'm going to take a quick break to hear a message from our sponsor. Every tool you bolt onto Microsoft 365 is another console, another login, another thing that eats your team's time.

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[00:21:54] Learn more at proofpoint-total-protection.com. Now you made an argument that the channel is not one economy, but two. There's an advisory economy, which is paid at the front of the deal in the build, and an operational economy paid at the back end in the run. The cash flow shapes are totally opposite.

[00:22:19] A vendor running a single partner program has chosen one of them and may not have known which that is. And there's some data in there. By your data, a large majority of vendor incentive spend lands at one moment, right at the transaction close. That's the start of the work for one group and the close to a relevant for the other. And roughly three-quarters of partner profit sits and expand and renew, while new logo acquisition is the least profitable motion most partners run,

[00:22:48] and it's the one most programs are rewarding. So I kind of have to say, walk me through your analysis here of this disparate economy and how you came to these discoveries. Right. So we have been, you know, you said that, you know, we have been tracking this kind of data for a long time. And increasingly at the start, at the end of last year and the beginning of this year,

[00:23:15] we started to see that the channel is splitting into two, the advisory and the operational economy, actually spurred on by this Gen AI, right? Right. So the advisory economy is, as you rightly said, the consultant selling AI transformation, SI is architecting multi-vendor solutions, ISV is building proprietary IP. They get paid at the front of the deal in the build, they run long sales cycles,

[00:23:44] they measure their own success in IP created and outcomes delivered. On the other side is the operational economy, which most of the MSPs sit. MSPs deliver managed outcomes at scale, whilst deploying product at speed, they get paid for what they keep and grow, and they get paid fast in cycles, a fraction as long, right? So two economies, opposite cash flow shapes, opposite definitions of a good quarter.

[00:24:11] And you can see it in the growth expectations by partner's type. ISVs are projecting the fastest growth, MSPs are strong, and the VARs are the slowest by a wide margin. So those are not three companies doing the same thing at different skill levels. They are different businesses. So the way you talked about the cash flow, that is very interesting.

[00:24:41] So most of the partners today that you and I talk to sit in the operational economy, and they are trying to move to the advisory economy, right? They say, you know what, how do I build an advisory business? Because everybody kind of talks about it, right? So what happens to the partner who is sitting in the middle, right? An MSP decides to add advisory work.

[00:25:07] Advisory requires a bench that has to be paid before any revenue arrives. So the managed services cash flow covers it. The advisory practice never has to price itself honestly because it is being subsidized by that managed services cash flow. And the managed practice quietly loses the reinvestment it needed. So 18 months later, the partner finds that it has a mediocre version of both,

[00:25:37] both the managed services and the advisory. So the partner should actually price their advisory product, right? Or their advisory work as a product. With a real rate, stop giving it away as priest says to win the contract and be willing to lose deals over it. The partners who get this right treat the assessment as revenue, not a sales card. That single change is the difference between a services business

[00:26:06] and a services-flavored resale business, as I call it. I like that framing. Now, I want to ask because I think it dovetails with some of the stuff that I'm working on. I want to see if it does. Because if agentic AI is an advisory motion, and maybe it's an operational one, you've argued that it lands operationally first and that the real consequences are there for those who capture it. So here's my thesis, right? I've been arguing all year that the value from the agentic shift

[00:26:36] accrues to the vendor and not necessarily to the partner, particularly if you're looking at it from a consumption basis, right? That if more and more consumption is the way things are built, it'll move up to those that are selling consumption, which is ultimately the vendor. So if you're right that it lands operationally and the economy paid in the back end with the consumption, with the lease incentive support behind it, does your data make my case for me? Or tell me where I'm wrong here. Right.

[00:27:05] So I think we grapple with this a lot, right? Agentic AI, is it an advisory? Is it operational? What do you have to do, right? So the assumption is that it is advisory, right? The assumption is that agentic AI is a strategy conversation, which would put it squarely in the advisory economy. But let's see what happens, really,

[00:27:34] because agents run workflows. They do not run strategy decks. Once they are in, once they are deployed, they need identity, entitlement, monitoring, versioning, rollback. They need someone watching them at three in the morning. That is the operational muscle memory. It is the MSP skill sets, almost exactly, right?

[00:28:02] Which becomes operational. And I think the industry narrative has this backwards, right? Okay. And then, and then I think your point was also pretty valid, right? What happens is the acceleration in AI spending should land first in the operational economy, and that favors MSPs and it favors small businesses, because small businesses are almost entirely operational to begin with.

[00:28:32] It does not run on a 200-day advisory cycle. It buys the productized agent. So the segment everybody writes off as the laggard is the one position for the next wave. So this is an MSP opportunity, not an advisory or not a consultancy one, because our study also shows that, you know what?

[00:28:59] Those SMBs or those mid-market firms who have already deployed agents, right? Agentic AI are having 144 agents running to one human. Now think about this. 144 agents for every human in the workflow. Each one has credentials, even if they're ephemeral. They're permissions, a version, a failure mode, and a cost.

[00:29:27] And this is a huge opportunity for an MSP, because this is an operations problem with a governance wrapper, which is precisely what an MSP does. And you've also noted that the small business ratio is 59 to 1, right? So it's a little bit smaller. Help me out, understand a little bit there. What do you think those ratios... That's a pretty wide range. Are we going to land somewhere? Is there a standard that we should be looking at?

[00:29:56] What's the real thinking on what that ratio may be? I was speaking with IBM's CTO. I should not have mentioned that, but because I forget the name of the executive. He was saying that in their own experiments within the enterprise customers, they're finding that it is 125 agents to one human, which is very close to what we have got, but that's the enterprise deployment

[00:30:25] because they have got pretty big IT setups, these enterprise organizations. Mid markets do not, and small businesses definitely not. So it will land between 144 to 59, or it could go even higher. But I think to begin with in the next year or so, we will be between 144 to 59. Why 59 for small businesses? Because, you know, there are only so many workflows a small business has, right?

[00:30:55] So they can... So there is a physical ceiling that small businesses runs into. But when you look at an upper mid-market, it will probably go beyond 144. But if we only look at core mid-market, it is slightly less than 144. So I think that's where it is happening, right? Yeah. I mean, that's the answer, yeah. Fair.

[00:31:23] So I want to couple that with some of our own data. So we've surveyed over 3,500 MSP websites, right, and gone through. And we asked a simple question. Do they have AI on the website? Literally just, are they mentioning it in any capacity? And what we find is 65% of that sample set, no mention at all, right? So I know I'm confident in saying there's a partner right now watching this with no AI practice and no capital to build one. So give them your advice.

[00:31:53] What's your advice around? Is it building? Is it partnering? Is it specializing around AI rather than in it? Like, what advice would you give to the smaller partners who haven't really leapt and moved forward? Yeah. I think the way I would say that to a smaller partner is specialize around it, right? Do not try to build a horizontal AI practice

[00:32:19] because you will lose the talent fight to partners or firms that can pay double and you will never get the reps to be credible. So the work that is adjacent to AI is work this partner can already do and it is what buyers require first. So for example, data readiness, governance and acceptable use,

[00:32:49] security for AI systems, identity management, change management, which is where most of these projects actually die. almost 46% of the SMBs in our study, in an SMB study, expect a data strategy conversation with a partner before they will entertain an AI purchase, which means the first meeting is not an AI meeting at all.

[00:33:18] So the honest positioning is, I am not the firm that builds your model. I am the firm that makes your model safe to put into production and keeps it running. And I believe that is a more defensible business for a $5 million partner. Being a small generalist AI consultancy is not, right?

[00:33:47] So you do not have to be an AI firm. You have to be the firm that makes AI safe to run. And that's a more adjacent business of a smaller MSP. Well, Anurag, that is exactly the right place to end because you've given our MSPs exactly the actual insights that we're looking for. Anurag Agrawal is the founder and chief global analyst at TechIsle. The channel survey we talked about is at techisle.com.

[00:34:16] The piece we spent most of today on published on the 31st of July. Anurag, thank you so much for joining us. We're going to have you back before the three months are up. We're going to have you on more often. Thank you so much. It was a blast as always. Your questions are absolutely fantastic. Makes me think. That is the great fun of it. Well, when we get done, I'll send you an email. We'll figure out when you're coming on next.

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[00:36:10] The financial side of running an MSP, handled by people who understand the model. Learn more at abcsolvesit.com. In this show, the whole questions, the back and forth, the discussion, it's the closest thing on the podcast feed to what the Small Biz Thoughts community is every day. Member meetings, real questions, and real answers from operators running businesses like yours, plus the resource library and courses through IT service provider university behind it.

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