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Channel Matters Blog > April 2011 > Getting Partners to sell cloud services

Getting Partners to sell cloud services

by Chris Marshall
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Massive growth is predicted in the adoption of cloud services. So why are so few partners getting on board and what can vendors do to help?

Massive growth is predicted both of adoption by end-users and XaaS offerings from partners according to a recent  CA survey. Also, this very useful study by Microsoft, 'The Economics of the Cloud' quotes Gartner's survey that shows adoption of cloud services rising from 68% in 2007 to 90% of respondents last year.

The barriers to entry have never been lower and vendors are falling over themselves to offer support programs. We should be amazed that everyone isn't out there selling everything cloud to everyone. Surely it's like the 80s mobile boom when anyone could set up as a mobile phone shop and just count the contracts, isn't it?

Er, no.

  • Everyone

Compubase data shows that nearly all content providers and over half the ISPs now offer SaaS, but less than 1% of resellers, nor is their number growing rapidly. So despite the huge customer demand and the available support, few SIs are actively involved.

According to a recent study by Amazon Consulting there is money to be made in servicing the cloud. The potential revenue steams include:

  • referral/agency fees: Microsoft is offering 12% up front and 6% of recurring. Oracle offers 5% for the first three years of a CRM On Demand deal. Netsuite recently announced 100% of initial margin and 10% on renewals. Compatible with software licence mark-up but, obviously, nothing like the 30%+ on a server-based solution.
  • Resell Margins are closer to client/server income, running at 30% for CRM On Demand or 5-15% for Rackspace. Salesforce is offering 50%.
  • Pre-sales assessment. This should be a chargeable Scope of Work, but never was in the old world, so is hard to charge now.
  • Integration and customisation. Appirio is able to charge 20-50% and Bluewolf up to 60% depending on the complexity, plus a further 10% on training and 25% on their own aps. Salesforce estimates their partners get 30% -50% on customisation. These are very similar to, if not greater than the pull-through on Client/Server solutions.

In actual fact these are the areas where SIs can add value and they are exactly the same as the value they add in traditional services. They are comprehensively listed in this useful article from ST Consulting.

So why such low adoption in the SI channel? Four main issues:

  1. Ability to charge for services: Traditionally service is charged as a % of the capex, e.g. 10% for 1st year maintenance. If the TCO is going to be so dramatically low, then the services are expected to be low as well. Is it worth trying to bill .40c a month against a $4 per month 10GB storage box, especially when it is essentially self-provisioned.
  2. Managing the business implications. This is the big one: modeling the cash-flow, revenue recognition, exit valuation and other implications of an annuity model, especially whilst trying to run a traditional business model in parallel. Then there are the internal issues such as sales compensation. All up-front and the SI takes the cancellation risk? It's that kind of behavior in the mortgage industry that lead to the financial crisis we're all in now. But how many of your top people will stay if you pay them as the customer pays. In a hard-to-cancel managed service contract, this is straight-forward, but for PAYG contracts, this means a continuing sales effort to prevent cancellation and increase adoption. That means Farmers not Hunters. Do you try and change your sales team or replace them?
  3. Customer ownership: Traditionally, the customer wants a Single Point of Contact: "You told me what to buy, I bought it through you, you put it in, you d**n well make it work". In the Saas model this often breaks down. There's nothing the customer hates more than finger-pointing, but the SI has no choice.
  4. ROI: Partners are aware that this is a short-term opportunity. When any product goes main-stream, the services get built-in so it becomes and 'Out of the Box' solution and margins are squeezed as prices drop and vendors rush for land-grab. Traditionally, this meant that SIs gave way to volume channels as the main route to market. In SaaS they may give way to service providers that will (and already are) bundle with access services, but otherwise it will be to the vendors' direct online sales. Either way they will be cut out and need to start looking for the next big thing. The quicker the adoption of cloud services, the shorter their window of opportunity. This was always the Catch 22 in the SI business model, but the pace of change has dramatically increased with cloud services.
  • Everything

The Microsoft report says it is only CRM that businesses feel is fully ready to migrate to the cloud and other applications need a lot more work. Their 2010 paper showed no one about to move their ERP. As in the mobile phone boom of the 80s, it may be PAYE that drives mass adoption. Few vendors can afford that model, so it is restricted to mass apps amortising risk across huge base, or those, like Google and Amazon, that need the infrastructure for their own use anyway.

Most SaaS still requires a per seat subscription contract which, in cost terms, looks very like a managed service. We have several clients, for instance, that have avoided rolling out Salesforce to partners in order to do better lead-sharing because of the huge license fees needed. So, at a certain point, perpetual/Enterprise-wide is preferable. Indeed, the decision on Capex vs managed vs cloud comes right at the end of the cycle. Applications only available as SaaS are restricting their market.

And the vendor lock-in is a real concern, once you've loaded your data and moved your business process. Even if, theoretically, you could switch, there would need to be a very serious problem before you did so. Again, looking at mobile, it was not until true number portability that there was true competition in the industry.

  • To everyone

The Microsoft study calculated that SMEs stand to gain 40 times the cost-benefit through public cloud services, compared to private servers. By contrast Enterprises stand to gain 10x cost-savings. So SaaS is an SME play at the moment. There is an 80% TCO reduction between a 1,000 and a 100,000 server data centre. As over half of IT budgets are spent on Infrastructure and a further third on application maintenance, the areas most likely to benefit from this TCO saving, adoption should be a no-brainer.

However, a recent Gartner CIO survey, quoted in the Microsoft article, shows continuing concerns over security (84% of respondents) and maturity and performance (29%). So there is no boom yet; we have not entered the 'Tornado'. We are still in the Bowling Alley, knocking over niche cloud services one by one. The industry needs to
- raise awareness
- overcome objections
- develop an urgency to act

And this is best done by the trusted advisors in the channel. However, if they cannot see the benefit to themselves, they will not evangelise to their customers. So the most important thing vendors can do to drive sales of cloud services, is to work with their partners to develop a successful business model to help them benefit from it. This is very different from the traditional conversation that Channel Managers have with their partners. Both Salesforce and Microsoft have used outside consultants to help that conversation. A more scalable approach would be to train the teams in the financial modeling skills to be able to do it themselves. This is where courses like Channel Enablers' Channel Sales Financials and Effective Partner Planning are useful.

Last modified on 6/30/2013 10:10:35 PM
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