Tuesday, 31 May 2011

Will The Cloud Change Distribution?

One of the most popular Channel debates right now is, 'How will The Cloud impact large distributors?'

The assumption is that smaller, specialist distributors will actually be able to change more quickly and take advantage of the possibilities that the Cloud opens up and so largely they are left out of the question. I think that's actually misunderstanding what is going on because the problem for smaller distributors is their capital base which may hold them back from delving into The Cloud whereas this is something bigger distributors may find quicker to cover.

The Cloud is really good for SMEs and there are thousands of those sorts of companies out there. In fact, 97% of all companies in the UK actually qualify to be called SMEs and they employ the most number of people in Britain in aggregate. This represents a juicy opportunity for resellers and distributors alike. Big vendors and distributors have traditionally tried various methods and schemes to try and focus on this large sector of the market as they realise that they can only expand so far in the overcrowded large Corporate sector where so much of their business comes from today. So that's why everyone is getting excited. At last the world of possibilities opens up for SMEs and vendors should be interested.

What does The Cloud Mean?

But what does it mean for SMEs? Well, traditionally growth in IT spend in SMEs is small. In reality, they try to make do with as little outlay per year as they can and it's why the more budget style products and consumer aimed bundles by vendors are very popular down at the SME level which is a bit of a nightmare for third party maintainers as configurations are not steady but are 'Offer du jour' offerings usually.

With bitty spend and no real IT strategy at the SME level, it's very difficult for serious vendors to get their 'Big Company' messaging such as virtualisation and BURA taken credibly as they are costly, industrial grade types of solutions. More nimble vendors offer solutions which may not be as good but fit most of the bill and are a fraction of the price. And this fits for the most part for SMEs. Why buy industrial strength solutions when 90%+ of their needs are met by much lower cost solutions that are just as reliable in most cases?

So how does The Cloud change this? The biggest problem for an expanding SME is making the leap from small to bigger in terms of IT and infrastructure. Where SaaS based Cloud models really help is providing scalability to small companies. Rather than have to leap from one size to another in terms of IT spend, The Cloud offers the possibility of growth via incremental spend. Concepts like 'Pay as you Go' or 'Concurrent user licences' are a godsend to small companies. What The Cloud does is to leverage the overall spend of small companies to provide growth at a stepwise and manageable cost rather than big outlays in capital spend each time they meet a vendors band of user licences or different solution level.

This opens up a world of possibilities. What if you could buy software licences for major applications for your business at an economic price without having to buy industrial grade servers to run them or vast arrays or expensive storage to back the data up with? If only you could leverage the economy of scale and critical mass that pooling with several other companies in the same position brings? That's where The Cloud changes the game. It allows small companies to behave like bigger companies without the need for quantum leaps in IT investment. IT spend for growth can be smoothed and proportional to growth.

The New Model

As an early day SaaS person, I saw the look on people's faces when you explained how concurrent licensing could save them money. Most were blank looks. Today, there are consultancies making small fortunes simply auditing licence spend to reduce cost for Corporates. Guess what? Vendors don't like it. For the most part, large companies actually, at any one time, are over-licenced rather than under.

SMEs should never have this problem - in fact, they usually are under-licenced if truth be told. But The Cloud again allows them to get the optimum number of licences at the right price and smooth the payment of them and build in upgrades and support into the monthly costs. If they want a new employee to have a licence and they go over the server limit, The Cloud allows them to do it for only the cost of the new user licence.

It means that every big software vendor should be looking to get their act together and get a Cloud version out there as now is their opportunity to persuade SMEs to buy in early and grow smoothly and not wait for them to be big enough to invest in, say, SAP.

Microsoft are investing heavily in this and you can now get Cloud versions of their entire Office Suite for a small monthly cost. They see that over 50% of their licences they sell in the next few years will be via The Cloud. That's a big bet by the biggest software vendor. It validates this whole area for the doubters to see.

Where Does Distribution Play?

So what of the distributors who make a significant portion of their revenue on shifting traditional boxes of software and benefit on the complex licencing structures in today's world? Are they dead in the water? Does The Cloud mean hardware is done for?

Clever distributors will see the new world as a major opportunity. They, like the vendors, have been looking for an economic way to get into the untapped SME market and here's their chance. Of course, the problem is the model. For the most part, massive logistic operations and ERP systems don't really lend themselves to monthly annuity-model billing or hosting applications and having storage farms. It's a very different world.

Quantum Leaps are Required

That's the first quantum change to contemplate. The second is profit and loss. Today, distributors simply look at the volume of 'boxes' sold and know that they make some front end margin and some rebates at the back end. Add those together and look at how much cash is used in buying, selling and financing credit and you can even work out your Return on Capital Employed. That's easy. So looking at high capital investment on server and storage farms and charging monthly for licences is a very alien model. For a start, how do you work out what to pay your salespeople? How do you work out how much margin you make? At least the debtor days should be more positive as this world could make life simpler there.

But the biggest quantum change is management. For most distributors, the well-honed machine lumbers on and if you can keep all the equations in check while you grow, the hardest decision is which competitor to buy to consolidate the market. The disturbance of The Cloud is almost some ethereal thing that is just swirling around at the moment that somehow will sort itself out. The model looks so alien that it's almost not worth thinking about.

Danger lurks for those who aren't making plans today because The Cloud will be important to a lot of SME companies out there and the supply chain has yet to be crystallised. But many vendors may choose very non-traditional options to service it and that is the biggest risk to distributors today. So avoiding The Cloud and waiting, will cost vendor relationships and that is a long term risk to big distributors.

Dead Ducks or Wild Geese?

But let's not also get too alarmist. One thing I learnt from SaaS in its early days was that, as pleasant and refreshing the argument can be, there are two major issues companies face in deploying Cloud based applications.

1) Infrastructure & Reliability
2) Security

The second is obvious - storing more data offline gives most IT managers the wobbles as they think the world outside their network is infinitely less secure then within their network. But the reality is not quite what they think in both their understanding of their own network and certainly of the world outside. The world has moved on.

The first is the bigger issue. Automatically, network managers will think suck their breath in and think that at minimum their WANs will not be man enough to have applications served externally. Secondly, they will feel that reliability is an issue. After all, they will argue that the internet can go down and that is something they cannot control. They will conveniently forget the number of times that their own network has caused outages for either all or a subset of users and particularly in accessibility for those on the road. The Cloud can be actually far more reliable and easy for everyone to access - wherever they may be.

In reality, this is where distributors have an edge. Infrastructure is a big problem to overcome and this will need network skills with the appropriate hardware and software sales to help SMEs be man enough to take advantage of The Cloud. This also means that distributor sales staff need to have a better understanding of the financial arguments for the SaaS vs Premise business cases and this calls for a better quality of sales training. But the opportunities are there.

You could argue that for the clever distributor, there are MORE sales opportunities and at better margins because of the value that is required in the business case because of The Cloud. And that's where forward thinking management needs to come to the fore.

Forward Thinkers to the Fore!

One thing is for sure, ignoring The Cloud will be a big mistake. To my mind, this is a chance for the real Channel innovators to come back into fashion. There was a time when entrepreneurial ground breakers changed the world in getting products to market. Now is the time for those characters to come back or for new ones to crop up. Certainly, it is not the place for traditional thinking.

The Cloud is a very different place.

- Posted using BlogPress from my iPad

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