Monday, 29 August 2011

The Cloud - The Business Model Challenge

Thousands of resellers are are on the cusp of the new Cloud opportunity. Some have already cut their teeth with a few sales of Microsoft BPOS or something similar. Some may already be building a healthy new business at the heart of which may be provisioning software and hardware in The Cloud either themselves or with a hosting partner. The majority of resellers, though, are playing a waiting game.

Central to this waiting game is a nervousness about changing sequential lumpy sales into a recurring monthly annuity model. Even if you collect the cash as an annual or quarterly sum, subscription models are always accounted for as 12 equal monthly additions to the Profit & Loss account - just the same impact to overheads that the buying company experiences. Costs for the customer are smoothed; revenue and profit for the reseller does the same.

In one example in a workshop I ran recently, a reseller faced the prospect of a 70 user installation usually worth £50k being a monthly annuity. How could he scale his business properly? How should he reward his salespeople? But one of his biggest headaches was that the new Cloud based solution involved 3 different suppliers and his biggest job would be to track the billing and renewals on the annuities.

You can throw most other things to one side in The Cloud from a resller point of view. After all, while there may be some different terms and technology to learn, understanding solutions has been in the blood for channel players for years. Understanding the change in how they account for Cost of Sales, track annuities and renewals and incentivise salespeople are the biggest changes to their businesses in years. And it is not easy.

Most resellers, certainly in the short term, will not be able to adapt their internal accounting systems to take care of such administrative problems. It is a cost too big to bear in the face of low sales in the short term. Vendors talk glibly about how they will run 'Transformation Workshops' but the costly talking shops usually see things only from that vendor's point of view as if the is the only company that exists and while ably pointing out the problems they talk little of showing practical solutions. Everyone knows that transformation is necessary - now where are the solutions, ask resellers.
As a reseller builds its Cloud business, it may be interacting with dozens of suppliers, each billing them differently at different times of the month for parts of solutions they are supplying to a volume of end users as parts of total solutions which have to be tracked and consolidated then billed.

Some are proposing complex solutions to this like adopting Consumptive Billing Systsems as based on mobile or telecom providers who poll dumb switches to accrue minutes consumed on telecom numbers and services then consolidate them. That's one way to do it but none of these systems deal with the complexities of software APIs, provisioning system outputs or software licensing. It may the wrong hammer to crack the nut. It may not even be a nut at all, if you see what I mean.

There are systems which will do this and they involve hefty cost. It is highly likely that high end, large resellers will accommodate such systems as they can afford them. But for mid-market resellers there is little chance that they can affrod such systems in the short term.

Vendors are making life very difficult. Some, like Microsoft, are trying to take supply to end users direct and then reward the channel with fees or commissions. This sounds great but there is an issue for most resellers in terms of tracking and getting fees plus the fact that they lose the cash-flow of the revenue on the order and the contract with the end user. I have heard more than one reseller curse the model and some fear it is the first step by Microsoft to rip out at least one layer if not two in their supply chain.

Within Microsoft they argue that not all customers will move to Cloud so perhaps it is vital to have the channel to join into the sales model fully to make sure the best advice is given before a decision is made? Sounds logical to me. But if Exchange 2003 customers can't move to Cloud because directories won't map, either they are going to need some good advice or they will be simple prey to Google who care little for such negative complexities. It is at the question of upgrades that most end users will face the dilemma of Cloud or not and this would be an ideal time for Google to strike. Resellers need to be fully bought in as to how to keep customers and by giving them only the possible commission short term, no revenue and the renewal nightmare, it's likely resellers will begin to question their allegiances.

Back to the administration. Most vendors think that Distributors are thick and don't understand Cloud and therefore should be ignored as a link in the supply chain. They may be right but adopting the broad brush is neither helpful or intelligent. While Distributors feel they have survived every challenge so far, that is not a cogent strategy in the face of the Cloud. This is actually a recipe for disaster - daft vendors and complacent Distributors.

Think about the Insurance model as it is based entirely on annuity sales from multiple vendors. In the era of the internet, Independent Financial Advisers and 'aggregator' portals have revolutionised the way in which insurance is sold to collapse the cost of products and increase competition. Insurance on the face of it is hugely complicated but we have brilliant sites that compare features and prices which demystify the decision making and then they bill and track the renewals making sure that all parties who should get rewarded.

There are governing bodies and regulators, lots of training and rich product content available and there is a good model for salespeople reward too as well as rich participation in renewals promoting good customer service ethic - noting those who do support on the cheap usually get most 'churn'.

The IT Channel has a lot to learn about The Cloud model but there are good models that already work. Note that in the Insurance model, vendors have to fight hard in Demand Generation, keep salespeople highly incentivised, links technical and marketing links to the aggregators and keep prices very competitive while constantly innovating their products. The reward is more sales for less cost and happy users with channels that participate willingly.

Direct vendors can survive but you have to have been in very early as Direct Line showed. Those who might attempt to do so now would likely fail.
Software vendors beware and listen in to this. There is a model and, in my mind, Distributors have a huge role to play. In fact, ignoring them may cost many vendors. Clever Distributors will become the resellers' saviour in bringing the systems and services in place to support the business transformation they so glibly talk of.

Here's a salient point in all this. While software vendors worry about whether they will retain their 60-80% gross margins, Distributors will worry how they maintain 5% gross margin and cover the cost while resellers have the same concerns. It's clear who has the money to invest here, vendors.

Finally, as some Distributors don't understand who they have to adapt, don't be surprised if we see new players emerge in this field.

- Posted using BlogPress from my iPad

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