Wednesday, 17 August 2011

Reselling in The Cloud

This article explores what may be important to Resellers who want to participate in sales in The Cloud. The list is not exhaustive and I hope it can stimulate more debate and ideas to help Resellers realise opportunities in The Cloud. Primarily, I have assumed that the main opportunities are in the area of SME companies and therefore those Resellers that address that market. At Enterprise level, it's clear that Vendors generally have a very tight plan on how to address those customers - as they always try to do.

Changing Times
Today a 100 seat licence sale of some software may well include a server, some storage and networking infrastructure. That would mean a nice lump sum of money to pay for it all and it is easy calculate the difference between cost and sale price to deduce the gross margin. From there it becomes an easy task to work out how many similar deals are required in any period to pay all the bills including the cost of goods.

The Cloud is different. The same deal would be converted into a monthly cost which would be charged as a service to include the amortised cost of the goods in some way and the service for looking after the lot in some site other than the customer's premises. The amount being paid by the customer would be much reduced compared to the upfront 'fire and forget' sale.

The beauty for the customer is that costs are smoothed and management of the system is outsourced - and by leveraging that server for other activities, the theory is that the monthly cost in some way reflects the scaling that the supplier can leverage. For the Reseller, that is certainly true - servers and storage can be leveraged to serve many customers to make sure that base costs are minimised which produces higher margins.

The problem for the Reseller is that not so much revenue and margin is recognised in the same month of the original sale now and the margin may actually vary over time as the computer assets are 'sweated' and leveraged over many customers or applications.

This is the new world of The Cloud and presents some problems in terms of accounting for profit and loss recognition while you may actually get a year's cash up front. It's a new business model and it doesn't fit easily with the old. Some Resellers are setting up 'shadow P&L's to try to account for this but things can get complicated in resource duplication or even cannibalising old style sales for new which I would bet most people don't budget for.

The Cloud presents it difficulties for accountants as well as the Sales and Marketing people.

There are tons of Vendor strategies out there all of which are similar but they aren't. Each Vendor has some tweak or angle that is different from the other as they all jostle to get a piece of the action, in many cases just by rebranding or repositioning current offerings packaged slightly differently. Making sense of all these offerings and strategies is going to be one of the biggest issues for Resellers and it will take a good Distributor to pick their way through the morass of gobbledegook and FUD. However, it will pay to attend whatever seminars and read what you can - and get someone to explain it.

It pays also to get some idea of what The Cloud really means. Many would have you believe the whole concept is new but the reality is that every company has a website these days and most do some level of transaction over the web. This is The Cloud in action, just as you are reading this blog today. From that point of view it is whatever application that sits outside your premises and is served via a web interface. That's simplistic but it will start you thinking - people will confuse you with 'hybrid' Clouds but that's just tweaking where parts of the application, its data or hardware may sit - either inside or outside your company's firewall.

Quick Solutions to Whet the Appetite
If you are worried how you can participate think about key issues within your clients today. Almost all will have a need to back up and restore data, have some kind of data compliance need or want some kind of disaster recovery insurance. These are classic applications that can be quickly answered by 'off the shelf' Cloud solutions offered by many hosting companies which are cheaper than running on-premise. They are a quick way to understand the selling concepts, the billing changes, the profit and loss model and how easily or not solutions can be provisioned. Most hosters offer White Label services in these areas which Resellers can rebrand.

Try them out for size. and see what your salespeople and customers think. Look at what objections are raised about data protection and security and learn the answers. See which customers easily fit the model and which don't. This provides vital early learning in The Cloud.

Align with Key Vendors
One of the criticisms of The Cloud application scene is that many of the obvious Vendors have not really moved much toward the Cloud. And some of the big newcomers don't have channel friendly policies. The choice, from that point of view, seems limited. and Google are not known for their channel attributes - I mean who and where do you ring to become a Reseller for a start? It's that basic.

Meanwhile, Microsoft are playing. They have several Cloud offerings, notably CRM and Office, which are now Cloud based. Admittedly, these are hardly innovative products and the Office 365 Cloud version includes a SharePoint back end which is most cases pointless to SMEs and confusing but the reality is that at least it gets people into the Hosted Exchange environment and solves the issue of upgrades.

Get involved with Distributors who know their onions and are making some progress in enlightening Resellers. Choice is going to become important as time goes on and Distributors still have a role to play here.

Changing Processes
Going back to the concept of an upfront kit order, it means one invoice and one cash collection - easy to book and bill. The problem with Cloud sales is that they are effectively services and they need to be treated differently.

Imagine that you have five software Vendors and you sell some licences from each during any month plus some hosted services to run the applications. For billing purposes you need to know when you booked and fulfilled each sale and invoice accordingly as you are now on monthly tracking and you are very interested in anniversary dates. Sell a few more licences the following month to new or existing clients and suddenly the whole billing process becomes quite messy with mixing new sales with existing annuities - across many customers and many Vendors and hosting companies potentially.

Aggregation is a much talked of concept but a few Distributors realise that this is going to be crucial in The Cloud world. How do Resellers keep track of all these sales and be able to produce accurate and timely invoices for all their customers, when some Vendors like Microsoft actually have the contract with the customer and pay a 'finder's fee' commission?

This is one of the biggest areas of service that a Distributor can bring and there are a few who working hard to crack this big nut so that Resellers can bill easily and effectively plus keep track of all the renewals. For Distributors, it will be one of the biggest areas of 'stickiness' going forward as well as being a nasty liability as systems are costly and if they should go wrong, it is highly likely that Resellers will vote terminally with their feet and across all products.

Provisioning Hosted Solutions
Many Resellers are already providing some kind of co-located service, probably backed off to one of the main hosting companies. For companies wanting to get into this, get involved with hosting companies who provide quick and easy to use configurations which understand the logic of licensing and what goes with what to produce a single monthly cost - with margin variable to be selected by the Reseller.

Not as easy as everyone thinks and many hosting companies don't understand enough about licensing to get this right. Keep an eye on companies who are cracking this issue as there is easy money to be made.

Service Level Agreements
While Hosting companies offer great facilities in terms of serving power continually and providing security of access, the fact is they don't offer much more without large costs involved. They are hosting companies only, after all. The liability for outages and downtime rarely get passed to them for the customer so think long and hard about contracts and who is liable for what and then add in an appropriate level of service to accommodate. This means making sure the kit is maintained and preventative care is high. This can all be built into monthly costs which is good as often such up front costs have put customers off in the past. But covering your service well is important.

Choose Partners Carefully
Many Distributors are adopting a 'suck it and see' approach to The Cloud and are not modifying their systems and behaviour much, waiting for the market to mature a little. After all, Distributors are not great at making markets but are brilliant at fulfilling once the market has taken off.

There are a few who are working hard to solve the key issues like providing choice, tools, education, lead generation, business development and systems to help Resellers successfully profit from The Cloud. Keep an eye open for the programs and test then carefully.

Meanwhile, it is a good time to test such community tools like MS' PinPoint to see if it works. Can you refer sales to other companies and get profit share and keep customers? Maybe now is a good time to test the theory as keeping customers happy is getting awfully important.

The Sale is Only the Start
Hardened SaaS or Cloud veterans will tell you that the initial sales decision is only the start of the journey. To be successful in The Cloud is it is all about usage and adoption, then renewing, upscaling and preventing churn. This means a cogent strategy is required to roll out services in The Cloud, educate customers, promote adoption, look for inside referrals sales and then focus on making sure the renewal comes in and the base gets grown.

It's a different mentality for most salespeople and so be well aware that incentive models need to be tweaked and that new sales skills are required or else people will try and continue selling the old way.

Focus on the Proposition
Commercially justifying Cloud solutions is a huge area. The financials are not as simple as people would have you believe and customers do not always save money, at least immediately, when migrating to The Cloud

Learn the models and practice them. Create tools to explain the ROI model so that it becomes easy to pitch. Many Resellers say that they get more traditional sales when they try to sell Cloud and that's not because they are good but they are being less than honest in most cases. FUD factors and fear of change lead to paralysis and then mis-selling. That's a strong word but it's true - common sense tells you that leveraging infrastructure to scale small businesses should save them money and in most instances it does.

If we all had to build and host our websites, then the worldwide web would never have taken off so quick. The same argument applies to The Cloud - salespeople who sell against that are probably verging on the dishonest and Heaven knows we have seen enough of that in our 'unregulated' industry over the years.

Incentive Models
Commission and salespeople - a thorny subject. The basic change is that sales will move from the upfront lumps to effectively monthly/annual annuities. The good news is that assuming most customers will renew their service, then a base level of sales each month or year is 'banked' and incremental sales provide a very appetising stepwise growth each year.

Incentivising salespeople in this environment is tricky. In old SaaS days we adopted the insurance industry way of paying for the full sale upfront which is what you do today in all types of insurance or investment - a percentage goes up front in commission. If the sales 'lapses' then commission is clawed back. Messy.

Another way is to adopt something called the 'Rule of 78' which basically looks at the 'banked' business, adds a growth rate to it, and then says in month one you are expected to retire 1/78 of that annual target. In month two you will retire 2/78 -. i.e. last month's annuities plus the one month's new. Then in month 3 you will retire 3/78 and so on so that over 12 months you will have hit 78/78 of your annual plan. This means again that commission is usually overpaid in the beginning but if you operate this as monthly cumulative scheme then you will even out and true-up payments by around 6 months in. Many companies also employ a 'monthly cap' to prevent too much payments in one go and carry forward the extra into the next month etc.

There are other ways but it is as well to think them through ahead of time as this will be one of the biggest roads to success - or lack of it.

Develop a Migration Plan
Customers will be fearful enough but if they sense the Reseller doesn't know what it's doing then a sale in the Cloud is unlikely to be made. So, Resellers, develop something like a clearly documented, process driven easy to follow Migration Plan which should have no more than 5 or so significant steps. Each step will have actions around it and a timeline can to easily be overlaid.

Talk through and agree the Plan upfront, get it signed off, assign tasks to people and follow it up. Guess what, not only will the Resellers sound credible but the Migration will be far more likely to go smoothly and succeed. And it's repeatable.

Compelling Events
So when does a customer make a move to the Cloud? When the salesman says so on his forecast? In my experience, sales forecast in the Cloud are more spurious than usual.

There needs to be a clear trigger point or 'Compelling Event' which the customer identifies and buys into. A point at which there is pain or loss if the customer does not migrate to Cloud. If it is just the date of the decision maker's daughter's birthday, don't be surprised if nothing happens.

And here is the rub. The biggest competition to The Cloud is 'No Change' or 'No Decision'. Customers just carry on doing the same thing as they cannot buy into the argument for change.

Compelling Events are hard to create as the customer has to agree with them. In The Cloud world it may a decision point - an acquisition, an upgrade, kit coming off maintenance contract, downsizing, new business ventures, new divisions, new location being set up etc. Get in early, understand your customers, their motivations and what is happening in their businesses. Only then can you spot potential Compelling Events but they are fundamental to success in Cloud sales.

Marketing and Lead Generation
Vendors like Microsoft are spending a fortune on the Cloud both in terms of infrastructure and marketing. There is a huge motivating force for success. That usually means there are campaigns to join in, dovetail to or even the potential of obtaining new money for innovative campaigns which are proven to provide the opportunity of incremental sales. Be creative, be bold and use someone else's money. Get close to Distributors as, unusually, they also have the same urge to drive the market if only to justify their place in the supply chain.

The Cloud is a real potential for innovative companies to make a great deal of money. Just don't expect the real profits to roll in month one or perhaps, even, year one. But by years two and three - if you really keep the faith and go for it - the real profits start to step up really fast. And like the Cloud itself, it scales leveraging what you have sold before which means after a while you really do get higher leverage of sales per head and therefore profits do rise.

Get involved, get clued up and get selling. The Cloud is here.

- Posted using BlogPress from my iPad

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