Tuesday, 25 October 2011

Cloud Sales Set To Increase - Shocker

There is a lot of hype about the Cloud. Everyone has an opinion about what it will mean for the computer, software and services market but few really agree on what that is but most acknowledge that things will change.

TechMarketView, an industry analyst, reckons that over 15% of the software and services market in the UK will be Cloud based by 2014 when the market will be worth over £6bn - this is up from 6% currently. In that time, tablets and smartphones will be account for over 30% of the client devices in the market.

Most industry people would agree that the business model in Cloud software and services sales is very different to the old and this poses a problem to companies entering into it. One Reseller I have spoken to told me of a deal they had specified to an HVAC company in Yorkshire which had gone from being a traditional lump sum of £50k to one worth around £1,500 per month by switching to the Cloud. This posed a dilemma for the company as much of its cost model, cash flow and compensation plan had been geared to the £50k upfront sum.

The problem was further exaggerated by part of the sale being 'pass-through' from Microsoft which, although it was relatively margin-rich compared to the upfront sale, meant that they could only recognise the pass through referral fee portion of the money albeit at 100% gross margin, not the full value of the software.

Microsoft have been relatively enlightened about their referral fee model in terms of giving higher margin incentives for Office 365 but most mature software vendors are thinking either same margin models and some are even thinking to give less as they bear the cost of the application hosting in the Cloud. The channel is in an uncertain time when it comes to business models and opportunities to earn - many think that mature vendors are being unrealistic in terms of margin opportunities in a changing world, given the pain of change Resellers will have to go through.

More of the mature software vendors are jostling for position with Cloud offerings and this will force change on Resellers. For sure, there is a very big change happening in Corporate IT where the 'Consumerisation of IT' is causing nightmares for IT managers and suppliers as individual users spend their own cash on smartphones and tablets and ask for them to be included in their networks. Apart from the implied security risks, there is a lost opportunity in revenue for many Resellers while IT managers are having decisions being made for them. This is a trend that will only accelerate in line with the growth in these new client devices. 
Until Resellers wise up and take Mobility as a serious computing market opportunity not just the realm of the likes of Telcos and airtime providers who know little about Corporate networks, security and Governance.

The pressure is on then. Buying decisions are changing at the client end, software and services are moving toward the Cloud and there will be pressure on both the sales potential in this new world and the business model for Resellers.

It all sounds pretty bad - but should we all be afraid?

Some Resellers have taken the plunge. They have made fairly sweeping changes to both their business models and their compensation plans to help transition salespeople to a new earnings opportunity. It seems those that have embraced change fully or by setting up 'shadow P&Ls' in the new model have fared better than those just trying to shoehorn Cloud sales into a classical model. Vendors have the same dilemma. Few vendors are looking at how they earn differently or use the Cloud products themselves or change their compensation plans, but they are happy to pass that down to Resellers at the same or less margin believing they are doing them a favour.

Resellers may well be wise to look at new applications in the changing world and new opportunities to earn money. One thing is for sure, where there is change there is usually opportunities to earn more - whether that be by increasing margins on current sales or by making money in services surrounding the change. There are also opportunities to sell new types of applications such as services like Cloud back and recovery, disaster recovery, security, hosted email etc and these all should be modelled so that margins increase rather than decrease.

It could be that we see a rise in 'white label' products. Back in the 'Cola Wars' Britain became the first country to have aggregated sales of white label colas to actually knock Coke off the No. 1 slot and in the same way Applications as a Service might become more prevalent too.

The upshot of all this is that as a Reseller you can ignore the Cloud and continue in an uncertain and changing market ploughing the same but narrower furrow or you could look to engage early on the new world opportunities that Cloud offers. There is no doubt that old thinking and business models don't really apply in the Cloud world but if you think with not the next 12 months in mind but the next 24 or 36 months, then you will begin to see how Cloud models really pay back not just in terms of good, profitable repeating business but in how 'sticky' it makes you with your customers.

Whichever way you feel about Cloud, it is growing and it won't go away. Now is the time to consider how to tap into the opportunities.

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