Thursday, 17 November 2011

Cloud Billing Models for the Channel

Latest research sponsored by virtualisation giant, Parallels, shows that SMBs are adopting Cloud much faster than larger companies. This tends to validate the view that SMBs can glean much greater efficiencies and scale their businesses more easily, cost effectively and flexibility if they adopt Cloud - and this ends up as a competitive advantage as well as a positive influence on the bottom line.

This means there is a great opportunity for channel businesses to get in on the act and provide solutions for SMB companies. Traditionally, channels have been led by vendors and their distributors, and so have sold the solutions provided. Pretty much, it has been a product sold by a vendor is bought by the distributor, sold to the reseller and then sold to the end user. At each level orders are placed for specific sku's from the product catalogue and invoices are cut and the difference between the value of each invoice provides the gross margin. So the accounting systems needed to transact this business are pretty much standard stock control or ERP systems and involve a level of logistics at the back end to deliver the actual products.

Times have changed. Software can be downloaded or just licences sold and distributors and resellers have had to modify their approach. This has changed further with the trend to annual software licences as opposed to perpetual licences and suddenly tracking numbers of licences, when sold and renewal dates is crucial to everyone. Typically, these old stock based systems are not good at tracking such sales or virtual product and renewable licences. Either manual intervention is required or parallel systems have to be built. Either way, there is a significant new cost to the business in terms of systems compared to the past and, guess, what margins are tending to get smaller rather then bigger in order to pay for these systems.

The Complexity of Doing Business in the Cloud

Enter the Cloud. If you resell software and services today as renewable products then you have a headstart in terms of understanding how you have to account and bill for these products. But many resellers and even distributors do not have the necessary systems in place to bill for such things as monthly recurring seat licences, monthly fees for use of physical resources within a co-hosting centre or any permutation of such solutions.

Utility Style Billing

Since forever electricity and gas companies have billed us monthly for 'product' consumed. They have various ways of collecting the data they need on our consumption and this is fed into the system and the appropriate pricing plan is applied and we get our monthly bills. Surely this style of billing is pretty much what the Cloud requires and so the systems in place should be easily modified for use in the Cloud?

Well life isn't that simple. After all, who today has such  thing as a 'smart meter' for any of their utilities? I don't. I have two meters stuck on a wall outside my house and the SLA from the energy companies is that they will be read at minimum once every two years. So most bills I get are estimated. But you can't get over the fact that the basis of these systems are manual collections of data. That's hardly going to help large computer distributors or vendors who transact as many as 70% of their orders automatically online.

Then comes the challenges. How many of us believe their utility bills are true reflections of either the amounts of energy we have consumed or the tariffs we are on? And for the energy companies point of view, how many customers have they undercharged over a period as they have not had the most up to date data or not changed everyone's prices as they should have? The margin for error is enormous but then again the gross margins involved in those businesses tolerate a significant 'leakage' in revenue in these cases.

Consumptive Billing

The Telecom industry has a sophisticated set of systems which allow them to match a specific account with all the usage data they require. Systems poll the dumb switches which handle calls between specific telephone numbers associated with specific SIMs and accurately measure to the millisecond if need be the actual minutes in calls consumed. We may have plans that allow certain numbers of minutes to be billed at a flat rate but these are just complex pricing tables which need to be compared to before the actual billing occurs for each individual number.

The result is that vast amounts of data can be consolidated onto a single bill giving an aggregated price. Now that has to be more in line with the concept of billing for 'resources' used as in the Cloud, yes?

Well firstly, the information gathered by Telcos are just minutes off ports on dumb switches. This is an actual amount consumed and varies greatly from month to month for every account. The reality is that Cloud resources are similar but quite different. Firstly, they are logical resources which are grouped together to form a service plan - so it could be that a number of servers plus storage, infrastructure and software licences need to be allocated and billed for starting from a certain date which is then billed exactly the same for subsequent billing periods. It is not a variable usage model dependent on the number of times the resources are used but a flat charge based on their original costs.

This means that Telecom systems which are inherently complex and expensive have to be significantly modified, even dumbed down, to actually do what the Cloud requires. Such systems tend not to take specific vendor sku's and bill for them but map onto the signal from a switch and whether it is on or off and what that relates to.

The telecom industry also has a 'leakage' problem. A whole ancillary industry has cropped up around Telecom usage called 'Revenue Assurance' and these are equally complicated and highly expensive systems that verify the accuracy of the Telecom billing system. It is estimated (and there is a ton of research on this by a Revenue Assurance associations and whatnot) that Telecom companies leak between 2% and 7% of their revenue annually through inaccurate billing. At the kinds of margins resellers and distributors make, this could be the difference between profit and loss.

Why are these systems so inaccurate compared to stock based systems? Because they are measuring actual usage not auditing a trail of transactions. And that means a very high level of manual intervention - if only to account for the multifarious price changes, promotions and service plans that go in this industry. To be frank, it is very likely that a reasonably high proportion of customers are either being significantly over or under charged by utility company at any given time. Surprise, surprise there is also a whole new service industry developing which interrogates telecom bills on behalf of customers and charge by proportion of amount saved rather than a fixed fee indicating a high confidence that charges are inherently wrong.

Such billing systems are not well suited to the orderly world of IT channel where the capacity to tolerate billing errors is very low.

Logical Resources, Service Plans & Aggregated Monthly Billing

Companies like Parallels have thought about this and have robust systems that can accommodate the provisioning of resources, creation of service plans and the aggregation of these plans to form single monthly bills. It is a potentially complex world where the accumulation of billable services and tracking of renewals becomes a growing and self perpetuating story in terms of complexity.

However, the reality is that if you look at each seat of software or logical device provisioned and the cost to you, then you can create a service plan that covers what you are selling. You don't need to query it monthly to ask how many times it has been used. Once provisioned you only need to account for any changes to the service plan in terms of additions or deletions.

The problem for distributors is that they would like it to be an orderly mapping of a sku from a vendor through their system. Then that gets billed monthly. But what if that sku changes price after the initial contract has commenced? At each new billing cycle, the new price of the sku will be picked up and the new bill will reflect the change. Unless each sku is individual to the service plan for the customer then it doesn't map going forward.

So a system is required to bridge these two worlds. For the reseller, the complexity and cost of implementing such a new aggregation billing system is almost completely prohibitive for all but the largest ones. The best they can hope for is that their favourite distributor implements a system that can account of what they sell in terms of service plans and then produce an accurate monthly bill indicating all net new service plans they have sold and account for all those that they need to invoice from historical sales.

Super Stickiness

The goal for distributors is to create such systems that can do exactly this for resellers. If distributors can aggregate all service plans, new and old and produce a monthly bill that is detailed enough for resellers to accurately know what they have to bill each customer then they will have provided a real value to their resellers. Interestingly, itemised billing has been a service which media and telecom companies have often charged for which is an interesting point, such is the actual cost involved in the systems behind the scene.

But the real benefit to distributors is this. If a distributor can create service plans and aggregate bills, even bill on behalf of its resellers then for the lifetime of the service plans provided, it will form an almost unbreakable bond. The cost and aggregation of change from one distributor to another by a reseller will no longer be a simple choice based on price and availability as an example but it will be an issue of not just porting historical data access but also of the worry of where the logical resources being provisioned are located too. At last, distributors will be able to limit churn of customers.

While this is a possible downside in the negotiation position of any reseller it's also actually a godsend as once a service plan is in place, it needn't be worried - it will have one 'vendor' to chase on bills and costings rather than polling multiple suppliers for multiple service plans for multiple customers. That's a headache that can be alleviated.

It does mean that distributors have to step up. They need to have robust aggregated billing systems with the most flexibility in terms of provisioning software licences, services and physical resources. If their portfolio is weak then it's likely that other distributors will get the lionshare and this is why the big broadliners are actually back in play. Size and portfolio will count in the new world of Cloud products and services.

But for those in early, the rewards are potentially greater. The key point here is that if distributors and resellers get this whole billing model right then there is every possibility of being able to increase gross margins, thanks to being able to break free of the shackles of mapping sku for sku in vendor portfolios for fixed margins. At last the channel may get back to making some new margins.

And they will need it. Such systems, wherever they come from, are not cheap. My take is that Utility and Telecom billing models for Cloud are too expensive and not tuned to the actually way in which the products need to be resourced into a service plan and billed. The actually bills they produce would be fine although my own experience of them is that they are not by any means ideally suited for accounting for channels.

I think there are far better options available at a fraction of the price far better suited to Cloud billing.

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