A Black Hole in PC Software Revenues Looms

Hot on the heels of my blog yesterday on the demise of the European and UK PC market as exposed by Gartner Group's latest figures for Q2 2011 on the back of a similar drop in Q1, it would argue that at some point software vendors are going to see a nasty Black Hole open up in their revenues.

The rise of mobility computing or whatever you want to call it as signified by tablets and even smartphones set against the 53% drop in mini-net books in Europe and a 20% drop in mobile computers shows that there is a fundamental change going on in both the consumer and professional PC markets.

Recently, when faced with an upgrade question, I chose to not replace my two year old PC but bought upgrades to the software. In hindsight, the upgrades have actually not done a great deal of good and certainly have not extended the life of my PC or enhanced my experience much - certainly nowhere near enough to justify the price tag. However, in the course of the year I have bought two Apple devices - an iPhone 4 and an iPad 2, both of which of revolutionised the way I work and relax. I have no doubt which way my future lies.

For volume software vendors and even their Broadline Distributor partners, the Gartner figures must be a nightmare. Such a huge drop in PC shipments will inevitably hit the revenue figures in short order for current shipments but renewals are going to be hit too. The simple fact is that by 2014 around one third of the global PC market will have been surrendered to tablets. That means less software sold as we know it today. The other obvious fact is that the main way for tablets to receive their Apps is via the Cloud and the price of software on these adaptable devices has collapsed.

The mood of change at a user level is not pretty too as companies look hard at their software base via Software Asset audits and management tools. On the one hand big software vendors have played the 'Enterprise Licence' game to get big sales, they also use a 'true up' method to assess if enough licences have purchased. Over a given period, if the licences consumed are lower than the original estimate, the vendor charges a massive difference on each new licence bought. While big companies are ruled by Governance issues and don't want to be accused of 'pirating' this works. But it is obvious a storm is brewing as companies also assess how much they actually use of the software provided, particularly on those who provide a 'Stack' of goodies most of which never sees the light of day. There will be a time when large companies will stop being the honest drivers who pay all the fines on behalf of the real road menaces to use an analogy and they will say they want to pay a fair price for what they actually use. Consumptive pricing may not be far away.

All this, if you are a volume PC software provider or operating system vendor, must be bad news. The squeeze is on at all ends.

The tablet market represents the biggest threat as it hits business and consumer. I now use my iPad for around 80% of my work functions. It is light, adaptable, has a superb battery, is always on, doesn't have long-loading clunky operating systems and it doesn't require heavy and expensive software. I run over 85 Apps on the machine and I have no idea how much I have spent on Apps and music etc. But I do because it's easy and there are no corporate restrictions that networks impose.

And some of the software is really useful, better than staid PC applications in many instances. Microsoft and others are wrong to suggest that users require machine based versions of their Office Suite - we want to run Office 365 as a Web App and why not? Why have local Office? Why have files resident on the machine and use SharePoint's daft check in and check out system? Just have one repository in the Cloud, for heavens sake. Google have it so much more sensibly worked out but they are yet to be a credible alternative. You get the feeling only time will tell.

BUT, Microsoft watch this carefully. It isn't about an iPad not having a USB port - that's a dumb and typically narrow-minded argument and fails to truly realise what tablets are doing. The fact is, if you think about it, the iPad is nothing more than a glorified and clever USB device itself. It needs to be tethered, backed up and refreshed by iTunes which runs on a PC and Mac. It must have a mother ship. Therein lies its inherent weakness as a device. The printing issue will get solved but the micky-mouse filing structures are hopeless until you realise that Dropbox is the best solution. Apple will have to up its game to fill the 20% that I have to go back to my PC. Mainly Excel but PowerPoint too and file structures are my main issue.

But iCloud may well change all that if Apple is serious about business and that may be the turning point in this market - the point of no return and Microsoft had better be ready for the fight and have its Office applications truly in the Cloud to have a chance of retaining its dominant position. In my opinion, anyway.

If only Microsoft innovated instead of tree-hugged, with all its brain power and money it could turn this market inside out. Instead it thinks it can have its cake and eat it. Hybrid Cloud is what they think will win, Windows 8 on tablets clunking away not Windows Mobile and we will all value Office run locally and a USB port. And we will all continue to worship at their alter and pay top dollar for ropey old software.

Well the puppy is off the lead and is running around wildly and people are enthralled. There isn't a way back. You either embrace the fact that tablets and smartphones are serious business tools or you die. You either rewrite your applications to get slim and cheap and embrace the Cloud or you die.

Microsoft is not alone by a long chalk. All those vendors who have enjoyed massive sales on each PC should be very scared by the Gartner numbers.

The good times are over and the really groovy times have started. Users and companies will never again be slaves to expensive, buggy and out-moded software. We want innovation and usability and we want it at a very fair price. And we want it business -grade for the future.

And if you do not believe it - go study those PC numbers very carefully because it tells you that I am not making this up. Companies and users have cast their vote with their wallets and it's there to be seen.

Apple and Google must be smiling this morning.


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Wake up Call

I have received a good deal of criticism for suggesting that Microsoft is under any pressure in its core competencies and specifically in relation to Cloud Computing.

Well, you only have to look at the latest Gartner figures on the PC market to see what I mean. The overall sales of PCs in Western Europe fell by 19% in the second quarter of 2011 - on the back a similar sized drop the previous quarter. The mobile PC market fell 20% while desktops fell 15% and mini-netbooks fell by a massive 53%.

The demand was weak in both consumer and professional sectors and the much vaunted migration to Windows 7 is taking place against a dramatically falling market and is simply not occurring at anything like anticipated levels in the professional sector.

While last year's graphs look good for Microsoft, they have been bushwhacked in the mobile market by Google's acquisition of Motorola Mobility against their, as yet unrealised, partnership with the declining Nokia whose share of the Smartphone market is pitiful and falling. The tablet market is set to pass them by where Apple and Google already have a stranglehold on the operating systems in both tablet and Smartphone, effectively side-lining Microsoft and RIM.

The squeeze is on. Tablets are taking a big slice of the mobile computing market and that's an area Microsoft are way behind in. As Google challenges hard on Cloud based productivity software for the office, Microsoft is now being hit hard in its heartland as Google and Apple become stronger in both consumer and professional sectors.

These figures are a huge wake up call. Whatever the internal slides are saying at Microsoft, they don't contain the worrying assessment that Gartner make: 'PCs are not attracting consumers' disposable income, particularly in light of alternative devices....there are few compelling technological reasons to drive PC replacements.'

Wake up and smell the coffee.


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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.

Demystification
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. Salesforce.com 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.


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Google Buys Motorola Mobility for $12.5bn

The gloves are off once more in the very personal fight between Microsoft and Google.

Hot on the heels of the rumours that Microsoft may buy Nokia to try and win some share of the smartphone market, Google have done something rather decisive. They have bought Motorola Mobility for a walloping $12.5bn representing a premium of over 60% on current share value.

Not only does it take a potential user of Windows Mobile off the shelf but Motorola owns some of the key patents in this space so together this could be a very powerful combination for Google's Android operating system.

As I have been banging on about lately, Microsoft are getting squeezed by the two companies that are fiscally strong enough to take them on - Apple and Google. Right now Microsoft is looking very leaden footed on the back of a successful year.

When will the complacency wear off and Microsoft start really fighting back?


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Why is The Cloud Different This Time Around?

As Marc Benioff of Salesforce.com put it, 'The Cloud is so passé.' He's right, companies like his have sold Software as a Service (SaaS), the forerunner of The Cloud, for years. I started PlaceWare Europe back in 1999 same as Webex. The Cloud is in many ways old hat.

There is nothing new about SaaS. It has been poo-poo'd for years. Even Salesforce.com being one of the fastest growing and most profitable software companies hasn't really shaken the tree much for some industry veterans. There is a healthy scepticism that vast majority of software sales in the future will be one per machine and on-premise. The traditional way. I mean, people want to touch and feel their investment, don't they?

So what's going to make calling SaaS a new name like 'The Cloud' change things? Well, the internet has a small part to play. Actually, strike that - it has everything to do with it. The one thing that the internet has done is to give an equal voice to a lone individual like me to a large corporation. Sure a large company can spend a lot of money to be heard more but my words have equal rights around here. I can use the scale of the internet to my advantage. And that's fundamentally what The Cloud is about.

The Cloud gives scale. So if you are already big, you might see The Cloud differently. But if your are small, then The Cloud is your advantage. By leveraging infrastructure in The Cloud like storage, servers, and security your small organisation can afford to behave like a large one without all that huge capital cost. By effectively renting assets we can all scale our organisations smoothly. IT should never hold us back from being successful in selling our products in the future.

That's the way I see it. I don't have to scale my organisation by leasing more premises, I can be mobile and agile as a workforce. I don't have to have vast file storage areas or data centres - all that can be somewhere in the ethereal vapour called The Cloud.

But why is it different now when 10 years ago the same arguments applied? To use one word - Google. To use two - Google, Apple.

Google were founded in the web and grew up there. From search engine upstart to operating system and office productivity apps and a load more cool stuff in between. Google have made the first serious challenge to a world dominated by the PC and Microsoft. And they have the money to sustain it. You will have never, ever have received a CD with Google software on it because it doesn't exist. The web is the platform.

Apple saw the change. In their stealth tactics of giving people and executives gadgets, they have crept back into the Corporate world. Now more employees are using Apple technology for business than ever. Yet to work an iPad or iPhone you have no CD that comes with the box. Your entire interface with the world is via The Cloud.

Commerce has changed in the last 10 years. As the High Street declines, more business is done the web. Banking, insurance, gadgets, flowers, groceries, flights, holidays and even auctions all occur in The Cloud. In fact, it's a surprise that any software really exists on the desktop machines anymore that hasn't been served via The Cloud as so much has changed. Instead of handing my family USBs of photos of my new child, I post the pictures on Facebook, Dropbox or Photobucket. Not just one or two. Hundreds of them. For free.

While so much of the above has been aimed at consumers, Google and Apple hatched the plan to capture the Corporate, Business-to-Business world. By using the ubiquitous growth of how we use The Cloud, it has become business-grade in its robustness and security.

People worry about security. Why? Windows is the single most hacked operating system in the world. It's also horribly unreliable. I have just upgraded to Windows 7 and it's so buggy it leaves shadows on my screen of command buttons used several screens ago. It's that basic. And yet we put up with it. Apple and Google are refining their software daily and serving their users at the same rate. And we transact millions of highly confidential business deals every second over The Cloud. Security for small businesses will never have been so good.

But more than anything, scale brings cost savings. How much would it have cost me to buy install and manage a server just for MS Exchange and the storage for my emails and back ups? Don't know - don't worry about it. For £189 a year, I have all I need - Exchange, Office 2010 and 25Gb of storage. What about the server? Who cares?

Sure, there are lots of things to consider like uptime, security and data protection but those are normal business governance issues and many of them are not solved as well on premise to give robustness to a business - disaster recovery is a myth in most companies below the FTSE 250. The Cloud gives solutions to all these problems without massive capital outlay and massive ongoing management costs.

The Cloud means that IT should never again tell you how to run your business. Google and Apple have validated this market, now all the others are clamouring to get their stake in there too. Most are hastily re-writing some of their traditional applications, working out how to fool us they are in The Cloud and then trying to retain profits by amortising the costs monthly. How disappointing, in most cases. You see Google, Apple, Salesforce.com, NetSuite and the likes have shown us real innovation by embracing what The Cloud is about. Microsoft are showing us how to shoehorn old, tired and resource-hogging products into some kind of half-world.

Innovation is the key here. Just this weekend the Sunday Telegraph reviewed 30 top new Apps for your Smartphone just for motoring. You can now get your car valued at the touch of a phone keypad while getting the directions to that country pub you are visiting.

The Cloud has changed the way we receive our Apps and the price we pay for them. That's innovation and commercial genius in one. That's why The Cloud is both a serious proposition and is here to stay. Business never saw a use for mobile phones at the start. The rest is history. Texting was just a back channel in the mobile phone industry until consumers showed the use. Business followed.

The Cloud is here and it will revolutionise business. Software will never be the same again. that's not an original thought by me, it's a fact.


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Involving Channel in Selling Software in The Cloud

So you are a software vendor or channel player and you want some sales of Cloud product. What's different to the way you sell software on-premise today?

To put a finger on the whole software industry, this is the vital question. Today, in a mature PC world, conversations about general volume software sales usually involve either questioning what the budget is, numbers of users required or what is the licence base today and calculating the difference required. It's a given that people know how the software works.

It's rare that the conversation goes much further than the above, to be honest. So when it comes to working a customer through the differences that Cloud products make will take some changes to the approach.

Firstly, to test whether Cloud is applicable, I would suggest a different set of questions. Typically, SME companies are going to be most interested today and it's where the software vendors would really love to get sales. So concentrate there for best results is sound advice. Then think about what customers are trying to achieve and ask the following sorts of questions:

Are you interested in decreasing costs and increasing cash-flow?
Are you interested in increasing performance?
Do you have a mobile workforce?
Are you interested in scaling your organisation?
Do you have to ensure you are managing your data and complying to regulations?
How secure is your data?
Do you want to spend less time and money on IT and more of both on selling your own products?
Do you want to simplify technology?
Do you want to get access to the latest technology whenever it's available without costly upgrades?

There are more questions and you can phrase them differently but the obvious inference here is that selling in The Cloud takes a bit of brain power and effort. It's not just about what a product will do but what difference it will make to the company. You will have to be prepared to walk people through how the software works differently in The Cloud, so demonstrations may be required.

But the most important requirement will be to develop an easy, thought through Step Plan to take customers from where they are today to working in The Cloud. For most products it will involve at least some steps. For example, those vendors who only ever sold Cloud products like Salesforce.com had to deal with how to import legacy information and all the relevant data associated like notes or activities from old products like ACT or similar. If you are selling MS Office 365 as another example, you need to understand how to migrate users by obtaining DNS and domain transfer information, user accounts and more. There will be training required as SharePoint is involved as well as running through the web apps. Not knowing the steps involved will create fear and customers don't like the unknown and will not trust those who haven't thought things through. This usually means there are opportunities for professional services but my advice is not to be greedy here as high start up costs can kill any Return on Investment argument and will almost certainly limit the long term worth of the sale.

That's just the start - to get the initial sale. It is paramount in the 'Sales Plan' to ensure that users adopt the new software and use it. Salesforce.com made sure that salespeople and support staff were all over customers after a sale to ensure that users used the product and then the adoption became viral as other departments got involved.

Here's a lesson in the Cloud - pick off departments first to prove the concept and then make that sale a reference within a company. Make sure users are trained, do web surgeries regularly and be prepared to demo to more people so have regular set demo times to maximise efforts.

All of the above selling tactics are very, very different to current on-premise selling. It's why, yesterday, I blogged that many vendors are approaching the whole issue of selling in The Cloud wrongly. They are making it low profit for their channels whereas the likes of Salesforce.com realised that you need highly incentivised salespeople.

There was a reason that Salesforce.com and the like did not widely adopt channels in the early days. Not least that they did not want to dilute their profits but mainly because they did not believe that channel salespeople were good enough to sell their products. They believed channel salespeople were fat and happy with the margins that volume software gave them and that they had not really sold for a long while. So Salesforce.com went for a new breed of salespeople as these salespeople would have to fight the market, the FUD, the mis-selling that goes on and understand the key issues to win sales while also knowing their technology in terms of handling objections about data security and availability.

So it is highly likely that the current breed of salespeople both at vendors and in the channel will simply not be capable enough to sell The Cloud as it will seem a) like hard work and b) not very rewarding for the effort they put in.

I am back to my theme from yesterday. Software vendors have to realise that in order to tap into the rich vein of sales that the Cloud can bring, they are going to have to invest in the market and the level of sales capability. Most of the software vendors who are bringing out Cloud versions of their product are applying similar margin models to their channel. It isn't going to work.

Investment is required and that will mean upfront profits in the Cloud will not be there. Live with it. Under the annuity model, vendors and channel get their profits a year or more down the line. And then they are big.

Think about it. You sell 100 licences every month, which may seem a low monthly value but this time next year you will have the annuity of every licence you have sold previously to 'bank' before you start selling new licences again. Make sure those customers are happy and renew, and you have the beginnings of the stepwise profit accumulation that makes the Cloud hugely profitable. But it will not be in year one. In fact, in year one all you will do is invest.

And the more you invest upfront, the more you will make in subsequent years. So, no rocket science here, the MORE you invest now in providing education, incentives and margin to the channel, the more you will make in the future. And make sure that renewals are also rich so that channel players will support customers once they have bought as renewal is not a 'given' - it has to be earned.

So do Distributors have a role to play? Any Distributor who says that they will continue to perform the same job as before, I advise you don't use them for Cloud. It's no longer about credit and reach, it's about focus, investment and changing techniques. It's about channel enabling, education and providing platforms to sell easily and consolidate billing. If a Distributor cannot see that now then they only will ever invest in buying to catch up. Don't give them that chance, is my advice. If there are profits to be made down the line, make sure those who invest know make them with you.

Resellers are not as incapable as software vendors make out. The big guys will carry on doing what they do but the mid-market who serve the SMEs are hungry for new products and to make money. This is where to concentrate your money and efforts and its why a good Distributor can be important.

The problem for software companies is to get ahead of where Salesforce.com came from. Sales can be sequential and hard going - every customer needing convincing, possibly a demo but certainly fear needs to be taken out of the equation. To scale this it is vital for vendors to work with their Distributors to get 'massively parallel' rather than 'serial' in sales. A good Distributor will have educational plans, a way to bill effectively, dedicated Cloud sales focus and above all, a plan.

Vendors will need partners who are willing to invest and adapt to the new sales Cloud can bring. It's pointless just assuming Distributors and channel offer no value - assume the opposite to start with and filter out the time wasters. But bypassing channel will be a path to failure unless you have large pockets. The fact is that vendors who capture the power of the channel and switch it on to their advantage will succeed wildly whereas these who don't engage channel will fail.

Think about that last statement. Cloud sales, if left to the web, will go with Google. Why? They dominate the Search and advertising market. When it comes to the web - they already have won it. Not even Microsoft can compete there. So how can Google be stopped? The thousands of capable, willing and hungry salespeople in the channel are the answer. Educate and incentivise them correctly and you can win.

It means investment. Vendors cannot avoid it. Don't turn Distributors away who have plans to invest in as if you spend money with them it's highly likely you can get better leverage through to the channel. Every pound invested here may save 2 or 3. Spend it all building your own sales channel - it will cost more as you have to achieve the same scale as before.

There will be time wasters, of course. There will be those who just posture. The trick is to engage, share knowledge and jointly invest in a well thought through, focused joint plan around education and enablement.

Those who believe the Cloud will solve itself will get left behind. The channel is the opportunity to get scale. To unlock it will take investment and that means incentivisation. It takes time and effort to sell software in the Cloud and if there is no profit in selling software in the Cloud, it won't get sold. You don't have to be a rocket scientist to work that one out.


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How to Build a Software Business in the Cloud

Ask anyone in the Distribution business if there is much money to be made in software and they will tell you it's only a numbers game.

Average front end margins on software are minuscule and most money, if any, is earned at the back end by hitting certain rebates. The bigger the vendor, the worse it gets. It becomes a numbers game as the only way to make any money is to sell very high volumes to get some rebates and then streamline processes so that the efficiency is so high that little intervention is required to actually transact sales. Automation is essential and heaven forbid a salesperson has to intervene to explain features and benefits in order to differentiate one product over another.

Welcome to the world of software distribution. Whose fault is it that there are no margins left in this business? Well a great deal of it can be put at the doorstep of the distributors themselves for cutting their own throats by extracting value and cutting prices exchanging sanity for vanity by chasing volume. But the vendors don't help as their lack of understanding of business models actually leads them to think that distributors can make money on 1 or 2% margins and think they should help them grow markets at the same time.

So as vendors want to make an impact in The Cloud they are applying the same mentality to the new sales model. Not only are they offering low margins but they are expecting Distributors and the wider channel to make markets for them while the profit and loss model moves from upfront sales to monthly annuities.

Software vendors are kidding themselves. Some then think they should change the model by taking the sale away from the channel forsaking partners who have helped them build the very business they enjoy. And in the same instance, the same vendors get angry that the channel is not engaging to help them make net 40% margins when the channel make hardly anything. In fact, as some models are 'pass through sales' only, the channel cannot recognise the 'volume revenues' they used to enjoy as they can only recognise the small margin offered as a sales commission.

Clearly, the traditional on-premise software vendors have a big problem. How do they get to the market opportunity fast to justify their investment? And how do they do it to make the same money they did before? And why should they give the channel more than they are used to - what value does the channel add in the supply chain to justify anything more?

Some veterans like myself will remember those halcyon days when a channel company actually knocked on doors, made demonstrations, did their own marketing and made some sensible gross margins on software products. There was a time when selling software was not just fun but profitable and vendors loved it because they had willing, capable foot soldiers to extend their reach. But the PC market matured and the rest is history.

Is it not ironic then, after vendors strangled the margin out of products, that they now think the same channel will be interested in their Cloud story and be expected to sell under the model on the same margins they currently have, assuming that they add no value?

There is a difference. For companies like Microsoft, they are receiving the first major challenge to their empire. It's called competition and it's in the form of Google. The threat is not just that Microsoft may lose ground in their Office heartland but if Google get a foothold, they also have Google's growing domination of Smartphone and impending growth on tablets in the operating system market to contend with. If Google, and Apple for that matter, get serious traction as the operating systems of choice on these devices then it will inevitably squeeze their domination on the PC. And who is to say that by 2014 that most office productivity will be done on smartphones and tablets, leaving the PC as a legacy dinosaur in the office? If so, then Google and Apple are slated to have over 70% of the tablet OS market and Microsoft just 13%. The writing is on the wall.

Microsoft is not alone. But it is the classic case in question. As it sits there revelling in another record sales and profit year, the slides by management must look lovely. Nothing will show that tablets will become the office productivity tool of choice. Nothing will show that smartphones will have the same compute power as PCs. Nothing will show that the PC market will decline. Nothing will show that Cloud applications will only exist in The Cloud and that clients of software will always be required. Nothing will show that Windows will ever lose its shine.

So the assumption by Microsoft and others will remain the same. Distributors will engage in selling Cloud based software and be happy with single digit or no margins as that's what their businesses like and what possible value can they add. The same goes for the wider channel - some tacit acknowledgement that there are some clever resellers, but that's it. They will all be happy losing the relationship with their customers, lose revenue recognition and have single digit margins - and still help vendors access the Cloud opportunity.

Read the words. It doesn't make sense. It's back to basics time. To fight the likes of Google it will take an army of foot soldiers who are capable of demonstrating, selling and supporting the new model of software. Salesforce.com and others didn't win their sales on the back of paying their salespeople peanuts - in fact, they are some of the highest paid salespeople in the industry. Salesforce.com recognised that you need clever salespeople, highly incentivised to not just win sale but keep them and expand them in order to succeed.

Vendors coming into The Cloud need to pay close attention to how 'The West Was Won' by those early Cloud vendors. Incentives for new sales and existing are rich. Salespeople are clever as in the main they had tough competition to sell and differentiate against.

For all vendors moving into Cloud sales, think about this deeply. Because if you engage with the existing model, not only will you get frustrated with channel, you will also not succeed. There needs to be a solid debate amongst partners on how to model the opportunity properly.

This is simply not happening at the moment. And so Cloud sceptics are having a field day at these vendors and the Distributors. And they may be right - vendors may miss the market because they simply have no idea how to engage and win it.

Beware of Google and Apple then, is my advice. They have a strategy and all the indicators point to them winning right now. There is limited time to get this right.


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