Is Billing Aggregation the Nirvana in the Cloud?

If you want to buy Salesforce.com the most common way is to work out what you need in seats and the types of user, then work out the monthly total charge, multiply it by 12 to get the annual fee then add any project management work to go in and you have your first bill. Eh? You mean that despite the advertised monthly fee you actually pay annually up front?

Actually as a residue of the world of SaaS this is exactly how Salesforce.com operates. As did my company, PlaceWare. Even with a minuscule discount for cash offered, most companies paid the annual charge up front rather than pay monthly.

Here's the even dafter thing, companies buying the Salesforce.com actually accrued the charge monthly to the profit and loss account despite paying annually. Meanwhile, Salesforce.com themselves smoothed the revenue recognition equally over the 12 months for the seats while recognising any project management fee up front.

So why this difference in the cash and P&L? The old way of buying software was on the capital account - pay up front but depreciate the 'asset' over 36 months. Salesforce.com offered to not use the capital account but to pay for the software through overheads as a service while saving the cash account the extra two years. So to some extent, paying annually up front represented a positive on the cash-flow versus the old way. And it stuck.

Until now there hasn't been that many mainstream successful Cloud software offerings with the exception of Salesforce.com, and maybe NetSuite, Taleo, Workday and a few others. SaaS has kept its little notion of paying 12 months up front as a peculiar thing to software. You even get it to some extent in buying storage space as Dropbox, Box.net and others all advertise monthly costs but charge annually.

The next wave of the Cloud, where many more software packages will migrate to the Cloud, is reckoned to be offered a different way. Gone will be the days of up front annual charges but monthly invoices will be payable for all the software licences consumed by companies. Currently, firms average less then 2 or 3 Cloud based software services each in the US and that's considered relatively high adoption. Most SaaS is offered directly from the vendor and so there is no middle man reseller involved in the main. So it is easy to provision and charge in a certain way.

But the next wave could be very different. For one, it's likely to use channels to a much greater extent. Why? Because most of the new entrants into Cloud based software will be traditional software vendors migrating their offerings as a web alternative. They will most likely leverage the channels they already use to service customers and so resellers may be selling multiple SaaS offerings from varieties of vendors to lots of end users. Pretty soon, keeping track of all those licences in play will become a pretty intensive task.

But if the end users are only buying 2 or 3 SaaS offerings, why would they be worried by over complexity of bills? Might they still be happy to buy the service paying annually but smoothing the charge over the P&L monthly? In the case of larger companies that may be the case - they have deeper pockets and can negotiate harder. But SMEs will be different. For one, they are greater credit risk to resellers and vendors and secondly they have less inclination to pay up front for 12 months, is the theory. But secondly, one of the great advantages of the Cloud to SMEs is that they can smooth costs for IT as they scale rather than having pump, cash-intensive periods of investment - each incremental user is a simple additional monthly cost.

So the aggregation of bills on a consumptive basis is seen as the way forward. Companies offering billing platforms which will take all that sold licence information, storing the history and producing one monthly bill based on the amalgamation of all that information per end user is important.

Well, not actually as important as it will be for the resellers who will have to produce bills for all their customers. It's actually the layer in between which has the greater need. End users may be happy to consolidate bills as usual - after all they have multiple bills coming in from multiple suppliers already with enough staff in accounts to deal with it. SMEs may appreciate an amalgamation service but realistically isn't that what their credit cards are for?

If an SME buys its SaaS on a monthly credit card account, all the bills will be in one place with an average 30 days credit.

Resellers, meanwhile, will have tons of data to deal with and those distributors who offer an aggregated billing service will be adding significant value in the supply chain. The question is - how much will that service be worth? 

Today, if you want to pay for Salesforce.com monthly, you can get it with a finance charge through a select band of resellers or you can play really hardball with the vendor themselves and they will cave in if the deal is big enough. But will all vendors operate the same way?

What if the aggregators offered monthly billing to resellers but the resellers charged up front for 12 months? What if the aggregators bought all licences with 12 months in advance but billed monthly with a finance and service charge added? In general it means that software bought via aggregators will inherently be more expensive as the cost of the service and any finance will have to be added. This reduces the reseller margins. Some high end resellers will possibly be able to afford their own aggregation billing platform and make more money in the long run.

Most companies have not considered the transformation of billing services required to support the Cloud. Things are going to get complicated and most current billing systems do not perform well on monthly recurring billings and the burden on cash collections is heavier. Meanwhile, if cash collected is only one twelfth of the annual fee then cash-flow is hit a little harder for the reseller making that hyper jump to the Cloud all that much harder.

The end result is that there is a lot yet to play out in the world of Cloud software billing. Services like cohosting already have moved to monthly billing and cash but software has not. Will it really change or will the original SaaS vendors' models of annual collections up front pervade?

Will aggregators provide enough value to charge for their service to resellers and possibly end users? Will this new billing model negate some of the cost benefits and ROI that Cloud purports to offer over on-premise solutions? All this has yet to really play out.

However, if you run the numbers on Microsoft Office 365 over on premise Exchange or even Hosted Server Exchange, there is little or no cost benefit of moving to the Cloud. The only saving could be monthly billing and payments. Surprise, surprise - Microsoft's most popular payment method is 12 months in advance.

Either the end users are a strange lot or some assumptions about the monthly billing models are wrong. The answer has yet to be clarified.

Creating Value in The Cloud

Distributors and Resellers are struggling with the conundrum of how to create value in The Cloud.

At the recent Cloud Forum sponsored by CRN, no lesser veteran than Paul Eccleston of SDG, preached that Distributors must find value to establish themselves in the supply chain. He is right to a degree, particularly as some large vendors are actually working without their channel engaged as usual.

The business model is changing, yet software selling has changed over the years. Some vendors still sell shrink wrapped versions of their products but the majority of software is sold in electronically distributed, licence-enabled format. The distributor and reseller still have a role to play as they own the relationship with the end user. Now vendors are threatening these relationship by wanting to have the sales contract direct with the end user. This trashes some 25 years of working partnership between software vendors and their channels. The channel is under threat - and make no mistake. Paul Eccleston is right about value but he may be wrong to think distributors can add value in some instances.

The order of things may be due for a change. Some distributors who have been strong in the box world will not survive in The Cloud simply because the underpinning principles have changed. Some vendors are going to struggle as they assume that Cloud means just mounting their products on servers outside firewalls and amortising the cost differently. The problem is that those companies whose entire raison d'être has been The Cloud are streets ahead in understanding the new dynamics of the market.

Salesforce.com and others started small, selling in chunks to big companies and small. They earned their sales spurs by nipping at the edges at first and proving their concepts. Now, they run out Enterprise grade solutions across huge companies proving their scalability. But the basic principle has not changed - the web is their platform. They have all users at the same revision of software and new features are rolled out in short order to all users, the costs are fees per user per month. Salesforce.com has proved over time that The Cloud isn't about making software cheap it is about driving down deployment costs, smoothing costs and scaling the organisation when needed without massive capital outlays. There is nothing cheap about Salesforce.com unless you are an SME - and that's where they never forgot their roots.

For vendors and distributors alike, the party will be in the SME market space. Only nimble, high transactional sales suit the channel where they can turn small margins into High Return on Capital Employed by not having to invest heavily in the selling process. The problem is that Salesforce.com and all the others know that to win hearts and minds you do have to invest in sales.

This is the first area of value that SDG et al should be looking at. There is nothing simple about selling SaaS or Cloud software. Users need time to understand it, feel it and be reassured. For vendors wishing to make a fast buck, think again. For distributors, it has to be made easy. But the resellers is where the potential is. There are thousands of eager, loyal sales and technical people out in the field working at Resellers who have trusted relationships with their customers.
These relationships are not going to get trashed just because a large vendor wants to send them their contract. In fact, I would argue strongly that customers will want more of their software and services provided on one bill with one 'neck to choke'. The Reseller is still the best route for this.

So, Distributors, the relationship and management of these Resellers is still your forte. And so, vendors, your goal is to engage SMEs and release the potential of The Cloud.

The ingredients are there. You just need a cook who understands the recipe.

Xerox, Canon, Ricoh Buying Small Resellers - Why?

What's with the strategy by high end copier/printer companies buying small resellers?

Xerox continued this activity last week by buying a competitor's reseller in Scotland and another in Middlesex. I have seen Ricoh do the same in Scandinavia on a grander scale where at least the reseller in question was a strong Ricoh player while it had also had several geographically dispersed offices and had a strong service capability. That at least augmented a manufacturer's position in the territory and gave it a working office base. In Xerox's case it just seems to be taking out a tiny portion of its competitors by buying a reseller and converting it to Xerox.

If that's a strategy, then it seems a very long play as there are thousands of these resellers all over Europe. It's also expensive, as you are either buying troubled or defunct companies with problems and debts or paying top dollar to owners that might play the vendors off against one another.

But where does it get you long term? Lots of small companies to be assimilated by giant companies it looks like. For the sake of a tiny gain in marketshare it seems a crude way to move forward.

This is likely the issue for Xerox and similar companies. The markets are mostly saturated and they are only after refresh and upgrade business mostly at lease break points. If a reseller sits on a significant number of opposition products under lease, then this option of moving the marketshare needle may the last hope.

But it's an awfully risky plan. Let's hope all the skeletons in the cupboards of these small companies are only small ones or else this strategy could be a financial fiasco.

Making Money in The Cloud

If you are a reseller you may understand the potential for reselling in The Cloud. The problem for most will be, how can I make money out of selling in The Cloud?

At first sight things don't look too good and it's confusing. Everyone seems to want a piece of the action. There are vendors with their software wanting resellers to buy into new certifications. There are hosting companies wanting a slice of the action. Then there are service providers who are offering to add a billing and management layer to the applications resellers want to resell. And then take a look at the margins on offer from the vendor.

Let's be honest, it isn't looking exciting. By the time a reseller has potentially paid hosting fees and for a management player the thin margin from a starting price of £4/user/month at Microsoft 365 is not that compelling. Even if the reseller just acts as an agent to Microsoft, the fees are pretty low although at least there is no slice paid to hosting companies or management layers.

For those who have some investment money, building their own hosting centre is a huge risk - there is massive over capacity in hosting centres all over the place and pricing is already aggressive. Besides, for every reseller who attempts this, it risks prices going up when Cloud is about reducing costs to SMEs.

So you have to be pretty confident that you can sell an awful lot of seats to make it all worthwhile. And here's the rub. The margins on offer are not particularly conducive to making a market on this.

Traditional software vendors talk blithely about The Cloud being a new, incremental opportunity yet they apply traditional pricing and margin strategies to it. The risk with that approach is that resellers will just stick to what they know. These traditional vendors may fancy their chances of working direct but, as in the case of Microsoft, they got where there are by using a leveraged model of channel sales. As Microsoft goes to build its Cloud business, there is a strong likelihood that its biggest competition will be its own traditional channel selling on-premise solutions as usual. The danger here is that by adopting this strategy, Microsoft is taking its eye off its main competition in The Cloud - Google.

In fairness, original SaaS vendors like Salesforce.com and Google never leveraged a channel and sold mainly direct. Only recently have they adopted channel as a route to market on a more wide scale. There is good reason for this as selling SaaS takes a completely different approach to selling on-premise.

The key difference is this - to sell SaaS successfully the sale itself is only the start in the journey. Driving usage and adoption is the critical factor to long term success. It is why SaaS vendors trusted their own sales teams to do this as resellers, like traditional software vendors, end their journey at the sale itself. Sure, you keep your relationship to get upgrades, but you are not worried about adoption as if a licence isn't used then you still get the money. In SaaS/Cloud, if a licence does not get used it won't be bought again. If usage is not high, companies will question value. If adoption is not achieved then renewals will dwindle.

It's a different selling world. It's a different reward model for salespeople.

The biggest mistake a vendor can make in The Cloud is to not reward beyond
the point of an initial sale as this is only the start of the journey to success. Driving usage, adoption and customer experience is vital to success. If the subsequent rewards for renewals and uplifts in licences aren't there, then salespeople will switch off.

At PlaceWare this was the driving force for salespeople. At Salesforce.com it is the critical factor to success. Monthly billing models mean that renewals have to be a minimum of 60-70% but you want most renewals to increase licences at the anniversary of the sale. You can only achieve that if the salespeople remain actively motivated.

Already, this is where vendors with the strategy of taking existing price and margin structures and amortising them to mimic Cloud risk failure. No names and no pack drill but some of the biggest vendors in the world are making this huge mistake. It means that there is zero incentive for the channel to engage.

If the channel doesn't engage, they risk losing their biggest advantage over Google. The advantage is using an experienced, loyal set of foot soldiers in their thousands who call on the same customers daily. This loyal salesforce believe in the vendor but need to make money.
For Google, if it now comes to a straight direct fight with the likes of Microsoft then things have changed. Google is a web only company and is now one of the biggest brands in the world. They are the lionshare of all search in the market and they are by far the largest advertising system online. The message is that Microsoft needs to include its channel to help it win.

We thought we would never say these words but Microsoft are no longer dominant enough to win a direct fight with Google in The Cloud. That battle has already been lost.

IPv6 - What's that got to do with The Cloud?

It seems like Y2k all over again. Another scare for the software industry and a chance for charlatans to sell 'snake oil' remedies for protection. Is that IPv6?

Nope. This one is not optional and there will be change. But there will still be charlatans selling snake oil.

You know all those silly little numbers we only get to see when something goes wrong? You know the clusters of 4 three digit numbers separated by dots that all look the same? Yes, the IP addresses. Well like London telephone numbers a few years back, in that format there are only so many of them you can have as the number of possible combinations run out soon as all the possible permutations are close to exhaustion. IPv6 solves that by introducing hexadecimal and changing the formats so that the theoretical limit is, err, limitless. Well near as dammit.

You see as the numbers of users and logical devices have exploded on this thing we call the Internet, World Wide Web, gizmo, thing, the chaps who invented the address system didn't realise its potential and so their original system has run out of steam.

So there will be a transition to the new format. US Federal agencies are moving swiftly while Enterprises are well behind in terms of understanding the implications, according to research. And therefore there are opportunities for the Channel to become trusted experts in the change.
Once again it is all about how software handles the new structure of the IP address. Most have the current format embedded within them and so it will test IT Manager's skill, patience, planning and skills to get to the nub of which vendors are prepared and which are not and what to do about it. When the full change occurs, we may find several devices sitting there not being able to be addressed and therefore not work.

Why is The Cloud important in IPv6?

Here is a case in point. Enterprises and Government departments will spend fortunes investigating, planning, preparing and tackling the issue. But what happens to SMEs? How can they afford to go through another Y2k scare - and this one is non-optional and fundamental?
This is where The Cloud plays a part. By effectively outsourcing large tracts of your IT applications to The Cloud, these are updated automatically and almost daily, so the worry of such enormous changes is mitigated. Cloud based applications will be ready, prepared and updated well in advance and automatically - all included in the price.

This is an enormous benefit of The Cloud to SMEs and it is why it is so crucial to their future. The Cloud not only handles mundane and key tasks in the ether but it means you get the new features and debugs immediately plus you get the advantages of scalability as well. All for a single, smooth monthly cost, making sure that major changes like IPv6 does not make a sudden dent into capital or IT budgets when you can put that money to better use on growing your business.

IPv6 is a profound change for everyone and is an illustration of why The Cloud is of great importance for the future for SMEs.

Will The Cloud Change Distribution?

One of the most popular Channel debates right now is, 'How will The Cloud impact large distributors?'

The assumption is that smaller, specialist distributors will actually be able to change more quickly and take advantage of the possibilities that the Cloud opens up and so largely they are left out of the question. I think that's actually misunderstanding what is going on because the problem for smaller distributors is their capital base which may hold them back from delving into The Cloud whereas this is something bigger distributors may find quicker to cover.

The Cloud is really good for SMEs and there are thousands of those sorts of companies out there. In fact, 97% of all companies in the UK actually qualify to be called SMEs and they employ the most number of people in Britain in aggregate. This represents a juicy opportunity for resellers and distributors alike. Big vendors and distributors have traditionally tried various methods and schemes to try and focus on this large sector of the market as they realise that they can only expand so far in the overcrowded large Corporate sector where so much of their business comes from today. So that's why everyone is getting excited. At last the world of possibilities opens up for SMEs and vendors should be interested.

What does The Cloud Mean?

But what does it mean for SMEs? Well, traditionally growth in IT spend in SMEs is small. In reality, they try to make do with as little outlay per year as they can and it's why the more budget style products and consumer aimed bundles by vendors are very popular down at the SME level which is a bit of a nightmare for third party maintainers as configurations are not steady but are 'Offer du jour' offerings usually.

With bitty spend and no real IT strategy at the SME level, it's very difficult for serious vendors to get their 'Big Company' messaging such as virtualisation and BURA taken credibly as they are costly, industrial grade types of solutions. More nimble vendors offer solutions which may not be as good but fit most of the bill and are a fraction of the price. And this fits for the most part for SMEs. Why buy industrial strength solutions when 90%+ of their needs are met by much lower cost solutions that are just as reliable in most cases?

So how does The Cloud change this? The biggest problem for an expanding SME is making the leap from small to bigger in terms of IT and infrastructure. Where SaaS based Cloud models really help is providing scalability to small companies. Rather than have to leap from one size to another in terms of IT spend, The Cloud offers the possibility of growth via incremental spend. Concepts like 'Pay as you Go' or 'Concurrent user licences' are a godsend to small companies. What The Cloud does is to leverage the overall spend of small companies to provide growth at a stepwise and manageable cost rather than big outlays in capital spend each time they meet a vendors band of user licences or different solution level.

This opens up a world of possibilities. What if you could buy software licences for major applications for your business at an economic price without having to buy industrial grade servers to run them or vast arrays or expensive storage to back the data up with? If only you could leverage the economy of scale and critical mass that pooling with several other companies in the same position brings? That's where The Cloud changes the game. It allows small companies to behave like bigger companies without the need for quantum leaps in IT investment. IT spend for growth can be smoothed and proportional to growth.

The New Model

As an early day SaaS person, I saw the look on people's faces when you explained how concurrent licensing could save them money. Most were blank looks. Today, there are consultancies making small fortunes simply auditing licence spend to reduce cost for Corporates. Guess what? Vendors don't like it. For the most part, large companies actually, at any one time, are over-licenced rather than under.

SMEs should never have this problem - in fact, they usually are under-licenced if truth be told. But The Cloud again allows them to get the optimum number of licences at the right price and smooth the payment of them and build in upgrades and support into the monthly costs. If they want a new employee to have a licence and they go over the server limit, The Cloud allows them to do it for only the cost of the new user licence.

It means that every big software vendor should be looking to get their act together and get a Cloud version out there as now is their opportunity to persuade SMEs to buy in early and grow smoothly and not wait for them to be big enough to invest in, say, SAP.

Microsoft are investing heavily in this and you can now get Cloud versions of their entire Office Suite for a small monthly cost. They see that over 50% of their licences they sell in the next few years will be via The Cloud. That's a big bet by the biggest software vendor. It validates this whole area for the doubters to see.

Where Does Distribution Play?

So what of the distributors who make a significant portion of their revenue on shifting traditional boxes of software and benefit on the complex licencing structures in today's world? Are they dead in the water? Does The Cloud mean hardware is done for?

Clever distributors will see the new world as a major opportunity. They, like the vendors, have been looking for an economic way to get into the untapped SME market and here's their chance. Of course, the problem is the model. For the most part, massive logistic operations and ERP systems don't really lend themselves to monthly annuity-model billing or hosting applications and having storage farms. It's a very different world.

Quantum Leaps are Required

That's the first quantum change to contemplate. The second is profit and loss. Today, distributors simply look at the volume of 'boxes' sold and know that they make some front end margin and some rebates at the back end. Add those together and look at how much cash is used in buying, selling and financing credit and you can even work out your Return on Capital Employed. That's easy. So looking at high capital investment on server and storage farms and charging monthly for licences is a very alien model. For a start, how do you work out what to pay your salespeople? How do you work out how much margin you make? At least the debtor days should be more positive as this world could make life simpler there.

But the biggest quantum change is management. For most distributors, the well-honed machine lumbers on and if you can keep all the equations in check while you grow, the hardest decision is which competitor to buy to consolidate the market. The disturbance of The Cloud is almost some ethereal thing that is just swirling around at the moment that somehow will sort itself out. The model looks so alien that it's almost not worth thinking about.

Danger lurks for those who aren't making plans today because The Cloud will be important to a lot of SME companies out there and the supply chain has yet to be crystallised. But many vendors may choose very non-traditional options to service it and that is the biggest risk to distributors today. So avoiding The Cloud and waiting, will cost vendor relationships and that is a long term risk to big distributors.

Dead Ducks or Wild Geese?

But let's not also get too alarmist. One thing I learnt from SaaS in its early days was that, as pleasant and refreshing the argument can be, there are two major issues companies face in deploying Cloud based applications.

1) Infrastructure & Reliability
2) Security


The second is obvious - storing more data offline gives most IT managers the wobbles as they think the world outside their network is infinitely less secure then within their network. But the reality is not quite what they think in both their understanding of their own network and certainly of the world outside. The world has moved on.

The first is the bigger issue. Automatically, network managers will think suck their breath in and think that at minimum their WANs will not be man enough to have applications served externally. Secondly, they will feel that reliability is an issue. After all, they will argue that the internet can go down and that is something they cannot control. They will conveniently forget the number of times that their own network has caused outages for either all or a subset of users and particularly in accessibility for those on the road. The Cloud can be actually far more reliable and easy for everyone to access - wherever they may be.

In reality, this is where distributors have an edge. Infrastructure is a big problem to overcome and this will need network skills with the appropriate hardware and software sales to help SMEs be man enough to take advantage of The Cloud. This also means that distributor sales staff need to have a better understanding of the financial arguments for the SaaS vs Premise business cases and this calls for a better quality of sales training. But the opportunities are there.

You could argue that for the clever distributor, there are MORE sales opportunities and at better margins because of the value that is required in the business case because of The Cloud. And that's where forward thinking management needs to come to the fore.

Forward Thinkers to the Fore!

One thing is for sure, ignoring The Cloud will be a big mistake. To my mind, this is a chance for the real Channel innovators to come back into fashion. There was a time when entrepreneurial ground breakers changed the world in getting products to market. Now is the time for those characters to come back or for new ones to crop up. Certainly, it is not the place for traditional thinking.

The Cloud is a very different place.


- Posted using BlogPress from my iPad