The cloud challenge for resellers

If VARs want to start benefiting from the cloud, they need to change their business model

Where are the cloudy VARs?

If you believe the hype then the cloud is everywhere. It may be in the minds of some energetic marketers but it certainly isn’t among the VAR community. At best, many VARs are confused, at worst they are terrified that their support models are about to blow up. This is bad news for mid-range buyers who often depend on VARs to help steer their technology course. What are the myths that VARs are trying to unravel?

In the private conversations I’ve had over the last year, the most common myth is that cloud computing is a variation on hosting. The conversation goes something like this: “What’s all the fuss about? We’ve been hosting XYZ applications - all we need do is add more customers.” Wrong.

Cloud computing isn’t just hosting, which implies a pricing and delivery model. Cloud computing represents the ability to transform the way business is done. It includes services the application vendor sells as part of the offering. That happens to include the hosting for which some VARs are used to being remunerated. That’s one major chunk of change that just disappeared. When put in those terms it is not surprising to see VARs struggling to respond.

The cloud model offers the vendor an opportunity of owning the many problems individual client/server based systems administrators manage but in a scalable manner. That allows the vendor to pare back running costs even though that means trashing big pieces of the VAR model. Putting this into perspective, in its last quarter’s earnings report, (PDF download) Salesforce.com cost of providing services totalled 14 percent of revenue. Compare that with the much touted 60-70 percent of IT budget spent keeping the lights on. As an end user organisation, which would I prefer?

What’s left for the VAR?

VARs that ‘get’ the cloud model are building portfolios of menu style services. It is no longer about managing servers, desktops and upgrades. It is about managing email, integrating call centres, providing due diligence and advisory services around what it means for an end user to transfer ownership of risk back to the vendor. These are not trivial tasks but require the acquisition of skills the VAR may not currently have.

From an implementation perspective, volume is the name of the game. During a recent conversation with Ray Tetlow, CEO Skyytek, Ray said he has consultants engaged in up to 15 concurrent implementations. That would be impossible in the traditional world. It is achieved by virtual implementations that take advantage of technologies like teleconferencing and Skype.

In most cases, implementations will be about configuring a solution rather than customising. That may sound anathema to those who insist all customers are different but it is eminently do-able. Where there is a need to fill white spaces, NetSuite provides a toolkit that offers scripting capability which sits as a layer above the core code.

There is an opportunity to engage with change management. The emergence of systems that provide end-to-end process capability provide that opportunity. That is very different from implementing an accounting or CRM or payroll solution. Again, it requires a skillset that needs to be acquired but which can be monetised. The big SIs understand this and are actively looking to build businesses based upon this expanded model.

The most bothersome question for VARs comes in figuring out what their main revenue sources will look like. Different vendors have different models but all involve some degree of revenue sharing that is staggered over time. Rather than the usual 40 percent up front licence revenue share, vendors share over extended time periods based upon an earnings principle. That is entirely consistent with the idea that software as a service is exactly that - something that is delivered over and over for which payment is made at quarterly or monthly intervals.

It may play short term havoc with cashflow but provides long term revenue advantages for those prepared to live up to the service requirement. It also means the VAR has to get into the volume game as described by Skyytek. It is the only way to build a sustainable business model but more important, it should mean there is a value adding relationship between buyer and VAR.

This is not without issues of its own. SAP, in providing Business ByDesign implementation costs as firm estimates via its configurator is signalling the upper financial limits for implementations. That serves as an incentive to VARs who should be able to undercut SAP’s costs.

VARs should recognise that cloud implementations do not dispense with the need to normalise and cleanse data. The difficulty comes in pricing the service in the context of a specific implementation. I have seen situations where this job has taken a matter of days. In other cases I have seen teams devote six months to sorting out a morass of systems data. Each case will stand on its own merits but the potential for revenue should not be underestimated.  The flipside is that VARs need to exercise care in explaining what this means to the client. In most cases, it will mean adopting an incremental approach because that will keep the job manageable.

VARs that envisage a new, flexible and expanded business model are doing well. Rewards do not come cheap,  most I speak with estimate it takes 9-18 months to become profitable on cloud solutions. But, once break-even is reached the rewards are likely to be substantially better than the traditional model provides.

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