Begun The Cloud War Has!

cloud war

The Cloud War?! It’s not quite as dramatic as Yoda ominously announcing the start of the Clone Wars. It’s legacy vendors and distributors (who rely on channel partners for a huge amount of their sales) rushing to claim business with Value-Added Resellers (VARs) and IT Solution Providers (ITSPs).

Not many of The Cloud War actors understand it’s happening, and don’t factor it into their long-term cloud strategy. Despite VARs and ITSPs saying “the cloud is not affecting me“, here is a reality check on the cloud market, in five points:

  1. 50% of those who made this statement several months ago have recanted their view. They’ve looked at their data center deals in their pipeline that hadn’t moved and found they were not on budget hold, but had moved to the cloud.
  2. Major legacy vendors that only two years ago had $0 in cloud sales are now reporting that cloud revenue is 7 – 10% of total revenue. Think Oracle, Microsoft, IBM. If you’re not capturing a minimum of 7% of your revenue from the cloud you are lagging the market.
  3. Amazon Web Services, Inc. (AWS) did not exist prior to 2006 and now it’s on an annual revenue run-rate of $7.2B. Most of us have not made a dime on AWS’s rise.
  4. The customer is driving the market for the first time in years. We’re all trying to catch-up to where she is taking us. It’s to an OPEX world that demands value that can be consumed and paid for on a monthly basis.
  5. We’ve hit the inflection point and there is no going back, however, we do have time to adjust and change so that we thrive 12 – 18 months from now – but you need to prepare now and incrementally move to alter your current model (business, financial, sales and operating).

The cloud is affecting all of us. It’s time to align our businesses to a cloud-centered model and transition to growing a sustainable recurring revenue business.

How will The Cloud War affect the distribution and vendor models we currently embrace? (VARs and ITSPs decisions on cloud vendor and distribution contracts over the next 6 to 8 months will determine who wins The Cloud War).

Here are two important considerations:

  1. Traditional buying model of switching costs are low to non-existent between providers.
  2. Cloud buying models of witching costs are high and prohibitive in moving to new providers.

Let’s move on to distributor-vendor-channel partner relationships and how the dynamics of the cloud changes the equation.

What is The Cloud War?

The Distributors

From a distributor’s perspective, the effects could be catastrophic. The traditional buying behavior of a VAR or ITSP has been to set-up several buying relationships (three to five distributors) to ensure buying flexibility based on credit line limit, product availability, price points and terms offered based on “the deal”. I had preferred distributors, but the loyalty level on a day-to-week basis varied as I looked to pack more margin or backend dollars into my deals.

It seems a chaotic approach for both VAR and distributor, but it led to a predictable flow of business to at least three of our distributors. Over the course of a quarter, the distributors could earn a chunk of our business and by the end of the year they were close to achieving the amount of business flow from us that they had forecasted. Several distributors benefited, even though no one had the majority share of our business. This micro-view works even at the macro level. Business transactions move in a fluid manner. But eventually, distributors benefit from the model and business strategy.

Now enters the cloud-buying scenario where VARs and ITSPs don’t have the time, energy or resources to deal with three to five buying sources. Most (over 90%) choose one buying source at the distribution layer. They might add one or two boutique cloud service brokers to obtain specialty solutions as they construct their cloud solutions stack.

Here’s the problem. There is only one winner, instead of several on the distribution side of the equation. So, it’s imperative that you lock-in all suitable partners today (those willing to invest and transform their business to make it cloud/recurring-revenue ready) before your competitor beats you to it. If you didn’t realize this movement was happening, you should evaluate its impact on your business. Adjust your partner acquisition strategy to reflect its importance, and adjust your level of urgency accordingly.

The Vendors

Although the effect of The Cloud War on vendors is not as dramatic (VARs and ITSPs will choose at least three vendor partners) as the effect on distributors, many of the same elements are at play, and the time for vendors to lock-in critical channel partners is now.

Like the distribution scenario above, a partner architects a solution and bases it upon their key vendor’s technology. But then the customer, who always gets the final say, outlines their budget constraints and preferences. It’s not difficult to switch out the server platform, PC model, routers, switches or storage devices we’d initially spec’d to meet the customer’s need. And the preferred vendor might have suffered on this deal. However, they understood that the lion’s share of our deals will have their offerings baked in. Again, the oscillation of the business over time benefited all our preferred vendors. You lose today, you win tomorrow. Eventually, you typically get your share of the business.

Now, the cloud solution scenario appears again. Like the distribution framework described above, it’s likely that the first four or five cloud solutions crafted by a VAR/ITSP will feature one of their primary vendors. And, that flow into the cloud services business will set the tone as to how my cloud practice solution-set will be built-out and who I’ll partner with for the long-term. The reality is that a small to mid-size VAR or ITSP can’t afford to create the number of relationships they held in the transactional world. It’s not practical. Think about it in these terms. An IBM server looked a lot like an HP or a Dell server. It’s easy for me to leverage my server experience against many vendor offerings.

The cloud solution-stack is complex and once a VAR or ITSP is matched with a primary vendor, it is quite difficult to pry them away and gain a share of their cloud services business. Imagine dealing with four to five cloud provisioning engines! Act now to win The Cloud War, because if you don’t you will lose that key partner. 

Are we all Doomed?

First, the winners will have a much more loyal partner ecosystem than they’ve ever had before. It will yield steady revenue and margin growth for years to come.

Second, The Cloud War has just begun. Most vendors and distributors are much further along the path of transforming their business than their channel partners are. You have some time to look at the underlying needs of your channel partners and why they’ve yet to become productive in the cloud. You can invent innovative approaches to help them cross the chasm and begin to leverage your sales and marketing enablement programs.

You have these partners today. The bugle has just sounded and The Cloud War has begun. Good luck grabbing your share of it.

SHARE
George Mellor
George Mellor is the Founder & CEO of KloudReadiness, LLC. Prior to founding KloudReadiness, George co-founded VARcompliance (acquired by Netformx). George has spent his adult life working within the value added reseller and solution provider marketplace driving innovative approaches that positively affected the growth and profitability of several businesses. He’s held senior leadership roles at several solution providers including CBE Technologies, Netivity Solutions (now NWN Corporation) and Charter Systems.