Vendors Have Their Head in the Clouds
Many vendors are chiding their partners for not adopting cloud computing fast enough. The channel already sells plenty of cloud products and services. Solution providers just aren’t selling enough cloud to meet their vendors’ expectations – and with good reason.
By Larry Walsh
Lately, I’ve been hearing a number of vendors talk about how partners aren’t adopting cloud computing fast enough. To be clear, this isn’t about partners not using cloud resources; it’s about them not incorporating enough cloud products into their portfolios or generating the desired returns for vendors.
In fact, some vendors say that resellers and solution providers should be 100 percent committed to cloud computing, as it’s the model of the future, after all.
First, cloud computing is transforming the way technology is consumed. The economics of cloud computing is based on recurring payments (i.e., an “operational expense” model), with customers essentially buying the use of a resource – hardware or software – vs. the asset itself. While this seems like a radical change, it’s not. Vendors never really sold software; it was always licensed, and customers were more or less compelled to upgrade at some point. The difference is the steady migration away from one-time payments, or the “capital expense” model.
The concept and model of cloud computing has been around since the early days of the Internet, but it didn’t become practical until the late 2000s, when available bandwidth, distributed hosting services, and economics made it more feasible. Since then, vendors and solution providers alike have been gravitating toward this paradigm.
So why do vendors say partners aren’t adopting cloud computing fast enough? It’s a one-sided perception. For vendors and distributors, solution providers aren’t buying enough cloud for resale, which is hindering their ability to meet their sales expectations.
Here are some statistics:
- Only 6 percent to 10 percent of solution providers identify themselves as primarily cloud providers. These aren’t born-in-the-cloud partners, but they’re earning more than 30 percent of their revenue from cloud sales.
- The average solution provider is earning 10 percent to 20 percent of its gross sales from cloud products and services – a percentage that’s roughly commensurate with hardware and software sales.
- Nearly one-half of all solution providers say their growth strategy involves cloud services, either reselling vendor cloud services or using vendor technology to create new cloud services.
- The average solution provider earns from two-thirds to three-quarters of its revenue through managed and professional services, two product types that typically don’t register on vendors’ or distributors’ books.
- The best estimates for cloud computing is that it will generate $250 billion in sales annually by 2020, which is roughly 5 percent of total IT spending.
The issue isn’t that solution providers aren’t adopting cloud computing fast enough. It’s that vendors aren’t getting the numbers they want fast enough.
The challenge for vendors is that they need replacement revenue as much as incremental growth from cloud computing. For many traditional vendors transitioning to cloud computing, cloud revenue is a replacement for declining revenue from commoditized hardware and software. Cloud computing does come with healthy margins, which vendors want. And even in terms of replacement revenue, it’s coming with profits that legacy hardware and software can’t produce.
Here’s a reality check for vendors regarding cloud computing in the channel.
- Solution providers are adopting cloud computing at a rational, realistic pace for their businesses. In many cases, adopting faster would put their businesses at risk. On the other hand, solution providers aren’t necessarily adopting cloud computing “evenly,” which means that they’re placing too much emphasis on a few services, and that limits their cloud development.
- Cloud computing is still a risky proposition. While vendors are making money off cloud, solution providers haven’t quite figured it out yet. Vendors retain much of the revenue, and accounts tend to cycle partners out of the equation. Vendors say partners can make money on migration and support services, but those products aren’t nearly as accessible as traditional hardware support.
- Vendors haven’t fully made their bets on the cloud. Very few of them are cloud-only, and those that are were “born” that way. Salesforce.com, NetSuite, and Amazon Web Services are born-in-the-cloud vendors, whereas Microsoft, IBM, and Dell are cloud migrants. Even vendors migrating to the cloud are still offering legacy products and services, and they expect partners to sell those at the same rate they have been, or at higher rates, alongside their cloud services. The conflict stymies cloud adoption in the channel.
- Vendors need to make choices as much as solution providers. Consider the examples of Adobe and Microsoft. Both vendors dabbled in cloud-based software for years, with little success. It wasn’t until they committed to selling cloud suites – Adobe Cloud Creative Suite and Microsoft Office 365 – over legacy software licenses that cloud sales took off. Until vendors make their own cloud choices, they can’t expect partners to do it.
In addition, vendors must demystify cloud computing for their partners and customers. Solution providers need better guidance on how to sell cloud, how they can capitalize on cloud services, and what their needed investments are to take full advantage of the cloud opportunity. It’s simply not enough to say there’s a huge opportunity on the horizon; vendors need to give partners a reason why they should climb into the clouds.
And, most of all, vendors need to set realistic expectations. Traditional business models and products aren’t going way. Solution providers will continue to sell hardware and software. And they’ll continue to make most of their money on professional and managed services. Vendors need to recognize that 100 percent cloud adoption simply isn’t realistic. What’s needed is less hyperbole and more strategic guidance that results in returns on investment for vendors, distributors, partners, and customers.
Larry Walsh is the founder, CEO and chief analyst of The 2112 Group. Follow him on social media channels: Twitter, Facebook, LinkedIn.