As Chief Strategist of the Worldwide Partner Organization, I often speak with partners about their value-add, differentiation, and profitability. Here are some thoughts on how the traditional partner differentiation model needs to evolve in the cloud market place.
Partner profitability has always been driven by the unique value that partners add to surround the offerings from their suppliers. This can be in the form of integration with other third-party products, their own pre- and post-sales services, or even custom service level agreements. The more unique this differentiation, the higher is the partner margin on the transaction; and the more relevant their proposed solution is for the customer, the higher is their probability of winning the order. It is not surprising to see two Cisco partners – one making 12% gross margin and the other making over 25% on similar transactions due to their differing value propositions. Both business models are valid as long as the partner is managing the overhead against the subject margin they are receiving.
Over the past decade, channel partners have typically created unique value propositions around the Customer Premise Equipment (CPE) they have been reselling to end customers. This proposition may include having the lowest price, providing fast delivery, conducting pre-delivery testing or configuration, on-site installation or integration, and many others. These CPE related on-premise value propositions are still relevant in the cloud builder role, but are often not applicable to a cloud services reselling role.
It is clear that the market is moving rapidly to cloud adoption based on new consumption models. According to UBM (United Business Media), 37% of all IT spend will be off-premise in 2013 and there will also be an 11% decline in CPE sales next year. Channel partners need to create new value propositions to differentiate themselves when they resell new cloud services instead of CPE to their customers. In some ways, this requires a return to basics:
1. Understanding the business of your customer: This has always been important but it is even more critical as a foundation for identifying and proposing cloud solutions. These solutions, beyond their technical merit, need to explicitly tie success to business outcomes. Customers are expecting improved business agility when they move to the cloud, which requires a much deeper understanding of their functional processes by the partner. Both the buying decision and the budget for a cloud solution often comes from a business owner and the proposed ROI (Return on Investment) must identify specific business metrics against which subject results can be monitored and measured. Gartner is forecasting that the by 2014, the Chief Marketing Officer (CMO) will have a larger IT (Information Technology) budget than the IT department itself. Proposing solutions that meet business outcomes can only be done if the partner has a thorough understanding of the business of the customer – which can be a point of differentiation.
2. Picking the right cloud solution to resell: This is obviously based on the specific needs of the customer but is more difficult than selecting hardware for CPE based on e.g. speeds and feeds. The reason for this is that the customer wants to pay for the cloud solution over time through opex (operating expense) instead of capex (capital expense). So in addition to the technical specifications of the service itself, these offers require an ongoing SLA (Service Level Agreement) that is tied to both the performance of the service and the volume of usage by the customer. Crafting the SLA and the payment terms can become a differentiation as the partner must match the proposal to the exact needs of the customer – not more and not less. This is not easy since the partner is often dependent on a back-to-back SLA for the service from their own services supplier. Another differentiation opportunity lies in consolidating multiple SLAs across services and suppliers into one agreement to make it easier for the customer to manage these solutions.
3. Picking the right cloud services supplier to represent: The normal criteria used for selecting a supplier based on brand preference, field resources, enablement training, technical reputation, marketing programs, and profit opportunity still apply. But in addition, cloud services are often delivered by providers who have built these services on technology purchased from their own infrastructure supplier. Hence the decision to represent a cloud provider needs to also take into consideration the underlying infrastructure technology that the subject services are built upon. The reselling partner needs to do due diligence on the cloud offer itself, the provider of the offer, and the supplier of the infrastructure. Technology suppliers like Cisco make this easier by certifying specific services i.e. Cisco Powered, available from providers who use their underlying infrastructure. Such certifications can be a key element of differentiation for partners as these can significantly reduce risk for customers.
4. Cloud related professional services: This is perhaps the single largest area of differentiation and profitability for partners. Moving to cloud changes the economics and success metrics for IT investments, including how to evaluate the role of the IT function itself by the customer. New cloud services need to be catalogued and measured for their cost, quality, and agility. In addition to this, IT needs to create new processes for provisioning, metering, and charging back these services to the users. Decisions need to be made on the technical aspects of the service; private versus public versus hybrid implementation; standard versus customized solution; and of course, when to transition from the initial implementation to a different model. Since the role of IT changes shifts from control of assets to co-ordinating their usage in the cloud environment, partners can now become a direct extension of the internal IT department at the customer. Not only that, but they can even become an extension of the functional business units moving to the cloud. Finally, since cloud contracts are on-going, there is an opportunity to proactively monitor and advise the customer on what adjustments are needed to maximize ROI for the solution. Such contracts provide partners with recurring revenues and allow them to renew their incumbency position more easily. All of these opportunities need differentiated professional services from partners who have an advantage over the internal IT department by creating best practices through their experience across multiple customers.
In summary, reselling cloud services provide an opportunity for partners to both reinvent their business model and create new differentiation for competitive advantage. Few market transitions have had the potential to change the channel landscape as dramatically as is happening in the transition to cloud. There will be both losers and winners in this transition; and the key to gaining advantage lies in creating new value propositions that provide differentiation in reselling cloud services.
The first step on this journey is to confirm your current value proposition by getting feedback from your customers, and then understanding how these may have to change as you add cloud services offers to your portfolio.
I welcome your feedback and comments on this topic.