The big shift 2011 07

Copyright iCloud Limited 2011 1

Technology supply chains are on alert as the Cloud threatens disruption – will it be business as usual or is an iTunes like event impending? This points to one of the major challenges facing the channel; the symbiotic relationship of the channel with its vendors now needs to discuss the implications of the Cloud as a source of revenue, margin, and growth and importantly its impact on existing revenue streams and profitability. That is one big discussion.


Author Frank Bennett In July 2009 I wrote Thinking of …Selling Microsoft Online Services? Ask the Smart Questions and launched the book at Microsoft‟s Worldwide Partner Conference (WPC) in New Orleans and made available at the conference book store. The book was revised in 2010 and re-launched at WPC in Washington D.C but on this occasion Microsoft distributed the book to visitors to its Online Services Hall. This book was revised and published again in July 2011 with the launch of Office 365. In July 2011 I was delighted to receive a commission from Google to write Thinking of…Using Google Apps? Ask the Smart Questions. From my conversations with senior managers on the supply side of IT they recognize a shift is underway presenting new choices for customers to deploy IT and are trying to figure out what that means for their own and their customers‟ business. Where do you start that conversation? That‟s why I wrote this document to start a conversation about The Big Shift. It does not offer a solution (sorry); it does look to expand the mind to a bigger conversation that might jangle a few nerves.

http://www.frankbennett.co.uk

http://www.frankbennett.co.uk/


Contents Who sold you that then? ........................................................................................................................ 4

Supply Chain Disruption .......................................................................................................................... 6

Cloud and Clouds ............................................................................................................................ 6

Talk Talk Talk ................................................................................................................................... 8

The Shift .......................................................................................................................................... 8

The Cloud ........................................................................................................................................ 9

Big guns take aim .......................................................................................................................... 10

In the wake of the storm ............................................................................................................... 10

Justifying those IT Dollars ............................................................................................................. 10

Who is listening? ........................................................................................................................... 12

The next thing or the next BIG thing? ........................................................................................... 12

The age of the Datacenter ............................................................................................................ 15

Unexpected challenges ................................................................................................................. 16

Changing Buyer Behaviour ............................................................................................................ 16

Channel supply chain – service chain ........................................................................................... 18

Hard choices .................................................................................................................................. 19

The Bet .......................................................................................................................................... 20

In Conclusion ......................................................................................................................................... 21


Who sold you that then? The IT industry has over time established „n‟ supply chains to deliver products and services from vendor to the end-customer; vendor direct to customer, OEM, vendor via two-tier distribution, vendor via single tier distribution, retail (customer goes to a store) and online. Will Cloud enabled services be absorbed into the current basket of supply chains or will it be subject to an iTunes revolution like the music industry has experienced? Just as Apple, a computer company, albeit a highly innovative leader in product innovation, turned the music industry upside down, is there a predator that will seize the Cloud at the expense of traditional IT players? A scrap is already taking place and there are some leaders in certain categories e.g. HR (SuccessFactors), ERP (NetSuite), CRM (Salesforce.com), Unified Communications (too many to single out), Collaboration (email, document sharing where a big contest between Microsoft and Google is taking place). There is a school of thought that when IT is delivered „as a service‟ it will no longer be a domain reserved for IT specialist vendors. Any number of businesses that offer services can now recommend, refer and sell IT as a service to their clients to grow their share of wallet because the complexity of service delivery is removed (the service provider takes on that role) leaving the sale and customer service to others. To wrap that up in a few words; the availability of the Cloud opens up a new services opportunity – IT as a service – but without the need to be an „IT shop‟. Take for example an accountant, in the category of trusted advisor to a client; they would not normally advise a client on a choice of accounting software let alone implement a system. However, if that were a service (Software as a Service – SaaS) and perhaps one they used in their own business then why not offer the service and add the cost to the client‟s annual invoice? Go on then to provide an electronic archiving system (in the Cloud) to ensure the safekeeping of records for statutory periods. Two incremental revenue streams (that recur just as the accounting and audit fees do) based on an existing client relationship but with no overhead of being an „IT shop‟. It is early days to know how this might develop but the rationale is there. Vendors are looking for more „feet on the street‟. The business opportunity is large, Gartner forecast1 an industry with double digit growth and three figure $billion revenues in the 2013/4 timeframe. And, importantly, there is a large audience, as many Cloud enabled services are relevant to business and consumer. A number of studies highlight the creation of businesses and jobs as a result of the Cloud and they will be new buyers - but who from? A new business needs a source of capital even if that is in a form of micro-financing to meet some of the essential operational expenses of a business. This is not the mindset of most IT vendors whereas the broad services industry operates a model where the customer pays as they consume, ideal for a new business. For example, a new business needs a purchasing card to manage its expenses. That provider (say, American Express)

1 http://www.gartner.co.uk/it/page.jsp?id=1389313


could also offer access to a mobile phone, Internet access (with web site, email and calendaring) and a computer all billed to the card? Convenience for the customer and money in the bank for American Express. To put some other names in the frame; businesses with large customer bases with the infrastructure for variable billing (weekly, monthly, quarterly, annually) and payment collection, a service ethos with easy to access customer contact points via the Web (email) and phone, and include any of the mobile phone operators, Telco operators, utility companies and membership organisations to name a few. Many of these businesses have business and consumer customers so their influence is high. The Cloud opens up the prospect of new ways to partner and there is no template for doing this so it is a time to get creative, to think outside the box and ponder who else has spotted the opportunities of the Cloud and to start up a conversation. One last thought, depending on your point of view you may agree or disagree with what you have just read while as you read on keep in mind two things:

1. The market for Cloud is large, there are >2.1Bn computer users2 connected to the Internet and >4.6Bn mobile phone users and many already have data access to the Internet and rapidly their number will greatly exceed the number of users connecting via a computer. Many of these „customers‟ have multiple persona with technology pervading their work, home and social life. We carry more and more expense with the use of technology – and it is OK! If every mobile phone user spent $10 a year ($0.83c a month) on services delivered by the Cloud that would generate $46Bn in revenue annually. Who will be collecting that money?

2. It was once the case that IT (computing) was for solely for business who

employ highly qualified people to put IT to work. The personal computer brought computing in the reach of the consumer. The mobile phone (a computer) goes everywhere with you and has become an addiction – OMG let me see your new phone. Now we have tablets and „app‟ stores with many free to download or at a minimal price. The computing needs of a business are different to that of a student and the Cloud can serve all so you need to undertake market segmentation and persona analysis so that you can clearly position your products and services with your customer audiences. This is work in progress for most and some have not even started, it is somewhat complex yet vital work to know who you serve, your values and value. If you have no position on the Cloud you take the chance your customers will take that conversation to someone else. Are you OK with that?

2 There are numerous online sources for this information including www.cia.gov (the spy guys) and they

increment daily so numbers rapidly get out of date.

http://www.cia.gov/


Supply Chain Disruption The IT industry is a buzz with talk of the Cloud and that market is now maturing with a vast array of providers and to achieve full market exploitation the role of the channel needs to be clarified. The channel is all those businesses that orchestrate a supply chain to deliver products and services to business and consumers. There is a shift underway and the channel is alert to opportunity and the threat of new competitors attracted to the new business opportunity that is Cloud enabled services3 where affordability, convenience and service are top of mind for the customer.

Synopsis: The supply chain for IT products is vast and organized to deliver its products to a customer who installs those products on-premises (a term used to describe the physical location of IT on customer premises). This is the „own and operate‟ model for IT with products built to order for a customer to include pick and pack commodity products. As the majority of IT is sold this way the supply chain had no cause to manage disruption – until now. The availability of Cloud enabled services with huge customer interest presents a growth opportunity with challenges that are described here.

Cloud and Clouds The Cloud has variants, private, public and hybrid (combining private and public). Those customers that build private Clouds will continue to make purchases of hardware, software and services to deploy in the own and operate model. The supply chain is already adapting to serve these customers and the customer is easily identifiable as they typically have a large IT real estate (deployed assets and people and reliance on IT to run their business). The public Cloud presents different challenges and potential disruption as customers‟ direct money out of own and operate into spending on Cloud enabled services. It is more difficult to identify these customers as they span the Enterprise, SMB, start-up et al. For the reasons identified here and that the supply chain is already adapting for the private Cloud this paper looks more closely at the public Cloud and its impact on the supply chain. Before doing that however it is pertinent to look at the characteristics that the supply chain presents against the private and public cloud. 3 Cloud enables services; an array of computing, storage and data/information services and telephony services

from numerous providers, some are free others you subscribe to (one-off or regular payment) and are accessible from a computer, a tablet or mobile phone over fixed and wireless networks. In this text Cloud enabled services is often abbreviated to Cloud.


Private Cloud This is not an exhaustive list but an indication of how the action of customers to move to the Cloud creates a consequence and reaction from vendors.

Customer action Vendor reaction

Customer building a private Cloud with re-use of existing IT assets and acquisition of new assets to deliver „Cloud‟ functionality.

Vendors that have developed specialization and earned reputation are predatory for these opportunities potentially displacing existing vendors. Existing vendors scramble to protect their business and learn the required skills to retain the customer.

Customer wants to validate the business case for deployment of a Cloud.

Vendors want to be part of this conversation but may not have the skills/experience/tools to participate. This was not a problem when the customer was in an upgrade/refresh program. The customer did the business justification and the vendor responded with a quotation.

Customer is out to market for quotation to buy hardware and software assets – we are going to build a Cloud.

Vendors need to deliver a quotation that is competitive and proves competency to deliver a solution. What opportunities are there to differentiate our bid?

Customer wants to evaluate the merit of deploying Private Cloud versus Public Cloud ahead of an investment.

Does the vendor leave it to the customer to evaluate or engage? How will the decision affect my future business opportunities with this customer?

Public Cloud The accessibility of the public Cloud has made it difficult for IT departments and vendors to know about or even control the decisions to use Cloud enabled services. This is money that is being directed into IT but so often not through the vendors that see the IT department as their customer. IT managers will want to bring this under control but that may be easier said than done and in the meantime the Cloud is a click away to try and buy. Do you write this business off or work the opportunity? How do you balance your interests to be loyal to your IT department customer and build relationships with other departments to bag new business? The starting place for any vendor should be to know what the position is of IT toward the public Cloud, what controls they have or plan to put in place. What Cloud services are already deployed by department, vendor, application, number of users and the associated contract term end dates. Easier said than done; yet important for the construction of an account plan and the conversation with your customer.


Customer action Vendor reaction

Customer interested to know how they can use the public Cloud in the business.

Where is money in this conversation?

Customer wants to understand what aspects of IT could be delivered in the public Cloud and what the implications are for the business (finance, operations, supply chain, people).

Who is driving this initiative? IT? Finance? Call the customer and ask what is going on. We should be leading that conversation it could affect our future business with this customer.

Customer: “we are moving our email and conferencing into the public Cloud.”

What? Why? That has a big impact on the server and license upgrades we had forecast in Q4. Why didn‟t we know about this?

Customer: “we expect to move to a managed service for all IT within 2 – 3 years.”

Do we want to be a managed service provider? On the other hand what if more customers go down this route then we need to think this through.

These examples are by no means exhaustive and indicate that there is much to understand about how conversations drive actions and possibly unintended consequences. We started a conversation about the Cloud because we thought we should but didn‟t really have a plan. The customer got excited and started conversations with lots of people and now they are working with another supplier. There is opportunity and threat. Follow the diver‟s maxim; plan the dive and dive the plan. In other words, don‟t go with a conversation about the Cloud without a plan or you may end up in a place you never intended.

Talk Talk Talk As with any new market there is tendency for hyperbole to grab headlines and attention. Steve Ballmer of Microsoft, “We‟re all in”. Good for Microsoft but scary for many of their partners who are just not ready, willing and able to follow. Sam Palmisano of IBM, addressing IBM PartnerWorld 2011, talked about macro changes occurring and that “Success is perishable”. Summed up: Innovate or Die. Analysts Frost & Sullivan conclude that the Cloud will put the squeeze on the channel causing shrinkage. Read, some IT vendors will fail. Who are most vulnerable? How soon do they fail?

The Shift A shift in the market has been underway that offers customers an alternative to own and operate. That alternative, depending on who you ask, is told as: Online Services: also the name of a Microsoft business division On-Demand: coined by Salesforce.com with the catchy No Software branding SaaS: computer processing, storage and software via the Internet on „rental‟ terms


Cloud computing a/k/a the „Cloud‟, Cloud enabled services with many interpretations

New words describe ways to serve up IT where the customer „rents‟ rather than „buys‟ with the complexity of IT operations handled by a service provider. Some refer to this as utility computing but jargon aside it is a fundamental shift that changes the delivery and economics of IT for the end customer. In turn this affects the supply chain to the end customer and presents disruption and opportunity.

Bolt onto this shift the impact of a world emerging from recession and a new set of market dynamics with powerful new predators vying for customer pockets and you have the necessity for a game plan to survive let alone prosper.

The Cloud

This new phenomenon has been a cause of both excitement and derision. Among the excited are Microsoft and a host of new entrants while those that deride it claim it is hype and meaningless. Whatever your point of view the Cloud has become the conversation piece of the IT industry4.

The Cloud has three foundation services (see diagram) and the access point to these services is the network (fixed and wireless) and that opens up a huge global audience and is one of the reasons why there is so much interest in the Cloud.

There is money to be earned by providers of these services whether as discrete or aggregated services. It is pointless to rank the importance of these services as they are co-dependant (much like a PC and software are) but they do present different price points, propensity to commoditize, revenue and margin characteristics and customer stickiness to name a few. Those that understand IT will argue over terms and definitions but to Main Street it is the Cloud just as the mobile phone user will tell you they have an Apple iPhone, HTC Android Phone or Nokia Windows Phone without knowing anything about the complex underlying infrastructure that phone is reliant upon – and they don‟t care. The supply chain for the Cloud is quite different to the existing supply chain for most IT products sold today and the role of the channel to bring the Cloud to market is work in progress. You will also see the term SaaS used later – read the Cloud.

4 Gartner identify Cloud Computing as one of their top 10 strategic technologies for 2011

http://www.gartner.com/it/page.jsp?id=1454221

http://www.gartner.com/it/page.jsp?id=1454221


Big guns take aim In a hardened economy the CEO of Microsoft, Steve Ballmer, addressing Microsoft‟s Worldwide Partner Conference 2009 said that growth = share. This statement signaled an end to growth resulting from customers‟ appetite to invest in IT hurt by the global economic recession and a new focus on achieving growth at the expense of competitors. But that was only part of the story as Microsoft presented its Business Productivity Online Suite (BPOS, now branded as Office365) and Azure businesses as new opportunity areas for the channel to grow and earn money. That message was trumped in 2010 when Microsoft went public on its commitment to the Cloud announcing; “We‟re all in”. Microsoft is one of the world‟s biggest global brand names with a vast customer base among business and consumers – they will be getting the message. In the wake of the storm On 7 September 2008, it was announced in the USA that Fannie Mae and Freddie Mac would be nationalized to try to ensure the financial stability of the two firms. One week later, on the 14th September 2008, it came to light that the financial services firm, Lehman Brothers, would file for bankruptcy after being denied support by the Federal Reserve Bank. These events precipitated a global recession resulting in financial turmoil with many business failures and a sharp increase in unemployment. As a result many computers that were once needed by workers lay idle. If we look at the actions taken by business it has resulted in a rapid re-adjustment of costs to reflect the change in demand and preserve cash to ride out the storm. Investments and jobs were cut; inventory management and credit control became a top priority. Credit dried up and many businesses folded. It is interesting to speculate how business will take the lessons of this recession and what that might mean for the supply chain that is the channel. Do we expect customers to return to normal pre-recession buying habits or will they have had a re-think? As they look to repair their balance sheets and re-build cash reserves will they go on a spending spree when things start to return to normal? The truth is; we don't know or at least can't be sure what will happen.

Justifying those IT Dollars During this recession all capital investment has been subject to hardened scrutiny of the business justification. Many IT investments have been justified on productivity gains delivering savings to the business and now the workforce is trimmed back productivity has boomed. In the USA it was reported in March 2010 that the ratio of selling prices to unit labor costs has risen by 5.5 percent on a year-to-year basis, the largest one-year increase in post-war history. So, it may be the case that productivity will carry less weight as a business justification for future IT investments. The alternative business justification for IT investment has been sold as delivering competitive advantage but that has been shown to deliver short term advantage that can be quickly replicated and so IT investments decisions are becoming more cautionary to the promise of returns based on competitive advantage.


Studies have shown IT spending represents on average 4% of revenues (varies dramatically by industry) and with revenues flat or declining in a recession that has put the screws on IT spending. Where the recession left companies with excess equipment and capacity that needs to be burned and so new IT investment might stall until confidence in sustainable revenue growth returns. So, does SaaS provide a better economic alternative to outright purchase during this period of economic uncertainty? It is interesting to make a comparison of revenues (fiscal years 2008 and 2009) earned by companies offering SaaS and licensed software during this recession.

2008 2009 Yr on Yr

Salesforce.com $0.748Bn $1.077Bn +44%

SuccessFactors $0.011Bn $0.015BN +36%

Oracle $22.43Bn $23.25Bn +3.7%

BMC $1.73Bn $1.88Bn +8.7%

For a comprehensive view of the market opportunity and movement a bigger basket of companies would need to be compared. The chart above records top line revenue growth while like for like comparisons are not made easy by the fact that the current „how are we doing‟ measure for on premise is new license revenue growth and for SaaS deferred revenue growth. Of course some SaaS businesses are performing well and in particular those with CRM (Salesforce.com) and HR (SuccessFactors) applications are highlighted but that does not translate that all SaaS businesses are enjoying success. Even so this comparison highlights the changing nature of customers‟ spending habits. It is worthy to look at Microsoft‟s Office 365 seen as a solution for SMB customers but has also had success with enterprise customers. The Office 365 solution delivers communication and collaboration with email, documents sharing, web conferencing and other useful 'get the job done' functions. Big companies with highly capable IT functions are switching, for example; GlazoSmithKline a global pharmaceutical business is turning on near 100,000 users to Office 365 and in doing so can now switch off their own email servers. Why would they do this?

Every business has email and with the assumption that it delivers more or less the same productivity for all customers the only competitive advantage is a factor of what it costs one business over another. And so one change that might now occur is a cold light of day assessment of how IT is deployed; we do this ourselves because we can do it better and it is

core to our business. We prefer others (a partner) to do this because we know they can do it better because it is there core business and they achieve economy of scale that we can not and that means we pay less than doing it ourselves.


This approach focuses resources on what really makes a difference to the business and drives down costs. If this mentality becomes prevalent then customers will expect to see their vendors provide a comparative analysis of: own and operate vs. SaaS. And if you are not in a position to present a these choices, unbiased, competently articulating the business justification for the customer then you could find yourself at a disadvantage. Conversely, those that develop this aptitude will be at advantage.

Who is listening? Is there any evidence that customers want to see the alternatives? Vivek Kundra the Federal Chief Information Officer (CIO) at the White House is a strong proponent of SaaS and was quoted in a Wall Street Journal article in which he said: "I‟m all about the cloud computing notion. I look at my lifestyle, and I want access to information wherever I am. I am killing projects that don‟t investigate software as a service first." More recently he has described a future for federal IT as “Light technology” that means you pay only for what you use, scales quickly according to demand, and shares information more efficiently. Bill McCluggage the UK Government‟s deputy CIO is a fan of SaaS of and is busy with the establishment of a UK onshore, private Government Cloud Computing Infrastructure called G-Cloud. In essence the program will include Infrastructure-as-a-Service (IaaS), Middleware/Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS). In relation to SaaS the government intends to establish a Government Application Store, a federal IT online supermarket. Jeremy Vincent CIO of Jaguar Land Rover switched 15000 users to Google mail and calendar with some interesting observations: We are saving a lot of money but that wasn‟t the main driver. Cost enabled me to get the approval process signed off quickly but in the future it will give us access to a commodity solution across the workforce. It‟s been an easy job. Many of our workers use Google at home and as we know the experience of computing at home is years ahead of the corporate experience. I‟ve tended to be somewhat skeptical about the ability of consumer style applications to cross over into business but in making this clear and unequivocal statement I have to say: ‟sold.‟ One of the golden rules of selling taught at sales school - offer the customer a choice - just took on a new significance as businesses reinvent with the lessons of this recession. The next thing or the next BIG thing? Haven't we seen something like this before? If you cast back to the period 1999 - 2001 we had .com boom to bust. This was period of great innovation and created a vibrant online economy that is synonymous with names like eBay, Google and numerous brand names in financial services, travel and entertainment to cite a few examples. Many of these brands are now goliath businesses with global reach to business and consumer audiences.


I was working for Novell in 1999 and calling on customers to inform them about the Internet and how we saw it would transform connectivity across, what was then called, the Wide Area Network (WAN). As with any disruptive technology customers flagged their concerns around bandwidth, latency, security and the reliability of a public network for business critical functions. Little did we know and the words of Bill Gates resonate: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.” As Sir Tim Berners-Lee inventor of the World Wide Web (now commonly referred to as the Internet) commented; one characteristic of the web is that it will always be a little bit broken - yet that has not dampened enthusiasm with >3Bn connections if you count both wired and wireless connections. The Internet was the next thing that turned out to be the next BIG thing all inside 10 years. It also fuelled new opportunities for growth with hardware, software and ISP vendors profiting from 1.4Bn new Internet connections in the period 2000 – 2010. These are impressive numbers yet there is ample headroom for growth and SaaS is a key component to the delivery of affordable online services and its economic proposition is particularly relevant to business and consumer audiences in the developing world which has most potential for growth. SaaS is building on the success of the Internet. It also has another major opportunity to deliver services to the vast number of mobile phone users. Many mobile phones support Internet connectivity and it is forecast that in the 2012-13 timeframe more mobile phones will be connected to the Internet than personal computers. Many of these mobile phone users will already have a computer connected to the Internet and see their mobile phone as the portable, lives in the pocket or handbag convenience device. With 67% of the world's population owning a mobile phone5 this is a 'watch this space' category. If you needed any convincing; ask yourself why Google has suddenly become interested in mobile phones? Get it, got it What evidence is there to interpret the appetite for SaaS? As always there are things we know and things we don't know. In the former category we rely on news and announcements about customer adoption and here are a few examples: Salesforce.com FY2010 results stated 72,500 customers now use their On Demand CRM service and impressively added 17,100 net new customers in their FY10 during a global recession. In June 2009 SuccessFactors announced Siemens AG purchased a global enterprise subscription of virtually all of SuccessFactors modules to link strategy to executed business results with its worldwide corporate talent management vision, for 420,000 users across 80 countries in 20 different languages.

5 Source United Nations: http://www.un.org/News/briefings/docs/2010/100223_ITU.doc.htm


On April 2010 Xero a New Zealand based company founded in 2006 who advertise they offer the world‟s easiest online (SaaS) accounting system announced they have 17,000 paying customers in more than 50 countries. Four years to acquire 17,000 customers demonstrates the power of online. In March 2009 GlaxoSmithKline said they would move near 100,000 users to Microsoft‟s online service (BPOS) and in doing so cut operational cost by an estimated 30%. In December 2010 the US Department of Agriculture announced it would move its 120,000 federal workers to BPOS over a four week period. Both the private and public sector „get it‟ as they refresh how they deliver essential „get the job done‟ services, like email, to their workforce. In May 2009 Valeo confirmed they would use Google Apps for its 30,000 employees operating out of 192 locations in 27 countries. It is highly probable amongst these and other SaaS customers they use multiple SaaS solutions from different providers and so is established as a viable alternative to own and operate for those customers. In the latter category, things we don't know, is whether customer adoption is confined to a few applications that are highly suited to delivery as SaaS. This might be an indicator to a finite market for SaaS. We know that some customers are replacing on-premises with SaaS but is SaaS attracting new customers to increase the use of IT in their business (or at home) that would otherwise do nothing? The interesting dynamic is to know if the availability of SaaS is influencing customer decision making and to understand customers‟ predisposition to adopt SaaS. In a Microsoft end-user survey (published February 3rd 2010) among SMB customers, Microsoft looked at this with an interesting slant as they looked for evidence to correlate a customers adoption of SaaS (referred to as hosted services in their survey) and their financial performance. The headline statement for this survey was: Microsoft Study Reveals Small and Midsize Businesses Using Hosted Services Have Better Financial Performance.

In the detail they reported more than 40 percent of the respondents that use hosted or cloud technology reported revenue rises of 30 percent or more compared with 90 percent of respondents not using hosted technology that saw decreases in revenue. Depending how Microsoft use this research to promote SaaS with SMB customers it puts them in an interesting „marketing‟ position with those partners that currently have SMB customers and earn money from the sale and support of IT deployed on-premises. It appears SaaS is turning up the heat and will be the cause of

some headaches and heartache for the channel. Understanding customer choices and triggers that influence buyer behavior is root to channel Go to Market planning and sizing market opportunity. It is fair to say that


partnering opportunities are abundant and as no template exists this is creating confusion for those with legacy partner programs (do we reinvent the old, it has served us well in the past) and opportunity for others that think out of the box. The new focus is to identify those that are shaping and influencing customer buying decisions and figure out why they need you and how you help them with customer acquisition for Cloud services. The age of the Datacenter Enterprise customers‟ datacenters are typically housed in secure environments with most employees unaware of its physical location, smaller businesses more likely have a server room that doubles as the stationery room and micro businesses have the server under the desk in the corner where nothing will get spilt on it. Some have figured out there is an alternative and query why you need a server at all. In recent times massive investment is being made in datacenters that serve up SaaS and Cloud Computing and they dwarf anything built so far by any end-customer. Microsoft has invested $2.5Bn in 6 datacenters around the world. Google, IBM, CISCO, Oracle and HP have multiple datacenters. Apple has been reported as building a $1Bn datacenter in North Carolina. IBM is building a massive datacenter in China with 6.2M square feet of space (almost the size of The Pentagon). Other datacenter operators include: UNISYS, CSC, Sungard, Rackspace and Ingram

Micro to name a few. The datacenter industry has evolved sufficiently for Gartner to publish a Magic Quadrant for Web Hosting and Hosted Cloud System Infrastructure (On Demand). Those named as Leaders include IBM, AT&T, Savvis (acquired by CenturyLink) , Rackspace and Terremark (acquired by Verizon). It is not just that these datacenters are bigger; they are run on an industrial scale backed with the commitment of a Service Level Agreement (SLA) and their value as a „quality hosted platform‟ for the delivery of IT (compute/storage/web sites/email/voice) is fast gaining recognition. The complex technology stack (see diagram) of the datacenter is optimized for high efficiency and high availability with the operational requirement to be delivered 24x7 against a SLA. For many businesses the operators of datacenters deliver „IT at an affordable price and remove the burden of own and operate‟.

It is estimated one-third of global server production is delivered to datacenters and if classed as an industry would rank the 6th largest global consumer of energy. This is a big industry backed with big money players who understand how to shape and influence customer buying decisions – after all they have big money investments to deliver ROI against. This is IT delivered as a utility at a very compelling price point but no customer is in a position to throw away what they have already invested in IT so the role of the channel is evident; it is to advise the customer of the optimal solution for their IT requirements and that may or may not include SaaS.


In most cases and for some period of time to come the channel will earn money from maintaining and upgrading IT that is installed on-premises and from selling and providing services to customers that make a decision to deploy SaaS, often alongside existing IT (for most rip and replace is not an option). Few businesses have the resources to build and operate datacenters on the scale to deliver utility pricing in a competitive market so a process of natural selection will occur for the channel with those datacenter providers that want to partner. This will require the channel to evaluate what their value-added services are with the availability of SaaS and how they differentiate those services and so a change is underway and poses some uncertainty for the channel. For example; will Monday to Friday help desk hours meet the needs of customers who can access SaaS from anywhere and at anytime? If with the availability of SaaS the channel earns less money from selling server hardware and software licenses how is that replaced?

Unexpected challenges One consequence of this market shift is the need to educate the channel in the choices now available to their customers and this has presented some conflict. The upfront revenue and margin from the sale of hardware and software usually earned is replaced by a monthly recurring revenue and margin stream with the sale of SaaS (Monthly Recurring Revenue (MRR)) with important financial implications for the P&L and cash flow of a business. This has presented a dilemma for the channel; do they ignore these new choices or embrace them? In turn this has presented a dilemma for the providers of these new services; do they engage the channel or sell direct? There are examples of channel only, direct only and hybrid sales models. For new to market vendors the choice is easier made than for those vendors that have worked hard to build loyalty with their channel partners and feel tormented by the need to make progress while remaining loyal to existing channel partners. In truth the channel is hyperactive as a result searching out partnerships to take SaaS to market.

SaaS presents a choice for end-customers with many implications to work through and the channel can play an important role in advising customers. As every business knows; with change there is opportunity and timing is everything.

Changing Buyer Behaviour One time a customer would ask to receive information about products/services and that that would be dispatched via post, fax or email. Where customers were in an early stage of information gathering and discovery they would attend exhibitions and


seminars. Today most customers start with a search in Google, Bing or Yahoo, whichever is their preference. This in turn has changed how the channel conducts its demand and lead generation and allocation of its marketing spend. More marketing spend is directed to web sites, Pay Per Click (PPC), Search Engine Optimization (SEO) and more recently social media. The availability of SaaS has lead to a change in how customers can now evaluate solutions with self-activation of try before you buy offering commitment free - no risk - no cost trials. In turn this has led to a rethink of customer acquisition strategies as the effort moves from how do we find our customers to how do we ensure our customers can find us. This has changed the sales cycle from one where the vendor wants to assume control to where the customer is put in control, in turn creating havoc for sales forecasting. Where the customer can reach a decision without the need to speak to sales, the proposition for customers needs to be highly targeted and crystal clear with no obstacles to prevent easy conversion of a trial to a purchase. Here we see another example of how SaaS is disruptive to the channel as the role of sales is changed from upfront consultative selling or order taking to the conversion of a trial to purchase where you may know little or nothing about a customer's motivation to buy. The introduction of a SLA with SaaS presents an interesting new dimension for how customers evaluate the choices of own and operate vs. SaaS. Take for example where a customer experiences problems with servers this is recorded as downtime with some interruption in the business and sometimes a cost over and above any pre-existing maintenance fees. Some SaaS providers now compensate customers where they fail to meet the SLA and this not only builds confidence in the mind of the customer but they see it in stark contrast to where they usually end up paying when something goes wrong. That makes an interesting discussion point and is well made by SaaS vendors during their sales pitch to a customer. If buyer behavior is changing what does that imply for the resources and modus operandi of channel sales organizations? The impact of SaaS is far reaching and has more ramifications for vendors that offer both on-premises and SaaS than the pure play SaaS vendor. For the vendor offering both on-premises and SaaS they face many challenges to build dual competencies with impact on sales, marketing, service and finance and administration departments. It is evident that the skill sets selling on-premises and SaaS have differences. For example those selling SaaS need to have hands-on experience using the product with the benefit of insights they can share with customers; there are a number of ways to do that let's schedule a webinar so I can show you how to. The compensation plans for licensed software and SaaS are a source of contention with sales of licensed software attracting a bigger one-off commission payment and SaaS commission payments designed to reward customer retention that is fundamental to accretion of Cumulative MRR (CMRR).


With the sale of licensed software, sales disengage after the sale is made and hand off to the support team until the customer has a new requirement. In a large part this behavior reflects the compensation plans that reward the salesperson upon the sale. With the sale of SaaS the company's revenues are dependant upon the customers continuing use of the service that is to a large extent depends upon their satisfaction with the service. The sales compensation plan for SaaS reflects the company‟s revenue stream from the customer and the importance of customer renewals. Since compensation plans direct sales behavior there are challenges around how the compensation model for SaaS is implemented for the salesperson and the company – salespeople prefer sales commission paid up upon the sale whereas the company‟s cash flow from a sale of SaaS does not permit that. The impact of SaaS has many implications for the channel affecting the fundamentals of the business operating plan through motivation and reward of sales teams.

Channel supply chain – service chain The channel has a long history in operating a supply chain from factory to customer and with margins under pressure new opportunity areas are being sought out. Will a service chain complement the existing supply chain and deliver growth? A wholesale market operates to trade a range of utilities such as electricity, gas and network (voice/data) capacity. Earlier in this chapter I wrote about the expansion of datacenters and in time it might become true that computing capacity becomes traded perhaps using eBay (or other exchange) to connect seller and buyer. Is this too far fetched to reconcile with today's IT channels organized around the supply of IT? While it is plausible it is easier to conjecture near term developments based on known business models and possible business scenarios. It presents a conundrum because any points of view and interpretation of future events can be challenged but here is one possible scenario. When a business equips an employee with a computer, a desk phone and a mobile phone (for some deskless workers) they have the basic tools to do their job. The need to replace or upgrade these comes around typically every 3 years for a computer and every 18 months for a mobile phone. The difference is the mobile phone is under a contract that is invoiced monthly according to usage and the mobile phone industry is expertly set up to efficiently run subscription pricing the foundation billing process of SaaS. In a recent development they now offer a computer with Internet connection over fixed and wireless networks with subscription pricing. In a world where more and more computing power and software is delivered as a service the mobile phone operators are well positioned to vie for all of a customers requirements to include: telephony over fixed and wireless networks, a range of mobile devices with Wi-Fi access, a computer without the upfront capital cost, Internet access (fixed and wireless) and access to software without the need to install first


The channel just got more crowded but with companies that have big brand recognition that are well capitalized with global operations and collectively have 67% of the world‟s population as customers. Have you ever had to have a mobile phone replaced that was under contract? They typically deliver a replacement inside 24 hours usually in a delivery time window to suit you. The mobile phone industry knows service is key to delivering customer satisfaction and retention (to minimize churn) when the contract is up for renewal. When things go wrong we rely on the service promise of our suppliers and their capability to do what they say. This may turn out to differentiate a supplier in the mind of a customer. Take this story for example, a phone call from a customer to their mobile phone provider: “Our UK based employee on business in Brazil just had his computer stolen and he urgently needs a replacement. No problem, we will have a replacement with them in 24 hours at no cost under the insurance that is included in the monthly subscription. Meantime they can access most of their applications from their mobile phone. When they connect the fully configured replacement PC to the Internet all data will be accessible with options to download folders that they need to have stored on their local drive. When any attempt to use the stolen computer is made whether or not it is connected to the Internet pre-installed software will ensure the disk is erased. We are sending a SMS to your employee now informing them of the dispatch of their replacement computer. We will take care of everything. Is there anything else we can do for you? Thank you, we value you as our customer.” As so the product is wrapped with a service chain behind the supply of product and this I suggest is hugely appealing to a society that has become dependant on technology. Once the product is in the hands of the customer the expectation now is on the service they receive and that is a potential source of revenue while delivering on customer satisfaction.

Hard choices The poster child of SaaS is Salesforce.com founded in 1999 and on record as one of the fastest growing software companies to achieve $1Bn in annual sales that is in part explained by how SaaS companies account for sales. The attraction of SaaS is its revenue model. Monthly recurring revenue (MRR) that is cumulative over time as Cumulative Monthly Recurring Revenue (CMRR). For established software companies with revenue earned from the sale of licensed software (where the customer pays for a license to use the software) usually with a recurring maintenance fee the SaaS revenue model has profound implications. There is a revenue gap in Years 1 - 4 with implications for the Profit & Loss account, cash flow and sales compensation. That is why established software companies with revenue streams to preserve proceed cautiously to offer SaaS. The choices are: ignore SaaS for now, switch to SaaS or combine sales of licensed software and SaaS. In reality ignoring SaaS and a switch to SaaS are the hardest to contemplate and most established software companies choose to combine both, with it has to be said,


varying degrees of commitment. New to market SaaS only companies have a different challenge in that usually costs run ahead of revenue so they need secured funding through the early years whereas the established business with revenues is in a stronger position to ride out the early years to take SaaS into profit. This points to one of the major challenges facing the channel; the symbiotic relationship of the channel with its vendors now needs to discuss the implications of SaaS as a source of revenue, margin, and growth and importantly its impact on existing revenue streams and profitability. That is one big discussion.

The Bet With the assumption that all enterprise software will need to be re-written in the next 10 - 15 years then you have a software industry in transformation. If as a result of the re-write of software more and more software is deployed as SaaS deployed out of mammoth datacenters that changes the dynamic for resources (people and money) both supply and demand (customer) side. It will become commonplace for the customer to look at the alternatives of own and operate versus delegate to a service provider so vendors will need to be adept at presenting both. Is this a game changer? We may not know the answer for another 10 years and the question for many is when to place their bet.

Demand for networking is certain to grow while end-customer demand for processors and storage is likely to change with datacenters providing more of this capacity (this is already showing up in data on shipments of servers). And so consumption of hardware and software changes with implications for the channel. This signals a change in the mix of revenue and contribution that the channel earns from the sale of products and services.

It will be the case that where SaaS represents an increasing percentage of sales then services will need to gain momentum as a source of income and the good news is that it is easier to differentiate services and they are generally less price-sensitive than products. The network joins everything together and is a potential throttle on the adoption of Cloud with performance and reliability being at the heart of the customer experience. Fast with the promise of faster, and always reliable - nothing less will do. It is a reasonable bet and evidenced by demand that investment will continue to pour in to deliver on the expectations of customers.


In Conclusion

Is Cloud the work of creative destruction as described by German sociologist Werner Sombart and popularized by the Austrian economist Joseph Schumpeter. There are examples of innovators taking the place of established companies that enjoyed some degree of monopoly. Take for example the rise of Google and its challenge on Microsoft and how that has compelled Microsoft to respond. Will Cloud deliver the next wave of economic growth for the IT industry and in turn destruct the value of companies that move too slowly to embrace Cloud? In Nicholas Carr‟s book The Big Switch he talks about a revolution in how IT is served up through the Internet‟s global computing grid pumping software and data into our homes and businesses calling it a utility just like electricity. And perhaps he is right if we listen to an iPod generation who are interested in using the service (iTunes) rather than needing to understand how it works. With technology everywhere we take what we learn at home to work and at work to home. It occurs to me this reflects the thinking of Jeremy Vincent CIO of Jaguar Land Rover and might become more prominent in influencing customer decisions. Whatever conclusions you draw from what you have read here and your own experiences it is wise to have a position on Cloud. You need this so you can lead a discussion with a customer and have all customer facing teams deliver a consistent message. It might be that your customers are highly conservative fitting the profile of technology laggards and your position is - not yet let's see how this plays out while we learn from the mistakes of others. On the other hand you may already be losing mindshare and business to a competitor (and they may not be the usual suspects)? You would know that because they are your customers and you know them well. How do you judge your end-customers; where is your conversation with them?

Conversation point

Vendor description (Sample description)

Customer description (Sample description)

Watching brief no measureable impact on sales and capability to compete for and win business – maybe tomorrow?

business needs are being met by existing IT resources – we’re good for now

Minor evolution

a few customers have asked about SaaS and we have found solutions for them – we are in the game

SaaS looks interesting but we are not sure what it means, we need advice and are willing to experiment

Significant change

competitors new and existing are offering SaaS and we need to respond – this could hurt us

we are interested to compare SaaS with own and operate and know the economics for the business

Strategic importance

customers are asking for proposals that require our solutions to be delivered as SaaS – it’s happened

we are only interested to receive bids for this requirement that are SaaS

Whatever you do; do something, success is perishable.