Cloud computing, to many, may have been over-hyped in recent years. But within the hype there are some harsh realities with many corporates and vendors – including software giant Microsoft – literally being forced to re-invent their business models. This reality is now filtering down to the distribution channel, as Kathy Gibson found out when she discussed the issue of cloud with Microsoft’s local partner sales lead, Derek Kudsee
Digital transformation has been the buzzword on everyone’s lips for the last couple of years, and it’s fast becoming a reality for companies across the board that recognise they need to change the way they do business or risk being superceded by disrupters.
For many resellers, their ability to embrace the cloud or not will see them either succeed – or face going out of business.
“The reality is that disruption extends way beyond the end user customer,” says Derek Kudsee, partner sales lead at Microsoft South Africa. “We know about disruption in the hospitality and taxi industries, for instance, but we need to recognise that disruption is pervasive in every industry – and that includes IT and the partner ecosystem.
“Every single business operating in the digital age is faced with the need to transform.
“At Microsoft, we have to do it; and our partners have to transform as well. Whether we like it or not, our customers are transforming and we have to take the journey with them.”
Kudsee points out that as end user companies undertake digital transformation, they are rapidly changing the way they consume technology and so IT vendors and resellers have to change the way they sell this technology.
“And what this means is that if partners stay where they are, untransformed, they will become irrelevant. As business changes, partners must be able to service their customers.”
Microsoft itself has completely changed the way it delivers software, Kudsee explains, but it’s been careful to make sure its partners are included in the change.
“For us, it’s been a big change. And, since we are a partner-friendly organisation, the impact of change on our partners has arguably been greater.”
The advent of cloud computing has seen resellers having to evaluate their position in the value chain. “Partners want to know if we are still the friendly vendor; still the big bet for their businesses,” Kudsee says.
For Microsoft, along with many other software vendors, the advent of digitalisation and cloud computing has necessitated a complete rethink. It’s not just the way they sell or licence software that’s had to be redesigned. The whole business model has had to change completely as well.
“Partners know they have to change, and some have made the change already,” Kudsee says. “But I worry that some won’t succeed because they are still stuck in the world of project versus product and so they can’t or won’t transform.
“What we need to understand is that this transformation needs to be from a channel of service providers to a channel of solutions providers.”
He explains that the traditional business model for most resellers was built around deploying a vendor’s product. “But the partner in the cloud world takes the vendor’s platform and packages it with their own IP. They go to customers with a ready-to-consumer offering.
“They have to do it this way because the customer wants the solution immediately – they want a package that they can implement almost instantly.”
Kudsee believes the keys to success are for partners to target industries, lines of business and geographies that they know best and develop very specific point solutions.
“Microsoft will never build those solutions; only partners are going to take advantage of these opportunities, so there is no question of the vendor ever being able to sideline its partners,” Kudsee says.
“But partners need to realise that it has become an enterprise game. In the hyperscale enterprise world, this is a partnering model second to none.”
Ironically, smaller resellers – born-in-the-cloud companies – have been the first to seize these opportunities and are being more successful at packaging their IP than VARs accustomed to projects and service-based revenues streams.
“The born-in-the-cloud guys are going far, fast,” Kudsee says.
Key to the new cloud computing models is that the barriers to entry are effectively removed, and profits can be achieved quickly. “We think its 65% more profitable to productise IP on the cloud than a traditional services engagement.”
This puts pressure on the existing reseller base to begin their own transformation journeys. “The race is to understand productisation,” says Kudsee. “And it’s not happening fast enough as far as I’m concerned.”
The problem for many resellers is recognising that the profitable businesses they are operating now could be headed for obsolescence sooner rather than later. Before this happens, they should start setting a new, digitally transformed revenue stream based on productisation in the cloud.
“For many partners it’s a new world of productisation versus services delivery; the world they understood versus the new world. And there is a lot of discomfort,” Kudsee says.
Licensing partners could be hardest hit, he believes. “They are used to reselling packaged IP in perpetual licences and will need to get used to a different consumption model. They will have to evolve their marketing, sales and operations in the new world.
“While we are digitising everything else, we need to digitise those processes.
“Customers are saying don’t come to me with perpetual licence, but are asking for cloud solutions.”
As licenses shift from perpetual to subscription, partners will have to find new ways of remaining relevant.
“Should these guys be worried about their futures?” Kudsee asks. “Probably not. There is not enough money in selling licences to sustain any business. So even today, the licence should simply be the entry point. Over the lifetime of the customer, there are other revenue streams that are much more profitable than the licence.
“As a reseller, the margin on product is negligible. What’s much more important is the after-sales service and packaged offerings – that’s where the money will be made and should be getting made now.”
In the new connected world, where concepts like Internet of Things, big data and mobility are the new buzzwords, partners should be thinking about the connected world, Kudsee says.
“So partners should be thinking about how they can leverage data. Without data, none of the rest will be relevant. They should be looking at how to bring data sources together and derive new solutions that create insights and add value.”
It really is a case of adapt or die, Kudsee believes. Resellers can continue as they are, but their customers are already moving away from the old models. Or they can start transitioning now, and be in a position to offer their customers the solutions they need, that can be implemented immediately, when they need them.
“But partners need to shift their thinking. They have the IT resources available, now they need to be creative, to build solutions in collaboration with their customers.”
Microsoft is willing to help its partners to build cloud practices, as well as on fast-tracking initial projects so that customers see a quick time to value.
“I believe Microsoft has thought out how we can take our partners on this journey,” Kudsee says. “My only ask of the channel is that you have to move. You can’t sit on the fence and wait to see if it will work out. You have to make a trustworthy bet on it.
“If you don’t, and opt to wait rather, someone else will seize the opportunity.
“That is the reality of the cloud: it’s a game of speed and you have to move fast. It’s not about perfection, it’s about speed.”
Kudsee says the big VARs are already making rapid strides in building digital practices. “Of the typical licensing partners, I don’t know one who hasn’t made huge strides in the last 12 months. They are also ready with productisation.
“I’m excited about these guys,” he adds. “They were the initial sceptics, but are now ahead of the game. They have a customer base that wants to move to the cloud and have recognised that if they don’t do it someone else will.”
So far, the least transformed partners are the premier system integrators. “It’s not so easy to transform resources into product,” Kudsee says. “It’s more complicated for them.”
The companies that may become irrelevant quickly are those that don’t transform because they have a successful, profitable business in services. But Kudsee urges all resellers to at last begin the transformation journey.
“We call it perform and transform,” he says. “You can’t transform without keeping the lights on. But if you just perform and don’t drive transformation, you could run out of steam quickly.
“The partner landscape to know today is going to be very different in three years’ time,” he adds. “But the people with the greatest ideas and the fastest execution will be the winners.”