cloud university: idc

The Why and How of Building a Cloud Practice

Darren Bibby, Channels and Alliances Research

@darrenbibby


The

Marshmallow

Test

Stanford 1970,

Walter Mischel

Repeated around

the world

Studies on Delayed

Gratification with

children (4-6 yrs)


The Deal:

1 Marshmallow now

Or 2 if you wait


The Deal:

1 Marshmallow now

Or 2 if you wait

2/3 of kids ate the

Marshmallow


The Follow-up:

~18 years later

Children who waited had

better life outcomes

SAT Scores

Education

BMI


So what does this

have to do with

IT Solution Providers?

Agenda

Why You Have To Move to the Cloud

How to Move to the Cloud

Distribution’s Role in the Cloud


1. Why You Have To Move

to the Cloud.

10

Cloud Resale Economics Example

11

Deal Size

Traditional On-Premise Application Cloud Application

$100,000

Partner

Revenue

Partner

Gross Profit

Note – This is a fictitious example

and does not represent IDC

research data

35% Margin

or $35,000

$100,000

$40,000

Year One

$40,000 Year Two

(Possible)

$40,000 Year 3

(Possible)

35% Referral Fee or

$14,000 Possible Year Two Fee, and

on…

35% Referral Fee or

$14,000 With a referral fee, revenue

and gross profit are the same.

Cloud Resale Economics Example

12

Deal Size

Traditional On-Premise Application Cloud Application

$100,000

Partner

Revenue

Partner

Gross Profit

Note – This is a fictitious example

and does not represent IDC

research data

35% Margin

or $35,000

$100,000

35% Referral Fee or

$14,000 Possible Year Two Fee

35% Referral Fee or

$14,000 With a referral fee, revenue

and gross profit are the same.

How about if the invoice is paid

on a monthly basis?

What does month one look like?

$3,333 Month One

The Cloud Trough

13

Today Past Future

Revenue

On-premise Revenue

Cloud Revenue

The Cloud Challenge:

The Customer Has Won


The Cloud Challenge:

You Still Have To Move To The Cloud


Why Go to the Cloud

16

Growth

Profitability

Company Valuation

Future Viability

Why Go to the Cloud

17

Growth

Profitability

Company Valuation

Future Viability

Reality

18

“We would probably make more

money if we could keep

everybody on on-premise.

But that's not going to happen.”

Reality

19

“I think that if we don't partner

with [our vendor] and do this,

then somebody else is going

to take our customers.”

Reality

20

For us to compete in two years,

if we don’t have a few

references and a few case

studies and a few like, ‘yeah,

we’ve done it and here are the

scars,’ we’re going to lose

those deals.”

Reality

21

“Cloud is the Future.”

“The stats on the

market are clear.”

Cloud Services Momentum

Public cloud services sales will near $70B in 2015

• 5X the growth rate of the IT industry overall

The “greater cloud market” – including public,

private clouds, and enabling IT and services –

will hit $118B

Public cloud services sales will be $127B in 2018

• $200B “greater cloud market”

22


Data center growth will accelerate toward Service

Providers

• By 2016, over 50% of compute, 70% of storage

capacity will be installed in hyperscale data centers

23


70% of CIOs will embrace a “cloud first”

strategy in 2016

Over 90% of net new commercial apps will be

developed specifically for cloud in 2015

By 2018, it is predicted that nearly 27% of all

software revenue will be subscription based.

24

Why Go to the Cloud

25

Growth

Profitability

Company Valuation

Future Viability

Cloud Partners Outperform

Revenue Growth %


7% 8%

16%

14%

<10% Cloud 10% to <20% Cloud 20% to <50% Cloud 50% + Cloud Revenue

Revenue Growth %

Source: Microsoft eBook, IDC 2014, n=670

Why Go to the Cloud

27

Growth

Profitability

Company Valuation

Future Viability


Gross Profit %

28

24% 26%

33%

42%

<10% Cloud 10% to <20% Cloud 20% to <50% Cloud 50% + Cloud Revenue

Gross Profit %

Source: Microsoft eBook, IDC 2014, n=670



Cloud is not the only thing causing

these results

IDC believes the best performing

partners are adopting Cloud first, and

faster

Cloud Profitability

30

Revenue

- Cost of Goods Sold

Gross Profit

- SG&A Expenses

Operating Profit

Cost of Goods Sold

Gross Profit

Cloud Profitability Example

Cancom

HQ Munich, Germany

Formed in 1992

~600M € VAR

Transitioning to Recurring

Revenue


Cloud Profitability Example

32 Margin (%) * Estimated Hauck & Aufhauser

Why Go to the Cloud

33

Growth

Profitability

Company Valuation

Future Viability

Company Valuations are Higher for

Recurring Revenue


“And the stock market values companies with

more regular cashflow more highly.

Even if the revenues were the same, the costs the

same, the profits the same, moving from a

variable revenue stream such as upgrades to a

more regular one as in subscriptions should

boost the value of Adobe itself.

Tim Worstall

Contributor

Forbes

June 18, 2013


Recurring Revenue

35


Recurring Revenue

36

Potential

Valuation

Traditional

Revenue

Business

Recurring

Revenue

Business

Revenue Multiple 0.2 to 1.5 times 2 to 6 times

EBITDA Multiple 2 to 2.5 times 5 to 14 times

Source: IDC Partner Valuation Study 2014

“For the average sub $5 million a year VAR, it’s tough to get past

three times EBITDA“ - Brent Twist, Encore Business Solutions

Why Go to the Cloud

37

Growth

Profitability

Company Valuation

Future Viability

2. How to Move to the

Cloud

38

Collecting Successful Cloud

Partner Practices

2013 and 2014 studies with Microsoft

Survey and Interviews

Trying to understand the best practices

of Successful Cloud Partners

39 http://aka.ms/idccloudebook

Successful Cloud Partner

Practices

Planning for Your Cloud Business

40


Organizing for Cloud

41


Endure Short Term Pain For Long Term Gain • Revenue and cashflow trough

• What will my business be like in 3 or 5 years?

Don’t Wait To Adopt Cloud • You’re probably not behind… yet.

• But you are losing deals to Born in the Cloud and other partners

Is it time for a management offsite?

• Key decisions must come from the top

42

Your Cloud Business Strategy

Use Cloud Internally And Share Your Own Best

Practices

• Gain powerful credibility with customers by using the

products you are selling

You Only Have To Stay One Step Ahead

• Cloud technology is evolving rapidly

• Successful partners stay one or two steps ahead of the

customer and competitors to be a leader

43

Your Cloud Business Strategy

Differentiate With Domain Expertise To Increase Profit

• Cloud can commoditize; You must differentiate

• By business process (e.g. accounting) or by industry vertical (e.g.

retail).

• 80% of IT investments will involve LoB by 2016

Build Your Recurring Revenue – The New Killer Metric

• Offers predictability, cash flow, and positive impact on company

valuation

• Top RR: 1.5X Gross Profit and 1.8X Revenue Growth

44

Recurring Revenue Compounds


Year 1 Year 2 Year 3 Year 4 Year 5

Growth dependent on:

Customer churn rate

New customer growth rate

Fixed Costs

Cloud Revenue


Practices

Your Cloud Sales Strategy

46


Understand Why Cloud Sales Are Fundamentally Different

• Past: Get to the sale

• Now: The sale is the beginning

Open Doors With Cloud, Then Up-sell

• Get in the door with Cloud

• Upsell over the long term relationship

47


Choose the Right Sales Structure For You

• Separate or Integrated?

• Solve for Internal Conflict or Customer Choice?


Separate Cloud Group Integrated Group


Carefully Architect Your Sales Compensation

• Problem: How to motivate salespeople who were used to selling up

front license + services deals?

• If affordable, pay up front

49


Consider Hiring Outside The Box

• Hire Young

• Hire Congruent

• Hire for Value

• Cloud partners have more staff in sales

and marketing vs. other partners

50


Create A Lean, Mean Operating Model For Volume

• For a volume play, impetus must be on efficiency

• Lowering cost of making the sale

Consider Telesales To Increase Your Reach

• Telesales can be a cost effective strategy,

• Different skill

• Metrics driven

Consider Selling 1:Many

• Take customers through non-competitive steps together

51

“The top sales people, like Charlie, are making 50 to

100 calls per day. The sales cycle is a few days and

implementation is a matter of weeks. The focus is on

high-volume.” Ben Gower, Managing

Director, Perspicuity


Take Customers To The Cloud In Steps

• Many customers are still not ready to fully dive in

• Certain products are good for the first sale, some better to upsell

Speed Up the Sales Cycle by Sidelining Cloud

Objections

• Arm your telesales team with resources to take FUD questions

off-line

• One-page FAQs, videos, web sites, etc.

52


Practices

Your Cloud Marketing Strategy

53

Your Cloud Marketing Strategy

Shift Your Marketing To Digital

• Successful cloud partners are investing in digital marketing

• SEO, pay-per-click, banners, videos, webinars, blogs, social media, iterative web

pages and landing pages, etc.

54

Establish Your Brand With Thought

Leadership

• Get known as a thought leader

• Some partners provide incentives for staff to

publish


Practices

Your Cloud Managed Services Strategy

55


Increase Gross Margin Through Managed Services

• Partners with higher cloud / recurring revenue earn higher gross margin

• Become more efficient at delivering at a fixed monthly price

Create Efficiencies In Your Managed Services

• Remote delivery

• Spread highest paid technical staff across

more clients

• Automation, Methodology

56


Be Your Customers’ CIO or IT Department

• Some partners play the CIO or IT department role

Add Ongoing Retainer Hours To Your Projects

• Successful cloud partners are turning more offerings into

recurring revenue contracts

• Pre-purchase of monthly discounted hours

• Support, monitoring, but also ad hoc professional

services, custom development, etc.

57

“There’s a bucket of hours bought on a retainer, or use it

or lose it basis, at a discounted rate. They can use it for whatever they require as

the need arises.”

Greg Schlather, General Manager,

Cloud & Managed Services, Catapult Systems


Practices

Your Cloud Intellectual Property Strategy

58

Your Cloud Intellectual Property Strategy

Leverage Cloud To Create Your Own IP

• Cloud services are more stable

• Development effort is easier today

• Distribution of apps is easier today

Manage Using New Key Performance

Indicators (KPIs)

• Different KPIs:

Monthly Recurring Revenue (MRR)

Recurring Revenue %

Churn %

Lifetime Customer Value

59

3. Distribution’s Role in the

Cloud

60

Do We Need IT

Distributors in the

Cloud?


Distributor Core Functions – Traditional

62

Integration / Configuration

Training and Enablement

Partner Management

Marketing Sales

Tech Support

Logistics

Credit and Financing

Distributor Core Functions – Cloud

63

Integration / Configuration

Training and Enablement

Partner Management

Marketing Sales

Tech Support

Credit and Financing Logistics 2.0?

Aggregation

Order Management / Billing

Essential Guidance

64

Essential Guidance

There are many paths to Cloud success. Common elements of success include:

Recurring revenue models are slowly but surely replacing traditional project and transactional based models.

Most partners will have to endure some short term pain in order to achieve long term success, which could include higher margins and a higher company valuation.

Those who master a specific vertical or horizontal domain will be able to speak the language of the new power broker in the enterprise, the Line of Business executive.

The time to act is now. There is a land grab going on for cloud customers and there’s not much time left before you find yourself in the bottom half of cloud partners.

65


Leverage the Past and Invest

66

Revenue

Today Past Future

On-premise Revenue Cloud Revenue

The Why and How of Building a Cloud Practice

Darren Bibby, Channels and Alliances Research

@darrenbibby

cloud university: idc

Technology