Staying Ahead of the Cloud

Not only are cloud services here to stay, but they'll likely be mainstream among SMBs in just 18 to 24 months. Learn what you can do to get ready.

By Carol Hildebrand

The technology industry is undergoing massive change, as vendors reinvent technology strategies with offerings such as Software as a Service (SaaS) or Platform as a Service (PaaS.) Loosely known as cloud computing, these new services promise cost-cutting opportunities that strongly appeal to SMBs-the primary market for many channel partners.

"Cloud and hosted services have disproportionately high benefits for small companies because the cost of in-house IT, support, hardware, and the like really hurts their operating expenses and bottom line," says Paul DeGroot, an analyst at Microsoft-focused research firm Directions on Microsoft.

Offloading those chores to cloud vendors may be a smart choice for SMBs, but that cost reduction will mean lost revenue to many VARs. "Our research shows that as more and more software technology moves to the cloud, it becomes of greater concern to VARs, particularly in the SMB market," says Tim Harmon, a senior analyst at Forrester Research Inc. "All the on-premise stuff that gets eliminated in the cloud takes away from VARs' pocketbooks."

There's no question that cloud computing will affect many channel partners that currently depend on back-office work for their bread and butter. But what are the real ramifications? Will the cloud prove toxic to traditional VARs, or does it provide a promising new business opportunity?  

A SHIFTING BUSINESS MODEL
The channel's major concern about cloud computing is that of revenue replacement. Cloud vendors will depend on the partner channel to sell cloud services, but the revenue model differs-most VARs will receive a percentage of the sale for bringing the business to cloud vendors, and will essentially serve as go-betweens; cloud vendors will take care of all the hosting.

"Say a VAR receives 18 percent of the deal for the first year, and 6 percent ongoing after that," says Darren Bibby, program director for software channels research at analyst firm IDC. "On the negative side, this model takes away opportunities for software resale and makes things simple enough that some of the services work around the technology has gone. On the positive side, you get an ongoing revenue stream."

One thing is certain: Cloud computing will bring change, and channel partners must respond. "Offering cloud solutions from companies including Google, Microsoft, and Amazon is a necessity," says Robert Dempsey, CEO of Atlantic Dominion Solutions, a channel partner in Winter Park, Fla. "By adding cloud services, the average channel pro can offer highly scalable, on-demand solutions that don't require large cash outlays."

But while most experts and partners agree that change is necessary, most have not yet built or implemented a cloud strategy. For many, questions remain about what strategies will work and when they should be implemented.

Most channel partners point to low demand as one reason for the foot-dragging. "Have any clients taken advantage of any cloud capabilities? Yes, but not many as yet," says MJ Shoer, president and virtual chief technology officer at Jenaly Technology Group Inc., a channel partner in Portsmouth, N.H. "Has it negatively affected our revenue or services?  No, not yet."

Another risk lies in the need to provide reliable bandwidth to service the cloud. "Just recently I had a discussion with a client about cloud potential for their organization, and their intent is to develop, in essence, a private cloud of their own, because they have had too many instances of their connectivity being interrupted by cable cuts due to construction," says Shoer. "I think the major risk factor is the balance of offline vs. online access to address that issue. If this can be resolved, which I suspect it will, that will help considerably."

Dempsey also points to the risk of alienating current vendor partners by adding cloud services, as well as the learning curve the partner will have to tackle on both the provider and customer side.

TIME TO PLAN
These issues may slow cloud computing, but they won't stop it. Experts such as Forrester's Harmon predict that cloud computing will reach mainstream success around 2011 or 2012. "Cloud offerings are going a little slower than we thought, and that gives VARs a chance to rethink business models," he says.

What will those new business models look like? It depends on the VAR, its market, and areas of expertise.

Cloud vendors are encouraging partners to shift their focus from back-office service to applications and strategic consulting. "It's very difficult for a small player to defend its turf against the likes of Google and Microsoft on the technology front," says Directions on Microsoft's DeGroot. "Building expertise higher up in the stack, and in particular understanding your customers' business requirements-which Google, Microsoft, and Amazon will never do-and being able to translate those needs into IT solutions, puts you in a much stronger position."

Others envision a more evolutionary move, in which they add cloud services but keep the more traditional lines of work as long as they generate revenue. "I see this maturing into a hybrid model of sorts, where what we consider a traditional infrastructure will remain in place and likely be complemented by cloud services that add to and enhance the infrastructure and the capabilities that support growth for the business," says Shoer.

Even the channel partners that stick to the traditional model will need to adjust. "If you make the decision to stay doing technology reselling and on-premise implementations, you need to get very focused and very good around a certain set of solutions like security or CRM," says Tiffani Bova, research vice president of indirect channel programs and sales strategies at Gartner Inc. "The idea is to become an expert at something-don't be a generalist."

THREE STEPS TO SUCCESS
The vast majority of channel partners will end up offering cloud services in some capacity, so they need to build a strategy that dovetails with their client profile. Dive in and use these practical tactics to help ensure success.

1. Hit the books. Channel partners need to know the ins and outs of cloud technology and services in order to offer knowledgeable advice about use. DeGroot suggests that partners take the time to experiment with cloud offerings, which are often free.

"Anoint someone (or two) as the spear-carrier and give them time to train and play with the technology," he suggests. "Read case studies to get more ideas. Attend a conference or two. Then brainstorm customer problems in the light of this new knowledge."

Taking the time to build expertise in cloud technology will not only help partners integrate cloud computing into their existing portfolio, but will also help them build knowledge leadership with their client base.

"This gives you the opportunity to actually be a market leader with your customers, because you've invested in knowledge that they lack (and perhaps none of your competitors have) and can accurately weigh its risks and benefits," says DeGroot. "[Cloud] may not work for everyone, but it is a stone that customers should not leave unturned. The partner who helps them turn stones over will get paid. The partner who ignores it could be unpleasantly surprised when the customer learns it from someone else."

2. Build specialized expertise. As channel partners evaluate what's out in the cloud, it's important to sharply focus their cloud strategies-to go deep rather than broad, says Bibby of IDC. He suggests that partners use cloud computing to build services around expertise in a particular business function or industry. "It's all about replacing technical expertise that's been the domain of most partners with higher-value expertise around a business domain, or a horizontal function like selling and marketing," says Bibby.

Another option is to build expertise around the management of cloud services, something Harmon refers to as vendor management office (VMO) services. "It involves tasks such as spend analysis, contract negotiations, and service-level agreements," says Harmon. "If a client has five SaaS providers sourcing technology, the VAR can act as a centralized office to make sure that everything is synched and meeting business needs."

These new business-oriented offerings will open up new skill requirements as well as sales channels, says Bibby. "Partners are hiring people skilled in a specific domain expertise," he says. "One CRM partner I talked to is starting to hire people with sales and marketing backgrounds. He can teach them the technology around CRM, and that's easier to do than teach a technical person about sales and marketing."

It also means that channel partners may find a new selling target. "As technology complexity drops and business domain expertise rises, partners may be selling more to line-of-business executives versus IT," says Harmon. "Partners can play the role of broker between LOB and IT."

3. Reevaluate partner programs. As channel partners reevaluate their business models, they should also consider which partner programs will help them successfully adjust. Cloud vendors' partner programs are still in flux and differ markedly.

According to The Changing Yin and Yang of Tech Vendors and Channel Partners, a recent report from Forrester, "As vendors and channel partners seek out new markets and niches in the boiling ecosystem of the tech industry, they are rewriting the role and relationship rules that have dominated the tech value chain for decades. ... Channel partners need to start shopping for the best deals-a daunting move in these economic times, but one that is necessitated by long-term changes in the tech industry."

"I would look at the partner programs in place with each vendor," says Atlantic Dominion Solutions' Dempsey. "Microsoft traditionally has great loyalty to their channel partners, and I believe will continue to do so. Amazon doesn't have a formal channel in place per se-however, they do have a partner program where they promote services and products that partners have built on top of their infrastructure. Also look at the SLAs provided by each vendor, and assume only as much risk as you can handle."

Jenaly's Shoer says that it's important to find the partner programs that mesh with each VAR's specific strategy. "Partner with cloud providers that make sense for your clients, especially those that allow you to offer private-label cloud services under your own brand and be the cloud solution for your clients, rather than having them ask you to help them implement someone else's solution," he says. "The opportunities to do so exist."

TIME TO GET ON THE BANDWAGON
There's no doubt that as cloud computing spreads across the business landscape,  most channel partners will make significant adjustments in response. Those that ignore it run the risk of disintermediation from a business world that has moved to new technology. "This move is happening whether companies like it or not," says Dempsey. "It's time to get on the bandwagon or get left behind."

For those that make the leap, cloud computing could be a key step in moving them from the back office to SMB boardrooms. "I don't see this move up the stack as any different from the ongoing need to do this across our business," says Shoer. "This is just the latest technology development that needs to be integrated into the services that we provide to our clients. The key is to provide these services as a business partner and closely trusted adviser, and not as the ‘computer guy.'"

CAROL HILDEBRAND is a business and technology writer based in Wellesley, Mass.