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:

The Deal:
 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
TodayPast 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
32Margin (%) * 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
 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
TodayPast Future
On-premise Revenue
Cloud Revenue

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