Solution providers in the channel greet every new year with equal measures of optimism and trepidation. What makes 2014 different is that the gulf between those two extremes has never been wider.
On the optimistic side of the IT ledger there have never been more emerging technologies converging around private cloud computing, which customers clearly prefer over other cloud options. But it is uncertain whether that shift will stand the test of time. In an age where public cloud services are combined with software-as-a-service (SaaS) applications, many solution providers are wondering about the long-term viability of their business models.
“It definitely keeps me up at night,” said Michael Rapp, president of En Pointe Technologies, a solution provider that sells solutions inside and out of the cloud. “You’ve got to be prepared to weather the storm.”
A recent survey of channel partners conducted by PartnerPath, an IT channel consulting firm, finds that a little less than half the partners surveyed are making 20 percent of their revenue from cloud services. For now, most of that revenue appears to be additive versus a displacement of revenue that would have been spent for an on-premise system.
Case in point: It’s not uncommon for organizations to contract for a human resources application that is delivered as a service. Prior to the existence of that application in the cloud, most organizations would never have acquired that application to run on-premise on their own. Some percentage of existing personal productivity and mission-critical production applications will eventually move to the cloud. But the pace at which that transition will occur varies widely. For example, interest in running applications such as Microsoft Office 365 in the cloud is high; the moving of ERP applications and other systems of record is relatively slow.
“There will be some application workloads that won’t make it to the cloud for quite a while,” said Darren Bibby, vice president of channel and alliance research at IDC. “But it is a fundamental movement.”
The primary issue that channel partners face now is the impact the shift to cloud will have on their cash flow and balance sheets. Unlike an on-premise deal where the solution provider is compensated every quarter, cloud service deals are based on multi-year annual contracts. Ultimately, those annual cloud service deals may prove to be more profitable, but they can create a cash flow trough that solution providers must be prepared to absorb, Bibby said. If the transition to the cloud takes multiple years, solution providers should be able to transform their businesses in an orderly fashion. A sudden rush to the cloud, however, might destroy the solution provider’s financial equity.
As such, privately held solution providers are in a better position to absorb the costs of that transition than public companies that have to generate consistent profits and revenue to satisfy Wall Street expectations.
This pending shift, which is already fueling a wave of merger and acquisition activity across the channel, is shining a spotlight on the need for more focus on channel partner profitability.
“We see a lot of angst around this topic,” said PartnerPath CEO Diane Krakora. “There’s a vendor movement to better understand partner profitability on premise and in the cloud.”