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A solution provider's first steps toward a cloud business model

Solution providers have numerous paths to cloud, but what's the most logical route to getting there? Experts offer advice for making a transition with minimal disruptions to your current business model.

Experts generally agree that cloud-related services offer IT channel companies a lucrative business opportunity. Choosing the most logical path to the cloud, however, is not as evident. There are just as many paths to the cloud as there are solution providers, and the right path for a managed services provider (MSP) versus a reseller, for example, differs from one to the next. The good news: There are plenty of options for solution providers looking to break into cloud. The bad news: Regardless of which path you choose, there is bound to be some disruption to your business model.

"Most channel companies who resell products make most of their money on what they do after they sell that product," said Carolyn April, director of industry analysis at CompTIA. For example, a reseller may also offer any combination of consulting, integration, and professional or managed services. It is therefore very difficult to make a blanket statement that a reseller can most easily transition to the cloud by doing X and an MSP by doing Y. "I think that that's good news for the channel, because it means that firms are not pigeonholed," April said.

Types of cloud-related services

There are a wide variety of cloud-related services that IT channel companies can provide customers. CompTIA divides them into four categories. The first is the most elementary and easiest transition, according to April. It is procuring and selling the hardware and software needed by customers to build private clouds. As a value-add, she said, solution providers can provide up-front architectural design and assessments. "They can ramp up from straight reselling to doing consulting work as well," she said.

The next cloud-related business model is the providing and provisioning of cloud-based services. For the most part April said this involves selling software as a service, or SaaS, solutions, which may be white-labeled. "This is where the majority of the channel is playing today, which makes sense," she said. "A lot of firms already have relationships with developers that have added the cloud to their existing product lineup." It also offers an opportunity for recurring revenue, she said.

When people get into changing the customer and the technology and the sales process and the financial model at the same time, that's when they get themselves into trouble.
Ryan MorrisPrincipal consultant, Morris Management Partners

The third cloud business model identified by CompTIA is the enablement and integration of cloud solutions. It includes the implementation and integration work required to get solutions, whether on-premises or in the cloud, to talk to each other, April said. This particular offering is a high-profit area and where the majority of solution providers make their money in the cloud, she said.

Chirajeet Sengupta, vice president of management consulting company Everest Group, also sees integration work as a prime opportunity for solution providers. "For [an organization] to transform into a cloud-driven environment, there's a lot of tinkering and pre-work that needs to be done. We estimate anything between 10% and 15% of the global systems integration market to comprise cloud-related opportunities, and that's growing," he said.

The final category identified by CompTIA is management and support, "where the solution provider takes over ongoing management of the customer's cloud infrastructure and cloud applications. It's similar to a managed service provider taking over the customer's in-house IT," April said. She added: "It locks the solution provider into a recurring revenue with the customer, so this is a popular business model."

Terry Hedden, CEO of Cloud Guru, offers a similar but more granular breakdown of cloud-related services for his clients. He said, "The reality is, when it comes to making a killing in the cloud, it comes down to offering a complete solution. There are a lot of ways to make money in cloud, and those doing it right are not just picking and choosing. They are choosing all."

However, this doesn't mean that solution providers should attempt to transition their entire business model to the cloud. "In terms of making a transition, the most expensive and risky way is [to do it] all at once," Hedden said.

Making the first step

Ryan Morris, principal consultant of Boulder, Colo.-based Morris Management Partners, said, "Just because everything can be in the cloud doesn't mean you should be there all at once. Pick one or two very specific cloud offerings. Integrate them deliberately, get them to the point where they are viable, then add more things to the portfolio."

The solution provider's first step to the cloud -- whether it identifies primarily as a value-added reseller (VAR), MSP, professional services provider, systems integrator or IT consultant -- is a question of adjacency, Morris said.

Everest Group's Sengupta agreed. "If you look at the nature of market success that most companies have in the cloud world, there are logical adjacencies between their heritage and them driving the market as far as cloud is concerned."

For example, for a systems integrator involved with server hardware and management and the applications that run on them, a move to using Infrastructure as a Service, or IaaS, is logically adjacent, Morris explained. Similarly, a move into cloud-based customer relationship management makes sense for a reseller specializing in CRM. "The idea is there are infrastructure adjacencies, application adjacencies, tools adjacencies, security adjacencies, storage adjacencies -- all the layers of the technology solution that have an alternative in the cloud. The key is to pick one and move that piece to the cloud, then the next, and then the next," he said.

Training requirements for moving to the cloud

The adjacency approach reduces the need for technical skills training because the solution provider already has some familiarity with the technology itself. "Pick one and only one that's directly adjacent to something you already do so that [your] people can speak with confidence, and when you speak to the customer it doesn't sound like you're making it up," Morris said.

Referring to systems integrators specifically, Sengupta said, "From a capability standpoint, there is no significant fundamental change. Programming languages change all the time. New standards of technology change all the time. And successful systems integrators have delivery models in place that help them take into account those changes in the industry."

Morris agreed that if a solution provider of any business model has managed to survive in the IT channel for over five years, given the rate of technological change, then learning the technology piece of moving to the cloud won't be that hard. "Learning offerings from an implementation or integration point of view? That's not rocket science. What makes it difficult is that we're not just changing the products that we sell, we're changing the business model around what we sell. That's where it gets challenging," he said.

The challenge lies on the business side: changing financial models, training salespeople, targeting a new decision maker, etc. "Business model changes are always more complicated and expensive, and [they] take longer than product changes," Morris said. "That's why it's so vital that companies don't try to do everything at once. They'll get started and realize the cost and complexity, and end it midstream."

These business model changes are minimized when solution providers deliberately choose a cloud offering that is adjacent to their portfolio. For example, a solution provider specializing in productivity and collaboration solutions that decides to sell Office 365 changes only one element of the business, Morris explained. Office 365 introduces a new financial model, but it involves the same technology work, decision making and sales persuasion.

"The solution provider's job with the adjacent offering is to change only one of those at a time," Morris said. "When people get into changing the customer and the technology and the sales process and the financial model at the same time, that's when they get themselves into trouble."

Transition time and lost opportunity costs

Choosing a path into the cloud that is adjacent to one's current business can help minimize the transition time and lost opportunity costs, but the ultimate timeline and dollar amount will differ from one company to another.

"What takes the longest is the decision to move. The de facto argument when you're fearful of something is to resist it. VARs and MSPs have dug in their heels because they have fear, uncertainty and doubt about how it will impact their business. Once they get over that hurdle and commit to it, they can make a tremendous amount of money," Cloud Guru's Hedden said.

Once the decision is made, the transition time depends on the size of the channel firm, its current business model, its willingness to invest and its willingness to commit resources to the effort. "Most channel firms are operating on thin margins and can't take away from the current business … They commit little resources and few people, so ramp-up time can be slow -- not because it's challenging, but because they can't commit 100% to it. They need to keep paying attention to the legacy business that is keeping them in business," CompTIA's April said.

MSPs are likely to find the transition to a cloud business model easier than most. "They've already done a lot of the business model and financial model changes [that are required for the cloud]. They've retrained or hired sales staff who know how to sell contractual services. If you're a reseller, that's not going to be a strength of your sales, and if you do cloud, you'll have to do some retraining or recruit new people who know how to sell recurring services," April explained.

Experts acknowledged that the solution providers just starting on their path to the cloud have some work to do to catch up with their competitors -- but that it is worth the effort. "They'll have to do some heavy hitting to get some heavy momentum, and that may mean more significant investments than most. If you give something enough time, you'll get it right. The market isn't going away anytime soon," Everest Group's Sengupta said.

Cloud Guru's Hedden summed it up this way: "It makes sense to be in the cloud, and you can make a lot of money [offering cloud services]. The people who have made that decision are uniformly doing well, and they are doing much better than their peers."

Next Steps

Learn about MSPs transitioning to managed cloud services

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What's your greatest challenge for transitioning to a cloud business model?
The biggest challenge was ensuring adequate security procedures and protocols were employed. It was a little jarring to see all the available options, with very little information on what is effective for certain things. Once adopted, the second biggest challenge was adjusting to a hardware absent setup, which went against everything that was familiar to me and my enterprise.