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New concerns about the cloud reseller business model are bubbling up in the channel.
That's according to Eran Farajun, executive vice president of Asigra, a cloud backup vendor based in Toronto. Farajun presented his views on the shortcomings of the cloud brokerage model at the ChannelNext Conference in Alliston, Ont., earlier this month. Potential problems of the model, he said, included partners having to cede control of cloud service pricing and customer accounts to their vendors, resulting in an unexpected erosion of partner business valuations. Asigra, which provides software to managed service providers (MSPs), is differentiating itself among competitors by not engaging partners in a cloud brokerage model.
"I think [these issues are] fairly prevalent because the MSP model is now maturing. … Today, almost every channel partner has some sort of recurring revenue element to their business. So now the question is, 'What's the quality of your recurring revenue? Is it a brokerage quality -- meaning lower quality -- or is it you are the real service provider and it is higher quality?'" Farajun said.
The negative side of the cloud brokerage model
Farajun asserted that several risks are inherent within a business model where channel partners act as intermediaries between cloud vendors and cloud service customers.
First, some partners are recognizing that they have little control over the pricing of the cloud services. Farajun pointed to a trend of SaaS companies getting acquired by private equity firms, which then want to increase their margins. This has caused "the classic margin squeeze, which [partners had] seen in the old days of their business when they were selling product. You needed to sell more to earn the same amount," he said.
Another potential problem is lost control over customer accounts. "When you are a broker, you are basically handing over your customer list to these underlying cloud service providers," he said. As cloud vendors expand their portfolios into new technology areas, there is a risk of these vendors marketing and upselling those additional offerings directly to their partners' end customers. He asserted that many of the legal agreements between partners and cloud vendors grant "direct nexus with the end customer," so if a partner decides to change vendors, "the underlying provider can basically say, 'Hey, those are my customers, and I am going to take them to a different [partner] now since you are leaving me and my ecosystem.'"
But a problem that's triggering much of the concern over the cloud brokerage model, according to Farajun, is how the practice can dilute the value of a partner's business. This issue can be particularly troubling at a time when a large percentage of partner executives are considering retirement and selling their channel businesses.
Farajun said savvy buyers know that when they acquire a customer base, they risk customers leaving for other partners. In the brokerage case, cloud service vendors could potentially take a cloud broker's customers or move them to other partners within their ecosystem. "If you are a broker, the price per customer contract goes down," so the business is worth less, he said.
Partners today are discovering this issue "when they go to sell their business and then get hit in the face with, 'Oh, my God. My business is not worth as much as I thought it was. I now have to keep working for several more years building my customer accounts and the way I do business and so on,'" he said.
Why the cloud brokerage model gained traction
Several years ago, cloud brokering became an attractive option for partners at a time when reselling hardware products and attached services was becoming increasingly unprofitable, Farajun said. "When they originally made the shift … the fastest way to move from the reseller model to the recurring revenue model was reselling somebody else's service. So what they did is they became effectively brokers of various types of cloud services," he said.
As partners looked to build cloud-based recurring revenue, vendors seized on the opportunity, Farajun claimed. "[Channel partners] were marketed heavily to, and the pitch … was, 'You don't have to set up your own services. That's complicated and difficult. … You should resell our services. … We've already got the service up and running. Why don't you just connect your customers to it?'" he said.
The cloud brokerage model that vendors were pitching at first worked well for partners and created the desired recurring revenue. However, as the business model has evolved in the last five to seven years, he said, partners are realizing common problems in their cloud vendor relationships.
How to avoid cloud brokerage pitfalls
Kevin Rhone, senior strategic consultant and practice lead at IT market research firm Enterprise Strategy Group (ESG), pointed out that many cloud vendors in recent years have improved in how they engage partners. (Asigra is a client of ESG.)
Realizing they need partners to sell into certain markets such as the SMB segment, vendors both large and small have invested in "programs, expertise and talent to be able to behave properly in the way reselling partners would expect them to," Rhone noted.
"The smart ones -- and this is my opinion -- are recognizing that to have a healthy channel … their business model needs to let the partner retain that power," he said.
Rhone suggested that partners can select vendors they know to be "disciplined about understanding that they are in the software business and their partners are in the services business and not crossing that line."
He also noted the role that cloud distributors can play as intermediaries between cloud vendors and channel firms. Pax8, for example, has assembled customizable "Stax" of vendors' productivity, security, continuity and infrastructure cloud services that partners can access via the distributor. In Pax8's case, "they provide a service that augments the vendor, supports the partner and does create some space between the two," he said.
In Farajun's view, partners can sidestep negative brokering alliances by standing up and operating their own services "where and when it makes sense."
Asigra is among the cloud vendors in the market targeting partners with tools for providing services that they can host either in public cloud or colocation or on their own infrastructure. "How [Asigra does] business doesn't cause these problems, because we don't deliver any service. Nobody brokers an Asigra service," he said.
Farajun noted that some cloud services can't be owned and delivered -- Office 365, for example -- but "there are specific types of services [i.e. backup, monitoring and security] that you can deliver yourself and you should."
"You want to build value into your own business, not into your underlying supplier's business. … A little bit of work now is a lot healthier down the road when you sell" your business, he said.
Mutually beneficial vendor-channel relationships
It's well known in the channel industry that transforming from a traditional reseller business into a services-led recurring revenue business is fraught with difficulties. Rhone of ESG said that vendors are obligated to provide the "right economic opportunity" that supports partners in this business model shift.
"It is right from a business standpoint, but it's right selfishly as well, because [vendors] need to have that strong resell channel to reach segments of the market that they otherwise wouldn't be able to," Rhone said.
He noted that the transformation process can be challenging for small and mid-sized channel firms that lack access to capital as well as staff in "a scarce talent market, particularly in the security space."