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Nontraditional Rackspace partners pose threat to IT services partners

Rackspace sees growth in nontraditional partnerships, which include digital marketing agencies, private equity firms and venture capital firms.

Telecom master agents have been encroaching upon territory held by traditional solution providers since the convergence of voice and data -- and the blurring of the demarcation line between telecom and IT -- began years ago. Now, it seems there are even more competitors for VARs and MSPs to worry about.

Rackspace Hosting Inc. this week announced a new Master Agent/Agent partner program, and in the discussion of the new program, pointed to other types of partners the company is working with, such as digital marketing agencies, private equity firms and venture capital firms. These new, nontraditional Rackspace partners reflect the trends of IT budget decisions moving to line-of-business managers, as well as the growth of spending on cloud computing.

"We're seeing a broader trend in the industry, in that we expect about 50% of our partner-adds in 2014 to be from our nontraditional partner space. And what I mean by that is, outside of the two-tier distribution reseller model that we've seen so traditionally and really penetrated in the IT and high-tech spending space," said Will Knight, vice president of channel sales at Rackspace.

These nontraditional companies have proven influential on the way companies are consuming IT, he said. "Historically, it's been very much a reseller relationship, with a trusted advisor going forward. Now, we're seeing [it's the] private equity/venture capital space, with the abundance of relatively inexpensive money, lots of acquisitions and a focus on increased valuations. We're seeing those firms get much more engaged in how the companies run the IT."

The digital agency threat

Of greater threat to traditional channel partners than private equity and venture capital firms are digital marketing agencies. "We're continuing to see the flow of money from the CIOs into the CMOs, and they're driving many more decisions. And the trusted partner of the CMO, in many cases, are digital agencies, as opposed to say, a distributor or a reseller," Knight said.

We definitely see the digital agencies, private equities and certainly the master agents aggressively moving into the cloud space.
Will Knightvice president of channel sales at Rackspace

"We definitely see the digital agencies, private equities and certainly the master agents aggressively moving into the cloud space," Knight said.

The fact that digital marketing agencies have existing relationships with customers' marketing departments means that they're the incumbent when it comes to channels used for technology spending. Knight said platform and cloud investments are very different types of decisions compared to the day-to-day investment choices CMOs have traditionally had to make. "As a result, we're seeing them engage and rely upon deeply the digital agencies to make the right investment decisions," he said.

Digital agencies have a few different business models to choose from with Rackspace. "Some of the digital agencies will write [a paper contract] directly with Rackspace, and in that sense, they're managing the relationship of the end user with Rackspace and the delivery of services. In some cases, they'll do just a recommendation to the customer and the customer will buy directly from us," Knight said. In the referral scenario, the digital marketing agency tends to be more focused on the overall digital strategy than on cloud services.

"I think that's an area we'll continue to see more and more growth around, mainly because of more and more money we're seeing going into that CMO space," he said.

The emergence of equity firms as partner

Meanwhile, private equity firm and venture capitalist Rackspace partners are mandating how the companies they have a stake in buy cloud services, Knight said.

"Most of the [private equity and venture capital] firms have a standard operating procedure book. When they make an investment, they say, 'Hey, in exchange for this investment, this is typically how we run our companies.' They come with basic blueprints," he said. "Historically, those blueprints were around staffing or go-to-market models or other ways to get efficiencies. What we've seen is that more and more of those companies are saying, 'We have a standard operating procedure in the way that you should consume IT services.' And more and more of that's around cloud, as opposed to on-premises buys.".

Venture capital firms are engaging in direct relationships with Rackspace and with the companies that they invest money in. The portfolio companies go through the venture capital firm to contract with Rackspace, he said. "[VC and private equity firms] consult with [their portfolio companies about] staffing or operations, whether it be IT or otherwise, around how to better run their business," Knight said.

Knight cited Vista Equity Partners, which lists 25 portfolio companies on its website, as an example of the type of  private equity firm partner Rackspace typically collaborates with. "They're a partner of ours because they're working on how [to] optimize the infrastructure … across [the] companies that they own and run independently of Rackspace. … It is very much, I would say, a nontraditional partnership but a very strong partnership."

The VC and private equity firms receive a discount from Rackspace based on the volume of business they send to Rackspace, Knight said. As the volume increases, so does the discount.

For Rackspace partners, the new Master Agent/Agent program offers incentives, which include market competitive compensation, pre- and post-sale resources, and training and sales enablement.

Coinciding with Rackspace's launch of the Master Agent/Agent Program, reports have surfaced that Rackspace is in talks to be acquired by Louisiana-based telecom company CenturyLink Inc.

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Do you expect to face more competition from nontraditional partners in the coming year?