The AMI-Partners Blog

Support for Transition to Annuity Revenue Streams and Complementary Services is Becoming Critical

Microsoft’s recent announcement at its Worldwide Partner Conference of changes to Office 365 partner sales agreements is indicative of a realization on the part of cloud vendors of the need to commit more “skin-in-the-game”.  Microsoft is not alone in this because others such as IBM and Cisco have also recently enhanced their go-to-market support and enablement programmes for partners committed to investing in their cloud infrastructure and cloud service options.

Microsoft’s changed their terms to allow partners to bill customers directly themselves, and to include their own complementary services in a single invoice – thus significantly increasing ease of doing business.  At the same time, it has raised partner commissions on first year sales of Office 365 by 11 points to 23%.

The role of the channel in taking cloud services to small and medium business (SMB) market (businesses with 1-999 employees) is becoming more important.  While interest in exploiting the benefits of all kinds of cloud services grows amongst SMBs in Europe, decision makers look to their channel partner providers for a variety of hand-holding services ranging from devising the appropriate strategy for approaching the cloud, advice on which service providers to use, migration, integration, and ongoing monitoring and support.  The role of the local channel partner as “trusted advisor” is still alive and well!

Successful channel partners have realized for some time the need to play in the cloud space, and have been experimenting with their approach, often using a mix of their own service provision and 3^rd party service reselling.  The disruptive nature of the cloud service model and the process of evolving a business model from “up-front” capex-based revenues to ongoing annuity revenue streams present major challenges.

AMI’s studies into the UK SMB Channel provide ongoing tracking of the transformation these businesses are undergoing to make themselves effective players in the burgeoning cloud and managed services market.  Our research clearly indicates that cloud service providers (and infrastructure vendors) are looking to attract and sustain the services of more successful players in the channel/MSP ecosystem and need to base their partner programmes on the following principles:

• Speeding the ramp to sustainable service subscriber volumes: Annuity revenue models require critical volumes of subscribers.  Partners are looking for their service vendors to help them speed this business development up – effective demand and lead generation programmes (a key element on the channel partner wish list!) thus assume greater significance for cloud service resellers.
• Opportunities for partners to leverage the service provider brand while enhancing their own:  Partners fear the disintermediation potential of cloud services.  Co-branding and white-labelling options from service providers allow partners to reinforce their role and service value to their customers while enhancing their association with best-in-class service vendor brands.
• Shortening the sales cycle and minimizing partner cost of sales:  Sales tools (return of investments (ROI) tools, telesales scripts, FAQs, Case Studies) and cloud sales training (for telesales agents especially) play a critical role in improving sales efficiency.  Selling cloud services demands higher levels of cost control and efficient deployment of sales resources.
• Customer retention and cross-sell/upsell programmes:   “Easy-come-easy-go” cloud services  present traditional information and communications technology (ICT) channel partners particularly with a new challenge – churn potential.  “Free extra seats” are also important parts of cloud promotional offers.  If optimal usage is not made of these and other elements in a service bundle, there is risk of revenue impact at subscription renewal stage.  SMBs have also typically been experimenting with cloud services for limited numbers of seats for specific workstreams.  A key objective for cloud resellers therefore is to extend coverage for cloud services within their existing and recently acquired customer base.  A successful cloud partner channel programme needs to enable its members to  implement effective service activation procedures and cross-sell/upsell activities within an overall efficient customer retention focus.
• Easing the transition to annuity revenue models:  Transition to annuity revenue streams impacts significantly on partner cash flows.  Partners currently lament the contrast between what can still be relatively lengthy sales cycles for cloud services (to educate and overcome customer concerns) and the correspondingly lower initial revenue from subscription to cloud services.  In raising the weight of first year revenues for Office 365 resellers, Microsoft is making efforts to help partners counter-balance this.
• Supporting partner opportunities to add their own service wrap:  As the chart below illustrates, cloud consulting services constitute the largest element in channel partner cloud revenues and an important contributor to partner profitability.  Development platform services, solution accreditation schemes, and administrative support tools such as providing partners with the capability for billing customers for their own added value services within a services bundle (as with Microsoft) will prove key differentiators.  The provision of billing tools for Cloud Services both enables partners with key infrastructure while allowing them to retain a key role in managing the relations with their customers.
• Sharing experience of critical success factors and best practice:  The vendor as source for mentoring advice and conduit for discussion with other partners in the ecosystem have long been seen as part of the benefits of participation in partner programmes – particularly at moments of major market transition as it is at this moment.  AMI’s Cloud Partner Transformation research is showing that a major area of interest is how to enable their sales teams to handle both traditional on-premise opportunities and, at the same time, focus on selling cloud services.  Partners are looking specifically for advice on successful compensation schemes to induce appropriate sales behaviours.

- Hugh Gibbs, VP Research & Consulting EMEA