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The Cloud & Technology Transformation Alliance is a joint initiative of Channel Partners and The 2112 Group. CTTA's mission is to be a forum through which all members of the technology value chain – IT vendors, service providers, distributors, resellers, agents and end users ‒ can discuss the issues of next-generation technology and systems, define the value of technology in business context, create best practices for adoption and application, and provide guidance for the business community on what comes next. This blog covers some of CTTA's work. More information is at http://cttalliance.com.

Cloud Is No Channel Bonanza, Yet

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By Lawrence M. Walsh, CEO and President, The 2112 Group

If you believe the latest survey by CompTIA, cloud computing is a bonanza for the channel. The association’s Second Annual Trends in Cloud Computing report finds one-half of solution providers increasing their investments in cloud computing by 10 to 15 percent in the coming year, and 46 percent deriving 50 percent or more of their revenue from cloud-related products and services.

The vast majority – 85 percent – of the solution providers surveyed by CompTIA believe cloud computing will grow in the next 12 months.

Yes, cloud computing is growing, and growing fast. Yes, the channel is making money from cloud computing. And yes, the channel is investing in cloud computing capacity.

But sadly, no, the reality is not nearly as rosy as the CompTIA numbers indicate.

A similar survey by the Channel Partners Cloud Convergence Council – a group facilitated by The 2112 Group and Channel Partners magazine – found that 56 percent of the channel earns less than 20 percent of its revenue from cloud services and related products, and the majority (38 percent) earn less than 10 percent of their revenue from cloud.

In the Cloud Convergence Council survey, only 17 percent earn 50 percent or more of their revenue from cloud computing products and service. Equally significant, 10 percent of the channel earns no money from cloud computing.

These Cloud Convergence Council numbers are consistent with a similar survey conducted last year showing little movement in the revenue generation. The reason?: Solution providers struggle with executing on the cloud computing business model and the low margins offered by vendors.

CompTIA’s survey is correct that the channel is attacking the “low hanging fruit" in cloud computing by adopting cloud-based email, storage, backup and disaster recovery, and business productivity applications (e.g., Microsoft Office 365 and Google Apps). These LHF services have notoriously low margins through the channel. Solution providers tell the Cloud Convergence Council that the average cloud margin afforded by vendors is less than 10 percent and at best 10 to 20 percent of gross.

In the Cloud Convergence Council’s 2011 Cloud Compensation and Margin study, solution providers rated IT vendors as having the poorest cloud margins. Worse, solution providers in this sample believe margins for these commoditized cloud services will either remain steady or decline over the next three years.

If CompTIA’s overall cloud revenue numbers are correct and most of that revenue is coming from commoditized services, then the overall channel’s gross revenue production must have contracted significantly in the last year.

And that’s part of the problem facing vendors and channel partners in the cloud era: Everyone wants to cash in on the cloud computing opportunity because it’s huge and growing. However, no one wants to sacrifice their legacy business or accumulated revenue production. Even though a cloud business may be 50 percent more profitable at half of the gross revenue production, vendors and solution providers want the profitability and high gross. The cloud doesn’t allow for both.

What does make sense in the CompTIA survey results is the volume of cloud computing professional services work being done by the channel. This is consistent across several channel cloud studies. Solution providers are being called on to deliver service selection, migration and integration support for cloud computing implementations. The question is whether these professional services should be considered “cloud revenue" as they are often one-time events that don’t produce an annuity or have sustained customer engagement.

The CompTIA study suggests what the Cloud Convergence Council already has discovered: Solution providers need better and more definitive business plans. However, the CompTIA study suggests that this is a technology roadmap issue rather than a business management concern. It’s actually more about business than tech.

When solution providers say they struggle with the cloud computing business model, they’re actually wrestling with the specifics of funding the transition to cloud computing. Cloud computing requires funding not just for product and talent development, but to cover the gaps in revenue disruption. Cloud costs are front-loaded, meaning the solution provider must pay for all operational overhead while waiting for the recurring revenue to mount to a significant level. It takes nine to 12 months for a cloud account to become profitable – that’s an eternity for most cash-strapped solution providers.

Then there’s the entire issue of compensation. When a salesperson sells a $10,000 piece of hardware, the commission structure is pretty straightforward. But when that same salesperson sells a $1,200 cloud contract paid in monthly installments of $120, the commission is not just lower but fractionalized over the contract. Add on the lower revenue from the slimmer cloud margins and it becomes apparent why the majority of solution providers are struggling to make cloud compensation plans meaningful.

The industry is wrapped up in cloud computing as if it’s some messiah. Adaption to the cloud era and model is fraught with challenges and risks. The rewards, however, are substantial for solution providers who successfully morph to this model. CompTIA is doing a substantial amount of work in supporting this business transformation, as are other groups like the Cloud Convergence Council and the Cloud Security Alliance. The issue isn’t whether the cloud is the future, but what the future will look like and how to bridge the gap between it and conventional models.

Lawrence M. Walsh is CEO and president of The 2112 Group, a technology business advisory service that specializes in optimizing indirect channels and partner relationships, and principle blogger at Channelnomics. He’s also the executive director of the Channel Vanguard Council and moderator of the Channel Partners Cloud Convergence Council. He is the former publisher of Channel Insider and editor of VARBusiness Magazine. You can reach him at lmwalsh@the2112group.com.

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