By Ken Oestreich
The trend is undeniable: Many pure-play VARs and IT professional services organizations are beginning to lose their business to hosted services. Customers of all sizes and verticals are embarking on the use of outsourced IT, software-as-a-service (SaaS), online apps and a plethora of other types of cloud-based services. And they are realizing that the era of owning and operating their own equipment is slowly drawing to a close.
Customers are also embarking on a sea change in IT acquisition: the move from one-time transactional purchases of capitalized hardware to a subscription model for services that are operating expenses. This economic change can be as disruptive as the technology change.
To remain relevant, VARs need a plan one involving maintaining or growing customer relationships while providing even higher-value IT services.
Channel partners with forward-thinking management are pursuing newer ways of maintaining customer relationships while increasing customer wallet share. And this means making the transition from a pure-play VAR or professional services organization to one that provides a portfolio of hosted and/or outsourced services.
Rather than racing to build a cloud service, the savvy VAR should first determine what their customer base looks like from a vertical industry perspective and how their specific customer needs are changing. Some customers will continue to need highly customized work; others will value more standardized and, therefore, lower-cost offerings.
But one thing is clear: Look to provide value, not volume. The market is literally choked with service providers that provide little more than commodity services such as email, dedicated servers and website hosting. These are low-margin businesses with a high degree of churn. Instead, look to higher-value services such as hosting line-of-business applications, mobility services and even entire hosted desktop workspaces. These are significantly higher-margin businesses, and are strategic to the customer ultimately resulting in greater customer loyalty and repeat business.
More hosted service providers are turning to the application and workspace markets. That is, hosting applications, entire application suites or in fact entire desktop workspaces. A February 2012 survey of MSPs by MSPmentor found that cloud-based virtual desktop infrastructure (VDI) was offered by nearly half of respondents.
Bundled into the hosted desktop business are line-of-business apps, storage and even voice services. And while commodity” services command low per-month prices and thin margins, hosting apps and desktops can command value-based pricing well above $100 per seat, per month with commensurate margins.
Indeed, selling managed or hosted services has been shown to directly benefit both the customer and the provider. According to a February 2013 report, Cloud Channel Trends, 2013 to 2014,” by Forrester Research: A lot of traditional reseller channel partner companies are now utilizing cloud computing advances to add to or remake their businesses as hosters, integrators, syndicators and service providers. Gone are the days when tech vendors can view the channel with a siloed eye. ‘Hybrid’ is the new norm, as it applies to channel partners business models and tech vendors and channel partners are going through a lot of relationship re-engineering, both with each other and with their mutual customers.”
There are a number of options channel partners have once they have decided to make a strategic shift. One logical option is to partner with a managed service provider or even to acquire one if the opportunity permits. But not all VARs will have that ability. Another option is the organic do-it-yourself approach, which can be attractive because it preserves the company ownership, culture and, most of all, customer relationships. A third option is a hybrid model whereby infrastructure is outsourced, while the company builds skills and organizations appropriate for a managed services business.
Whatever strategy the VAR takes, there are a number of shifts that will need to occur in the business. And technology is the least of them. Each will require rethinking of skills and organization.
Technology. The move to becoming a hosted services provider can require a significant investment in technology, sometimes more than $1 million. However, there are also white label” providers of hosted IT services that will rent” raw infrastructure; sourcing from these providers can alleviate the need for a large capital outlay as the business grows.
Service Offerings. The new MSP has to view offerings as a pyramid. At the bottom are high-volume, low-margin services, typically infrastructure-related, such as infrastructure-as-a-service style offers. Closer to the top of the pyramid are low-volume, but higher-margin services, such as desktop-as-a-service. Often the customer life cycle is one of beginning at the base and migrating higher over time.
Finance & Accounting. A shift from a transactional to a recurring revenue model has many fantastic benefits, but can be disruptive too. For example, consider changing sales compensation models so that they account for the future value of a customer not just the initial transactions. But remember that a recurring revenue stream has the benefits of less churn, lower cost of repeat business and better overall cash-flow predictability and profitability.
Marketing. The good news about marketing hosted services is that most VARs have excellent existing relationships with their customers. The sobering news is that the specific contacts will need to shift and will expect different messages, value propositions and services. The traditional buyer used to be the IT technologist who cares about speeds-and-feeds; the new buyer will be closer to the line-of-business manager who cares about applications, access and cost.
Operations. The new operations model wont be about ordering and drop-shipping product; rather, it will shift to a focus on ensuring service levels and customer satisfaction. And the new supply chain management wont necessarily consist of vendors in the traditional sense. Instead, new suppliers will be other service providers sourcing infrastructure services, SaaS applications and other online services that you will aggregate, rebrand and sell as part of your integrated offers.
Sales. Because high-value hosted services will appeal to the line-of-business manager as well as to the IT staff, consider rethinking sales skills and tools. Salespeople will need to be able to articulate the business benefits of Web-hosted apps and desktops as well as the new work styles made possible with the newer mobility technologies. VARs also will want to select salespeople who understand the long-term value of a recurring revenue, subscription-style” service. Regarding compensation, youll also need to rethink the transactional-style commission payment and look toward a deferred compensation model.
Support. As a traditional VAR, you may already be accustomed to providing a basic level of break-fix product support to your IT customer. But as VARs provide non-IT services for line-of-business users they will find the need to offer an upgraded support model including 24/7 front-line support for non-technical users.
Ultimately, why shift from the comfort of being an equipment VAR to one of being a service provider? Besides expanding your customer relationships, the other undeniable reasons are profit and valuation.
Shifting even part of your sales from transactional deals to subscription-style services makes a big dent in profitability over the long-term. According to a Channelcorp Management Consultants Inc. report on IT channels in structural transformation, “Current valuation data is showing that for every 1 percent shift in revenue blend from the classical, transactional model to the transitioned or transformed recurring model, business valuation may increase by 2 to 4 percent. Our research indicates that a 100 percent recurring revenue business can be two to four times more valuable than a similar sized transactional business. This is the reward for the risk engaged in transition and transformation of reselling businesses.”
In many ways, that says it all. Making the shift has its undeniable rewards both to the VAR, as well as to the customer.
Ken Oestreich is senior director of product marketing at
, where he is leading the charge to virtualize applications and desktops within private, public and hybrid cloud infrastructures. Earlier in his career, he held marketing posts at EMC, Egenera and Cassatt Corp. as well as various posts at Sun Microsystems.