What VARs Must Consider When Reselling Cloud-based Tech

By  Lisa Terry — August 16, 2012

Cloud may be simply a new way to deliver familiar solutions. But it means big things for solution providers accustomed to selling primarily on-premise solutions. At the same time they adjust to a new flow of revenue, new vendor partners and new technical challenges, solution providers also get something new to sell to customers, lower support costs, regular cash flow and other benefits. There are a lot of choices to make along the way.

1. What do your customers need?
The place to start with any business change is, of course, with customers. It’s a careful dance: solution providers need to come from a position of strength, offering guidance on what cloud could mean for the customer, at the same time gauging the customer’s readiness for cloud. Are most of your customers ready for a tech refresh, or just a new set of servers and licenses?

“Know what your end user knows,” urges Greg Dixon, CTO at ScanSource (www.scansource.com). Some end users “see cloud as a way to disrupt the software license, and the reseller is part of that. They see it as a way to take power away from the reseller and put it in their own hands.” It’s imperative to demonstrate the value of services you will wrap around the cloud. “Just because you’re not installing on premise, you’re still supporting the end users the way you’ve always done. That’s critical to understand.”

Many cloud vendors offer ROI and other tools to help solution providers calculate the potential value of offering cloud services; CA (www.ca.com), for example, conducts simulator events where solution providers can train and try out cloud service offerings, says Adam Famularo, general manager, Cloud and Alliance Solutions, CA Technologies.

2. What do you want to be?
Know your metrics—the contribution each of your current products and services to your revenue stream, and how they’re trending. Which offer the most margin? What are your costs to deliver? Assess the rate with which you’re adding new customers—and what customers are buying. Those metrics will reveal your strengths and weaknesses, and allow you to benchmark against other solution providers. For some this may mean staying with their current models (say, selling data center gear to other people building clouds); others may look to move aggressively into cloud. Many will be somewhere in the middle, making an incremental migration. One common goal is a steady increase in the percent of revenue from services.

Olmec Systems (www.olmec.com), founded in 1996, began its migration away from break/fix in the early 2000s with remote backup, followed by hosted Exchange, RMM and offsite Spam filtering. In the last three years they got more aggressive, partnering with OS33 to put customers’ entire infrastructure in private clouds—the customer rents the software and Olmec owns the hardware, virtualizes the SMBs’ environments and delivers it via portal.

“This solution allowed us to take it to another level,” says Jason Manteiga, partner at Olmec. “It was the final piece to make a full package.” Having a portal to demo made cloud easier to sell, he adds. While startups are the easiest sell, with existing customers “in most cases we can successfully move them to the cloud completely.”

“Our model includes the tools to deliver IT in a unified way, everything migrated to the cloud with one vendor,” as opposed to reselling several different providers’ SaaS solutions or a public c loud services, explains Jacob Kazakevich, president of OS33 (www.os33.com).

3. What about your vertical solutions?
Often VSR readers write or resell vertical-specific line-of-business applications. Many are expected to eventually move to the cloud, but solution providers must do due diligence in getting them there.

Multiple factors go into cloud decision for vertical applications: Can the cloud provider meet compliance requirements? Can operations continue in the event of a connectivity failure? Is the app offered via SaaS? Could the licensed solution be hosted elsewhere? For the ISV, the big decision point is building a data center or partnering to host the SaaS solution.

Miles Technologies (www.milestechinc.com) outsourced hosting for its SaaS warehouse management software to Microsoft to stay within the solution provider’s core competency. “We only looked at companies we were confident would be there in 10 years and be up 24/7/365,” says Tom Beusch, president. The Microsoft name “gives us a lot of credibility with customers.” The move enabled the solution provider to demo, sell and support customers across the U.S. entirely over the Internet. Miles steers clients needing customization to on-premise solutions while reserving the SaaS solution for standard users. “I’ve expanded my marketing opportunity with a lot less overhead,” Beusch says.
Hosting providers can also help ISVs market their solutions, notes Tim FitzGerald, vice president, Cloud Solutions, Avnet Technology Solutions, Americas (www.ats.avnet.com).

But selling SaaS does require some changes for ISVs. For example, “It changes how you engineer the product,” says Kevin Price, founder and CEO of AccuCode (www.accucode.com), such as ongoing product enhancement instead of periodic refreshes.

4. Should you build or outsource data centers?
Creating your own data center clearly incurs significant upfront costs, but also offers solution providers the most control. In a survey by Trend Micro (www.trendmicro.com), hosting in the solution provider’s internal data center was the second most common managed service after remote management of a traditional installation. The percentage “was larger than I thought,” says Magi Diego, director of SMB Go-to-Market Technology for Trend Micro, a trend she attributes to vertically focused solution providers. Such an approach goes along with another piece of advice: offering something different from other MSPs.
But hosting is not for everyone. “Ask yourself if you can do it better, faster or cheaper” than a cloud provider with the capital, experience and specialization in providing cloud, advises Terry Hedden, founder and CEO of Infinity Technology Solutions (www.infinityit.com).

5. Should you use public or private clouds? Or a mix?
Each offers a different value proposition and a different level of control.
For Big Sur Technologies (www.bigsurtech.com), private cloud was the way to go. The solution provider actually started with its own data center when a dentist client literally couldn’t fit a server in his office and jumped at the chance for them to host. Eventually, Big Sur rented out cabinet space for its hardware within a third party Tier One data center. The MSP now offers white label hosted Exchange, backup and security, network support, productivity apps and a browser as well as hosting vertical software for clients, relying on vendors such as Level for first-line customer support. “When we looked at outsourcing cloud, we were going to resell somebody, but I want to control it, and not worry about someone not picking up the phone,” says Charles Love, manager of service operations. “If I have fifty customers in someone else’s cloud, I have no recourse. I can’t drive to the data center.”

6. What kind of cloud partners do you need?
A key early decision when moving to cloud: “Pick an ecosystem,” says AccuCode’s Price. “Pick a stack and vet it out.” AccuCode, for example, aligned with Google and esnatech (www.esnatech.com) for the bundled cloud solution it calls AO: Communications, layering services on top, and chose Lattice Systems (www.latticesystems.com) for hosting. The ISV and solution provider now has three SaaS products; recurring monthly payments accounts for half its revenue stream. AccuCode also now resells its cloud solutions through its own channel. “Margins in a services model are much higher, especially if you have your own applications.” Price says.

7. How do you choose the right cloud partners?
Many desirable qualities in a cloud vendor are the same as for an on-premise supplier. Two critical differences, though lie in channel program details. “Cloud providers are relatively new on the scene regarding channel relationships,” says Avnet’s FitzGerald, so offerings may not be as mature.

Another critical area is contractual terms. “Some vendors want VARs to pay up front for a year,” warns Jason Bystrak, director of sales for Ingram Micro’s Services Division (www.ingrammicro.com). Beware the click-through, take-it-or-leave it agreement, adds Avnet’s FitzGerald. “There is some increased risk of disintermediation of partners as a result of how they legally structure contracts and financially compensate the channel.” Make sure they model they’re offering will work for you.

Other qualities to look at:

  • Financial stability/access to capital
  • Security and redundancy
  • Scalability
  • Service level agreement terms
  • Onboarding process
  • Quality, responsive support and regular upgrades
  • Set-up and training time required
  • Self-service tools that allow end users to do simple support tasks themselves
  • Location of the actual data center. If it’s in another country, there could be legal or language implications.
Vetting potential partners is also similar: Talk to all size vendors. Test the product in your own environment. Talk to other users. “We ask for two customers that are happy and one that recently left,” to find out why, says Infinity’s Hedden. Industry shows are a great place to mingle with other cloud channel customers.

Also determine if the service you want is the vendor’s core competency. “Most successful companies are ruthlessly focused,” says Justin Moore, founder and CEO of Axcient (www.axcient.com). That’s good advice for solution providers as well, Moore notes. “Identify clear and specific pain points and solve them, and explain how cloud technology does that. Try not to bite off too much.”

Don’t overlook distributors, who see themselves as cloud service aggregators who vet vendors for all of these factors and make it easy for solution providers to deliver cloud services.

8. How will you need to change internal processes and culture?
For solution providers early into managed or cloud services, changes will be more significant than for those already accustomed to this new paradigm. You can expect changes in:

Pre-sales Tasks. “There is a lot more homework up front to make sure the solution will work for them [potential customers],” says Olmec’s Manteiga, checking things such as bandwidth capacity and the suitability of their applications for remote hosting. “The ability to deliver to the client according to their expectations is where you’ve got to focus your efforts and training.”
Another task. Sharpening your licensing skills before taking over a customer’s environment. “It’s amazing the number of people with improperly licensed software,” says Big Sur’s Love.

Recurring Revenue. For solution providers making a substantial push into cloud, the financial impact can be significant. “This was a much-discussed topic at our VAR 500,” says Avnet’s FitzGerald. Avnet has developed a financial tool, PayNow, to help VARs finance the transition by pulling the profit forward—kind of like getting an instant refund through your tax preparer.

Financial infrastructure must change as well. “We find a lot of resellers don’t have the accounting systems to accommodate billing end users on a monthly basis,” adds ScanSource’s Dixon.

Sales Approach. On the one hand, it’s consultative and business-results oriented, focused on selling value to the business folks. But it can also mean a shorter sales cycle, since a monthly recurring payment is a lesser commitment.
Without techs constantly visiting the site, it’s important for sales reps to stay in contact with customers. Olmec sends a rep out for regular client visits. “It’s been a great thing for us,” says Olmec’s Manteiga. “Client satisfaction went up, and it may lead to more sales.”

Service-Level Agreements. SLAs make or break customer satisfaction in the cloud, and have strong impact on the solution provider’s business as well. Make sure you carefully understand vendors’ terms and develop your own. Miles Technologies adapted its SLAs from those of its hosting provider.
Compensation. Varied models, such as agent, are available to compensate sales staff under a recurring revenue model. Big Sur offers its sales folks a one-time closing contract award and offers higher incentives for salespeople to sell recurring revenue services.

Technical Skills. When moving to cloud—especially moving a full cloud-based IT environment—one can’t automatically assume everything will perform the same way, says Joseph Palumbo, managed cloud account management team lead for Rackspace (www.rackspace.com). Knowledge of code and dependencies is key. As an industry, “we’re still perfecting the core cloud experience to really make stable, secure enterprise offerings,” says Palumbo. “In the past year so many companies have come out to solve problems to make for full-fledged adoption of cloud,” such as add-ons to Rackspace’s platform to ensure a certain database performance level. SMBs will need solution providers with the knowledge and skills to layer integration services on top of cloud offerings.

Integration of cloud services is similar to on-premise software, but entails subscribing to APIs versus leveraging middleware. “If you are a VAR that understands business logic and how to do mapping, you can turn on a new service quickly,” says Dave Asprey, senior director, cloud services for Trend Micro.

A Tectonic Shift
Analysts and industry experts portray cloud as a large and inevitable part of the IT industry’s future. While caution is advised, so is a sense of urgency.
“The reality is, the next 18 to 24 months are going to be a critical timeframe,” says ScanSource’s Dixon. ScanSource itself plans to move into cloud as its vendors do, adding to cloud services to its line card in a measured fashion. Solution providers are advised to take a similar, measured approach, he adds.

If traditional solution providers had any doubt about their role in cloud, here’s some proof: Managed Services provider Infinity Solutions has offered cloud and managed services since its inception in 2003; now the company is acquiring a value-added reseller so it can add the hardware and support skills needed to fully service its customers.

“Once you’ve signed a managed services agreement, it becomes a VAR relationship,” with skills such as refreshing on premise PCs still needed, says Infinity’s Hedden.

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