Cloud Computing Challenges the Channel

All leading IT companies - Microsoft, HP, Dell, IBM/Sun, Oracle, Salesforce.com and Amazon (yes, I would call then an IT company) are driving towards providing a variety of cloud based platform and application services. Complementing them are a whole host of new companies that are aggressively developing solutions for this space. No doubt over the next 5 years cloud based services will be the new arena of intense competition. A lot has been written about the pros and cons of the various services so I won't address them in this post. Very little though has been talked about the impact on the channel.All leading IT companies - Microsoft, HP, Dell, IBM/Sun, Oracle, Salesforce.com and Amazon (yes, I would call then an IT company) are driving towards providing a variety of cloud based platform and application services. Complementing them are a whole host of new companies that are aggressively developing solutions for this space. No doubt over the next 5 years cloud based services will be the new arena of intense competition. A lot has been written about the pros and cons of the various services so I won't address them in this post. Very little though has been talked about the impact on the channel.

The channel comprising of ISV partners, Systems Integrators (SIs), dealers, resellers and retailers form the essential cogs of an IT vendor's eco-system that puts products and solutions in the hands of the customers. This is particularly true in the small and medium business market (SMB) where the vast majority of the opportunity can ONLY be addressed through the channel. Selling direct is not economical. IT firms such as Microsoft and HP are particularly dependent upon the channel to maintain their position in this market. So it makes complete sense then that these companies are trying to find ways to engage and involve the channel in their cloud computing efforts (see HP Partner to Deliver SaaS to Target SMBs)

Challenging the Channel Structure

The first issue to tackle is Cloud Computing's impact on the existing channel structure. For decades the packaged product industry has survived on a two-tier system consisting of master distributors such as Ingram Micro and Techdata and a large reseller base. In the case of SMBs, this reseller base is very very large. While master ditributors aggregate products and handle the logistics of distribution and promotion to resellers, the resellers themselves handle the final sale to customers and provide installation, integration, customization and maintenance services. The exception is a handlful of customers that a vendor sells directly to (typically very large strategic customers such as NASA, Pentagon, GE etc).  How does this hold up in the era of Cloud services?

Customer needs and customer scenarios will likely drive the change in channel structure in the era of cloud services. Three scenarios come to mind depending upon the extent i.e the number of cloud services and applications a customer uses:

1. Customer Scenario 1 - Customer needs a single cloud application or very few cloud applications - for very small businesses this is a viable scenario. it is likely that a really small business will not use more than 4-5 Cloud services. These will likely be very basic such as email, web conferencing, collaboration etc. Integration and customization needs are minimal at best.

2. Customer Scenario 2: Customer needs few services but integration with existing systems and customization are paramount. Resellers of cloud services can capitalize on such opportunities

3. Customer Scenario 3: Customer needs multiple cloud services and subscribing to them on a one-off basis, managing multiple vendors is an administrative burden and perhaps an inhibitor to greater adoption of cloud services. Integration and customization needs may or may not be important. This scenario will likely emerge over time as SMBs and enterprises dive deeper into cloud computing. This scenario is also potentially the most disruptive for the channel. It suggests the need for a Cloud Services Aggregator (CSA) that has the capability to aggregate, integrate and syndicate cloud services to resellers and customer. The interesting thing here is that a CSA could be an IT vendor such as Microsoft or HP or an entirely independent entity. IT vendors that act as CSAs (Microsoft, Saleforce) will be subject to some form of "cloud nepotism" i.e. their priorities will always center on their own services rather than third party services. This makes room for an independent entity whose primary function is to integrate and deliver services that best serve their customer base. It is possible therefore that CSAs that focus on a particular industry or deliver a specific competency (and closely related competencies) will appear in due course of time. In many ways CSAs replace master distributors in the old value chain.

Tis emerging structure does much more than shake the foundations of the current channel structure. Indeed, it impacts channel competencies at a deep level.

Challenging the Channel Competencies

Broadly speaking the current channel responsibilities can be divided into two - distribution and implementation. Clearly this works well for packaged products but breaks down to some extent when it comes to cloud services. The logistics of packaged product distribution are replaced by delivery of services over the web. Similarly, implementation can further be divided into 3 sub-tasks:

1. Installation,

2. Integration and Customization and

3. Maintenance

Installation is replaced by "Provisioning", Integration and customization needs will be service dependent. Some services will offer limited customization while others will offer extensive customization capability. Maintenance is all but gone except in cases where customization has been done by the channel. These channel activities are a significant and indeed primary source of revenue for the channel. In the SMB space, in particular, channel members do not make much on the products they sell but depend on time billed related to the above activities. The severity of the challenge increases considering that channel revenue now takes the form of an annuity rather than a lump sum payment.

This suggests that over time the channel must develop and indeed be trained in new competencies. these encompass service provisioning, billing, data center management, customer support and a whole host of related competencies that the channel did not have to deal with before.





A parallel to this emerging structure can be drawn from the telecom industry. Large telcos such as verizon would be the equivalent of an IT vendor that also acts as service aggregators. Large telcos also support an eco-system of "virtual telco operators" - who essentially resell telco services without having to invest in their own telcom facilities or lines. Similar competencies are observed among these players.

The coming change in competencies is critical if Cloud Computing is to succeed. At this stage the onus rests largely on IT vendors such as Microsoft and HP to aid existing channel members to rework their business model, retrain for new competencies and deliver profitability to sustain the channel.

This email address is being protected from spambots. You need JavaScript enabled to view it.