The Australian channel is witnessing the birth of a new kind of service provider – the cloud integrator. Some are cloud natives, born to as-a-service models. Others are more traditional operators making the transition from systems integration and managed service businesses. But they each have one thing in common: they are being driven by the market shift toward new way of doing business.
Research by Oxford Economics and SAP indicates that as many as a third of Australian SMBs are investing in the cloud solutions. That figure is expected to grow to 44 per cent in three years. That might seem low. In fact, it slower than in some mature and emerging markets.
That said, Gartner predicts that cloud will become the bulk of new IT spend in Australia as soon as 2016. The research firm says overall, cloud services revenue will continue to rise at 15.3 percent to 2017 across all segments; growth will be even snappier in SaaS and IaaS, which will grow at 23.6 percent and 24.5 percent, respectively.
Whichever data you choose to look at, the vibe from those out there in the market implementing cloud services is bullish.
Andrew Tucker, managing director of Mascot, Sydney-based hosting company ITonCloud, says adoption has increased in recent months.
Tucker’s company helps businesses move applications such as email and desktop services to the cloud.
He says: “There is a much bigger acceptance of what has been offered in the cloud, the security issues are dissipating and people are starting to appreciate the environments are becoming much more advanced and mature.”
There is also evidence that customers who have made an entry into cloud are getting more sophisticated in their usage. “We did a comprehensive analysis a few months ago and we found that about 40 per cent are proactively throttling up and down, and I think that is quite a large number for such an immature market,” adds Tucker.
History repeats
The IT industry’s capacity to reinvent and disrupt itself is legend. The world has turned from mainframe-based bureau computing to personal computers, to client server, the internet and now to the cloud – which, to many industry stalwarts, looks like we have come full circle.
While the technology has evolved, in many ways the challenges IT departments are trying to solve – aligning systems to business outcomes have remained consistent.
“These problems have existed, but they are now being solved in a new way,” says Nick Verykios, managing director of Distribution Central. At the heart of the shift, he says cloud integrators are simply providing a pathway to market. “It’s bureau computing all over again.”
Verykios is not alone in drawing the parallel. Google chairman Eric Schmidt made the same point in an interview with McKinsey & Company earlier this year.
While change can be dramatic, it often carried with it the legacy of previous shifts.
Daniel McLean, director, hybrid cloud services, APJ at VMware, for instance, sees a lot of similarities in this to the shift from physical data centres to virtual data centres. But there is a critical difference he says, “There are a lot more options out there as an organisation because cloud has given a lot broader scope and options for organisations.”
It is this plethora of options that has opened the door for the cloud integrators to step up. The trend will not just impact fast-moving operators but may have a restructuring effect on the whole IT channel.
Telsyte analyst Rodney Gedda says that while the cloud is more of a direct sales model between vendor and user, there are still opportunities for integrators to add value for customers. Gedda suggests that as their vendor relationships evolve, IT service providers will find themselves in less negotiations around solely being a “channel” to market and more around adding value to an existing channel.
The IT pressure on many end user businesses is growing. They are tasked with managing increasing volumes of structured and unstructured data. They must respond to staff demands for BYOD and greater mobility and flexibility. Customers and business partners want them to interact and collaborate with one another across a variety of platforms.
“Cloud delivers the required business agility to deliver upon these demands, “ says Dean Swan, director of partner strategy, programs & industry, at Microsoft Australia.
“This enables businesses to better compete in the market and enhance staff satisfaction, which in itself often drives improved performance.
“We also know that for today’s CIOs and business leaders, the cloud presents an opportunity to redefine the role that IT and non-IT business functions play in implementing the business strategy. Because of its power to fundamentally change how businesses operate and compete, the cloud is a gamechanger for many companies. Cloud has fast become a critical component of the IT stack.”
Look inside first
There are clearly high hopes for the cloud, yet the transitions customers must make to capitalise on these new ways of working are not easy or without risk. This presents another opportunity for savvy providers. But before they can take their own clients on a journey, they need to successfully traverse the shift in business model themselves.
Martin Gregory runs consultancy MG365, which consults for vendors and partners on the business model transformation required to profit from the shift to cloud. He says that whatever kind of partner a company has been in the past – whether VAR, legacy integrator or the new breed of agencies born in the cloud – to be relevant in the market, a provider must be relevant in the boardroom.
“Successful partners need to understand what is on the business agenda for their customers and recognise the changing role of IT. When customers think about innovation and improving their business outcomes, those decisions are increasingly being driven from outside of IT. Partners need to be able to speak the language of their customers’ business to line-of-business executives and to help IT as their role evolves.”
For an industry built on disintermediation, it is telling how much vendors and customers alike need this new middleman to succeed.
Take SAP, for example. Two-thirds of the ASX 20 – which between them represent 50 per cent of ASX’s market capitalisation – run SAP software. Today, the enterprise resource planning (ERP) platform is mostly run on-premise.
“But we see the balance shifting toward the cloud rapidly, “ says Beth Ryan, general manager, ecosystem and channels, SAP Australia.
“On the one hand, these companies – and indeed companies of all sizes – want to continue to get the most out of their on-premise platform investments. On the other, they want to be able to innovate on the edges to take advantage of the business benefit from newer technologies like mobile, analytics, big data and, of course, cloud.
“The value of the integrators in this landscape is to effectively marry the best of both the on-premise and cloud worlds, integrating the solutions toward the customer’s desired business outcome,” she adds,
SAP’s view is that the hybrid model has a long way to run, especially as it enables its customers to transition to the cloud at the pace that is right for them. But one thing is clear: the giant German ERP developer is rushing headlong toward as-a-service, consumption models for its systems – and it sees a role for the channel in that growth. SAP was historically a very direct business servicing tier-one customers, but has a global target to grow indirect sales to 40 percent by 2015.
“In the case of SAP, cloud integrators will bring exceptional value in extending innovation to cloud offerings using SAP cloud-based tools, such as the SAP HANA cloud platform, our platform-as-a-service offering.”
The need for specialist providers is particularly apparent when you look at the different models for deploying SAP’s systems. Ryan says that cloud integrators are innovating new approaches for linking SAP cloud to non-SAP cloud solutions, as well as SAP cloud to SAP on-premise and to non-SAP on-premise solutions.
Microsoft is another vendor rapidly transforming from a traditional software company to a new model. It has a huge stake in cloud computing through both Office 365 and its own Azure cloud. Like SAP, Microsoft understands the value that cloud integrators provide through their ability to give clients options beyond simply managing the traditional IT infrastructure.
Customers want a safe pair of hands, says Microsoft’s Swan.
“Working together, partners can provide a full range of services – in some cases consisting of solutions from a variety of vendors – designed to be the perfect cloud solution tailored to their clients’ needs. They are also able to combine cloud offerings with their current services.”
For example, partners could sell online productivity services such as email, contact management and calendaring in the cloud while continuing to keep business-critical information or software on-site for a perfect mix of security, reliability, and scalability.”
What drives choice
To understand the emergence and the evolution of the cloud integration market, it is first necessary to understand the driving force behind this trend – customer choice. HubOne, which was established in 2008 and has offices in Sydney and Melbourne, bills itself as “the world’s first cloud integrator”. Founder and CTO Nick Beaugeard says the cost advantages of cloud are well documented, at least in terms of cash flow.
“Unless you are a massive asset squatter then it’s clear that you will get savings. If you are someone who bought a business server in 2002 and still has it running under the desk, you will probably find at this stage you are still saving money – at least until the day of your catastrophic failure.”
But the real savings come from how people use the cloud, not simply from the price on the sticker. “We have a client, a bus company, and we found that they only worked in business hours but they did nothing outside of business hours. They didn’t need it outside of hours. So we put it on the cloud and we turn it off at night. There savings are enormous.“
Seasonal changes
Brian Pereira, chief executive of NSW- and Qld-based cloud services provider CN Group, offers the example of his retail industry customers. “Many of them will add significant numbers of staff over the next three months and then want to turn them off in the New Year. That’s compelling from a cost perspective because they are no longer committed to a one-year or 24-month contract with no exit.”
CN Group is a partner of NetSuite, Microsoft and SAP, and Pereira offers other areas of savings that customers find compelling. “Many smaller companies are now getting access to functionality that was previously only affordable by large organisations. They are also getting administrative overhead savings as the cloud streamlined many compliance issues around things like data security.”
But it’s a mistake to think of cost as the key criteria for many companies, says Beaugeard. Instead, he argues that one of the real attractions is simply to remove IT as an impediment. The company’s specialisms include deploying Office 365 and Xero’s SaaS accounting platform.
“We operate across the spectrum from enterprise down to small business. Fundamentally across the business landscape, people are waking up to the fact that running their own IT infrastructure is not an appropriate use of their time or resource,” says Beaugeard.
“Companies want to focus on core business and let people who are good at IT focus on the IT.”
Cloud isn’t just changing the way companies manage IT or pay for it. The person signing the check is also changing. Often that decision maker is determined by the size of the company, says Tucker.
“Generally speaking, for companies up to about 150 users, you are dealing with the owner or the CFO They tend to move a lot quicker. In that mid-tier of companies from, say, 150 to 400 staff, that’s when you are dealing more with the network manager or IT manager. “
It’s this tier where the cloud integrators meet the most resistance. They are harder to deal with, says Tucker, because they are a little more focused on issues like self-preservation. “In those companies, we do tend to try and sell into the C-level “
In the corporate space, Tucker says the new generation of CIOs are great to deal with. They often have a business background. Likewise in larger companies, Tucker says IT suppliers tend to be selling into department managers who appreciate the immediate benefits to their business.
“If the CIO is anti-cloud, you can definitely sell into businesses units especially if those business units have their own P&L. They see it, they get and it offers amazing savings.”
He says this dynamic is causing quite an upheaval in the corporate management of these departments.
Winning more hearts and minds to cloud will require a different sales pitch, says SAP’s Ryan. “We need to be placing the emphasis on better, faster and more frequent innovation, speed of deployment and business agility that is enabled by cloud, as opposed to just cost savings and data sovereignty or security.”
Numbers game
Of course, the cloud also has to make good business sense for seller as well as customer. For many traditional providers moving to the cloud, the shift to annuity-based payments is quite a challenge.
Even with the more sophisticated take on an old idea, fundamental issues remain. Distributions Central’s Nick Verykios adds: “The issue for many companies trying to make money in the sector is just getting enough volume in terms of people wanting to use their method for doing their computing.”
“You don’t have the lumpy cashflow that you normally you get and which many companies rely on,” says Tucker.
“As the amounts are smaller via monthly annuity, it becomes a bit of a numbers game. Cloud integrators need to have the numbers.”
Tucker suggests companies with larger infrastructure and sunk costs face more of a struggle to make the transition from a more traditional systems integration or managed services model. “The smaller nimble businesses that don’t have the staff transition a lot quicker “
CN Group’s Pereira agrees. “The traditional SI environment we grew up with – where you would spend six to nine months implementing a solution – is gone. In the cloud, companies can be up and running much faster and that a significant change.
“You no longer get paid in large chunky amounts of dollars as an SI; you have to learn to model your business around small annuity payments based on the number of users your customer will have.”
Telsyte’s Gedda suggests that VARs can make a business out of adding value to cloud services without any existing on-premise clients. But he says the real challenge is among channel companies that have established businesses in reselling products and offering services around the products.
“If a cloud service obsoletes a product, then the existing channel business is under threat. It’s not easy for a business to transform into a service provider if it has a strong business around project work.”
He believes, however, that the allure of annuity revenue associated with IT-as-a-service is now enough to get channel businesses rethinking their business models and how they can succeed in a cloud world.
“The cloud integrator has the cloud service as the baseline and looks at the many ways to add value, from security and protection to integration and workflow management,” says Gedda. “While there is nothing stopping integrators from becoming cloud providers themselves, the potential to add value to what the cloud already provides should not be overlooked. The cloud itself – rather than a switch, router, server or storage system – should be viewed as the product you can add value to.”
The cloud integrators CRN spoke to also made it clear than adjusting to an annuity model is only the start. There are fundamental cultural issues that need to be addressed, in particular around skills. The salespeople who are good at selling big licence deals are not necessarily the right people to sell annuities. The technicians who enjoy the company of computers more than the company of customers probably will struggle in the new world as well.
According to Gedda: “This is another challenge as many cloud skills are quite different from their on-premise equivalents. VARs should review the adaptability of their existing skill sets to the cloud world and not be afraid to adopt new skills as required.”
It’s a fascinating trend, says Beaugeard. “All of my team are turning into infrastructure people with development skills because there is so much you can script and automate in the cloud.
“If I look through my staff list, I can see other changes too. The Office 365 guy in my enterprise division used to be a Microsoft-certified trainer. He came to us with very few preconceived ideas and very little consulting skills. And he turned out to be brilliant.”
Beaugeard contrasts that appointed with another now former employee who came is an Exchange implementation person; just two weeks into the role, the employee realised almost everything he knew was redundant.
“These are the things that can create conflicts in an organisation and can lead to people fighting against the move to cloud.
“You need people who are able to understand business needs, who can do lots of scripting to make it happen fast. They need to be passionate about being fast but also have that underlying technical depth to be able to deliver. It’s a new breed of consultant,” says Beaugeard.
Pereira agrees that it’s a very consulting-based approach. “You are no longer proving tech advice about how fast the hard drives spin. That sort of technical detail is no longer required because the clients we service expect they will get what they need when they need it.
“They don’t really care about brands,” he adds. “The days when we would go out and sell IBM and HP for their brand – that happening less and less.”
Rebirth of a salesman
There are also clear changes in the nature of people who sell technical solutions in the cloud.
“The buyer has changed, the buying process has changed, the buying cycle has changed,” says MG365’s Gregory. “The trick is to gear up a conversation about the business applicability of the solution and the business outcome for their customer. The partners I speak to tell me that technology purchasing decisions in their customers are increasingly being influenced by line-of-business owners. Partners are increasing their value by bridging the gap between business requirements and IT’s strong platform for delivering.”
VMware’s Daniel McLean says that educating customers is critical. “Cloud integrators need to explain how the cloud can lower cost of infrastructure migration; or how SaaS alters business processes to deliver a better cost base for a business service; or how can PaaS provide more capability that can deliver a competitive advantage.”
Loryant Strant, director at Melbourne-based Paradyne, a major Office 365 partner, says a core skill is being able to quickly adapt to change and absorb a lot of new information. “The people I need to employ must have a constant thirst for knowledge to improve. It’s not like the days where we had the three-year life.“
RULES OF ENGAGEMENT: redefining vendor relationships
Relationships vendors and their partners are being redefined in the cloud era. That adjustment has not always been easy or comfortable for either party.
“All the vendors have struggled to work out what this ‘cloud integrator thing’ is. Microsoft has a very close relationship with Telstra but that has disenfranchised many of their partners,” says HubOne founder and CTO Nick Beaugeard. However he does credit Microsoft for working through the issues and improving its relationships.
“Microsoft is doing a better job now with their partners, but boy, it’s been fun because they have a whole legacy of traditional partners who don’t have anything to do with the cloud.”
Meanwhile, fellow Microsoft partner Loryant Strant, director at Melbourne-based Paradyne, says it is obvious that reseller-vendor relationships will have to change. “If you think about the late ’90s and early 2000s, the reseller was the customer of the vendors because the reseller was the one you had to sell the kit to and they would recommend that to customers. But that’s not necessarily what’s happening now.”
Customers, he says, are making those decisions themselves and then choosing the partner.
Brian Pereira, chief executive of NSW and Qld-based cloud services provider CN Group, says the maturity of the program depends on the maturity of the vendor; some are more mature than others. “NetSuite have been in the cloud market before the cloud market even existed. They are very mature in terms of their ability to deliver.”
Other vendors understand what cloud is doing to their business says Pereira but they are taking more time to get to the point where they are really driven by the cloud. “They have traditional cost structures and maintenance payments that fund their business today.”
MAKING THE SWITCH: Advice from cloud integrators
The days of big lumpy project payments are over. The business and its costs need to adjust to lower value monthly annuities, but the good news that these can be sticky despite the lack of contracts.
The people who make big licence sales once or twice a year may not be the right kinds of salespeople to sell those annuities. Cloud integration is much more a business-driven consultative sell.
The nature of technical staff is changing too. You need people with a thirst for knowledge who understand business imperatives.
Be prepared for a little dislocation in your relationships with key vendors. The big IT companies are adjusting their businesses to the cloud and that means they are changing the way they structure their partnership deals. Many partner programs are built structured on the basis of mature and well-understood market dynamics, but the cloud sector is still evolving… quickly
Expect a lot of M&A activity. The name of the game is to grow customer numbers quickly. In future, acquisitions will be more about the client list and less about the staff and management.
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