Why cloud's credit risk should make resellers nervous

Cloud-based recurring revenue business models are a dramatic departure from the traditional IT service provider business. It takes some time before monthly profits equate to the margin previously gained from a single transaction. 

There’s a powerful incentive to build a large ‘book’ of recurring revenue clients that deliver profits monthly forever, with little cost to maintain. Like telcos and insurance agents, the ‘book’ soon becomes a valuable asset in itself. However, today’s cloud solution provider model poses a significant credit risk if not understood and managed.

Let’s say an international software vendor appoints a distributor, which then appoints resellers. Soon, resellers have secured numerous end user customers provisioning cloud storage, backup, software licences, infrastructure and communications, even while their service provider is asleep, dreaming of recurring profits.

What happens if an end user – either deliberately or accidently – runs up massive bills for services, before the service provider pulls the plug? Who bears the credit risk?

Not the international software vendor: they require payment within a short period of time, whether end user customers pay on time or not. 

Not the distributor: they extract payment in full from resellers’ bank accounts. 

That leaves the cloud solutions provider, typically less capitalised and the least able to wear it. 

Unless the service provider meets the shortfall, the distributor could cut them off, evaporating all their cloud revenues. Time to call in the administrator. Scary? It is, and was a common problem in the early days of mobile phone service providers when large carriers launched multi-tier distribution to the SMB market.

Threat to all

Service providers won’t face these risks alone. Their business customers sink with them. How so? 

Imagine you are a thriving end user company that has fully embraced cloud services. Supported by your trusted service provider, you have moved all infrastructure, communications, software, storage and backup into the cloud. Every month you receive an itemised account listing services used, and you pay it promptly. After all, you wouldn’t want to be cut off.

Unbeknown to you, your reseller – which has a hundred customers like you – hasn’t paid its distributor. While extolling cloud technology to your colleagues, your mobile phone, email, business technologies and other cloud technologies stop working without warning. You can’t access business records and archives; they’re all in the cloud.

Without overdramatising or labouring the point, many current cloud provider business models represent significant risk to distributors, their resellers and particularly end user businesses. To harness cloud service provider potential, distributors need to urgently collaborate with international software vendors to design a business model that eliminates inherent risks and ensures cloud scales both commercially and technically. 

Recurring revenue business models proven in similar industries include
‘step-in’ rights if a reseller fails. Some models empower only the product owner to terminate errant end users, not all resellers’ customers. 

Yet another amalgamates all services on a single bill to the user, but distributes revenues to each vendor upon receipt of funds to an escrow account, including the service provider’s fees and margins. These mechanisms need to be crafted for cloud service providers to enable cloud’s potential to be profitably achieved.

These – or similar – models demand sophisticated billing, credit management, collection processes and supporting technologies that few, if any, cloud solution distributors, let alone their resellers, have in place today.

Graeme Boorer is an internationally recognised speaker, writer and consultant with experience gained in more than 50 engagements across 17 industries. Graeme helps enterprises design and implement scalable business models that deliver high value with low risk.