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Guest Opinion: Why CIOs should care about the impact of ‘Cloud’ on their traditional suppliers

Gary Kinsley | May 2, 2014
How cloud computing is impacting the channel partner ecosystem.

Typically, depending on the partner profile, their business would rely on between 30-70 percent of revenue coming from established hardware and software Vendors sales, with the balance coming from their own professional services in installing, supporting, and upgrading these platforms in context to their customer's business environments. An example here would be retail systems for automobile showrooms and car service centres. The applications are broadly standard but require specific configurations for each customer or dealership, and are run on broadly industry standard hardware and networks. The resellers of such systems have huge domain expertise in the automotive industry and traditionally had been able to install, configure and localize each implementation with knowledge of that market. All the time these channel partners are able to operate a viable business on the hardware and software licenses margins, and installation and upgrades services those clients needed.

 The world has changed

But the world has changed! Virtualisation means more efficiently deployed servers and software licenses. Cloud allows for hosted applications, outsourced datacentres, and managed storage; while mobility means VDI [virtual desktop infrastructure] and BYOD [bring your own device] clients. And the net of all of this means a decline in traditional revenue for the established system integrators and solution providers.

The domain expertise is a massive value-add to the customers, but given it's hard to quantify, its historically lost in the margins made on the revenue of the traditional hardware and software businesses, a revenue window which is slowly closing. For these reason, a relatively small drop in traditional revenues is what accounts for the 12-14 percent failure of traditional channel partners stated earlier. So the question to the CIOs becomes - do you need the inherent domain expertise of your traditional suppliers, and if yes - how can they deliver that service in-order to monetise that expertise - and stay in business?

There are several answers. One for the channel partners is to partner with the Cloud service providers, and make money off the Cloud services sell-through, this however requires a new set of skills and traditional carriers now offering Cloud services can become formidable competitors.

The carriers have a large installed base in every aspect of the market - large enterprises, government, right down to SOHO [small office/home office] and consumers - and so can aggressively acquire customers. The carriers are typically well capitalized with property and space to build datacentres (IaaS - infrastructure as a service) and they own the access infrastructure, thus charging however they like to access their datacentres.

This IaaS model is assumed to be viable, but many IaaS providers who operated on the "build it and they will come" model are struggling to show a credible return on capital, hence a logical need to partner with industry domain experts for access resale. However, in the mid-term carriers may become competitors to traditional channel partners, who historically sold infrastructure to enterprises and who now find themselves competing with a carrier who is selling a hosted Cloud Service to their enterprise customers. Longer term if this trend continues the enterprise will simply no longer need to buy their own infrastructure from local Integrators.

Here the traditional channel partners may like to resell carriers' Cloud services, either as a 'white-label' Cloud service or leveraging the carrier's brand. The industry has over recent years seen more Managed Service Providers (MSPs) and carriers acquiring system integrators to build out market coverage and their geographic footprint, while 'buying-in' the domain expertise. When a carrier moves into a Cloud and service-provisioning model, they tend not to have the core skills required to sell and support such a service, therefore the Carrier is faced with either building or buying the prerequisite skills. In this case, acquiring system integrators is an easy way to scale these skills quickly.

This only addresses the IaaS aspect of the business. Platforms can fall under the same model with the IaaS providers supplying the platforms also, this opens up a much richer services 'seam' around service delivery, service orchestration, ITSM, etc. Software as a service (SaaS) is also a slightly different model with service provision 'going up the stack'. There are some broadly-used standard business applications that can be sold by the large Cloud providers, but with many more business and industry specific applications developed by small independent software vendors (ISVs) and application software providers (ASPs) which are provided in a Cloud environment. In many respects, Cloud, while being a threat to traditional system integrators and solution providers (SPs), is a huge benefit to those doing application development.

 

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