The Cloud Model: Why The Channel's Future Is Shining Bright


Those who follow this space regularly know we spend a lot of resources on researching and understanding the channel so we're able to help solution providers and vendors alike make the best possible decisions for future growth.

We recently updated a study around the emerging cloud business model. I've personally been encouraging partners to move away from the traditional vintage model of selling one-off solutions and billing for time and materials. Fortunately, the number of partners operating in the vintage model has dropped 40 percent in three years and now makes up just 11 percent of the North American partner base.

The progressive model we have been advocating as a transition to a pure cloud or transformative model now makes up 71 percent of the partner base, having grown 15 percent since 2010.

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While on-premises infrastructure deployments still make up the largest opportunity in the market, with 41 percent of sales in that environment, it has shrunk by 11 percent, while pure-cloud deployments, off-premises hosted and on-premises hosted have all increased.

Most importantly, the decision-making process is becoming democratized with many line-of-business executives increasingly making the decision. The best advice I can give partners is to step up the sales and marketing skills and understand you now need to get to know the CMO, HR director, CFO and virtually any other executive. This is a good development strategy, but it also means it is more important than ever to not only understand a customer's business but also the challenge of the particular business units within the overall business. When we look across the market, the vast majority of the growth in solution provider businesses at 8 percent is coming from the services component. Hardware is declining to the tune of 5 percent and software sales growth is a meager 1 percent.

While services is a big category, the managed services category is really where the action is. We are projecting that managed services revenue is already at 36 percent of partner sales and will grow at a 25 percent clip over the next two years, accounting for nearly half of all services revenue by 2015.

All this growth around cloud is clearly an opportunity for both the vendor and the partner community, but it is also going to follow the path of every other major trend we have ever seen in this industry. That means the margins that are being captured today are as high as they are going to be. Simply put, the mystery around cloud and managed services is already clearing. With 54 percent of partners already offering some cloud deployment and cloud revenue at 20 percent of total revenue climbing to 28 percent by 2015, we are going to see price and margin begin to decline.

As that happens, the channel will change significantly. This is just my opinion, but I believe we'll see the birth of many more billion-dollar-plus solution providers. This is already happening judging from the amount of merger and acquisition activity in the market. The large players will force smaller partners to become more specialized in order to gravitate toward higher margin areas. In the end, the size of the channel will stay relatively constant with new partners coming into the market as others merge. We saw something similar in the early 1990s.

I've never seen more opportunity and a brighter future for the partner community, but it is going to take work and a commitment to build great marketing and sales skills. In the past, the best attributes were technical skills. The future is all about sales and marketing.

Robert Faletra, CEO of UBM Tech Channel, writes a monthly column on CRN.com. You can contact him via email at robert.faletra@ubm.com.