The clock is ticking. You've got about four years to transition your business model to one offering cloud-based services with recurring revenue. Here's why: Customers are making their last hardware purchases now—they just aren't telling you.
I was talking to the former CTO of one of our Solution Provider 500 companies recently and in the past 30 days alone, he has spoken to 20 CIOs who are in the process of buying hardware for the last time as they build their own infrastructure and platform to operate as a service model.
You can convince yourself that your situation is different and your customers are different. And you may indeed have tight relationships with your customers in offering them solutions and services. But think about it: Have you ever told someone that you were buying something from them for the last time? Of course not; it hampers your negotiating power.
To make matters worse, your particular contact may not be in the loop. Cloud-loving line-of-business managers might be circumventing your points of contact. The cloud computing model is so compelling in terms of price and capability that your customers may be forced to go elsewhere if you don't offer those services to them. In the not-so-distant future, no one wants to maintain a server room. They want to invest in strategic IT.
The change will be profound. According to our research, partners will need to have at least 50 percent more customers to derive the same amount of sales. The future of the channel will be about integrating cloud infrastructures, growing your SaaS business, making it recurring, and making it unique. It will not be about selling products and stitching together solutions.
The transition ahead will be expensive and, frankly, risky. We've already seen large data center solution providers be forced to sell their business because they didn't have the capital to grow.
And we've seen solution providers that have been forced to sell their company at one-third of its sales because they relied too heavily on product sell-through. Learn from their mistakes.
There's no doubt that moving to this type of model is scary. But remember, it could also be liberating. You won't need to rely on your vendor as much as you have in the past. You won't have to wait for the next product turn to see an uptick in sales. In today's world, you have control over the customer and the service, you don't have control over the quality of the product.
Of course, the vendors want your reliance and will reward you for your loyalty. Make sure you do the right thing for your business. Marty Wolf, a global M&A investment adviser and columnist for CRN, said in a recent interview, "I would rather run a $2 million SaaS business than a $50 million VAR business."
Hard decisions need to be made now. You may have to cannibalize some of your profitable infrastructure business to truly make the transition.
Naysayers believe the channel won't have the stomach or wherewithal to do it, predicting more than half of the on-premise VARs will not survive.
Prove them wrong. Make the moves, make the hard choices, and be the half that does survive and comes out the other side stronger than ever.
BackTalk: Kelley Damore, SVP, Editorial Director for UBM Tech Channel, writes a monthly opinion column. You can reach her via email at firstname.lastname@example.org.
PUBLISHED MARCH 4, 2013