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DESTROYING OLD BUSINESS MODELS
Many solution providers stuck in the on-premise world are indeed losing business bit by bit to transformative cloud solution providers that were built as startups to tear apart the vintage on-premise model. '"These guys are dead men walking," said Dave Rice, co-founder and CTO of TrueCloud, a Tempe, Ariz.-based cloud computing services provider, referring to vintage VARs. "Frankly, they are the milkmen of the 21st century. It's not even that they don't know they need to change. It's just really too hard to change a business built on an entirely set of different principles."
Rice, a former CIO for $5 billion on-premise solution provider/IT product provider Insight, believes that fewer than 20 percent of the current crop of solution providers will be able to make the transition to the transformative cloud model. "It's like trying to put lipstick on a pig," said Rice. "The solutions these guys are offering right now are antiquated and aren't going to last. It's just not in their DNA to change. For the most part they grew up around the single-tenant client/server model stemming back to late '80s and early '90s."
Rice has doubled or tripled his sales every year since he founded the company in 2008, winning business primarily with the NetSuite ERP SaaS suite against partners selling on-premise offerings. He said he simply can't remember losing a deal to an on-premise solution provider.
Many of those on-premise midmarket infrastructure solution providers operating under the old model have built a business around capital expenditure-based deals that run several hundreds of thousands of dollars and sometimes even more than a million dollars with hefty up-front payments and commissions. Those organizations are used to selling high-priced deals and moving on to the next big deal. That's a drastically different model than the subscription-based model from TrueCloud. "Think about the sales guys and how it affects their commission," said Rice. "Do you think they are going to want to sell subscription software or are they going to be more inclined to sell the servers and IT equipment the way they have for the last 10 to 15 years?"
"This is as big a change as when the PC was introduced to the enterprise back in late '80s," said Rice. "It is transformational. Think about how many major minicomputer and mainframe companies tried to make the change in that client/server era and then look at how many actually made it. If you look back, all of them thought they would make the transition but very few did. It is not easy to change your stripes even if you intellectually understand that it is the right thing to do. It's extremely difficult to try to go back into an organization and retool it."
At the same time that partners are moving to the transformative model, their customers are adopting the cloud model at a rapid clip. The change is being driven in large part by a subscription-based model that is saving customers 30 percent to 35 percent right out of the gate, said Rice. And when customers make the cloud services plunge, they end up shifting those resources that were being used to maintain on-premise IT equipment to their core business serving customers. "A lot of the pain points that come from traditional on-premise stuff get removed from the customer and they start to see they want to let go of as much of that as they possibly can to focus on their own business," said Rice. "They don't want a server room anymore. They see it as an impediment."
Cloud providers such as TrueCloud are often selling to business owners and chief financial officers, said Rice. "The people we are dealing with are not IT people," he said. "It is a different conversation with them than with IT. They are entirely comfortable with the idea they are able to operate without having to rely on the traditional form of on-premise IT." In contrast, vintage solution providers are still selling to IT and many of them simply do not know how to have that more strategic conversation, particularly since it was those solution providers that loaded the customer up with costly on-premise infrastructure solutions.
"It is very hard to go back to your client base and say there has been a substantial IT change and going forward we are going to be recommending an entirely different set of practices on how we run our firm, what we sell and how we deal with customers," said Rice. "It's a very difficult conversation to have. How do you approach your customers and tell them you sold them all this on-premise IT stuff that is no longer suitable or supportable for the long haul?"