Cloud Is About Cost Transfer

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The future of computing is increasingly
going to see bigger efforts to transfer costs up
the sales chain with the channel likely to see
its fair share.

Cost shifting is an old game but it’s something
you have to watch carefully and adjust your model to
manage properly. In some cases, whoever bears the cost is just
a function of who has the leverage.

As an example, suppliers that have a highly sought-after
technology that is easy to sell have more leverage to push
partners to accept costs that they might
otherwise push back on. Take a look
at who charges solution providers for
certification training. Oftentimes, it’s
those that have a hot commodity.

On the other hand, suppliers that are
in a highly competitive area with lots of
viable alternatives use free certification
training as a carrot and recruitment
technique. Top-tier suppliers that understand
having lots of certified partners is
a competitive advantage in the market
also accept the costs on their own balance
sheet more readily.

There are other examples here as
well. Demo units come to mind.

But now we are seeing a lot more
cost transfer because it’s a fundamental
piece of the new cloud computing model. When I take on costs,
especially costs I need to capitalize, my risk is high. But if I
don’t have to capitalize a technology deployment because I’ve
transferred those fixed capitalized costs onto someone else,
my risk goes down.

The reality is this is a huge selling point to the end user but
it’s also going to become a significant selection point on the
part of the channel.

One significant decision point for partners building a cloud
model is where do you transfer the costs. Are you going to
transfer them onto your balance sheet by building out hosting
services and data centers and offering them for rent? Or are you
going to find hosting suppliers that give you the capability to
offer their package as part of your underlying solution? Both
models can work, but clearly the former is a more risky proposition,
albeit it likely means greater reward if you’re successful.

In the old model, suppliers that were focused on shifting from
a direct to an indirect sales model did so to transfer sales and
support costs to partners, and hopefully sell to a wider audience
that can’t be effectively met directly. But the old model
also meant the infrastructure costs ultimately got transferred
to the end user at some point.

Now we are heading toward a model
where those costs are either going to sit
on the suppliers’ balance sheets or on
the solution providers.’ With that comes
increased risk because customers can
cancel, go out of business, get bought
and an untold number of other things
that can mean a loss of revenue. The new
model, therefore, requires diversification
of that risk by increasing the number of
customers with whom you do business.

It’s necessary in any case because
when the revenue generated by a sale
is paid out in monthly fees rather than
a one-time big check it requires you
to have more customers to obtain a
similar cash flow.

Ultimately, the more risk you take on by allowing costs to
be transferred onto your balance sheet, the higher your margin
needs to be. For large hosting companies and cloud-service suppliers
there is obviously a tipping point where the risk is spread
across so many customers that the next customer on board barely
moves the risk needle. But you need to decide where the cost
will be before you can make long-term supplier selections.

BACKTALK: Make something happen. Robert Faletra is
CEO of UBM Channel. You can contact him via e-mail at

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