Cover Story: Rise Of The Cloud Provider

Dave Rice knew it was time to make a break from the old-school solution provider set and start a cloud services business when he began playing the imaginative and mystical online interactive role-playing game "World of Warcraft" with his son.

When Rice saw the power of "World of Warcraft," a cloud-based application that boasts more than 10 million online subscribers, he knew the Internet was ready to handle complex business applications.

That "World of Warcraft" epiphany was the impetus in 2008 for Rice and a partner to found TrueCloud, which is riding the cloud computing wave with the robust Software-as-a-Service-based NetSuite business applications suite as its centerpiece. Scottsdale, Ariz.-based TrueCloud's mission is to provide cloud-based enterprise resource planning (ERP) for small and medium businesses.

"There is no shortage of customers," said Rice, a 35-year IT veteran and the former CIO of Insight Enterprises, a Fortune 500 behemoth. "All I know is that we're up against the worst economy in our lifetime and we're based in one of the hardest-hit metro areas in the country and we're seeing triple-digit growth across the board. My expectation is that this will continue at least through 2015 as more and more customers discover the incredible value associated with running their businesses in the cloud."

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Rice usually finds himself in a battle with old-school solution providers selling on-premise solutions but said customers are embracing cloud partners because they see 'a stark contrast between cloud and on-premise' solutions. Stark contrast, indeed. TrueCloud is one of a new wave of what CRN parent Everything Channel is calling "Transformative" cloud services providers -- defined as having no revenue generated from on-premise solutions and with the large majority of sales coming from recurring revenue -- that are wreaking havoc on the traditional solution provider market. These Transformative companies are winning customers and growing sales at a breakneck pace.

Everything Channel research shows that one-third of all solution providers are expecting to change their business model in the next three years. This comes as solution providers anticipate that 36 percent of their sales will come from off-premise solutions by 2013, according to Everything Channel research.

Everything Channel CEO Robert Faletra has said the new Transformative solution providers are challenging the status quo model of "Vintage" solution providers, which garner the large majority of their revenue from on-premise capital-expense-based IT projects with little recurring revenue, and "Progressive" solution providers, which have a measure of recurring revenue generated from off-premise services and are making heavy investments to capture more recurring-revenue-based cloud/managed services sales.

Progressive solution providers currently make up the largest part of the market (62 percent), with Transformative players making up 20 percent and finally Vintage players accounting for 18 percent, Faletra has noted. The cloud computing revolution, he said, requires solution providers to 'remake the business,' tackling both a technology change and business model change at the same time.

"I have never seen anything like this," said Faletra in a keynote address at Everything Channel's XChange conference in August. "It is real and something everyone [in the channel] is going to have to think hard about. You are going to have to make a lot of technology decisions and a lot of vendor decisions. You are going to have to look at whether the vendor that got you here is the one that is going to get you to where you need to be. Should I partner with telcos? Should I white-label someone else's services? It is all about moving from on-premise transactional sales to off-premise recurring revenue," said Faletra, who has followed the solution provider business for the past 25 years.

TrueCloud's Rice said his decision to make a break from the old transactional sales model is paying off in astronomical sales growth. TrueCloud revenue is up 150 percent year over year and client interest in cloud solutions is up a whopping 400 percent based on his company's NetSuite "product demonstrations, implementations, cloud consulting engagements and direct inquiries' from customers," he said.

The success TrueCloud is seeing in the market validates Rice's view that the channel has not adequately been serving the small-business market (fewer than 200 seats) because there was no business model that could generate enough revenue, he said. The cloud, he felt, would change all that. Even small businesses could afford to take advantage of SaaS and be supported by solution providers.

"We built our business around public cloud and supporting customers--the 'S' size in SMB, to be frank," Rice said. "But we're not excluding the fact that cloud will start to move upmarket and become prime time, and we can use the same skills to help larger companies consider adopting [cloud]."

Everything Channel research shows that small and midsize businesses are the most rapid adopters of cloud services, with an estimated 33 percent of midsize businesses expected to deploy at least some cloud solutions this year.

"What we're trying to be is a one-stop shop for small businesses that don't want to operate from the traditional perspective of IT," said Rice. "If you haven't crossed into that big IT investment, you have better alternatives. You can acquire IT capability as a service and we can help you with that portfolio and product and service opportunities and provide ongoing support. That's been the basis for the first three and a half years."

The customer view of the cloud has changed dramatically since TrueCloud was founded, according to Rice. "Three and a half years ago, people would look at me like I had three and a half heads when I talked about cloud,' he said. "Now customers 'get' cloud and they are not sure how to get started."

NEXT: The Progressive Solution Provider

The Progressive Solution Provider

If TrueCloud represents the no-holds-barred Transformative solution provider, then Network Doctor, Englewood Cliffs, N.J., is the classic Progressive solution provider. The company started as a standard break/fix solution provider about nine years ago and slowly made the transition to offering hourly services, time block services, and then to recurring revenue managed services for a fixed monthly fee.

About two years ago, the firm started to offer cloud solutions after securing more space in a data center to help build private cloud solutions with unique VPN lines for each client, said Paul Hilbert, CEO. "Whatever infrastructure they had, we give them the same thing, dedicated to themselves," Hilbert said.

Natural disasters such as the massive power outages on the East Coast caused by Hurricane Irene drove home the point that cloud solutions benefit even small businesses, Hilbert said.

"We have a client who is in mid-migration into our cloud. But they still had servers in their office. They were down for four days. I picked up their servers Monday morning and brought them to our office and they ran here on Citrix. They're begging us now, 'How can we come into your data center? We can't weather another storm.

"The cloud just makes perfect sense. There's no more capital investment with infrastructure. The entire headache goes away. They get to focus on their business."

Hilbert got the idea to go full force into the cloud about two years ago after attending an Everything Channel XChange event in Los Angeles, he said.

"We were in a boardroom talking cloud technologies and how you can probably make more money by doing what you're already doing and just putting it in the cloud. Where there's mystery, there's margin," he said.

A year later, Hilbert attended XChange again and the same conversation was struck. Only Hilbert was shocked at how many solution providers hadn't done any more than just talk about cloud.

"Nobody was doing anything. I wanted to see what everyone was going to sell first, but they said they were not willing to make the investment. I was surprised. You have to be willing to take a risk," he said.

Cloud services now account for about 30 percent of Network Doctor's services revenue. "Two years from now, it will probably be at least 60 percent of services. We have many clients in the pipeline to migrate to the cloud. It's just our operations slowing it down," said Hilbert.

"The other thing is we also rely on compelling events. When they're ready to upgrade servers or do a major upgrade of the network, do they want to spend $100,000 or [use] this service as a monthly fee?" he said.

Hilbert believes there's still time for solution providers to start up a cloud business.

"I don't think it's too late. The product needs to be offered to all clients of all VARs, even if VARs are looking for another provider to be able to do it if they don't want to do it themselves,' Hilbert said. "I think they're willing to outsource, but they do that losing control over the support. Today, we have our own [cloud hosting] infrastructure, but I want to move away from that. There's more flexibility and less capital investment on my part. But one of the major issues is the need to maintain as much control as you can over the environment. A couple of companies are marketing [hosting] to the MSP world and providing everything, but it doesn't give the MSP any leeway to provide their own support."

NEXT: Helping Partners Step Up To The Cloud

Helping Partners Step Up To The Cloud

Many solution providers are struggling with how to move from the Vintage solution provider model, making their living selling on-premise hardware, software and services and integrating them into solutions. One troubling statistic from the Everything Channel study shows that nearly 33 percent of solution providers "do not see" the cloud services opportunity. The key to whether those partners are successful in making the transition to the cloud may well rest on whether they step up and make cloud investments or partner with other companies to get to the cloud.

Everything Channel research shows that 46 percent of solution providers are expanding their technology offerings by partnering with other companies. That's where a company like IndependenceIT, an Allentown, Pa., solution provider, comes into the picture. The company hopes to attract service providers that otherwise don't have the cash or the infrastructure to go it alone trying to offer cloud solutions to customers.

IndependenceIT, in fact, has been so successful transforming its business to a cloud model that it's now looking to get out of the VAR business and resell its cloud solutions through other solution providers.

Thus far, IndependenceIT has attracted about 15 to 20 channel partners but hopes to ramp up that number quickly, said Seth Bostock, director of business development for IndependenceIT.

"We've launched a channel program to sell prepackaged solutions to help MSPs get out of the gate. We're getting out of getting direct customers,' he said. "Our goal is to transition out of being a direct service provider to strictly serving the channel. We've already started giving our direct sales force [leads] to MSP partners we have today.'

IndependenceIT was born as a traditional MSP in 1999 with the mission of delivering services and application upgrades. By 2000, replicating an on-site environment into a co-located data center was its primary offering and, by 2004, its only one.

The really big play for IndependenceIT�and all cloud solution providers�is integrating disparate cloud applications into a seamless dashboard, said Bostock.

"A customer might have or Dynamix or QuickBooks, but they're not integrated together. You also have the cost for having two cloud delivery systems with more sophisticated apps,' he said. "Our outlook is a continued rapid migration to cloud services. Today we see the market a little more fragmented. The big thing we see is a mass migration in the next three to five years of knowledge workers.

"We are able to go in and for less than most managed service contracts offer an entire cloud IT solution and immediately end cap/ex and lower the cost they were paying,' Bostock said. "A lot of companies are four to six years in and at the point where they need to raise money. They have some seats out there but they can't buy the equipment to expand. There is a challenge to get off the ground.'

NEXT: Taking The Vertical Leap

Taking The Vertical Leap

At the same time solution providers are investing in the cloud, they are also expanding aggressively into vertical markets. Everything Channel research shows that 44 percent of solution providers are expanding into vertical markets in the wake of the cloud revolution.

DataCorp, a Pembroke Pines, Fla.-based solution provider, for example, recently launched a spinoff, HealthCore, to deliver cloud solutions to health-care customers.

Datacorp, which is celebrating its 10th anniversary next month, has had a services-focused model since its inception, centering on business continuity consulting projects.

But Hugo Perez, managing director, knew his company had to transform to ensure long-term success and that project-based revenue was not the way to secure the company's future.

"There's always going to be a need for firms that are traditional VARs who can survive the storm: CDW, Dell, Dimension Data. But the Datacorps of the world? If they don't reinvent themselves into how to create a recurring revenue model beyond traditional MSP, I can't imagine how they're going to sustain themselves,' Perez said.

"Florida will always be a big state where health care is prominent. Most folks end up in Florida [to retire], so that's something that's of interest to us. Also, health care and IT have been friends over the years, but that has to change to something more [substantial],' Perez said.

Perez's son, now in medical school, recently asked him whether two iPads had the ability to securely transfer patient information from one doctor to another. "That's what my son's generation of doctors is expecting. They want the information now and they want it electronically,' Perez said.

Rather than offer traditional on-premise electronic health record deployments, Perez believes the cloud will bring doctors the best solutions for the future.

"There are a lot of people who do EMR [electronic medical records]. That in and of itself seems like a black hole to get caught in,' Perez said. "We're going to look at building private clouds. We're going to transform ourselves to a vertical play while still leading with our core business.'

NEXT: Now Is The Time

Now Is The Time

So what does the future hold for the cloud and for Transformative solution providers? Like many traditional technologies, there is room for different takes and different niches. But the time to act is now.

"Where this is headed is businesses like ours are going to have to get more nimble in terms of app-to-app integration between cloud services�to knit a with a NetSuite. As more cloud starts to occupy the neighborhood, we're gearing our business for that,' said TrueCloud's Rice.

Transformative solution providers are also likely to develop much tighter relationships with vertical-market ISVs, he said.

"As those ISVs spin up cloud offerings, they're going to need help to get those fairly vertical services to market and get to end customers. I think the right place for a VAR to be is to get very vertically focused. The skill set isn't [about] building capabilities; it's [about] fostering capabilities to an end customer for an ISV, not unlike a telco. They provide service, but there's still the last mile to the customer. That may be a significant frontier as cloud starts to grow up,' Rice said.

For Datacorp's Perez, the future means carving out more cloud space at a company such as Terremark, a Verizon company, and selling cloud solutions to customers that simply want IT in a secure and less expensive fashion.

"They don't care about cloud computing. Our idea is to morph our business into cloud and if Datacorp gets rebranded [into HealthCore] so be it,' he said.

Meanwhile, Independence IT's Bostock sees more video in the cloud going forward. "We're already starting to do R&D with large video files. There's still so much local horsepower needed right now, but we can do it with some accelerators,' he said.

NEXT: Recession-Proof Cloud

Recession-Proof Cloud

Several solution providers said the economic downturn of the past couple of years has helped their businesses. Companies of all sizes either can't or won't make heavy capital expenditure investments but still see IT as a means to increase production and lower costs. Transferring those IT costs to a fixed operating expense makes it more palatable to end users' C-level executives, said Rice.

"I would probably say half of our business opportunities come from people that said they can't afford a heavyweight form of IT that they invested in in the past,' he said. "It's something that not only drives lower costs and efficiencies, but it helps businesses be more agile. Their business has grinded to a halt and it's a very difficult move with traditional IT going forward without sizable investments. And the majority of investments were going into maintenance, not into new investments on behalf of the business. Absolutely, that has caused big things on the cloud front.'

Meanwhile, cloud providers also see business pouring in from startups. "Anybody starting a business today is not going to acquire all these servers and set up traditional IT. Anybody starting business today will start with leveraging the cloud so they don't get into the traditional pattern of maintenance and overhead,' Rice said.

New cloud-only providers also have a leg up on traditional solution providers because end users better understand cloud computing now compared to three years ago, he said.

"First, it was, 'What do you mean by cloud?' They didn't even get the concept. It was a little along the lines of, how is it different than a hosting service? As people began to get familiar with that, some of the big players started to run commercials on TV. You hear the terminology. It was a steady drumbeat and at least they know what you're bringing to the door,' Rice said. "The second wave is, 'I think I get the idea, I can accept the idea but now I am concerned about security, safety, liability, performance, response time.' That second wave was more challenging in the sense of trying to get people to a certain comfort level. We had more success with younger entrepreneurial types. Guys in their late 30s, early 40s were more inclined. They'd say, 'This makes perfect sense,' as opposed to some older types in their 50s who have been around a long time and are more skeptical to make a transition to put the jewels of the kingdom at risk. For the most part, those fears have subsided. We don't encounter much [angst] anymore. It was more borne out of IT fears than of business fears.'

Vintage and even Progressive solution providers could face big challenges trying to transform their business models to the cloud, Rice said. "It's a fairly difficult transition. We made a conscious decision not to bring legacy IT baggage with us,' he said. "The biggest problem to explain to an existing client base is the difference between what we've always done and what we want to do. That's a significant departure for most. It's tough in this situation when someone made their bread selling solutions to their customers and now they have to make the transition. What is the incentive, motivation [for solution providers] to increase [or] radically change their portfolio? Obsolescence is motivation for some, but it's hard when it's in your DNA."