Will Cloud Computing Kill Distribution?

Solution providers aren’t the only ones seeking to capitalize on cloud computing. Distributors are making their mark in the cloud as well, investing heavily in their own cloud programs and tools with one goal in mind: staying relevant to solution providers as the technology landscape shifts underneath them yet again.

As more businesses adopt cloud technology, some channel observers feel distributors run the risk of disintermediation as sales of on-premise hardware and software lose share to off-premise solutions. Solution providers are forging relationships directly with cloud vendors, and the need for the so-called middleman will become obsolete. Or so the theory goes.

It’s a battle distributors have faced before. In the past few decades, distributors have seen obstacles posed by the Internet, the direct model, ever-shrinking product margins, and the commoditization of technology itself. Each time, distributors met the challenge. They automated processes, slashed their own costs and built or bought resources when necessary. And they’ve remained relevant. Case in point: The world’s largest distributor, Ingram Micro, expects to close fiscal 2011 with more than $35 billion in revenue, its biggest year ever.

But cloud computing feels different. In the past, distributors evolved with a slight tweak of their business model, in some cases as simple as charging for services they basically had been giving away before (think logistics, tech support, integration services).

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Providing cloud solutions is an entirely different business model than distributors -- and many solution providers, for that matter -- are used to. One doesn’t just flip a switch and start offering hosted applications or backup from across the country for a monthly recurring revenue stream all while constantly monitoring a customer’s network for irregularities. It takes the right resources, business processes and execution to successfully sell cloud solutions and add enough value to make solution providers -- and end users -- care.

The ability to add value -- and convince solution providers that they are, indeed, adding value -- has become an imperative for distributors, particularly as a whole flock of new cloud-only solution providers has emerged.

NEXT: A Tale Of Two Solution Providers

A Tale Of Two Solution Providers

Cumulus Global, a $1.2 million Westborough, Mass., solution provider, is the kind of fast-growing cloud provider distributors want to get close to, as last year it doubled its sales vs. 2010. But when a cloud vendor asked Cumulus Global CEO Allen Falcon to contact Ingram Micro for a new purchasing process, Falcon brushed off the request.

“Most of our relationships are with [cloud] vendors directly. One or two of our vendors have gone to distributors for the purchasing process, but at this point it’s made it more cumbersome to order those products and services,” Falcon said. “To me, distributors still appear as nothing other than purchasing mechanisms. They’re still looking for their role in the overall process.”

For distributors to add value, they will have to come up with better pricing, better purchasing and deal registration processes and marketing development, Falcon said. And that’s something he said he has not seen.

“I’m also not seeing the cloud computing vendors rushing to the distributor market,” Falcon said. “How can distributors enter and provide services without impacting the pricing and taking a piece out of resellers’ margins? Where would you put distribution in without upsetting the competitiveness of the pricing? I don’t have an answer to that yet.”

Whether that perception is true or not, it’s evidence of the uphill battle distributors face. Still, some progress is being made.

For a long time, Peter Zarras, president of Cedar Knolls, N.J.-based CloudStrategies, felt the same way as Falcon. Zarras remembers the first pitch he received from a distributor about cloud computing two years ago: The distributor said it could help boost CloudStrategies’ relationship with Microsoft. Zarras could only laugh. Not only is he a former Microsoft employee, he already was one of Microsoft’s biggest cloud partners, with more than 200 clients using Microsoft’s cloud solutions.

“We have [employees with] years of ex-Microsoft experience in our organization and multiple channels to ridiculously high levels of Microsoft. A distributor doesn’t offer value to me in Microsoft,” said Zarras. “If you asked me two years ago after we started will distributors be valuable [in the cloud], I’d have said, ‘What do you mean? Distributors are going to go out of business.’ The first couple of times distributors approached me I said, ‘I’m way past you.’ We resisted distribution for a while,” Zarras said.

But over the summer, Synnex got Zarras’ attention with conversations about sales and marketing support and demand-generation services that Zarras also needs to sell Microsoft cloud solutions to customers. If Synnex couldn’t help with Microsoft, it could help with everything else around Microsoft. Zarras listened.

“No one ever has enough leads and no one ever has enough marketing. That’s interesting to me,” Zarras said.

Today, CloudStrategies relies on Synnex for leads, business advice and integration help, Zarras said.

“It’s a little early to say what they’ve generated for us, but we’re very pleased so far and expect the relationship to continue to develop and expand,” Zarras said.

NEXT: By The Numbers

By The Numbers

Overall, cloud services account for a miniscule portion of distributors’ annual revenue, distribution sources said. But with the global forecast for cloud computing revenue expected to hit more than $241 billion by 2020 from $40.7 billion in 2011, according to research firm Forrester, it’s little wonder that distributors want a piece of that pie.

In addition, between 36 percent and 38 percent of all IT spend is expected to move off-premise by 2013, according to a UBM Channel study completed in September. To meet this need, roughly one-third of all solution providers plan to change their business model in the next three years, the study found.

Growth of off-premise hosted solutions (7 percent) and pure cloud solutions (46 percent) are predicted to increase through 2013, while on-premise product sales and on-premise hosted solutions are predicted to fall 11 percent and 5 percent, respectively, according to the study.

It’s a steep learning curve and distributors need to act quickly, said Tiffani Bova, vice president of research focusing on IT marketing and channel strategies at research firm Gartner. Today, a distributor’s value in cloud computing is based on leveraging its scale to aggregate the provisioning, billing, metering and other value-based services such as partner recruitment, management and enablement, Bova said.

“Most distributors negotiate pricing, SLAs and support for third-party cloud services and have APIs built into their proprietary platforms, and create portals where customers can go for instant provisioning, billing and support. And they do so pretty well,” she said. “There’s lots of value to be had there. They’re saying this is what we have always done: We’ve aggregated all these manufacturers from around the world in terms of providing product, credit, billing, MDF management, really, the logistics for all these providers for on-premise products and services. The aggregation of cloud services is a mirror of that.”

The relevance of distributors shouldn’t be altered in the near term, said Brian Alexander, senior vice president and director of technology research for technology hardware/distribution/EMS at Raymond James & Associates, particularly for private cloud infrastructure. Research firm IDC estimates private cloud infrastructure will grow at a compound annual growth rate of 28.9 percent through 2015, compared to 23.6 percent for public cloud.

“Private cloud helps the channel because it accelerates the refresh cycle,” said Alexander.

But if businesses, particularly small businesses, eventually embrace public cloud, there is a risk for distributors, he said. “They won’t be supplying hardware to the end customer through the reseller anymore,” he said. “The good news is I don’t think the move to public cloud as a model is imminent for the vast majority of infrastructure that’s out there.”

Cloud Conversations Are Changing

Ingram Micro Sales Director of Services Jason Bystrak has declared 2012 as the year that the distributor “definitely” starts to move into a cloud implementation phase with solution providers.

“The conversation here is moving from what is the cloud and what should we be thinking about to talking about the financial aspects of converting to cloud, sales training, sales compensation plans and talking to the right people at the end client,” Bystrak said. “We’re definitely starting to move into an implementation phase for 2012.”

NEXT: Distributors Take Different Paths

Today, Ingram Micro’s cloud portfolio amounts to about 50 services from 25 vendors. Those numbers have doubled since the third quarter of 2010 but, of course, still pale in comparison to the 1,400 vendors Ingram Micro represents in its traditional pick, pack and ship business. The stark contrast in just sheer numbers between the cloud portfolio and Ingram Micro’s traditional business underscores the cultural challenges distributors face in an era where the center of influence for many customers is quickly moving to off-premise Platform-as-a-Service, Infrastructure-as-a-Service and Software-as-a-Service.

CRN surveyed eight distributors about their cloud strategies. Ingram Micro said that from a launch in early 2011, it expects its cloud revenue to reach $200 million by 2015. None of the other distributors were willing to detail their cloud-related revenue or growth projections.

Distributors Take Different Paths

If -- and how -- distributors get to the cloud is the subject of a fierce battle being waged on multiple fronts right now. The eight distributors surveyed by CRN revealed eight different plans of action Cloud Eight: Distributors' Game Plans. Broadline distributors Ingram Micro, Synnex and Tech Data plan their own marketplaces and tools to offer third-party cloud services to resellers. Others, including enterprise suppliers Arrow Electronics and Avnet, appear happy to supply the products that solution providers need to build their own or their customers’ private cloud infrastructures and then teach them how to do it.

A distributor’s ability to ramp up, accelerate and complement a solution provider’s cloud capabilities is a key attraction for vendors trying to bring their own cloud solutions through the channel, said Julie Hens, vice president of Americas Distribution at Cisco Systems. Cisco is counting on distributors to educate and enable its solution providers to sell cloud, while also providing access to credit capacity and cloud expertise, she said.

“Our distributors are actively pursuing the capability of providing Cisco-enabled cloud collaboration services for resellers to offer their customers,” Hens said.

Bob Dutkowsky, CEO of Tech Data, said distributors will continue to enhance their cloud services strategies and solution providers will increasingly rely on them, just as they rely on them to provide products.

“People thought the Internet would put all distributors out of business. That didn’t happen. In fact, it made us more important. The same opportunity exists now with the cloud. It represents a different way to compute,” Dutkowsky said. “I’ve seen the mainframe change to the minicomputer, change to the desktop, change to client/server, change to the Internet, change to mobility. In every case, companies like Tech Data got stronger, not weaker. The key component is that each of those sea changes made computing more valuable to more people.”

Distributors are primed to become cloud leaders because they long ago made the transition from a transactional services model to an enablement model, regardless of what technology or service is being enabled, said Tim Curran, CEO of the Global Technology Distribution Council.

“Distribution is moving in lockstep with vendors and VARs as they broaden and transition to a solution sales approach. Distributors have continually and constantly improved their services. It’s an ongoing transition from a legacy tactical role to a strategic one,” Curran said.

NEXT: Distribution Lends A Hand

Just ask Joey Parker, client service manager for Pharr Technologies, a $2 million VAR in Shelby, N.C. Pharr has been offering backup and recovery services for about three years and is looking to migrate more small-business customers to a cloud-based environment in his small geographic area west of Charlotte.

“We’re looking to host our own data center, host our own clients. [Distribution] helped us put a lot of pieces together. A lot of the design and direction, we’ve gotten from [Synnex]. We view them as a quality partner, more so than just a distributor,” Parker said.

Pharr Technologies started selling Synnex’s CloudSolv unified communications offering in April and has closed two deals working with Synnex engineers to deploy the solutions, Parker said.

Ultimately, distributors’ cloud success will come when they recognize they don’t have all the answers and are willing to adapt just as much as solution providers are, said CloudStrategies’ Zarras.

“Synnex is this behemoth organization that is anything but a startup company, yet they operate that way,” Zarras said. “I told them I don’t need you to have a silver bullet. I don’t believe that even exists in the world of the cloud. But I need you to be willing to say, ‘That makes sense; let’s try that. We know the world’s changing and we want to help shape the way it changes.’ ”