As-A-Service Model Creates ‘Additional Risk’ For Channel Partners

‘You have situations where, what if the customer goes out of business? So we’re providing Infrastructure-as-a-Service and maybe they’re in bankruptcy and we can’t get paid, but we still have to deliver those services,’ says Robert Keblusek, CTO, Sentinel Technologies.

As customers change the way they consume IT, channel partners say there’s more risk in providing as a service offerings but must make the transition in order to meet the growing demand for consumption-based solutions. Vendors, for their part, are doubling down on helping meet this demand head-on by designing new platforms to be consumed as a service and investing more in channel-facing capital financing arms.

Partners said as a service deals can increase the risk of not receiving payments stemming from customer issues which typically isn’t the case in traditional perpetual maintenance and support contracts.

Robert Keblusek, chief technology officer, for fast-growing Illinois-based solution provider Sentinel Technologies, said customers who are investing in next-generation technologies are demanding as a service offerings that can create additional risk.

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“You have situations where, what if the customer goes out of business? So we’re providing Infrastructure-as-a-Service and maybe they’re in bankruptcy and we can’t get paid, but we still have to deliver those services. Or maybe they’re completely out of business and we were expecting that type of revenue but now it’s gone,” said Keblusek, whose company was an early pioneer in creating as a service practices more than six year ago.

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“When you had the perpetual [contracts] people already paid it, unless it’s a lease or some other financing. So that means the money is already in the bank. Your at-risk portion is really the ongoing maintenance and often times that is three-years prepaid as well,” Keblusek said. “So I would definitely agree that there is some additional risk [with as a service].”

The largest technology vendors in the world including Cisco, Dell Technologies, Lenovo, Hewlett Packard Enterprise and Hewlett Packard are making the shift towards as a service with some serious investment dollars behind it.

These IT titans are specifically designing game-changing as a service, consumption-based platforms such as the Dell Technologies Cloud, HPE GreenLake and Lenovo TruScale Infrastructure Services to meet the massive demand from customers who are seeking to consume and procure technology in a more cloud-like way.

On the financing side of the house, vendors are expanding on their capital financing organizations to help partners better finance as a service deals. Networking leader Cisco, for example, has Cisco Capital Open Pay and Cisco Capital Easy Pay to help take some of the risk off channel partners.

“Our opportunity is to be able to deliver whatever kind of risk model we want to deliver to the partner and ultimately through the end customer,” said Nirav Sheth, vice president, Partner Solutions, Architecture & Engineering for Cisco. “We've got scenarios where third-party companies can take on all the risk on behalf of the partner. We've got scenarios that offer our capital structures called Cisco Capital Open Pay and Cisco Capital Easy Pay where Cisco capital takes the risk. But again, the commercial terms and the relationship is owned by the partner. We've got hybrid offers where maybe there's a capex outlay that either the partner or the customer could make on let's say network gear, but then the software subscription can be consumed in a different way. The really neat thing of the way we're looking at it is: we can size the opportunity and we can adjust the risk profile to however the customer and the partner wants to consume it.”

Vendors say they want to be pragmatic about making sure their delivering the correct incentives, rewards and capital structure to channel partners as they move toward as a service sales models.

Laura Latrello, vice president and general manager, Data Center Services for Lenovo, said Lenovo is striving to help take the additional risks for partners off their plate with TruScale Infrastructure Services, where customers have the option to never buy and own their infrastructure.

“With TruScale, in terms of the balance sheet, we own the capital asset. So when we are creating the workload, sizing what the customer needs, sizing exactly what stack to put on it -- it's a shared risk now with the customer and us. So if we do it incorrectly, the financial burden is on us. It's the profit we lose,” said Latrello. “So it helps create this bond and empathy with the customer and with the channel partner on that shared risk. Now if the partner has decided to financially fund the asset, then they would take on the risk and the asset would sit on their balance sheet, but it no longer sits on the customers. So it depends on the model the partner wants.”

Chris Dedham, solution architect for Mainline Information Systems, a Tallahassee, Fla.-based solution provider, agreed that channel partners take on more risk in as a service deals. He said although Mainline is still focuses on winning traditional large capex deals, the company is pivoting toward consumption-based selling thanks to vendors offering more as a service products.

“SaaS platforms are perfect for channel partners because it’s hybrid in a way, because it’s a SaaS model but it drags hardware,” said Dedham. “For me as a seller, I can sell a SaaS model but at the same time I can drive hardware sales through my distribution network, through Arrow for example. So I’m not having to get too far out of my swim lane to do something that I should be doing anyway.”

Sentinel’s Keblusek said there is a clear difference in the types of customers seeking as a service offering versus wanting to stay the traditional course of upfront capex spending.

I’m seeing pushback in some cases where some people are used to buying a perpetual on maintenance, especially in the area of networking gear for example. The customers that are buying into next-gen technologies where it includes automation, artificial intelligence, and they’re actually consuming those things and digitizing their business accordingly -- I do see them very tolerant of a consumption-based model. They see the value,” said Keblusek.

According to research firms Gartner and IDC, worldwide IT services spending reached approximately $1 trillion in 2018 and is growing at a faster pace that product spending this year.

Paul Miller, vice president of global marketing for HPE, said channel partners need to transition to an as a service model or risk being left on the sidelines.

“The as-a-service market will surpass the as a product market. So if channel partners aren't getting on board, they're going to miss this wave,” said Miller. “As a service is all about a cloud. It's giving customers a self-service portal. It's giving them the ability to pay for only what they use, and it's all managed for them. … Why should the partner get into this? It's where the market is going. It’s what customers want.”