CRN Cloud Services Roundtable: Partner Keys To Success In the Cloud Services Era

The Strategic Shift

Strategic service providers, those driving a higher percentage of sales based on solving business problems, are boasting more than $1 million more in annual revenue, according to exclusive research from CRN parent The Channel Company. In fact, these strategic service providers are driving nearly double the percentage of cloud and managed services sales than solution providers that have not made the shift to a model focused on driving business outcomes.

In the wake of this shift, CRN asked four top channel executives from Microsoft, EMC-Virtustream, Hewlett Packard Enterprise and NetSuite to weigh in on the state of cloud services.

The four channel chiefs -- Microsoft Corporate Vice President Phil Sorgen, HPE Cloud Chief Marketing Officer Bobby Patrick, NetSuite Senior Vice President, Channel Sales Craig West, and Vice President, Channels EMC-Virtustream Sean McGinn -- also spoke about their respective company cloud strategies and the future of the channel.

Following is Part 2 of the CRN's Cloud Services Roundtable. This portion of the discussion focuses on the keys for partners to succeed in today's cloud space, how their role is changing, and the transformation from solution provider to cloud ISV.

CRN Cloud Services Roundtable: How Is The Role Of The Partner Changing In the Cloud Era?

Microsoft Corporate Vice President Phil Sorgen

The line is blurring between who's a customer and who's a partner. The traditional term of a partner is evolving. There are many companies that now, which public cloud capabilities, who are taking IP that they've done internally that was really interesting, and saying, "Hey. I'm a financial institution, but I have an application that has applicability to many companies that have branch banking." You see it in healthcare. You've seen it some in financial services. I think we're going to see that happen more and more where their own IP, their own vertical capabilities become potentially a profit center for them.

HPE Cloud Chief Marketing Officer Bobby Patrick

Your buyers may become your competitor. I know from our perspective we exited the public cloud with one thing in mind which is we're not competing with the channel. We're not going to come back three, four, or five years from now and say, "Hey, we've got your customer! Goodbye." That's a different view.

The customer is the center of our universe, and we have to understand how the customer is going to grow, profit, and have success. Then, you have to identify what assets do we have to compliment that? As long as you keep that perspective, they never become a competitor to you. It's just how you bring value to them, based on where they're going. Are they just a consumer of your capabilities? Or, are they actually now not only a consumer of your capabilities, but you need to help them go to market. I never talked to them about going to market before, but they're actually a partner of mine now. If their successful going to market, they just consume more of my cloud services.

NetSuite Senior Vice President Channel Sales Craig West

We're almost 10 years into this notion of productizing IP. We extended NetSuite the product to NetSuite the platform in 2007. That's when we really started the notion of, in the business applications solution provider community, that almost certainly they have IP. They've built IP for industries that solve business problems. It was really hard to productize that stuff for on premise solutions because of all the challenges that have already been discussed.

We've seen the mix really change where there really is more of this investment-based portfolio now, where folks are looking at the opportunity differently with more scale, and are much more willing to build something ahead of that first customer. That has been a really significant change. That's been driven a bit by the ISV community, but it's still being also just as much driven by the traditional solution provider.

Vice President Channels EMC Virtustream Sean McGinn

The early business partners are coming over are coming over from the EMC ecosystem. That obviously makes a lot of sense because we're the shiny new object in the portfolio. There's a lot of press. There's a lot of customer demand, and they're seeing that demand. Those partners have access to, and are trusted by, those customers to provide solutions that support those mission-critical applications -from a storage perspective, from a computer perspective, Vblock, converged infrastructure. That whole story plays very well to, "Okay, what's next? What is the customer looking at next?

A lot of the vision is being set at the top (of the customer business), but you can't ignore IT. That is where the business partners play a really valuable role for us, that middle tier of IT management. VP level, director level, both on the infrastructure side, as well as on the application side. You've got to really be conversant with both sides of the IT house.

CRN Cloud Services Roundtable: Do You See Solution Providers Transforming Themselves Into Cloud ISVs?

Microsoft Corporate Vice President Phil Sorgen

At Microsoft we've always believed deeply in developers, but now we're betting even more significantly on companies that are building IP. Notice I'm not saying ISV, because that has been characterized as a certain kind of partner.

Many companies that never considered themselves ISVs are building IP, and they need the same kind of help. They need access to the same assets, so they need places to do development. We're providing internal use rights to allow them to spin up their applications in Azure. We're providing them specific support targeted towards developers. We're standardizing the dev center so that they can do application certification, and we're working to make it easy to put it in a marketplace to help them be discoverable. Then, we're taking it across our entire ecosystem. We have a big channel who can potentially be their channel, and that creates a win-win across the board. Forty percent of of all of our consumption in Azure are ISV/IP providers.

HPE Cloud Chief Marketing Officer Bobby Patrick

We think specialty clouds are a big part of the evolution of cloud as we look out into the future.We have one with Accenture which is a dealer management system on a hosted private cloud. It's built on Open Stack. It runs in their data centers. They sell to manufacturers, and it's all about eliminating supply chain inefficiencies.

It a subscription business for them. They run the entire operation for the manufacturers. It's got cloud economics. The customer gains instant provisioning and the manufacturer benefits with more efficient dealer networks. I think we'll see more and more of that kind of solution.

Partners are leaning into what their expertise is. They're learning the new technologies. It's a great niche, vertically-oriented partner that understands Open Source that can implement Open Stack Swift (object store). Their business is doing terrific.

The tier two area is really exciting. You can feel them wanting to move quickly. I was in Miami with United Data Technologies which has hired their first CMO (Chief Marketing Officer). They're hiring CTOs.They are starting to take the customer base they have and they are starting to add IP on top of that building consume services. The pace of acceleration is just starting to take off in a big way.

NetSuite Senior Vice President Channel Sales Craig West

Obviously, we have a discreet ISV community and the traditional solution provider community. There's not a lot of overlap there. Every one of our traditional solution providers has some kind of productized IP. They're not necessarily putting it on our marketplace to sell it. So it's captive. But they're marketing around that IP. They're doing demand generation around that IP. They're doing all that as their unique offering in the marketplace to attract customers.

Vice President Channels EMC Virtustream Sean McGinn

We see systems integrators developing new businesses around ISVs. We're talking about the large, bulletproof, productized software solutions for particular verticals.

System integrators are very good at recognizing those new business opportunities and developing a practice around them with repeatable business process, best practices and (solution) blueprints. To the extent that Virtustream can help SaaS-ify some of those ISVs, that's good for us, and good for our partners.

The typical profile, historically speaking, has been partners with very strong and deep expertise in the SAP space, for a good percentage of our customers. I don't want to just focus on SAP, however, because, there are a number of other ERP vendors, database vendors, vertical application vendors that we support and offer cloud services and infrastructure services to, and enable those environments to be deployed into the cloud.

CRN Roundtable: What Kinds Of Guarantees Do You Give Partners Concerned That You Will Compete With Them As The Cloud Market Evolves?

NetSuite Senior Vice President Channel Sales Craig West

That's a very common reality for us, whether they're an ISV or a traditional solution provider who wants to attack a particular white space, from a functional standpoint. They want to know that if they make that investment, we're not going to ultimately just build the same thing right behind them. There are elements of transparency that we can share with them about our roadmap, and where we're ultimately going to give them comfort in that. Then obviously, there's terms, the SLA, and the other agreements about ownership of ultimately that code and the IP that goes with it. Those are really common things that we have to work through, but it's not terribly complicated.

Microsoft Corporate Vice President Phil Sorgen

The important thing we have to do is provide as vendors is transparency, because ultimately, it's in both of our interests that their R&D compliments our R&D. The reality is the cycle time of innovation in the cloud, and the fact that there's no single cloud provider. Therefore, there's going to be innovation coming across the board. Continuing to advance and meet customer expectations means everybody's platform continues to evolve, grow, and increase in capability. Which means any partner that's building IP, it can't be one-and-done. You have to have a culture of innovation where you're continuing to develop that IP, or continuing to enhance it, based on your customer experiences.

Our focus is giving partners visibility to our roadmap, and making that a priority. We have launched a roadmap (web) site. We publish that now. And you've got to remember when Microsoft says "public cloud", we're not a single public cloud. We're CRM Online. We're Office365. We're Azure. We're (Dynamics) AX. Each of those have very different dimensions. The point is we're providing a common site to provide information to our broad ecosystem on the roadmap.

Vice President Channels EMC Virtustream Sean McGinn

"What is the role for traditional VAR today? Is it ISV? Do VARs become more of a systems integrator and offer more services, as opposed to intellectual property around the software solution built upon a particular platform. For Virtustream, it's more about the services side than it is developing vertical IP. That means that we're looking for those types of partners who are willing and able to invest in transforming themselves so that they're still capable of providing their traditional services, from an infrastructure standpoint, but can be a strategic advisor.

So they can go in with an advisor agent list software utility that we can provide to analyze the workloads on the infrastructure, to help the customer understand what their TCO (Total cost of Ownership) would look like if they migrate to the cloud off of an on-prem, or into a hybrid deployment model. Those are the types of skills we're looking for partners to upgrade themselves into. We can help them in that regard, and are planning to do that.

CRN Roundtable: Talk About Margin On Cloud Licensing And How Much Partners Can Make Selling Cloud Services?

NetSuite Senior Vice President Channel Sales Craig West

When you look at our partners, we felt like we had to disrupt an industry without disrupting an industry. Partners that were doing business applications in the 90s and early 2000s were used to big-box product kind of margins. 30-40-50 percent is what was earned on that stuff in those days. They were still fundamentally services companies. Their bread-and-butter was they billed hours to projects, that's really what they did.

We needed to disrupt that from a product standpoint. We needed to disrupt it from a recurring revenue standpoint to get to a recurring revenue model without that one-off, one-time, project-based thing. We really felt like we had to blend box product kind of margins and a subscription model. That was just our core tenet from day one. We, to this day, run as high as 50 percent on the subscription in the first year. It's an annual transaction.

We give as much as 50 percent on the first year subscription, then literally as much as 30 percent on the renewals year over year and that is for perpetuity- as long as they renew and you are the partner of record.

Microsoft Corporate Vice President Phil Sorgen

Our view is first of all, it's about profitability. That's at the core. Profitability is determined by a number of things. There's a cost side of the equation, and a revenue side of the equation. We look at a comprehensive view of how we provide assets that help 1) drive down cost of customer acquisition and cost of sale. That will help accelerate the funnel. That's one place we can help.

Then, the second area is what can they earn through acquiring a customer, guiding them on the ratios, and how they should think about what is their unique value contribution, as a component of the revenue, and what anything else, potentially our public cloud services should be.

Then, there's the fact that in cloud economics, it's not about the deal anymore. It's about customer lifetime value and how they are driving customer success, and keeping their costs low for the long run so that they can continue to up-sell, cross-sell, and bring their incremental innovation that they're going to to continue to invest in.

HPE Cloud Chief Marketing Officer Bobby Patrick

We want to help accelerate growth together. We want to drive profitability together, and we want to enable channel evolution together. What I hear from channel partners is they recognize the changing tide, where the future is for them, and where they will make their money in the future. We have programs then in place across those to identify the partners, the coalition of the willing, which is growing very fast, which is saying, "I'm all in on this transition to cloud." Then you get in there and you get the programs, the MDFs, and all these things that enhance the partner proposition.

I think the next step is helping partners go from resale to business outcomes to consumption models and really helping them sell and market those solutions, where our field can sell, or help drive those solutions.

Vice President Channels EMC Virtustream Sean McGinn

As we go through the cloud migration phases, partners are going to have to go through phases of growth and development themselves. In order to earn profit from those phases, you will need to see the partners providing different elements of value. For an EMC business partner probably 70 percent of their revenue is EMC hardware and software, and services. They are going to rely on that, and need to rely on it, to fund their development, and invest in new people, new processes, best practices, cloud strategy advisement services, maybe some element of managed services, life cycle management, billing.

We're encouraging that process, and we are eager to bring on and enable more of those business partners that are willing to go through that journey, which is really what it's going to be. We do see the potential there for the continuance of strong profit margins, as long as they see it as an evolution - not just to resell the service. That (resale) model won't work. In order to earn the discount, there has to be some value-added service that compliments and goes along with that.

What Do Partners Need To Do To Overcome Obstacles To Cloud Services Growth?

Microsoft Corporate Vice President Phil Sorgen

The four areas of differentiation we see with partners doing more than 50 percent of their business in the cloud are: IP differentiation, differentiating for value, and ensuring they're building recurring revenue streams, annuity streams, and monetizing the kind of IP they create. The second one is because the buyer is changing, and how customers are researching and buying cloud services, how they leverage digital marketing to build a digital profile, that makes them visible to a buyer they may not have a relationship, or to a customer that's researching and looking at, reputation engines, or leveraging social as a means to identify potential solutions. Digital marketing is critical.

The third is optimizing their operations. When you starting getting into a world of repeatability, the ability to operate your organization efficiently, then scale across many customers, is so key to profitability. Then, the fourth one is in the category of optimizing for long-term customer value. Cloud economics are about lifetime customer value, not about the initial sale. How are you building a customer success engine that builds a customer for life?

HPE Cloud Chief Marketing Officer Bobby Patrick

Partners need to scale up. They need to build skills that are going to help them assess workloads and understand security in today's world.

It is an economic discussion about when things move and how they move. They can do that through acquisition, I think we're going to see partners acquiring other ones who have certain skills. They could build it around certain vertical expertise, or certain specializations.

They've got to make that kind of investment around skills to understand new technologies. If they do that, there's gigantic opportunity.

We have 85,000 partners and we want as many as possible to be able to make this transition into value and outcomes.

We want to help make that happen, but it starts with that CEO mandate from the top of the partner organization.

NetSuite Senior Vice President Channel Sales Craig West

I think the interesting thing about us is our current partners and our future partners is the growth of their NetSuite practice, to some extent, comes with demise of one of our competitor's practices. A lot of on-premise folks that are saying they're going to reduce investment in one practice to move to a NetSuite practice. But there has to be a plan for us to be, maybe not the single growth lever, but a major growth lever. We can't just be a nice-to-have, or something to have in the bag, or way to check a box that when you walk into your customer and say, "How can you help me cloud?" If it's just about us being the check-the-box-on-the-cloud thing, it's not going to work. You're going to have to invest in building a practice. You're going to have to meet all the competencies.

It really has to be a fundamental growth lever to the business, and that's either helping you get to different industries than you were getting to before, or helping you retain customers that you were otherwise losing.

Vice President Channels EMC Virtustream Sean McGinn

From our perspective, solution architects are key. Investment in people, and deciding what type of resources to hire, when, and prioritize them, is really a key piece of advice we would give. Solution architects are really critical in our world because they can go in and assess the nature of the workloads, the performance behavior characteristics on the infrastructure, which then leads to optimizing and designing that system in the VirtuStream world, which leads to a TCO (total cost of ownership) calculation.

You're talking about different skillsets. You're talking about someone who can do the cloud economics for the customer and demonstrate TCO savings from a migration, or a hybrid solution. That's probably the biggest piece of advice we would give is really think hard and long about where you're going to invest in people.