The Alexander Group’s 2014 Cloud Sales Index, an annual survey of cloud sales practices, revealed a somewhat stunning finding—a dramatic decrease in revenue as a percent of total sales driven by the indirect channel. In 2011, approximately 28 percent of software company revenue was being driven by channel partners. Today this number is approximately 10 percent. Why the significant change? The main reason, of course, is the rise of the Cloud as a method to purchase and consume software. In fact the decrease is almost entirely among the hybrid software companies (those offering both on-premise and cloud solutions). “Pure play” cloud company revenue from channel partners has remained stable, averaging about 10 percent of revenues (and zero percent in some cases).
This might be worrisome news for the channel partner community as things move to the cloud. Are channel sales for software disappearing? Not so fast. According to the same study, the majority of respondents envision a larger role for the channel in the future. Which begs the question, What will this look like? One thing is clear—it will be different than today. The cloud model has disrupted the software partner channel significantly, causing traditional software partners to rethink their strategy and bringing about entirely new types of channel partners for the cloud. Most newer, smaller pure play cloud companies recognize little to no revenue through channel partners today. But in order to rapidly scale, some cloud companies will choose to leverage partners–particularly to access hard to reach markets and/or to offer more complete solutions. And while the disruption caused by the cloud model has resulted in some “de-evolution,” the partner eco-system is beginning to catch up with the needs of cloud companies, offering new services and value.
Cloud Disruption Has Forced Companies Backward in Partner Channel Evolution
Findings from our cloud study and our recent Cloud Sales Symposium indicate that cloud companies are focusing on three ways to leverage partners to grow cloud sales:
Investing in the right existing partners
For companies with existing partners, finding ways to better work together is a preferred method. You can leverage current relationships, and expanding mutual opportunity can increase partner loyalty. Three ways cloud vendors are investing in existing partners are: 1) focusing on “sell-with” models to utilize the sales event as a platform to train partners on selling cloud solutions, 2) directing traditional MDF or partner development funds on cloud sales and services, and 3) creating specific-use cases and/or product features that align to market segments where the partner has specific expertise and presence. In this case, the cloud vendor makes bets on particular vertical or horizontal solutions where their software solution can be easily employed. Key partners are brought in to collaborate early in the process to help build the business case and design the solution. Due to limited budget and resources, cloud software vendors must be selective and make bets on specific partners and partner programs. For most hybrid software companies that have relied on partners for a meaningful percent of their revenues (25 to 85 percent or more in some cases), these trends have caused the need for a fundamental re-evaluation of channel partner and program investment. Best in class companies are ahead of the curve conducting these evaluations and making calculated changes. Companies that move too slowly in this area will eventually fall behind.
Recruiting and enabling new cloud partner types
Some cloud companies are spending significant effort trying to identify their “partner of the future.” As we eluded earlier, traditional software channel players must adapt to the cloud sales model. There are several examples of this happening today. For example, DMRs now provide assessment, planning, design, installation, configuration, support and even managed services for cloud companies. This is a significant expansion of capabilities compared to five or certainly ten years ago. The cloud evolution has also brought about the creation of new channel partner types, including cloud service brokers and next generation fulfillment partners. Research firm Gartner estimates that just 5 percent of cloud services are sold via brokerages today, but it estimates that this will rise to 20 percent by 2015 (from Gartner, Inc., 2014 http://www.gartner.com/technology/topics/cloud-computing.jsp). Examples of brokerages currently in operation today include Gravitant and CloudSherpas. Next generation fulfillment partners have the capability to aggregate and resell Cloud solutions with single provisioning, bill and first-line support. Another trend in cloud partner types is the rise of referral or distribution partners who expand the market and drive new opportunities. These partners are usually specialized in specific verticals or solutions. For example, a cloud-based digital marketing company is partnering with one of the largest dental industry distributors to reach dentist offices and groups on a massive scale.
Updating partner incentive programs
Not surprisingly, the shift to cloud has caused many companies to re-evaluate their partner incentive programs. This is especially true for hybrid software companies that have both on-premise and Cloud solutions. Traditional partners often think very short term, resisting change and resisting making investments in new solutions or capabilities for cloud. Incentives specific to cloud sales are necessary in cases where the natural propensity for partners is to continue to sell on-premise solutions, because the on-premise license provides a bigger booking credit upfront and because the partner may lack familiarity with the Cloud value proposition during the sales process. The partner incentive program is critical to recruiting the right partners and driving the right behavior, but you should evaluate the cost carefully. On average, channel partners receive 30 percent margin on the first year contract, but this figure can range significantly depending on the type of partner and solution. Furthermore, more than 75 percent of companies pay direct reps on either the gross or net sales amount sold through a channel partner, adding to the cost of sale.
Are you leveraging partners to grow your cloud business?
If your company’s growth depends on driving cloud solutions, utilizing partners can be an effective means to offer broader solutions, reach new markets and scale your business. Whether you are re-evaluating your current partner program or considering partners for the first time, here are five steps you should consider:
Want to learn more? View or download our eBook on this topic, or contact us for an in-house briefing on cloud sales best practices.