Rapid Changes in the IT Industry Have Impacted the Roles IT Channel Partners Play in their Partnership
Cloud computing, Internet of things (IoT), and artificial intelligence (AI) are just a few technologies spearheading the 4th industrial revolution. The new technological advancements have positioned distributors, software as a service (SaaS) providers, Value Added Resellers (VAR), Independent Software Vendors (ISV), and other entities in the IT channel at the center of this digital evolution. While IT channel partners try to configure their new roles, many argue its need for existence.
The digital transformation in the recent years has threatened entities that sell, distribute, and support hardware and software through the IT channel. If businesses and the public sector’s move towards the cloud continue at its current rate, the IT channel partners ecosystem as we know it will cease to exist.
In January of 2018, after surveying 997 technical professionals across a broad cross-section of organizations about their adoption of cloud computing, RightScale reports a 21% increase in public cloud adoption and a 4% increase in private cloud adoption from the prior year.
The report also states that 81% of enterprises have a multi-cloud strategy. Leveraging almost 5 clouds on average, these organizations run 32% of their workloads in public cloud and 45% in private cloud.
1st Industrial Revolution: Use of water and steam to power industrialized production
2nd Industrial Revolution: Use of electricity for mass production
3rd Industrial Revolution: Use of electronics and information technology for automated production
4th Industrial Revolution: Use of robotics, AIs, nanotechnology, quantum computing, biotechnology, IoTs, 3D printing, and autonomous vehicles for connecting people and improve business efficiency.
Worldwide Spending on Public Cloud Computing in Billions
By 2021 the top 5 largest categories of public cloud spending are:
- Software as a Service (SaaS) to reach $117.1 billion
- Infrastructure as a Service (IaaS) to reach $83.5 billion
- Cloud Business Process Services (BPaaS) to reach $58.4 billion
- Cloud Application Infrastructure Services (PaaS) to reach $27.3 billion
- Cloud Management and Security Services to reach $16.1 billion
Source: Gartner – April 2018
2018 Enterprise Cloud Spending:
- SMBs have smaller cloud bills (half spend under $10K/month) but 17% still plan to double that
- 17% of SMBs will grow private cloud use by more than 50% in 2018
23% of enterprises will grow private cloud use by more than 50% in 2018
Source: RightScale 2018 State of the Cloud Report
The Rise of Cloud Computing and Software as a Service (SaaS)
Cloud Computing and SaaS industry’s conception can be traced back to as far as the 1960s. However, it was not until the late 1990s when the Internet with major bandwidths became a beacon of productivity and the cost of personal computers decreased that Cloud Computing technology gained its footings.
Although Cloud Computing and SaaS are different they are, however, closely related terms. SaaS basically is a layer of Cloud Computing.
There are 3 categories or layers of Cloud Computing:
- Infrastructure as a Service (IaaS) e.g. Amazon Web Services
- Platform as a Service (PaaS) e.g. Google App Engine
- Software as a Service (SaaS) e.g. Salesforce
IT channel partners, such as independent software vendors (ISV) have taken the hardest blow since Cloud Computing and SaaS brought about significant changes in technology and business operation. The constant software and operating system updates plus costly licensing fees are no longer attractive to consumers and businesses. Not to mention, the computers’ inability to provide unlimited hard drive space, left most businesses confined and unable to install all the software they needed.
In contrast, Cloud Computing and its platforms don’t require specific installations or continuous maintenance. Benefits such as not residing on the user’s devices or a company’s server and being accessible through the internet have helped Cloud Computing and ultimately Software as a Service gain their momentum.
With its customization capabilities, the popularity of SaaS continues to grow as consumers and business are able to install and add applications that cater to their personal or business needs. Also, the era of Cloud Computing has freed up time and resources allowing management to focus on optimizing the business instead of worrying about IT maintenance.
Cloud Computing, SaaS Providers, and Channel Partners
Cloud Computing has been a thorn in the side for some IT channel partners, particularly partners in the indirect channel. Cloud technology has changed the demand, implementation, and delivery of Systems Integrators (SI) and ISV products.
Today, vendors that introduce products to the end-user via the cloud have found the roles their traditional IT channel partners once played almost dispensable.
As the image above shows, Cloud Computing has had an evident impact on IT channel partners that traditionally served as the conduit between the end-user and the vendors’ products. The Cloud has enabled end-users to connect and interact directly with the vendor.
The Impact of Cloud on Systems Integrators
Before Cloud Computing gained its popularity, system integrators (SIs) had an established stance within the software supply chain channel. Software vendors relied on SIs to sell their products and integrate their software with customers’ other solutions. The whole existence of SIs was based on the difficulty of software integration and customization. On the other hand, SaaS is based on offering the end-user straightforward usability and implementation.
The world in which SIs flourished has changed and continues to change. The challenges facing SIs are:
- Businesses that are looking to enter the digital arena often choose Cloud services and SaaS providers
- Most organization are leaning towards applications that are able to specifically address their needs
- The rise of Application Programming Interfaces (APIs) and integrated platforms, in general, have narrowed the opportunities for many SIs by reducing the complexity of integration
Opportunities in the Cloud for Systems Integrators
In order to endure the changes in the software world, SIs need to identify more than one surviving strategy. Today 64% of small businesses use cloud technology for sales, growth, and productivity. The transition to cloud services has ultimately opened up new doors for SIs to provide value-added services to these small to mid-size businesses. It only seems logical for SIs to create a diverse business model that tailors to cloud and SaaS adopting businesses in addition to providing services and products to those clients who are using on-premise services.
28% of US companies would choose system integrators as IoT implementation partners.
Source: TIA 2016
Creating a New Business Model by Providing Cloud Integration Services:
According to CompTIA the initial cloud migration and integration create numerous hurdles for a transitioning organization. These impediments have created a new business opportunity for SIs to oversee the transition from beginning to end.
This business model transitions SIs as an organization’s asset supervisors to end-user and vendor liaisons. For example, a SaaS vendor such as Netsuite has expanded its sales by partnering with more than 200 SIs (source: Cloud Strategies).
If System Integrators want to continue thriving in the era of Cloud Computing they need to embrace the cloud and SaaS products by expanding into new markets as a SaaS product implementer. System Integrators such as Accenture have formed such strategic relationship with a SaaS vendor NetSuite and have seen a high growth opportunity.
The Impact of Cloud on Independent Software Vendors
The rise of Platform as a Service (PaaS) and software platforms such as Salesforce and NetSuite have replaced the opportunities that once belonged to ISVs. Nevertheless, there are still many ways for ISVs to leverage Cloud Computing. To survive in the channel, ISVs need to take into consideration the 5 most important value propositions cloud-based software offers:
- Delivery Model
- Pricing Model
- Core Functionality
- Mobile Access
Opportunities in the Cloud for Independent Software Vendors
Cloud Computing significantly alters ISVs’ traditional business model. As long as ISVs are open to meeting the changing market needs, the 5 SaaS value propositions mentioned earlier can open doors to newer opportunities.
Cloud-based software delivers software via the Internet to the end-user in a subscription-based and a volume-based price model. This means end-users are not required to make a major upfront investment. By offering cloud-based services ISVs can extend their target market to include small and medium-sized businesses. The economies of scale Cloud Computing claims to offer, provide a great opportunity for ISVs to target smaller businesses while targeting larger companies with their on-premise solutions.
For traditional on-premise ISVs, upfront software licenses and annual maintenance fees are the main sources of revenue. Since Cloud Computing is based on a subscription basis, a different sales compensation for channel partners needs to be configured. A common practice amongst some ISVs for a recurring revenue is to require a pre-configured set price per user and bill the customer separately for additional functionalities, customization, or transaction volume.
Where traditional ISVs focuses on software development, features, capabilities, and sales as the main objectives for delivering a software, cloud-based software providers focus on further resources to run their infrastructure. To overcome this obstacle, cloud-based software vendors have created their own data centers with teams for creating, maintaining, and updating dedicated applications for every customer. The different layers of Cloud Computing (IaaS, PaaS, and SaaS) that allow for a software application to be divided into smaller modules have enticed service providers to turn to their partners for consideration of hosting the infrastructure.
A cloud-based software provides end-users with mobile access. The software accessibility is accomplished via a web browser or a software vendor’s specific mobile application. SaaS mobile applications offer complex analytics which requires integration with a larger set of applications and data sources in order to provide the greatest value. Since data requires large computing resources SaaS initiatives can be combined with Big Data projects in the Cloud to provide more revenue opportunities for IT channel partners.
The multi-tenant model that cloud-based software is based upon restricts the level of customization and creation of customer-specific solutions. The multi-tenant model stipulates that customers share computing resources in a public or private cloud in which each tenant’s data is isolated and invisible to other tenants. Cloud-based solutions serve multiple customers which means a limited customization capability. This opens the door to new opportunities and partnerships between software vendors and third-party software services. Many SaaS solution providers welcome third parties to their platform and equip them with the necessary tools for creating and developing application add-ons. These add-ons are usually available for sale to the SaaS end-users.
A New Value Proposition for IT Channel Partners
By now it should be evident that traditional IT channel practices and partnerships that once guaranteed success are very different for cloud partnerships. Many partners are still unprepared to join the service based cloud revolution. The IT channel partners ecosystem that existed a mere decade ago will not sustain partners who:
- Do not transition from being a product-oriented organization to a service-delivery organization
- See no need to develop strategic partnerships with organizations that offer cloud-service technology
- Have no use for developing new applications
- Are not open to entering the cloud industry or at least provide cloud services to their customers
To stay afloat in the Cloud, IT channel partners, ISVs and SIs, need to reshape their value propositions to reflect:
- A web-based access to business applications with full and limited functionalities
- Leverage technology advancements by supplementing traditional software functionalities with mobile applications and analytics
- Expand customer service to encompass small and medium-sized businesses
- Provide services for implementation of the customers’ cloud solution and train them in using the cloud-based software