The Evolution of IT Distributiongtdc.org/presentations/Future_of_IT_Distribution.pdf · data level protection on top of that for the mail. Well the traditional mail stuff doesn't

The Evolution of IT DistributionDo We Need IT Distribution in a Cloud Consumption Model?

February 19, 2014

Darren Bibby

VP, Channels and Alliances Research

QUIZ TIME!

What is white, fluffy, quite popular, and weighs

almost nothing?

© IDC Visit us at IDC.com and follow us on Twitter: @IDC 2

© IDC Visit us at IDC.com and follow us on Twitter: @IDC


The

Marshmallow

Test

Stanford 1970,

Walter Mischel

Repeated around the

world

Studies on Delayed

Gratification with

children (4-6 yrs)

5

The Deal:

1 Marshmallow now

Or 2 if you wait

2/3 of kids ate the

Marshmallow


The Follow-up:

~18 years later

Children who waited

had better life

outcomes

SAT Scores,

Education, BMI


So what does

this mean for the

IT channel?

What’s The Problem?


The Cloud / MSP Trough

9

TodayPast Future

Revenue Revenue

Shift +

Investment

10

Cloud Partner Economics

“Selling cloud and managed services

is a new business model.

If you move too quickly to a recurring

revenue stream model, you will be

greeted with cash flow challenges.

If you move too slow, you’re out of the

game.

It’s all about timing,”

Edison Peres, Cisco’s senior vice

president, Worldwide Channels.

June 2013

Cloud Changes

The Selling Relationship

Sell UseStock

The Third Platform?

M A S CC A M SS M A CS C A M

Source: IDC

How is The Third Platform Evolving?

Shift from servers to services

IDC predicts that service providers will account

for over 27% of total server shipments by 2016

A brand new Hyperscale Market has emerged


Shift from On-Prem to Cloud Software

Roughly 85% of net new commercial apps will

be developed specifically for cloud in 2014

Over 92% of companies surveyed said they had

plans to shift their IT budget towards Public

Cloud

15Source: IDC’s CloudTrack Survey, 2012

The Cloud Consumption Model

Represents a Huge Shift

70% of CIOs will

embrace a “cloud

first” strategy in 2016

CIOs and CFOs will

move to “zero capital”

and transform the IT

financial model

By 2016, it is predicted that nearly 25% of all

software revenue will be subscription based.

IDC Predictions:

Key Stakeholders

What does each stakeholder want?


Key Stakeholders


18

PartnerSoftware Vendor

Customer

Key Stakeholders


19


Customer

Vendors want to…

• Achieve scale and reach

• Maintain a customer

relationship

• Maintain partner

relationships

• Transition to a new

consumption model

• Maintain operational

efficiency

• Optimize profit margins

Key Stakeholders


20


Customer

Partners…

• Want to own the customer

relationship

• Want to own the billing

relationship

• Want to ensure their

cashflow is positive

• Many partners aren’t sure

about the Cloud – it may

not be as profitable

Key Stakeholders


21


Customer

Customers…

• Want to keep things simple

• Want to buy from one company (or

limited companies)

• Want a trusted advisor

• Want Solutions

Initial Strategies on Cloud Offerings

Offer a monthly subscription, but direct

• Possibly with an advisor fee

Offer an annual, renewable contract

• More easily “resellable”

Offer a monthly subscription, indirect


Partner – Common Billing Scenario


“Here's a problem with Mail right now. I'll give you

an example.

You can really get three bills for a customer from

three different organizations at Vendor.



So you sell them Mail. And let's say they want

data level protection on top of that for the mail.

Well the traditional mail stuff doesn't have DLP

it just has anti-spam anti-virus.

So now I have to sell Product X and the

Product Y stuff.



So now Vendor's sending them a bill for Mail.

I'm sending them a bill for Product X and Y.

Now they want archiving for their mail. Well

that's a third party Vendor integration.

So now there's three bills going to the

customer for one solution.



If you give me resale, I can put all that on my

paper. White label it and send the customer one

bill.

That's a big deal. And there's more and more of

that stuff coming from Vendor.

The commission model is going to break down

really quick.”

Partner – Forced Into Unnatural Acts


“Okay. There’s no other way but for my

customer to buy the Cloud app directly.

This isn’t a great customer experience.

I’ll buy this Cloud App on my credit card on

a monthly basis.

And charge my customer for it. And add

some support.

On one bill!”

The Argument Against

IT Distribution in a Cloud

Consumption Model


Distributor Core Functions – Traditional

29

Integration / Configuration

Training and Enablement

Partner Management

Marketing Sales

Tech Support

LogisticsCredit and Financing

“There’s Nothing to Distribute”

If Distribution was historically known as a

“Warehouse and a Bank”….

…One of those things is not necessary anymore

It’s a service and not a physical product



Cloud Services are Inherently Direct

• The service is delivered directly from the vendor to

the customer / end-user

• It is out of a partner’s hands to control the service

(uptime, etc.)



Cloud Services are Inherently Direct

• There is inevitably more of a relationship between the

vendor and end user than with a perpetual license,

on-premise software

• The vendor MUST ensure the relationship continues



The advisor model (commissions, fees) has

been the default model for SaaS

Most similar to the insurance model or the

carrier resale model.

• The agent (synonymous with what we call partner)

gets an ongoing fee for the sale.


Alternatives to Selling Through

Distribution

Sell direct

Sell direct with referral /

advisor fee model

Re-sell through partners

without distribution (1-tier)

Marketplace (eg.

AppExchange, SAP Store)

Cloud Services Brokerage

(eg. JamCracker)


Or…

Distribution

The Direct Sales / Advisor Model

Has Seen Success in the Cloud

Salesforce.com • One year renewals

Microsoft began with advisor model with Office 365 • Advisor model remains

• Open license resale

• One year renewals

Adobe is leaning more direct with Creative Cloud• More of a subscription than Cloud

• Going more direct


The Resale Model w/o Distribution

Has Also Seen Success in the Cloud

Google Apps

• Partners can resell

• Over 6000 partners

Enterprise ERP Applications


The Argument For

IT Distribution in a Cloud

Consumption Model


Distributor Core Functions – Cloud

38

Integration / Configuration

Training and Enablement

Partner Management

Marketing Sales

Tech Support

Credit and Financing Logistics 2.0?

Aggregation

Order Management / Billing

39

Momentum and Stability

$130B in member sales WW, And growing

187 countries

2 million VAR calls

40 thousand end-user calls

Over 4000 certification trainings

(Source: GTDC)

40

Momentum and Stability

Steady gross margins

Reduced SG&A expense

Heavily diversified

• Spread across many IT

markets

(Source: GTDC)

41

IT Industry History

42

43

“SAP had carefully nurtured

relationships within the Big Five

consulting firms…”

“… It made choosing SAP a no-brainer.

Jeff Henley says, “We totally screwed

up partnering by building this big

consulting group. We totally pissed off

our partners.””

Page 116, “Softwar, An Intimate Portrait of Larry

Ellison and Oracle”, Matthew Symonds, 2004

“When companies were deciding whether

and how they were going to implement an

ERP system, they rarely started off by

talking directly to the software

vendors.”

44


In 2012,

Distributors handled

300 million software licenses

Efficiency and Scale


“The reason distributors can be relevant in a

cloud world is that they are cruelly efficient

I pity anyone who tries to compete with the

efficiency of an IT distributor. They are the

most ruthless as far as operational

efficiency.”

Jim Estill,

Former CEO,

Synnex Canada

Current Venture Capitalist

Canrock Ventures


Dealing with the “Difficult Things”:

• Credit checks

• Collections

• Dealing with credit cards, expiries

• Partner management (the long tail of

partners)

• Sales

• Marketing

• Enablement

• More…

47


Several stories of software

vendors returning to

distribution

Ingram Micro: “Vendors just

keep coming back to us”


Access to a Large Community of

Reseller Partners, and their Customers


Credit and Financing

Historically a key value-add of

Distribution

Distributors extended $12B of

channel credit in 2012 (GTDC)

Even more important in the Cloud

• VARs need to transition their business

model, and cashflow

• Physical logistics go away


One Stop Shop / Multi Vendor World

Customer AND Partner want one-stop

A partner can deal with one disti to get all the

apps in a solution. Vs. going to one disti for one,

one vendor for another, etc. etc.

Unified Billing

Cloud tools can help to

solve a key problem for

customers and partners

around billing


Vendor A Vendor B Vendor C Vendor D Vendor E

Distributor

Partner Partner

Customer Customer Customer Customer Customer

Email

Monthly bill

Per mailbox

1st of the month

Web Security

Monthly bill

Per server

8th of the month

Antivirus

Monthly bill

Per user

15th of the month

Storage Software

Quarterly bill

Per server

22nd of the month

Cloud Storage

Monthly bill

Per Terabyte

30th of the month

Unified

Billing

System

Partner

InvoiceEmail $400

Web Security $300

Antivirus $200

Storage Software $150

Cloud Storage $250

SUPPORT $400

$1700/month

Due December 15th

Vendor A Vendor B Vendor C Vendor D Vendor E

Distributor

Partner Partner

Customer Customer Customer Customer Customer

Email

Monthly bill

Per mailbox

1st of the month

Web Security

Monthly bill

Per server

8th of the month

Antivirus

Monthly bill

Per user

15th of the month

Storage Software

Quarterly bill

Per server

22nd of the month

Cloud Storage

Monthly bill

Per Terabyte

30th of the month

Unified

Billing

System

Partner

InvoiceEmail $400

Web Security $300

Antivirus $200

Storage Software $150

Cloud Storage $250

SUPPORT $400

$1700/month

Due December 15th

Distributor Cloud Tools

TechData StreamOne

• ~40 vendors, ~200 offerings

Ingram Micro Cloud

• ~50 vendors, ~150 solutions

Synnex CloudSolve

Arrow ArrowSphere

Avnet Cloud Ready

Others…


Distributor Cloud Tools

Storefronts, similar to Amazon.com

Unified Billing

For monthly, recurring offerings • Cloud or Cloud-Inspired sold annually is typically

treated like a software license

APIs are incredibly important

Cloud tools will create a stickiness with partners

This could cause consolidation of regional or smaller distributors who haven’t built the tools

These tools are a continuing work in progress


Is an Annual Cloud Contract

Good Enough?


The Hybrid Model is Strong: Cloud and On-Premise Together

By 2020,

about 80%

of the world’s 2,000 largest companies

will still have

greater than 50% of their IT onsite

Supply Chain Economics

Can vendors afford to use Distribution?


Typical Software Vendor Profit Pool: Revenue and Gross Profit Profile

Gross

Margin

Distribution of Revenue

20% 40% 60% 80% 100%

Break-

even

40%

30%

10%

20%

50%

60%

70%

SERV-

ICES

Profit Pool modeled

SOFTWARE

Symantec 82.65%

Oracle 80.49%

Salesforce.com 75.08%

Microsoft 72.40%

SAP 69.33%

(Source ycharts.com)

Typical IT Distributor Profit Pool: Revenue and Gross Profit Profile

Gross

Margin


20% 40% 60% 80% 100%

Break-

even

40%

30%

10%

20%

50%

60%

70%

Marketing

Services,

Financing,

Other Services

Front End Resale Margin Back End Rebates and

Other Incentives

Profit Pool modeled


Dealing with the “Difficult Things”:

• Credit checks

• Collections

• Dealing with credit cards, expiries

• Partner management (the long tail of

partners)

• Sales

• Marketing

• Enablement

• More…

62

Comparative Profit Pool: Revenue and Gross Profit Profile

Gross

Margin


20% 40% 60% 80% 100%

Break-

even

40%

30%

10%

20%

50%

60%

70%

Profit Pool modeled

SOFTWARE

DISTRIBUTION

Essential Guidance




Will we see a

new Distributor?

Amazon?

Digital River?

Jamcracker

Someone else?


Enablement is Perhaps

the Biggest Challenge

No matter what tools and sales processes are in place…

Can your partners make the transition?

Who’s responsibility is it to help them? • Partner

• Vendor

• Distributor

68

Thank You

Darren Bibby

VP, Channels and Alliances Research

Documents

The Evolution of IT Distributiongtdc.org/presentations/Future_of_IT_Distribution.pdf · data level protection on top of that for the mail. Well the traditional mail stuff doesn't