System Integrators to Cloud Integrators

In the mid-nineties IT system integrators (SI) and Value Added Resellers (VAR) focused on services on top of the software license model. These channels were able to earn a fair margin from licenses and services like implementing & configuring the package, training the operators, building interfaces with the customer’s enterprise resource planning (ERP).  They could monetize these integration services and get a 20 to 35% overall  margin on a deal.

With the breakthrough of the cloud their margins were squeezed by half. Since 2009, system integrators and VAR are faced with a new paradigm. They have typically 2 reactions to their margins under pressure:
–          SCALE : grow your top line by 20 to 30% in order to compensate for the thinner margins
–          CHANGE MY COST STRUCTURE: shrink the fixed costs with 20 to 30% by reducing staff and investments

The cloud is primarily a business and process revolution rather than a technical one. SI’s and VAR can build a long term competitive advantage if they adopt their business models to the cloud. They need to evolve from system integrators to cloud integrators. The cloud offers pre-assembled packages, where the systems integration is already embedded. The front end can be chosen by the end user, the security is taken care of, the templates are downloadable, the training is on line, there are hundreds of reports to choose from. The software is offered as a utility model, with a lot of flexibility and automated interfaces.

Most Cloud providers however are difficult to reach and deal with. You cannot call Google, Amazon, Salesforce for help. Many cloud providers consider their service to be so simple that they have no service desk. That is a major opportunity for the SI’s and the VAR to become the single point of contact for their customers who cannot deal with all these cloud based providers. The SI’s and VAR will move to a managed service model. They will offer a professional Service Level Agreement (SLA) to their customers and  assist companies in their transition to the cloud.

Today the SI’s and VAR’s margin is mainly driven by the utilization of his labor. The more technicians the SI could monetize the better this will look on his Proft & Loss Statement. In the future, when SI & VAR are cloud integrators, their degree of automation will drive their profit. This automation will allow them to become more pro-active versus their break & fix mentality of today. If they, the channel partners, are able to transform themselves then tomorrow more than 50% of their revenue will be recurrent and driven by monitoring and top class customer service.

ISV’s have a huge task to help SI & VAR in their transition to cloud integrators.