Is Cloud a Volume Play?
Cloud Computing breaks with the way we’ve traditionally worked in IT. With a cloud-based model, the partner revenue is diluted and is realized over the customer relationship lifetime. Differentiation is often easier to achieve when we sell complex IT systems, yet cloud can foster commoditization.
In the execution of the excellent “Cloud Business Model Transformation Workshops” I had a chance to speak to many partner organizations in Latin America and Europe. In these workshops I always asked partners what they considered to be the primary challenges in building a successful cloud practice.
Not surprisingly, they talked mostly about the cultural shift to buying and selling IT as a service and the transformation to an annuity business model, with its impact on top-line revenue . As the workshop day advanced, achieving a higher volume in operations (i.e., marketing, sales and services) would always become part of the conversation. We think of volume and repeatability as the answers to the financial challenges introduced by the cloud annuity-based model. For most partners, driving the required volume and increased efficiency that’s necessary is a fundamental business transformation.
Cloud Computing breaks with the way we’ve traditionally worked in IT. With a cloud-based model, the partner revenue is diluted and is realized over the customer relationship lifetime. Differentiation is often easier to achieve when we sell complex IT systems, yet cloud can foster commoditization. As partners embrace the cloud paradigm ― with volume and consumption at its core — they’re seeing a reduction in the number of one-off customized projects (and the associated upfront revenue) and an increase in standardized solutions, with standardized services attached. In that environment, achieving high volume can enable your company to maintain and increase your top line, and lift margins. Volume, then, becomes the engine behind the transition to higher profitability and long-term sustainability.
Business models and Cloud economics
Given the diverse business models in the partner ecosystem and the market segments served, volume can be interpreted differently from one company to another. To some, volume may mean number of customers, or services offered, or the number of users licensed in a given cloud service. Cloud economics impact each model and segment differently. Therefore every partner organization will have their own journey and strategy in the transition to a hybrid IT scenario, with the corresponding business model transformation effort required. For many, this journey starts by defending the traditional business of early-revenue realization for as long as possible, while driving volume in new cloud customer adds – which allows them to accelerate their transition towards more recurring and repeat revenue. Companies who have pursued a high volume model, a different business when compared to the traditional technology purchase pattern, are experiencing great success. Volume and recurring revenue will also contribute to better business valuations.
Business transformation for high volume
If high volume is your strategy, how do you make it happen? Here are some ideas of how such a model impacts the main functional areas:
- Marketing: Changes dramatically, if volume is the objective. The execution focus will be on increasing demand and converting web-educated prospects, and on reducing customer acquisition costs. Inbound marketing needs to be combined with outbound tactics to generate many more leads that are nurtured in a clearly defined, automated process (i.e. marketing automation). The website becomes your ‘digital hub’, where content is King. This requires a dedicated team and investment, as marketing must scale.
- Sales: Based on an accelerated, low-cost, remote-driven sales process, a high-sales-volume partner needs marketing and sales to work as one single engine. Sales will engage later as marketing advances further into the sales cycle. Focus on closing more deals, and faster. Subscription revenue is driven by the level of adoption (usually expressed by the number of users) and usage (consumption) so the ‘farming’ and ‘customer success management’ activities are of critical importance: upselling and cross-selling become key disciplines to increase account presence — and ultimately profitability.
- Services and Solutions: The most impactful transformation happens here. High volume in services means packaging solutions and services and driving repeatability, which reduces costs and risk. Specialized services help companies differentiate and escape commoditization, but a greater standardization becomes the norm. An adequate mix of services revenue types can raise profitability. Services departments (working together with sales and the other areas of the organization) will carry most of the company revenue in cloud as they have the relationship with customers and can monitor their usage. The services portfolio expands and areas like education and support have to evolve.
- Leadership, Finance, HR: Cloud business model transformation will require a greater alignment and connectedness across the functional areas in order to deliver more operational efficiency. The leadership team should be aligned around strategic and tactical cloud plans in order to make the entire business evolve. Understanding cloud economics is crucial for success . Investment in marketing, sales, services, talent acquisition and compensation need to be examined together. New roles and skills are necessary. The recurring revenue-based business model (vs. upfront) impacts cash flow so there are important decisions and forecasts to be taken into consideration. Financially speaking, however, it’s a more sustainable model long term.
Clearly, the points outlined above are not mere adjustments, but a reconceptualization of how you can generate and capture value, and deliver it to customers. However, for some partner organizations, these processes represent a fundamental transformation of their on-premises business.
In the channel there are some success stories that illustrate how cloud services volume can be achieved. These companies have redefined their strategy and business model in order to leverage the cloud volume opportunity .
I hope this post has given you some insight on this relevant business transformation discussion. Is Cloud a volume play for your organization? If that’s the case, in what areas have you seen the biggest need for transformation? Please share your best practices or comments below.
* This is an adapted and slightly extended version of the original post published in Microsoft’s Cloud GPS blog, now available on http://www.digitalwpc.com/Community/Perspectives/Pages/cloudVolumePlay.aspx#fbid=F7giXjEVBWj?fbid%3DF7giXjEVBWj Over 600 partner organizations participated in 19 workshops I conducted as consultant in the program, in different delivery models. Almost 100 partners reported on the primary challenges in building a successful cloud practice. The following received the most mentions (as a % of total mentions): 1) Cultural shift [to buying and selling IT as a service] (11.9%), 2) Business transformation (10.7%), 3) Security (9.5%), 4) Economic model, profitability (8.3%), 5) Strategy and Transition Plan (4.8%).  One of the best books with a detailed analysis of Cloud economics, and a comparison with the traditional model of selling IT is ‘Consumption Economics: The New Rules of Tech’ by J. B. Wood, Todd Hewlin and Thomas Lah, 2011.  TBK Consult, through its High Volume Competency Center, assists software companies in getting cloud-based, standard software to the international markets with a series of strategy and execution services.