ZS Executive Summary Diamonds in the Rough: ZS Research on SMB Cloud Channel Preferences Three things tech vendors need to know of channel partners in defining cloud service programs for SMBs John DeSarbo and Alex Southworth
ZS Executive Summary Diamonds in the Rough: ZS Research on SMB Cloud Channel Preferences Three things tech vendors need to know of channel partners in defining cloud service programs for SMBs John DeSarbo and Alex Southworth It s no secret that small and medium-sized businesses (SMBs) are flocking to the cloud, and for good reason. A recent ZS Associates study shows 45% of small and medium-sized U.S. companies were using software-as-a-service (SaaS) or infrastructure-as-a-service (IaaS) solutions and when it comes to purchasing or subscribing to those cloud services, 53% of those cloud service customers used an indirect channel for recent purchases. Medium-sized companies prioritize channel partner attributes differently than small businesses when purchasing cloud services. Vendors must identify high-performing resellers that fit customers desired profiles and reward them accordingly. Few resellers appear to fit the profile that customers are looking for, and as a result, vendors are having trouble finding them. In short, they are struggling to find the diamond in the rough partners that will drive cloud services growth. This executive summary of ZS research offers key findings on the SMB cloud services market, identifies attributes vendors should develop in their channel partners and provides insights on how vendors can act to make the most out of the opportunity.
Introduction It s no secret that small and medium-sized businesses (SMBs) are flocking to the cloud, and for good reason. Cloud services, including software and infrastructure services, provide flexibility, scalability and a means to treat IT as an operating expense. A recent ZS Associates study shows 45% of small and medium-sized U.S. companies surveyed in the third quarter of 2014 were using software-as-aservice (SaaS) or infrastructure-as-a-service (IaaS) solutions. And when it comes to purchasing or subscribing to those cloud services, 53% of those cloud service customers used an indirect channel for recent purchases (see Figure 1). Cloud Service Adoption and Channel Utilization Cloud Service Adoption (% of Respondents) Channel Utilization (% of Respondents) 55% 28% 9% 8% 47% 53% None SaaS Products Only IaaS Products Only Channel Partners SaaS and IaaS Products Direct Purchase Source: ZS Associates SMB Cloud Services Channel Utilization Study (2014). Based on 3,487 responses. Figure 1. A total of 45% of survey respondents are already using cloud services for software and/or infrastructure. More than half of these cloud service customers purchased their solutions through an indirect channel. However, the survey also shows most resellers are playing a minimal role in shaping SMB customers purchase decisions. SMB customers are looking to their peers and IT vendors for advice when selecting cloud services. This translates into missed opportunities for vendors seeking to grow their cloud service market share in the SMB segment. Vendors need to find and cultivate relationships with channel partners that can influence IT decision makers and create demand for cloud services, not just fulfill orders from customers who have already decided what services are best for their business. Not that doing so is an easy task. The ZS study finds that medium-sized companies prioritize channel partner attributes differently than small businesses when purchasing cloud services. Vendors must identify highperforming resellers that fit customers desired profiles and reward them accordingly. Few resellers appear to fit the profile that customers are looking for, and as a result, vendors are having trouble finding them. In short, they are struggling to find the diamond in the rough partners that will drive cloud services growth. 1
Research Background ZS surveyed 3,487 SMB U.S. companies in the third quarter of 2014. The online survey questioned individuals within SMBs that are responsible for cloud services purchase decisions. Of those initially surveyed, ZS selected 250 SMBs that had recently purchased software as a service (SaaS), infrastructure as a service (IaaS) or both from a reseller within the last 12 months, with a mix of IT and business buyers. Companies identified 10 categories of SaaS purchased (such as CRM, HR management, business intelligence apps, ERP and supply chain management). IaaS purchases included data storage and backup, security, computing and enterprise networking infrastructure. The study is part of ZS Associates ongoing voice of customer (VoC) research, which gathers data and feedback from a wide range of technology vendors, partners and customers in the industry. Additional research can be found at ZS s Sales Channel Strategy and Management web page. This executive summary of ZS research offers key findings on the SMB cloud services market, identifies attributes vendors should develop in their channel partners and provides insights on how vendors can act to make the most out of the opportunity. If the majority of SMBs are purchasing cloud services from third-party resellers, then tech vendors have three crucial questions they must answer, says ZS Principal John DeSarbo: How are SMBs choosing their reseller? What are they providing? And are reseller customers really satisfied? Key Findings 1. Different sizes, different needs Of surveyed SMBs that purchased SaaS or IaaS from indirect channels in the past year, nearly 60% purchased from a value-added reseller (VAR) or IT solution providers, underscoring the potential value that resellers can provide. SMBs appear to prioritize reseller attributes differently when purchasing SaaS and IaaS services (see Figure 2). When looking at SaaS resellers, pricing is more important to small businesses than to medium-sized companies, while small businesses value industry expertise and proof of concept from resellers less than medium-sized businesses. Importance of Reseller Attributes Prior experience / Relationship Small Business Midsize Business Security Pricing Depth of industry expertise Quality / Reliability of service Speed / Ease of implementation Depth of product / Technical expertise Recognition / Certification from cloud vendors Training and support provided Location / Proximity of organization Other Importance of Reseller Attributes SaaS Source: 2014 ZS Associates SMB Cloud Services Channel Utilization Study (N=75) Importance of Reseller Attributes IaaS Source: 2014 ZS Associates SMB Cloud Services Channel Utilization Study (N=50) 0 Relative Importance Index 1 0 Relative Importance Index 1 Figure 2. In purchasing both SaaS and IaaS from resellers, small businesses have different priorities than medium-sized businesses. When evaluating IaaS resellers, small companies placed the greatest value on relationships and prior experience, while depth of industry experience is more important to midsize companies. However, the survey also revealed that in both cases, SMBs are looking to indirect channels to help them through implementation and ongoing use of these services. 3
Adding more complexity, SMBs have different reseller needs depending on the maturity of the service they require. In mature SaaS and IaaS categories such as CRM and data storage and backup, the study found that a higher percentage of SMBs purchased through indirect channels. In mature categories, SMBs are more comfortable working with solution providers as they evaluate offerings, John says. However, the reverse is true for some less mature categories, such as business intelligence. The implication of these findings is that vendors need to prioritize different attributes when recruiting resellers, depending on their offering and the market segment they are targeting. What is important in the small-business segment may be less important to medium-sized businesses. In building a channel for cloud services in the small-business segment, technology companies should look for partners that already have established customer relationships, says Alex Southworth, an Associate Principal with ZS. For medium-sized businesses, demonstrated cloud expertise and abilities are the most important factors. Customer relationships can be cultivated if the partner is perceived as an expert. 2. Advisors equal value Despite opportunities to add value prior to and following a sale, cloud service resellers are playing a minimal role in shaping SMB customers purchase decisions, according to the study. Fewer than 10% of vendors report their resellers are significantly involved in presale requirements definitions, product vendor assessment, service provider assessments, or solution design and implementation. Approximately 43% of SMBs perform product vendor assessments and service provider assessments on their own, and 54% develop their own requirements definition. The survey also showed that 22% of SMBs use a tech vendor directly for service provider assessment, and 33% for product vendor assessment (see Figure 3). Reseller and Vendor Roles and Responsibilities 54% 24% 33% 43% 22% 43% 30% 38% Figure 3. Most prepurchase assessments are done in-house or with tech vendors, leaving resellers largely out of the process. 4 5% Requirement Definition 7% Product Vendor Assessment 10% 9% Service Provider Assessment Solution Design and Implementation Reseller Tech Vendor In-house Source: 2014 ZS Associates SMB Cloud Services Channel Utilization Study
11 10 9 8 7 6 5 Category 4 Category 3 SaaS IaaS The extent to which these customers are not tapping resellers for guidance is alarming, particularly in less mature categories where customers are investing in new technology where they need outside expertise, John says. In many cases, customers are looking for help, but they re looking to the tech vendor and not resellers. This will lead to challenges for vendors trying to build scalable channels. The story is not much better when considering resellers role in providing post-sale support. Fewer than 20% of SMBs surveyed said resellers assist with billing and invoicing, customer service, maintenance and warranty services, or service-level agreement (SLA) monitoring and reporting. While resellers are more involved in post- than presale activities, the primary source of support is again the tech vendor, with about a third of SMBs seeking their assistance from this resource after the sale. This trend will again create challenges for high-tech companies seeking lower-cost, scalable channels for the SMB segment. John advises technology vendors to qualify potential VARs that demonstrate the ability to add value post-sale, and help current VARs with established SMB relationships develop these capabilities. 3. Not much love for cloud service resellers Not surprisingly, customers report lukewarm satisfaction and more alarmingly, lukewarm loyalty for their cloud service resellers. Only 24% of survey respondents said they considered themselves a promoter of the VAR they worked with to purchase SaaS or IaaS, meaning they would be willing to refer the reseller to others. The results of the study enabled ZS to calculate customers Net Promoter Score (NPS ) for their channel partners to gauge customer loyalty and its correlation with revenue growth. Resellers NPS is relatively low compared with tech vendors and cloud service providers, which had scores as high as 43%, according to a 2014 report by the Temkin Group (see Figure 4). Customer Satisfaction With The Channel Microsoft Servers 43% Cisco 35% Google IBM IT Services Oracle Business Apps Adobe Cloud Service Resellers Dell IT Services Apple Accenture HP IT Services 24% 23% 19% 19% 15% 33% 32% 31% 29% Sources: Net Promoter Score for tech vendors and service providers from the Temkin Group Insight Report - Tech Vendor NPS Benchmark, 2014 Net Promoter Score for cloud service resellers from the 2014 ZS Associates SMB Cloud Services Channel Utilization Study Figure 4. Cloud service resellers Net Promoter Score lags many of the tech vendors they sell for. 5
There are some glimmers of hope in the survey findings, however. A closer look at customer satisfaction data gathered through the survey shows that channel partners that offer more advisory services have higher levels of customer advocacy. When customers viewed their channel partners more as a consultant versus a product reseller, their Net Promoter Score climbed to 44%, according to the study. This finding underscores the importance of partnering with resellers who have consulting capabilities and are actively promoting their professional service offerings to small and medium-sized businesses, John says. Without these valuable services, resellers are viewed simply as a transactional channel by SMBs. What tech vendors should do Despite SMBs high adoption levels of cloud services, there are plenty of untapped growth opportunities. SMB customers still need guidance when developing their cloud and technology strategies and the vendors that can build a channel that meets customer needs can capture share and accelerate growth. Technology vendors must find those resellers that are viewed positively as valued contributors pre- and post-sale from a customer perspective to enable growth in the SMB market. Here are some steps they can take: Recognize the different needs of small versus medium-sized businesses. SMB may be a handy acronym, but small and medium businesses are hardly the same, each with unique needs and preferences when choosing a reseller for its cloud services. When developing your channel strategy, think differently about the two segments, Alex says. There are differences by technology category, but in general, when it comes to small businesses, recognize that customers value close relationships and reliability in a reseller the most. For medium-sized companies, resellers most value demonstrated industry and technology expertise above all, with relationships a close second. Reward customer value and sticky relationships. It is clear from the survey that many customers do not perceive that traditional resellers are providing help before or after the sale. If that is the case, then vendors should be careful not to overpay for the minimal value resellers provide. Incentives should be redesigned to align to the role that resellers are actually providing. If resellers have established relationships and are able to create demand, they should be rewarded with additional compensation higher deal registration incentives, for example. Resellers that can take on more responsibility post-sale should be provided similar opportunities to boost profits. 6
It s time to rethink the incentives that tech vendors have in place for cloud service channel partners, Alex says. Make sure you re not overpaying for perceived value. Channel partners that cultivate sticky customer relationships and provide more value in the sales process should be rewarded. On the flip side, resellers that are only able to facilitate the transaction but do not have much influence on purchase decisions should not receive as much compensation. Enable resellers to invest in advisory services. Channel partners may have close relationships with their SMB customers, but may need assistance in developing the consulting and advisory capabilities that these customers demand. Vendors should segment their partner base to identify partners that have invested to build professional services practices and are actively promoting their ability to provide industry and technical guidance. These partners will be in a better position to build customer loyalty. Partners that have established relationships, but have not yet developed advisory skills will need help. Partner programs should be expanded to provide additional support to help partners build new professional service practices. By providing additional visibility to the product road map, more technical training and market intelligence to help partners build domain expertise and presale engineering capabilities, vendors can help partners provide more value to their customers earlier in their decision process. There s no silver bullet, John says. Honing your SMB channel strategy starts with a sophisticated approach to partner segmentation. Vendors should segment their partners not only based on past performance but also on their capabilities. Partners who have developed the competencies that SMB customers demand have more growth potential. When designing partner programs for cloud services, there s a tendency to over-invest in downstream support, in the form of sales and market collateral or additional MDF. Many partners need help further upstream to build new practices and expand their operational and engineering capabilities before they can take advantage of marketing and sales support. The key is to take a comprehensive approach that tailors support to partners based on their capabilities and the nature of customer relationships. ZS is a registered trademark of ZS Associates, Inc. Net Promoter is a registered trademark of Satmetrix Systems. NPS is a registered trademark and Net Promoter Score is a trademark of Bain & Company, Satmetrix Systems and Fred Reichheld. 7
About the Experts John DeSarbo is a ZS Principal based in San Francisco, and leads the ZS Sales Channel Strategy and Management Practice. He has more than two decades of consulting and industry experience focused on sales and marketing strategy and operations. His areas of expertise include multichannel go-to-market strategy, channel analytics, alliance and partner programs, and sales force design. John works with clients across a variety of B2B industry sectors with a particular focus on the technology industry. Alex Southworth is an Associate Principal based in Los Angeles, and is a leader of ZS s High Tech practice. He has more than 15 years of consulting and industry experience focused on developing and implementing go-to-market strategies for high tech clients. His areas of expertise include multi-channel go-to-market strategy, alliance and partner program design and sales and marketing integration. 8
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