The Evolution of IT Distribution Do 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) IDC Visit us at IDC.com and follow us on Twitter: @IDC 4
The Deal: 1 Marshmallow now Or 2 if you wait 2/3 of kids ate the Marshmallow 5
The Follow-up: ~18 years later Children who waited had better life outcomes SAT Scores, Education, BMI IDC Visit us at IDC.com and follow us on Twitter: @IDC 6
So what does this mean for the IT channel? IDC Visit us at IDC.com and follow us on Twitter: @IDC 7
What s The Problem? IDC Visit us at IDC.com and follow us on Twitter: @IDC 8
The Cloud / MSP Trough Revenue Revenue Shift + Investment Past Today Future
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 10
Cloud Changes The Selling Relationship Stock Sell Use
The Third Platform? MC S MA C MS A MS C
How is The Third Platform Evolving? Source: IDC
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 IDC Visit us at IDC.com and follow us on Twitter: @IDC 14
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 Source: IDC s CloudTrack Survey, 2012 15
The Cloud Consumption Model Represents a Huge Shift IDC Predictions: CIOs and CFOs will move to zero capital and transform the IT financial model 70% of CIOs will embrace a cloud first strategy in 2016 By 2016, it is predicted that nearly 25% of all software revenue will be subscription based.
Key Stakeholders What does each stakeholder want? IDC Visit us at IDC.com and follow us on Twitter: @IDC 17
Key Stakeholders Software Vendor Partner Customer IDC Visit us at IDC.com and follow us on Twitter: @IDC 18
Key Stakeholders Software Vendor Partner Vendors want to Achieve scale and reach Maintain a customer relationship Maintain partner relationships Transition to a new Customer consumption model Maintain operational efficiency Optimize profit margins IDC Visit us at IDC.com and follow us on Twitter: @IDC 19
Key Stakeholders Software Vendor 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 Customer about the Cloud it may not be as profitable Partner IDC Visit us at IDC.com and follow us on Twitter: @IDC 20
Key Stakeholders Software Vendor Partner Customers Want to keep things simple Want to buy from one company (or limited companies) Want a trusted advisor Want Solutions Customer IDC Visit us at IDC.com and follow us on Twitter: @IDC 21
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 IDC Visit us at IDC.com and follow us on Twitter: @IDC 22
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. IDC Visit us at IDC.com and follow us on Twitter: @IDC 23
Partner Common Billing Scenario 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. IDC Visit us at IDC.com and follow us on Twitter: @IDC 24
Partner Common Billing Scenario 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. IDC Visit us at IDC.com and follow us on Twitter: @IDC 25
Partner Common Billing Scenario 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. IDC Visit us at IDC.com and follow us on Twitter: @IDC 26
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! IDC Visit us at IDC.com and follow us on Twitter: @IDC 27
The Argument Against IT Distribution in a Cloud Consumption Model IDC Visit us at IDC.com and follow us on Twitter: @IDC 28
Distributor Core Functions Traditional Logistics Credit and Financing Integration / Configuration Training and Enablement Partner Management Marketing Sales Tech Support 29
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 IDC Visit us at IDC.com and follow us on Twitter: @IDC 30
There s Nothing to Distribute 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.) IDC Visit us at IDC.com and follow us on Twitter: @IDC 31
There s Nothing to Distribute 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 IDC Visit us at IDC.com and follow us on Twitter: @IDC 32
There s Nothing to Distribute 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. IDC Visit us at IDC.com and follow us on Twitter: @IDC 33
Alternatives to Selling Through Distribution Distribution Or 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) IDC Visit us at IDC.com and follow us on Twitter: @IDC 34
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 IDC Visit us at IDC.com and follow us on Twitter: @IDC 35
The Resale Model w/o Distribution Has Also Seen Success in the Cloud Google Apps Partners can resell Over 6000 partners Enterprise ERP Applications IDC Visit us at IDC.com and follow us on Twitter: @IDC 36
The Argument For IT Distribution in a Cloud Consumption Model IDC Visit us at IDC.com and follow us on Twitter: @IDC 37
Distributor Core Functions Cloud Logistics 2.0? Aggregation Order Management / Billing Credit and Financing Integration / Configuration Training and Enablement Partner Management Marketing Sales Tech Support 38
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) 39
Momentum and Stability Steady gross margins Reduced SG&A expense Heavily diversified Spread across many IT markets (Source: GTDC) 40
IT Industry History 41
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SAP had carefully nurtured relationships within the Big Five consulting firms 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. 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 43
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In 2012, Distributors handled 300 million software licenses IDC Visit us at IDC.com and follow us on Twitter: @IDC 45
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 IDC Visit us at IDC.com and follow us on Twitter: @IDC 46
Efficiency and Scale 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
Efficiency and Scale Several stories of software vendors returning to distribution Ingram Micro: Vendors just keep coming back to us IDC Visit us at IDC.com and follow us on Twitter: @IDC 48
Access to a Large Community of Reseller Partners, and their Customers IDC Visit us at IDC.com and follow us on Twitter: @IDC 49
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 IDC Visit us at IDC.com and follow us on Twitter: @IDC 50
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 IDC Visit us at IDC.com and follow us on Twitter: @IDC 52
Vendor A Vendor B Vendor C Vendor D Vendor E Email Web Security Antivirus Storage Software Cloud Storage Monthly bill Monthly bill Monthly bill Quarterly bill Monthly bill Per mailbox Per server Per user Per server Per Terabyte 1 st of the month 8 th of the month 15 th of the month 22 nd of the month 30 th of the month Distributor Unified Billing System Invoice Email $400 Web Security $300 Antivirus $200 Storage Software $150 Cloud Storage $250 SUPPORT $400 Partner Partner Partner $1700/month Due December 15th Customer Customer Customer Customer Customer
Vendor A Vendor B Vendor C Vendor D Vendor E Email Web Security Antivirus Storage Software Cloud Storage Monthly bill Monthly bill Monthly bill Quarterly bill Monthly bill Per mailbox Per server Per user Per server Per Terabyte 1 st of the month 8 th of the month 15 th of the month 22 nd of the month 30 th of the month Distributor Unified Billing System Invoice Email $400 Web Security $300 Antivirus $200 Storage Software $150 Cloud Storage $250 SUPPORT $400 Partner Partner Partner $1700/month Due December 15th Customer Customer Customer Customer Customer
Distributor Cloud Tools TechData StreamOne ~40 vendors, ~200 offerings Ingram Micro Cloud ~50 vendors, ~150 solutions Synnex CloudSolve Arrow ArrowSphere Avnet Cloud Ready Others IDC Visit us at IDC.com and follow us on Twitter: @IDC 55
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 IDC Visit us at IDC.com and follow us on Twitter: @IDC 56
Is an Annual Cloud Contract Good Enough? IDC Visit us at IDC.com and follow us on Twitter: @IDC 57
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? IDC Visit us at IDC.com and follow us on Twitter: @IDC 59
Typical Software Vendor Profit Pool: Revenue and Gross Profit Profile Gross Margin 70% SOFTWARE 60% 50% 40% 30% 20% Symantec 82.65% Oracle 80.49% Salesforce.com 75.08% Microsoft 72.40% SAP 69.33% Breakeven SERV- ICES 10% (Source ycharts.com) Profit Pool modeled 20% 40% 60% 80% 100% Distribution of Revenue
Typical IT Distributor Profit Pool: Revenue and Gross Profit Profile Gross Margin 70% 60% 50% 40% Marketing Services, Financing, Other Services 30% 20% 10% Front End Resale Margin Back End Rebates and Other Incentives Breakeven Profit Pool modeled 20% 40% 60% 80% 100% Distribution of Revenue
Efficiency and Scale 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 70% SOFTWARE 60% 50% 40% 30% 20% 10% DISTRIBUTION Breakeven Profit Pool modeled 20% 40% 60% 80% 100% Distribution of Revenue
Essential Guidance IDC Visit us at IDC.com and follow us on Twitter: @IDC 64
IDC Visit us at IDC.com and follow us on Twitter: @IDC 65
IDC Visit us at IDC.com and follow us on Twitter: @IDC 66
Will we see a new Distributor? Amazon? Digital River? Jamcracker Someone else? IDC Visit us at IDC.com and follow us on Twitter: @IDC 67
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