Cloud wars will be won or lost in the channel

Posted by Mike Vizard on Jan 12, 2017 3:08:15 PM

cloud wars.jpgIt appears cloud service providers (CSPs) are finally getting serious about steering business to their IT services partners. Microsoft has revealed that starting next month it will eliminate a Pay-As-You-Go licensing option under its Microsoft Products and Services Agreement (MPSA). Customers looking for those types of cloud service agreements will instead be referred to Microsoft partners that participate in the Microsoft Cloud Service Provider (CSP) program.

Microsoft will benefit from making this change on Feb. 1 because managing contracts of this nature tends to involve smaller customers that Microsoft as a rule prefers not to manage directly. Microsoft partners, on the other hand, get the opportunity to leverage their relationship with Microsoft to work with customers that need more time to mature their application workloads to the point where they consume a consistent amount of cloud resources.

Microsoft has a significant amount of untapped potential in the form of hundreds of thousands of channel partners that are heavily invested in its technologies. Turning that potential into a force to be reckoned with requires careful attention to business models.

Cloud business models

There are basically two types of cloud partners. The first resembles a traditional reseller in that the partner wants to own the cloud service contract in a way that includes the delivery and maintenance of all the associated services. The second type of partner functions more like an agent that picks up a referral fee for helping to sell a set of managed services provided by the CSP. There’s more margin opportunity for partners in the former business modelthan the latter, but agents benefit from not having to make nearly as much capital investment. Generally, they can also service more potential clients because most of their resources are poured into sales rather than engineering.

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In terms of cloud business models, IT vendors are all over the place. Shoretel just added an option under which its partners can now own the services contract. Previously, the only partners it had were agents. SAP, in contrast, just added an agent referral program to complement an existing reseller program.

The truth is that depending on the circumstances a partner may act as a reseller in one deal and as an agent in the next. It all depends on the nature of the service being delivered. A partner, for example, might want to be responsible for the core enterprise application being delivered. But, any ancillary software-as-a-service (SaaS) applications might be viewed as an add-on to the contract, which generates a referral fee.

Challenging relationships

Navigating business relationships that can change from one day to the next adds significant complexity for both the CSP and the partner. CSPs need to come to terms with the fact that relationships with customers in the age of the cloud are much more fluid. Actual usage of cloud services is often hard to predict, and each customer has a slightly different approach to the cloud involving lots of nuances.

At the same time, partners need to be wary of CSPs that provide managed services that compete with services they offer. On one level, a CSP is a technology partner providing infrastructure-as-a-service (IaaS). In the next breath that same CSP might be trying to convince a customer to upgrade to a set of managed services it provides directly. As tempting as that managed services revenue may seem, a CSP risks alienating reseller partners when it aggressively markets its own managed services.

Microsoft is clearly trying to work through all these issues in a way that means something to partners at the software-licensing level. It may take a while for all those contract issues to get ironed out. But once they are, the total number of salespeople that Microsoft will have on the proverbial street pushing Microsoft Azure cloud services might very well eclipse anything any other CSP is likely to be able to muster any time soon.

Obviously, the gap between Microsoft and Amazon Web Services (AWS) in the cloud today is quite substantial. In fact, over the past 10 years AWS has developed a substantial channel of its own. But as the cloud wars between these two behemoths enters its next phase, the power of the Microsoft channel ecosystem should not be underestimated.

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