When it comes to selling IT solutions in the age of the cloud, the biggest change for IT service providers is the emphasis that needs to be placed on customer renewal rates for services that are sold as a subscription. Historically, IT services providers almost always focused on the initial transaction. Renewals of software licensing contracts were an afterthought because most providers were rewarded for their efforts upfront. Now most of the deals in the age of the cloud involve subscriptions where vendors and partners get compensated over the course of one- to three-year contracts.

The vendor, however, still has to invest in the core technology to deliver the service. For that reason, most providers of cloud services are underwater for the first year of a subscription contract. They generally break even on the second year and then begin to make a reasonable return on the third year. As a result, cloud service providers need to have a fanatical emphasis on customer renewal rates in order to succeed.

Creating a sense of urgency

To instill that same level of focus on customer renewal rates in their channel partners, providers of cloud services have been crafting new terms and conditions that provide much greater rewards for both increasing usage of a cloud service in a particular customer account as well as upselling and cross-selling additional services. In fact, the recent “Best Practices in Enabling Reseller Channel Partners in the Changing World of the Cloud” report from Gartner makes it clear that changing the compensation and rewards model is a key element of any vendor’s transition to the cloud.

The report concludes that if those changes aren’t made, far too many IT service providers in the channel will continue to focus too much of their efforts on the initial transaction. Because of these requirements, providers of cloud services are being very selective about the types of partners they recruit. If there is no alignment on business models, chances are that potential business partner isn’t going to provide much value in terms of overall customer engagement.

Adjusting to a new model

While building a business around cloud services is relatively straightforward for an IT service provider that is “born of the cloud,” the transition to this business model for resellers that have historically focused on transactions related to on-premise IT solutions can be a major shock to the system. Many of those IT service providers have used the cash generated by those deals to fund their business first and then pay their vendor partners second.

In the world of the cloud, that model is generally reversed. The vendor manages the subscription, so they get paid first, with commission checks and renewal rewards flowing out to the partner from there. That often creates a cash flow issue for the partners that makes it appear to the financial community that their balance sheets are not as strong as they once were. For these reasons, many IT service providers prefer to treat cloud services as a business that is managed separately.

Of course, that may work for while, but customers are increasingly voting with their feet for the cloud. Because of the increased agility cloud computing provides from a business perspective and the simple fact that 100 percent of an operating expense can be written off, the majority of organizations these days are leaning toward a “cloud first” model when it comes to deploying IT. The only remaining issue now is for IT service providers and the rest of the IT vendor community to finally come to terms with that new reality.

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Mike Vizard

Posted by Mike Vizard

Mike Vizard has covered IT for more than 25 years, and has edited or contributed to a number of tech publications including InfoWorld, eWeek, CRN, Baseline, ComputerWorld, TMCNet, and Digital Review. He currently blogs for IT Business Edge and contributes to CIOinsight, The Channel Insider, Programmableweb and Slashdot. Mike blogs about emerging cloud technology for Intronis.

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