The Cloud Tipping Point

The Cloud Tipping Point:
Five Critical Go-to-Market Actions for 2012
November, 2011

Tim Furey, CEO

MarketBridge Cloud Transformation Research
Building a Database of Cloud Strategies and Economics
With the growth of disruptive technologies such as the cloud, virtualization, mobile communications, and social media,
channel executives face a growing number of new challenges. To help our customers navigate the rapidly evolving
channel landscape, the MarketBridge/IPED Alliance team has conducted several key studies outlined below.
2010 Q1 Q3 2011 Q1 Q2 Q3

Channel Cloud Migration: Issues Partner Profitability in Hybrid
and Trends Cloud Computing
Interviews with >100 vendor and Empirical survey of >300 North
channel execs American Partners

Customer Cloud Adoption: Drivers Mobility in the Cloud:
(
& Triggers by Market Segment Partner Revenue Sources
Empirical survey of >1,000 Mid-market Empirical survey of >250 North
and SMB customers American Partners
IaaS

Evolution of Technology Delivery Cloud Route-to-Market Migration
(
Model: IaaS in the Cloud Vendor Channel Investment Trends
Empirical survey of >300 North Blind survey of >50 Cloud Solution
American Partners & >300 Customers Vendors
SaaS
Evolution of Technology Delivery
Model: SaaS in the Cloud
Empirical survey of >300 North
American Partners & >300 Customer

© 2011, MarketBridge Corp. | Page 2

The Research Base
Customers, Channel Partners, Vendors

Cloud Cloud Cloud
Technology Buyers Channel Partners Technology Vendors
>1,500 IT and LOB Execs >500 SPs, ISVs, SIs, VARs >60 Global SW, HW, Network

● Technology buyer panels ● >15,000 Partner Database ● Members of UBM Channel
(UBM Channel) Leadership Forum
● Thought and Adoption
Leaders ● Emerging new “born-on- ● MarketBridge, IPED Clients
the-cloud” SPs Blind Surveys
● Cautious Followers
● New, growing MSPs
● Enterprise, Mid-Market,
SMB ● Traditional VARs, SIs,
Disti’s, etc.

Focus on Go-to-Market Issues, Best Practices, Benchmarks
Not Product/Technology Evaluation


The Cloud Disrupts Both Technology Delivery and Go-to-Market
Business Models

 Cloud as Disruptive Technology:
 Infrastructure moves “off-premise” and consumed “by-the-
drink” (e.g. Rackspace)
“Hollowing out”
of the IT glass house
 Software becomes multi-tenant and continuously
upgraded (e.g. Salesforce.com)
 Data moves to shared databases (e.g. Jigsaw)
 Labor moves to location of best talent/cost value

 Cloud as Disruptive Go-to-Market Business Model
 Revenue mix and streams change dramatically
 Marketing and Sales channels (e.g. routes-to-market )
shift significantly “Extreme Makeover”
 Cost-to-sell economics must get amortized over longer
of Sales & Marketing?
periods


Industry Current State
August 2011

 OPEX budgets, rather than CAPEX
 Less internal support, easing the
stress on already reduced IT staffs
 Data Center SPs will be focused on building
Private Clouds in the Enterprise

 Those SPs adopting RECURRING REVENUE
PRODUCTS have embraced the model and will
flourish
 Analysts predict spending on cloud
could exceed $2B by 2012  Nearly 1/3 of SPs say customers do not see the
opportunity: Those SPs will probably fail
 SMB is most rapid adopter of Cloud:
1/3rd of Mid-sized businesses will
deploy some cloud solutions in 2011  Traditional two-tier distribution will evolve and
new vendors/providers will become more
relevant Telcos: Friend or Foe?


Poll Question #1

 What Percent of your Business Unit’s Revenues will include a “cloud solution”
in 2012?
 <15%
 15-30%
 >30-50%
 >50%

Note: Cloud would include
 Enterprise “virtualization”
 Mid-market migration to 3rd party hosting
 SMB move to SaaS applications


Five Critical Go-to-Market Actions for 2012

1. Rigorous Segmentation of Markets and Customers

2. Building out New Vertical Channel Ecosystems & Solutions

3. Transforming Partner Business Models & Practices

4. Shifting Sales & Marketing Resource Deployment

5. Establishing New Financial Performance & Compensation Models


1. Segmenting Markets and Customers
Buying Behavior and Cloud Receptivity Differs Markedly by Customer Segment

Examples:

● >10% growth companies 2X more likely
Enterprise

to adapt cloud solutions
Customer Type

● <40 year old decision makers 55% more
Segment size, likely to adopt cloud solutions
growth,
profitability ● Non-IT LOB decision-makers projected to
SMB

“take over” at least 25% of IT budget

● Major upgrades or new IT footprints –
e.g. large $$$ spends – increasing
New Purchase/ Upgrade Renew/Refresh number of vendor bids and demanding a
cloud alternative
Buying Scenario
● Highly regulated verticals – health care,
financial services – moving to multi-
tenant solutions to keep up with
regulatory requirements


The Cloud Is Changing The Way Customers Buy Technology And
Disrupting The Channel Ecosystem

Customers are changing the way they buy IT

IT DELIVERY MODELS ALONG THE CLOUD CONTINUUM
On-Premise On-Premise Off-Premise
Cloud
Resale Managed Managed
Partner • Distributor • Distributor • Data Center • Cloud Provider
Types • VAR • MSP • MSP / BPO • Cloud MSP/ BPO

Customer
• Resale Margins • Resale Margins • Subscription Fees • Subscription Fees
Pricing
• Pay for Service • Pay for Service • Pay for Service • Pay for Performance
Model

Core Value • Tech Refresh • Cost Reduction • Risk Reduction • Business Agility
Prop. • Tech Update • Risk Reduction • Specialized Skills • Functional Expertise
% of Revenue

2010 2013
51%
41%
22% 22% 20% 23%
15%
8%

On-premise product On-premise hosted Off-premise hosted Pure cloud
resale IPED CLF Winter 2011, n=303

The different delivery models have different partner models


2. Building New Vertical Solution and Channel Ecosystems

Old Model: New Model:
Customer Integrates Multiple Vendor Customer Expects Integrated but Configurable
Products/Components into Customized Solution Vertical Solution Stacks

Software
Pro Pro Pro
Services Services Services

Data Data Data
Models Models Models
On-Premise
Services
Customer Hardware
Integrated Vertical Vertical Vertical
& Managed SW Apps SW Apps SW Apps

BoB Functional SW Platforms
(Comms, ERP, CRM, HR, etc.)
Data
IaaS Platform
(virtualization, storage,
networking, etc.)


CloudSolv

The CloudSolv platform will enable us
to quickly go to market with a
comprehensive stack of hosted
services from top cloud providers.
Patrick Booth, executive vice president at CCB,
a Racine, Wisc.-based solution provider


3. Transforming Traditional Channel Partner Business Models

• Traditional VAR model, makes money by integrating & selling hardware,
software & services, generally take title to product
• Make margin by selling both HW & SW into the customer data center
• Little to NO recurring revenue

20% 18% • Making the business transformation to recurring revenue
• Selling on-prem solutions + off-prem (across IT delivery continuum)
• May have added managed services year ago
• Responding to growing customer preferences and making investments
in their business to add cloud delivery model
62%
(emerging business model still in infancy)

• Model based largely from recurring revenue generated via off-
premise services. Either made the business transformation or
“born-on the web”

Source: UBM Channel
XChange Conference
2011

All Vendor Total: Use of Distributors, VARs, DMRs is moderately down in favor of
HW OEMs & Manufacturers, Hosting SPs, ISVs, Telcos & Retailers/e-tailers

Traditional Channels
MSP & Consultants experiencing the highest use beyond Disti-VAR, DMR
96%
84%
71%
66% 66%
60%
54% 55% 52% 53%
40%
34% 37% 32% 31%
37%

14% 18% 14%
8%

VARs Distributors DMRs/LARs MSP Consultants Hardware Hosting SP ISVs Custom System Other
OEMs Builders Hardware
Total 2011 Total 2012 Manufacturers

Non-Traditional Channels The only non-traditional channel not growing YOY is Telecom Broadband
40%
30% 29%
24% 22% 25%
16% 20% 18%
13% 11%
7%

Telecom Carriers Telecom Retailers/e-tailers Cable Companies Financial Institutions Other
Carrier/Broadband
Services
n=91 Total 2011 Total 2012
Base = All respondents
For the product categories you selected, which of the following routes to market (i.e., channels) – do you currently use as part of your stated channel strategy, and which ones
do you expect to use in 2012?
Source: IPED/UBM Channel's CLF Study (August 2011) © 2011, MarketBridge Corp. | Page 13

Channel Partner Profitability:
On-premise Resale, Managed or Cloud Services

AVERAGE MARGINS BY PRIMARY BUSINESS MODELS
MEAN %

On-premise product resale On-premise hosted Off-premise hosted Cloud
54.1
47.7
40.3
34.6 34.7
31.0 28.8
AVG GM 26.4
21.9
25.3
22.7
25.3 27.9 26.2
20.5 18.8 20.6
APPROX 15.9
18.9 17.5

25%

VAR Consultant Systems Custom System MSP
integrator builder

BUSINESS MODEL MARGINS

 MSPs having transitioned to recurring revenue drive close to 50% gross
margins in managed and cloud services

 MSPs even when selling on-premise, resale margins are at or above those
VARs primarily selling on-premise in a resale model


4. Shifting Sales & Marketing Resource Deployment
Cloud Buyers are “Shopping” well before engagement with Sales Resources
Go-to-Market
Vendor

Marketing Sales Channels Service & Support
Customer Relationship Development
Buying Process
Customer

1. Find 2. Learn 3. Engage 4. Buy 5. Renew/
$$ Upgrade

% Buyer Time Spent On-Line
100%
80%
60%
Off-Line
40%
On-Line
20%
0%
Find Learn Engage Buy Re/Upgrade


Cloud Buyers Shop on the Cloud
Marketing and Sales Enablement must shift toward greater Digital Media Engagement
Go-to-Market
Vendor

Marketing Sales Channels Service & Support
Customer Relationship Development
Buying Process
Customer

1. Find 2. Learn 3. Engage 4. Buy 5. Renew/
$$ Upgrade

Sales Reps


Channel Investment to Revenue Ratio is 18.2% of Revenues
59% of the Investment allocated to Headcount & Incentives, 73% including MDF.

At what level are vendors investing?
Total Channel Investment as a Percent of All Vendor Median Program to
Indirect/Influence Revenue: Headcount Dollar Ratio:

10.2% 18.2% 25.1% 1.8 to 1
Networking All Vendor Median Service Provider

At the All Vendor Median 18.2%; how is the channel investment being allocated?
Mix of Total Channel Investment
All channel-related headcount
Incentives

36% 23% 14% 12% 9% 5% 1% Demand generation funds (incl. MDF/BDF)
Program or other partner marketing (excl. MDF)
Infrastructure and operations
Free/discounted product education and certification vouchers
0% 20% 40% 60% 80% 100% Other
•Headcount , Incentives & MDF 73%
•Headcount & Incentives 59%


Marketing & Sales Enablement Consistently Appears as the
#1 Challenge for both Vendors and Channel Partners

Total

Developing marketing/sales enablement 60%

Building/adapting the partner program 49%

Recruiting new partners 43%

Product pricing models for the channel 43%

Transitioning partners to capture IT… 43%

Product channel readiness 41%

Channel conflict - partner-to-partner 36%

Overall disruption of the partner ecosystem 34%

Channel conflict - field sales 23%

Business planning 23%

Education/training of internal staff 20%

Building the business case for change 20%

Allocating investments 18%

Integrating partners of acquisitions* 14%

Executive buy-in 9%


5. Establishing New Financial Performance & Compensation
Models

● Revenues: Annuity contracts vs one-time
What does the Cloud P&L Look Like? transactions

● Gross Margins: Scale/utilization sensitive
managed services vs. tradtional product
mark-up

● Marketing Expense: Scalable on-line
programs and digital assets, collaboration
with channels vs. traditional MDF/Co-op
TRX incentives

● Sales Compensation: Paying upfront for
3-5 year contract sales vs. lover contract
life

● Product Development: Creating eco-
system of solution developers for each
vertical


Poll Question #2:

 Does your organization have a well-communicated and cross organization –
marketing, sales, finance, product development -- operating and financial plan
for cloud-based solutions?
 Yes
 Somewhat
 Not at all


MarketBlueprint™ -- Cloud Strategies and Solutions
for Product, Sales and Marketing Executives

Data-Driven Go-to-Market Strategy & Operational Planning

1 2 3
Segment Customers Understand How Build Route-to-Market
by Buying Scenarios Segments Prefer to Buy Playbooks by Segment
Customer Find Learn Engage Buy Attach
Enterprise

FIND LEARN ENGAGE BUY ATTACH Interaction
Customer Type

Search
Segment size, Direct Marketing
growth,
profitability Social Media
SMB

Industry Events

Offering Marketing Sales Web Site(s)
New Purchase/ Upgrade Renew/Refresh Portfolio Channels Channels Inside Sales
Buying Scenario

4 5 MarketBlueprint™
Determine Marketing, Establish Financial
Sales & Channel Resources Performance Plan
Marketing Sales Channel
Resources Resources Resources

Technology Support


THANK YOU
Tim Furey
Founder & CEO
tfurey@market-bridge.com

Learn more:
Web: www.Market-Bridge.com
Blog: www.salesandmarketinganalytics.com
Twitter: www.twitter.com/marketbridge

The Cloud Tipping Point

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