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The Evolution of IT DistributionDo 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?
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The
Marshmallow
Test
Stanford 1970,
Walter Mischel
Repeated around the
world
Studies on Delayed
Gratification with
children (4-6 yrs)
5
The Deal:
1 Marshmallow now
Or 2 if you wait
2/3 of kids ate the
Marshmallow
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The Follow-up:
~18 years later
Children who waited
had better life
outcomes
SAT Scores,
Education, BMI
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So what does
this mean for the
IT channel?
What’s The Problem?
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The Cloud / MSP Trough
9
TodayPast Future
Revenue Revenue
Shift +
Investment
10
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
Cloud Changes
The Selling Relationship
Sell UseStock
The Third Platform?
M A S CC A M SS M A CS C A M
Source: IDC
How is The Third Platform Evolving?
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
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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
15Source: IDC’s CloudTrack Survey, 2012
The Cloud Consumption Model
Represents a Huge Shift
70% of CIOs will
embrace a “cloud
first” strategy in 2016
CIOs and CFOs will
move to “zero capital”
and transform the IT
financial model
By 2016, it is predicted that nearly 25% of all
software revenue will be subscription based.
IDC Predictions:
Key Stakeholders
What does each stakeholder want?
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Key Stakeholders
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18
PartnerSoftware Vendor
Customer
Key Stakeholders
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19
PartnerSoftware Vendor
Customer
Vendors want to…
• Achieve scale and reach
• Maintain a customer
relationship
• Maintain partner
relationships
• Transition to a new
consumption model
• Maintain operational
efficiency
• Optimize profit margins
Key Stakeholders
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20
PartnerSoftware Vendor
Customer
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
about the Cloud – it may
not be as profitable
Key Stakeholders
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21
PartnerSoftware Vendor
Customer
Customers…
• Want to keep things simple
• Want to buy from one company (or
limited companies)
• Want a trusted advisor
• Want Solutions
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
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Partner – Common Billing Scenario
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“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.
Partner – Common Billing Scenario
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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.
Partner – Common Billing Scenario
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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.
Partner – Common Billing Scenario
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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.”
Partner – Forced Into Unnatural Acts
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“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!”
The Argument Against
IT Distribution in a Cloud
Consumption Model
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Distributor Core Functions – Traditional
29
Integration / Configuration
Training and Enablement
Partner Management
Marketing Sales
Tech Support
LogisticsCredit and Financing
“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
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“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.)
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“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
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“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.
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Alternatives to Selling Through
Distribution
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)
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Or…
Distribution
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
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The Resale Model w/o Distribution
Has Also Seen Success in the Cloud
Google Apps
• Partners can resell
• Over 6000 partners
Enterprise ERP Applications
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The Argument For
IT Distribution in a Cloud
Consumption Model
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Distributor Core Functions – Cloud
38
Integration / Configuration
Training and Enablement
Partner Management
Marketing Sales
Tech Support
Credit and Financing Logistics 2.0?
Aggregation
Order Management / Billing
39
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)
40
Momentum and Stability
Steady gross margins
Reduced SG&A expense
Heavily diversified
• Spread across many IT
markets
(Source: GTDC)
41
IT Industry History
42
43
“SAP had carefully nurtured
relationships within the Big Five
consulting firms…”
“… 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
“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.”
44
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In 2012,
Distributors handled
300 million software licenses
Efficiency and Scale
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“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
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”
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Access to a Large Community of
Reseller Partners, and their Customers
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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
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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
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Vendor A Vendor B Vendor C Vendor D Vendor E
Distributor
Partner Partner
Customer Customer Customer Customer Customer
Monthly bill
Per mailbox
1st of the month
Web Security
Monthly bill
Per server
8th of the month
Antivirus
Monthly bill
Per user
15th of the month
Storage Software
Quarterly bill
Per server
22nd of the month
Cloud Storage
Monthly bill
Per Terabyte
30th of the month
Unified
Billing
System
Partner
InvoiceEmail $400
Web Security $300
Antivirus $200
Storage Software $150
Cloud Storage $250
SUPPORT $400
$1700/month
Due December 15th
Vendor A Vendor B Vendor C Vendor D Vendor E
Distributor
Partner Partner
Customer Customer Customer Customer Customer
Monthly bill
Per mailbox
1st of the month
Web Security
Monthly bill
Per server
8th of the month
Antivirus
Monthly bill
Per user
15th of the month
Storage Software
Quarterly bill
Per server
22nd of the month
Cloud Storage
Monthly bill
Per Terabyte
30th of the month
Unified
Billing
System
Partner
InvoiceEmail $400
Web Security $300
Antivirus $200
Storage Software $150
Cloud Storage $250
SUPPORT $400
$1700/month
Due December 15th
Distributor Cloud Tools
TechData StreamOne
• ~40 vendors, ~200 offerings
Ingram Micro Cloud
• ~50 vendors, ~150 solutions
Synnex CloudSolve
Arrow ArrowSphere
Avnet Cloud Ready
Others…
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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
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Is an Annual Cloud Contract
Good Enough?
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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?
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Typical Software Vendor Profit Pool: Revenue and Gross Profit Profile
Gross
Margin
Distribution of Revenue
20% 40% 60% 80% 100%
Break-
even
40%
30%
10%
20%
50%
60%
70%
SERV-
ICES
Profit Pool modeled
SOFTWARE
Symantec 82.65%
Oracle 80.49%
Salesforce.com 75.08%
Microsoft 72.40%
SAP 69.33%
(Source ycharts.com)
Typical IT Distributor Profit Pool: Revenue and Gross Profit Profile
Gross
Margin
Distribution of Revenue
20% 40% 60% 80% 100%
Break-
even
40%
30%
10%
20%
50%
60%
70%
Marketing
Services,
Financing,
Other Services
Front End Resale Margin Back End Rebates and
Other Incentives
Profit Pool modeled
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
Distribution of Revenue
20% 40% 60% 80% 100%
Break-
even
40%
30%
10%
20%
50%
60%
70%
Profit Pool modeled
SOFTWARE
DISTRIBUTION
Essential Guidance
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Will we see a
new Distributor?
Amazon?
Digital River?
Jamcracker
Someone else?
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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