In-Depth

How 3 Microsoft Partners Are Adapting Their Service Models for the Cloud

• February 15, 2012

We talked to three very different partners who are taking bold steps to add service models that will help them stay relevant in the future. The themes that emerged from those conversations include:

• As partners evaluate cloud opportunities, they have to take a longer-term view of revenue/cost models than with traditional services.
  
  
• The transition to a recurring revenue model is a process, not an event.
  
  
• Companies with recurring revenue enjoy higher valuation that can be leveraged to fuel growth.
  
  
• Cloud opportunities are just emerging, so companies have to be flexible and pay close attention to customer feedback.

The common thread through all conversations is that these partners are trying to get in front of the cloud opportunity, sometimes through trial and error. They're willing to take risks to build for the future.

Defining Services Clients Want
Serving the Minneapolis-St. Paul region, Sovran Inc. is an IT services, managed services provider (MSP) and training partner with two gold and three silver competencies. Patrick Gibson, vice president of Sales and Marketing, describes Sovran MSP services as a "boutique" offering with the full range of IT management services tailored to fit individual business needs.

Sovran was an early adopter of the Office 365 opportunity, working closely with Microsoft to build an effective market approach. As a Cloud Champion, Sovran has added clients and steadily made headway into the cloud.

Taking a step further into the cloud, Sovran is rolling out an offering, tentatively branded "Totally Intune" that will include a managed services package including InTune, Office 365 and a light help desk service. The cloud-based managed services package will include planning and migration of current on-premises systems and continuing help desk support after the transition.

Adding value from the start, Sovran will provide free consultation to help companies build their Office 365 migration strategy. That service will help clients answer questions such as: What kind of authentication do they want? How should they manage their current SharePoint sites? Sovran is targeting customers who want guidance and ongoing support as they move to the cloud. Services will be offered in a menu format, where customers can pick what they want, from migration to training.

Setting pricing on a new business model is always tricky and Sovran is approaching the challenge carefully. "We have to make sure that the contracts that we put together are commercially viable. With Office 365, the focus has to be on the annuity, since there's no big revenue hit at the beginning," Gibson says.

Based on the company's experience to date, Gibson sees the target market as small businesses with five to 125 users. The early adopters of cloud services have been the "entrepreneurial" companies, including professional services companies such as marketing agencies. Companies that are contractors themselves are more likely to be comfortable with the notion of contracting IT services and moving to the cloud.

Sovran's traditional client base was heavily focused on the financial and legal industries, but those industries are more cautious about adopting the cloud. "They're interested in the cloud, but so far, haven't taken the plunge," notes Gibson.

Gibson plans an entirely different sales and marketing approach for Totally Intune than Sovran's traditional regional approach. To reach the volume of clients that makes the business strategy work, Sovran needs to expand the market past the twin cities region. "We're hiring lead-generation specialists supported by a national marketing campaign to market the package around the country," Gibson says. "With this package we never have to go on site."

The sales team that Gibson is building to support this effort has an entirely different skill set than the traditional IT salesperson. There are no face-to-face meetings, so the new breed of sales person must be comfortable driving the process quickly, without ever meeting the customer.

Compensation for sales people in a recurring revenue model is also a challenge. Gibson is practical about sales people needing immediate reward. "You can't pay them $15 bucks every month, it just doesn't work. You have to pay them up front -- paying out ahead of money that we get later. So there is some early risk," says Gibson. "The company is upside down for a little while, but gets paid as long as you're doing a good job. And, as long as Microsoft does a good job."

Gibson sees this cloud strategy as a way for Sovran to expand the business by building on the services that they know best. Through the national sales and marketing program, Sovran hopes to pick up customers out of state, expanding without having to invest in offices and personnel. Building recurring revenue beyond the regional boundaries of the twin cities presents an attractive growth opportunity to Sovran.

Next Page: SSi Consulting

The Transition to Recurring Revenue
Because Microsoft hasn't yet released a Software as a Service version of the small to midsize business (SMB)-focused Dynamics ERP solutions, partners are getting creative to fill the gap. McLean, Va.-based SSi Consulting, a gold competency Dynamics ERP partner, has added a services-included option for their customers implementing a hosted Dynamics GP or Dynamics SL system. While not a true cloud application service package, the recurring revenue approach to the sale instead of the traditional up-front transaction is a unique approach for a Dynamics ERP partner.

Bill Aiton, president of SSi Consulting, says there were two components to consider when building this package. The first includes the software licenses, hardware and hosting services that are commonly offered by partners and hosting companies for a fixed monthly fee. Because two-thirds of the average ERP implementation cost comes in the form of services, the first component only covers one-third of the customer's investment.

"Traditionally, customers have had to pay for two-thirds of the total project cost over the first three to six months, depending on how big the project is," Aiton says. "To help businesses preserve cash and move to a monthly affordable number, we decided to take the large implementation services piece, include basic ongoing support of their system and let them pay over a three-year term. On a typical project of $75K, with $25K software and $50K services, instead of paying all that up front they pay $3,000 per month over three years. That includes the hardware in a nice, secure datacenter -- so they really are getting more than with the old on-premises system."

SSi Consulting is finding that companies that wouldn't be able to afford a $75,000 investment can afford the $3,000 per month. Those companies see the value in using their cash for other purposes that will build the business.

"This is not a financing," Aiton points out. "We're absorbing some of the up-front costs and giving them a unique package that's different than if they did a traditional implementation. The main goal is to say you can have a low monthly cost that delivers a high-end solution to meet your current needs and support future growth. There will be an increase in costs when they add users, but it's not dramatic."

Many ERP partners worry about how to pay for their consultant's time on the initial implementation when they'll be collecting that investment from the client over the three-year contract. Aiton says it's all about the transition and your time frame, "If we transition 10 to 20 percent of our business to this new model each year, then that's something that we can absorb. With the traditional implementation we would get paid for services over six months, but now we get paid over 24 months. If you look at it over a one-year time frame you're cash-short, but if you look at it over a three-year time frame, you're fine. And, you've provided additional services that you wouldn't have [before]."

In addition to the gradual transition to the recurring revenue model, continuing services is a part of the SSi long-term strategy. Aiton advises partners to have an aggressive program to resell the customer on the ongoing services after the initial contract is over. Because the client is used to the monthly fee it will be an easier sell to just transition the monthly payment model to support ongoing services. Additional services, including upgrades and additional solution implementations like SharePoint, can extend the relationship with the client.

Another worry voiced by ERP partners is the idea of a fixed-fee ERP implementation. Setting a fixed monthly fee for implementation services requires a solid project scope, which is challenging -- some would say impossible -- in new ERP implementations. Aiton acknowledges the concern saying, "You have to turn it around and say to the client, 'These are the services that we're going to deliver for this monthly number. If you want to do something else, then we can do that for $250-plus a month.' The project has to be managed well."

In some ways Aiton says it has been easier to manage scope creep with hosted clients than with traditional fixed-fee jobs. When you present a change order to the client as a monthly fee, it's a little less shocking than a single-payment change order.

Aiton views this change as inevitable instead of revolutionary. SSi serves the government contractor space, where Deltek Inc. is a common competitor for ERP projects. On a recent opportunity SSi thought it was offering something unique with the monthly pricing. It turned out that Deltek was not only offering the same type of program but the company was also sharpening its pencil to make it very attractive to the prospect.

Aiton recalls, "We were trying to figure out how to offer a fixed fee for $30K and Deltek was offering something like $17K. We're behind the curve and we're scrambling to catch up. There are attractive offers out there and there is pressure."

Next Page: Quest Software

Adaptability to Recognize and Capitalize on Changing Business Models
Every size partner organization is facing changes associated with the cloud. While some of those changes come in the form of new services to existing target customers, some create whole new markets. Opportunity can come from unexpected places and organizations have to be agile enough to recognize them and respond.

Quest Software Inc., two-time winner of the Microsoft Global ISV Partner of the Year award, serves 100,000 customers including 87 percent of the Fortune 500. Known for its state-of-the-art migration tools, Quest has historically focused on the enterprise market. The cloud is adding a new dimension to the Quest customer base as they help partners and SMBs make the move to the cloud.

"Delivering the desktop as a service is a very new market, even for Microsoft. It's largely the SMBs that are starting to consume the deliverables in that market so we're seeing a lot of activity occurring through the larger MSPs and telcos developing and delivering these services," says Ben Sheffield, channel sales manager for Quest User Workspace Management Alliances with Microsoft. "It's a big area of growth and maturation in our relationship with Microsoft."

Quest is working hand-in-hand with Microsoft to provide the Hyper-V cloud platform for MSPs and hosting partners to replace VMware Inc. The Quest solutions work with Hyper-V to reduce the complexity associated with building, provisioning, and managing virtual desktops and applications.

Leveraging their migration expertise in the cloud, Quest recently released OnDemand Migration for Email. Developed on Windows Azure, the application migrates data from Gmail or on-premises Exchange to Office 365. Quest released two versions of the product with very different markets in mind. The Administrator Edition will be available through a partner program providing a powerful tool for MSPs and other partners to migrate legacy customer data to Office 365. The second edition is targeted to the IT do-it-yourselfer and is available through the Azure store. The OnDemand Migration for Email Self-Service Edition enables end users to self-serve and migrate their data with very little effort or knowledge of IT functionality. While Quest has historically had an online store where customers can purchase directly, the company recently revamped the site shop.quest.com to build on the momentum of the expanding direct-sales business.

As Scott Lang, director of product marketing for Quest Migration Windows management, observed, "We want to reduce the amount of friction that the SMB buyers face when coming to Quest.com to find the solution they're looking for. It's an evolving thing. We're opening up that online channel."

At the heart of the change is the evolving desire of the customer to purchase directly and download what they need with no service support. Definitely not the traditional sales model for Quest but clearly an opportunity and perhaps a necessity to serve cloud customers.

"It's an old adage, but flexibility rules. You have to be available to the customer the way they want to buy, when they want to buy," says Lang. "It's a consumer-centric mentality that business-to-business firms need to grab hold of more strongly."

The online fulfillment part of Quest's business is growing. "It's been a record year for us in terms of the transactions and the bookings from the online store -- by orders of magnitude," Lang says. "It's reflective of customer demand as well as the technology underpinnings. We've spent a lot of money and a lot of time to rearchitect our Web site so that it's easier for our customers to make that decision. We're trying to accommodate as many channels as possible."

Take a LongerTerm Perspective to Build for the Future
These three partners are taking different approaches to the changes that the cloud presents, but they share the willingness to invest and test. While Microsoft is providing plenty of guidance and advice for partners building services to support the cloud, there is no one path to guaranteed success. Partners have to look at their strengths and figure out how to make those assets work to their advantage in a changing market.

Related:

• Microsoft's Dynamics Partners Weigh their Cloud Options