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Has Axcient Solved Cloud Partner Payouts?

It was during a conversation with a VAR that Axcient CEO Justin Moore decided there had to be a better way for vendors to pay partners for selling their cloud services.

The VAR professed love for Axcient's Recovery-as-a-Service (RaaS) product, Business Recovery Cloud, Moore recalled. Yet the VAR had only sold Axcient to one customer during a period when the VAR had sold about 40 traditional software-hardware solutions that were twice as expensive, and took 10 times more time to recover.

"I asked the sales guy why," Moore said. "He said it was how sales reps were compensated. If they sold a $10,000 solution with a $2,000 margin, the sales rep gets a check for $200. Conversely, if they sold Axcient for $500 a month, and margin was about $100, the sales rep got $10 a month."

Imagining a 20-something sales rep who may not still be at the same VAR in two years as the cloud margins potentially start adding up, it's easy to see why cloud doesn't get the same focus as legacy systems.

"That was the lightbulb moment when we realized that the entire economic model is broken for VARs and resellers," Moore said. "There is a reason that Salesforce, Box and every other SaaS vendor has a relatively small amount of revenue going through VARs."

"We believe that value-added resellers play a critical role in sales to midmarket and enterprise IT as trusted advisors. Customers rely on the value-added reseller to ensure best practices implementation of the new technology"

Justin Moore, CEO, Axcient

Axcient on Wednesday announced what Moore called "an entirely new economic model for value-added resellers." Calling it "SaaS:FLO," short for Software as a Service: Front Loaded Option, Axcient will cut a check equal to the first five months of revenue from its RaaS. By the company's math, that's equivalent to two years worth of normal partner margin, but all up front. The partner will also get a renewal margin at the beginning of each year that the customer stays with Axcient.

According to Moore, the SaaS:FLO upfront year one margin is better than what a partner would earn on a traditional software-hardware sale.

MSPs, who are more comfortable fitting monthly recurring SaaS revenues into their business models, have been a strong area for Axcient, but Moore said the pricing move is designed to help Axcient build a complementary base of VAR partners. "We believe that value-added resellers play a critical role in sales to midmarket and enterprise IT as trusted advisors. Customers rely on the value-added reseller to ensure best practices implementation of the new technology," Moore said.

About 30 VARs are already signed up with SaaS:FLO, Moore said. Al Chien, executive vice president of sales at Dasher Technologies, and Michael Souza, senior vice president at FusionStorm, each provided enthusiastic quotes about the program for Axcient's announcement.

The program seems like an answer to the problem that Microsoft, analysts and other vendors with the monthly recurring revenue approach have been trying to advise partners to solve for the last five years -- how to make that leap from relying on big deal-based payouts to surviving on the smaller monthly recurring payments that could eventually bring in more money than the big deals.

By putting its money where its mouth is, saying effectively that "if the monthly recurring revenue is going to be better over time, we'll pay the partners up front," Axcient is taking on a huge amount of risk that other vendors may not want, or be able, to match. The risk could sink Axcient, as well.

That's partly why the program is going to be limited to about 100 VARs this year. "We're being picky, very picky," Moore admitted.

What's enabling Axcient to try the upfront payments for cloud services is a new Series E funding round of $25 million, also announced Wednesday, and a new debt facility. "[One] risk is that it consumes a lot of cash. We have mitigated that risk by partnering with people who have extremely deep pockets," Moore said.

The other risk involves customer retention. If partners are paid upfront and customers abandon the platform before Axcient breaks even, the company would be in trouble. "If you don't retain your customers for at least five years, then it's a model you can't possibly afford," Moore said. "We have the benefit of seven years of retention data, and we know and can project that we will keep our customers for at least seven years."

Posted by Scott Bekker on February 18, 2015