Cloud Computing - Business Models and How They Affect You

Whether you are an end-user, reseller or software provider, the rise of cloud computing will affect you. Probably significantly. But how? What can be done?

Once upon a time the internet promised “disintermediation” - the demise of the middleman. Now this is happening increasingly in the IT software industry as a result of SaaS cloud solutions (Software as a Service).

Disintermediation has happened in many industries such as air travel, where you can now book directly with the airline. The ultra-cheap flights are a product of that change. Travel agents have had to change to survive. Many haven't.

With car insurance the high street brokers have tended to disappear, and the comparison sites are just middleman brokers online (albeit in some cases a front for the group insurers). Despite this, I was interested to see a new insurance broker opening in our high street - I must ask them what's going on!

With software applications (apps) it's happened to a certain extent in being able to buy software direct from the author. In general this is low value software that would not have been commercially viable via resellers.

However traditional IT resellers are now under threat from cloud SaaS services. Software vendors are offering software apps to users directly for uses such as accounting and ERP – in the mid-market applications traditionally the preserve of resellers.

The more complicated cloud services still need implementation help, such as configuration and training. But in many cases support is provided direct by the software vendor, rather than from a local reseller as before.

But does this mean the end of resellers, with their transformation into implementation consultancies? This has long been the model for SAP and other corporate systems. Will this become the norm in the mid and small business markets?

Probably not. The simpler software systems can be sold “off the page” using demo videos and other pre-recorded techniques, without a salesman involved, helped by recommendations. The more sophisticated the system is, the more likely a discussion and/or demonstration will be needed – be this face-to-face or via a webinar. The vendor can employ sales people themselves, or continue to use “the channel” of resellers – or both. Even the simpler systems benefit from more people promoting the system, who will all expect commission.

But wait a minute! Many SaaS cloud services are paid for on a monthly subscription, with the benefit to users of a lower cost and delayed payment. The other side of this coin of course is a later cash inflow for vendors and resellers than before. Something has to give.

This situation is a major headache for the SaaS cloud industry! The life insurance industry has long coped with this problem by paying their brokers a lump sum when a policy is taken out. But this means the vendor has a significant negative cash flow for sometimes a year or more. When this model is applied to SaaS, a reseller may still not get as much for a sale as for an equivalent on-premise solution. Which will they prefer to sell? SaaS vendors have to pay their resellers adequately if the resellers are going to sell their services rather than other SaaS or on-premise options.

The industry is applying at least three approaches:

1. With monthly instalments, the reseller/broker gets a share of each instalment. Fine perhaps for extra services being sold, but not for a reseller’s bread and butter business. Reseller takes the pain
2. Or the life insurance model, which leaves the vendor substantially out of pocket. Vendor takes the pain, and the reseller to a certain extent if initial sales value lower
3. Customer pays a lump sum for a 1, 2 or 3 year contract, and commission is paid out of that. The customer doesn’t get the benefit of monthly instalments, and to that extent takes the pain. The vendor and reseller also take some pain with less money up-front than for on-premise software

Approach 1 means the end of resellers as we know them, as they cut back to become implementation specialists. Approach 2 means SaaS vendors have to be much better capitalised than previously to cope with growth. Either approach means less money available for vendors and resellers to help a customer in their buying decision, and indeed to help them buy their services. For the customer, it also means a higher risk of their IT partners failing, on whom they rely.

Approach 3 provides lower initial cost to customers whilst giving vendors and resellers more money to share upfront when the sale is made.

In Conclusion

Most of the SaaS cloud industry is adopting approaches 1 or 2, depending on whether the vendor can afford to pay lump sums up front, with a few using option 3. Those adopting approach 2 are offering resellers and brokers a larger amount up front, so their services will tend to be sold in preference to those using option 1.

It will be interesting to see if a larger proportion of the industry goes down the approach 2 route, and even use approach 3.

As an end-user customer, approach 3 still lets you benefit from a lower initial cost than equivalent on-premise solutions. The vendors and resellers then at least get a lump sum to share to pay for pre-sales assistance and to keep them in business. For many users, approach 3’s improvement in service and reduction in risk may be worth it. For others lowest cost will always win.

For a reseller, which approach do you prefer? Which vendors offer it? And as a vendor, will approach 1 get you the volume of sales you are looking for, or do you need to look at the other two approaches?
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