The Cloud, ERP and the Channel Partners (Part I)

Cloud solutions are impacting application software ecosystems. Channel partners will need to change several aspects of their businesses to optimize their revenues and profits. This is Part I of a series.
Written by Brian Sommer, Contributor on

In the last few months, I've attended software conferences by SAP, Progress and, as of this month, Microsoft. The awareness of cloud computing by channel partners has increased but so have the implications for these businesses.

Large amounts of application software products are sold and implemented by third parties: the channel.  The channel includes systems integrators, resellers and others. In Microsoft's case, approximately 95% of their revenue originates via these third parties.

Cloud solutions are a disruptive influence on the traditional ERP channel as these solutions potentially affect:

-          the timing of revenue received

-          the amount of revenue received

-          the mix of revenues received

-          the role of service professionals used in these accounts

-          how software and services will be sold

-          the concept of geography when it comes to software sales and support

-          what role the third party will have in supporting these solutions long-term

-          the importance of staking out key vertical markets for exploitation

That list is pretty daunting and it's one that has bothered many channel partners in prior years. However, channel partners across the spectrum of firms I watch seem to be:

-          more comfortable with cloud solutions

-          more understanding of how cloud solutions will change their business model

-          open to different ways of running their business.

In the cloud ERP solution space, integrators, et.al., will likely generate less revenue than they would implementing an on-premise solution. Certainly, tasks that involved the physical loading, testing and patching the software on the on-premise servers are no longer required. Debugging the new software is also unnecessary as the code is running on the vendor's server not the customer's server(i.e., this assumes the solution is not a hosted version of an on-premise product).

Revenue streams are different in some cases as the implementer and vendor will be getting monies on a more level monthly basis (although a lot cloud solutions providers are insisting on upfront 2-3 year contracts). With some suites costing sub-$150/month/user, the reduction in upfront monies can present a real hit to cash flow. Worse, software sales people aren't exactly gushing when it comes to selling something that doesn't have that big upfront cash payment. Would you rather make a commission on a large, million dollar license or get $30/month/user for several years?

The revenue mix is changing, too. More work is needed on data cleansing, data migration and cloud-to-cloud/cloud-to-on-premise integration while other configuration tasks may require less work. The SAP Business ByDesign solution even has a very robust up-front configurator to help with this work.

Maintenance work will be substantially lessened with the multi-tenant cloud products. With these applications, vendors, not customers, are on the hook to provide application upgrades. Channel partners will find much less of this work to do. This won't change though for customers opting for hosted products.

Cloud solutions are coming equipped with powerful development and deployment platforms. Gone are the gazillions of lines of old COBOL or FORTRAN code. Products built on enhanced service buses or PAAS (platform as a service) environments allow resellers and customers to create significant functional, vertical and horizontal product extensions that are automatically applied to new versions of the base software.

This PaaS capability is an opportunity for channel partners who want to move more of their revenue stream to royalties instead of just service revenue. In several interviews I did with SAP channel partners recently, each one, to the one, had already identified several vertical/industry or horizontal product enhancements/extensions they intended to create. In fact, they seemed enthused at the prospect of having customers all across the globe implement, use and, most importantly, pay for these extensions. It doesn't take much effort to cash royalty checks and royalty checks don't carry with them some of the headaches that professional staff can bring when you're doing straight services work. Smart resellers and integrators are looking for cloud solution providers that bring powerful PaaS, SDK (solution development kits) and/or extensible service bus architectures to the table.

click here for Part II

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