Microsoft: Cloud-First Partners Continue to Outperform Others

by Darryl K. Taft

A new study from Microsoft and IDC shows that partners who have added cloud computing to their mix of services outperform other non-cloud partners.

As Microsoft prepares for its upcoming Worldwide Partner Conference (WPC) in July, the company has commissioned a study that shows that partners that have implemented cloud computing into their offering perform better than those who have not.

The study, commissioned by Microsoft and conducted by IDC, showed that cloud partners – those with more than 50 percent of their revenue from cloud -- have 1.5 times the gross profit percentage versus other partners. They also have 1.7 times the gross profit percentage versus the bottom group of partners surveyed. In addition, the top two quartiles of cloud-focused partners also grow considerably faster than the bottom two quartiles, the report showed.

Moreover, Microsoft said cloud partners have 1.6 times the recurring revenue as a portion of total revenue versus other partners. And they have 1.8 times the recurring revenue compared to the bottom cloud quartile. Cloud partners also have a 1.3 times higher new customer ratio than other partners, and they have a 1.5 times higher new customer ratio than the bottom cloud group.

IDC also said public IT cloud services spending reached $47.4 billion in 2013 and will reach nearly $108 billion in 2017, with a five-year compound annual growth rate of 23.5 percent — five times the growth of the IT industry as a whole. Software as a service (SaaS) will remain the largest public IT cloud service category through 2017, while platform as a service (PaaS) and infrastructure as a service (IaaS) will grow faster than SaaS over the next five years. Meanwhile, emerging markets will grow 1.8 times faster than developed markets, and begin to close the gap on the size of the markets. By 2017, emerging markets will account for 21.3 percent of the public cloud opportunity.

This is the third such study IDC has performed for Microsoft. Last year, IDC surveyed 1,300 partners for the study it released at WPC 2013. This year IDC surveyed around 800 partners and went in-depth with 20 of them to take a look at best practices of the more successful cloud practices.

Darren Bibby, an analyst with IDC who worked on the study, said his team came up with more than 500 pages of transcripts detailing the moves Microsoft partners have made to the cloud. “There are all kinds of good reasons to move to the cloud, but in spite of that some partners just don’t want to go,” he told eWEEK. “It’s a fairly well-known fact that it’s hard to go from a transactional business to a subscription business. Some companies talked about a real hit in revenue as they go from one model to the next. They see cloud as a long-term play and they see on-prem as better. But our research shows that cloud partners are outperforming other partners in key metrics.”

Indeed, the IDC study said the transition from a project or transactional business model to a cloud, managed services, or any sort of recurring revenue model, means that there will be a pe­riod of time where your top line revenues may decrease. Bottom line profits may decrease as you are bearing the cost of the service immediately and only collect­ing or recognizing revenue over time. “But at some point in the future – perhaps between 2 and 5 years – revenue and profits should be higher,” the report said. “For instance, in year 5 of this new model, you have recurring revenue coming in from customers you signed up in year 1, 2, 3, 4 and 5! That’s very powerful.”

Moreover, there are plenty of partners that realize they need to transform their businesses due to the disruption of cloud computing, the report said. “Those who don’t will fall into the ‘boiling frog’ syndrome – comfortable in the short term, but less so once the market starts ‘boiling’ faster and faster. They will essentially get left behind. Business leaders should use market data around new buying behavior for cloud and managed services to trigger the discussion around a re-assessment of the business. The objective is to set a new strategy for the organization, invigorate the sales teams and get the employees behind it.”

However, according to the IDC study, partners who sold Microsoft’s Business Productivity Online Suite (BPOS) – the predecessor to Office 365 -- in 2008 and on are clearly ahead of the game today. They have established cloud practices and have already integrated the necessary business model changes. They understand that recurring revenue is an advantage that reduces revenue fluctuations and provides a solid base to fund operations. These partner sales teams have already adapted and learned to lead with the cloud. They also have long standing reference accounts to demonstrate their expertise.

Bibby also said the study showed that partners need only be one or two steps ahead of their customers to be successful providing cloud solutions. “It’s never too late to get into the cloud,” he said.

The IDC report offers “practical advice” for partners about how to move to a cloud model and what to focus on, said Josh Waldo, senior director of Microsoft’s Worldwide Partner Group, in an interview with eWEEK. “We continue to help the channel and our partners to move forward with us. Ninety-five percent of Microsoft’s revenue comes through the channel; this is a partner-driven business. Moving to the cloud gives partners a way to up-level their consulting.”

To ease the way, Microsoft has geared its investment to help partners move to the cloud, including evolving licensing terms to help them move their business model to the cloud. In a blog post from November, Waldo explained the changes.

“Rolling out managed services is a very strategic long-term effort that can yield annuity revenue based on billable and packaged services, as well as a high overall gross profit,” he said. “It also creates opportunity for partners to develop their own IP/Apps on cloud-enabled devices and to sell the value to customers. Our responsibility is to help partners be successful in this new model. That materializes based on our investments and our business model platform. I’m excited to share with you that Microsoft has recently announced a significant change to the Enterprise Agreement to make it easier than ever for you to take advantage of the power of Windows Azure within the solutions you provide to your end-customers.

"The Microsoft Enterprise Agreement (EA) has always been the best way to offer our enterprise customers the most economical means to plan for the future and get the most value using Microsoft technology. We are now extending that benefit to our partners – not just to take advantage of the benefits of the EA for your own use, but also for the use of your customers who are consuming your managed services and IP.”

The IDC report encourages partners to make the move to a cloud-first company and use the cloud to open doors to new and existing customers, as well as to take customers to the cloud in steps, and don’t move too fast.

On top of the large worldwide survey, IDC went deep with 20 Microsoft partners to gain some actionable business ideas.

“We haven’t had to hire new people to sell cloud. It’s basically an evolution of what we were doing previously,” said Conor Callanan, CEO of Core Technology Systems, a Microsoft cloud partner. “They’re used to selling days and not products and licenses. Selling 100 days to go with those Office 365 enterprise licenses, that’s where the real money is for us.”

“We’ll always tell a customer that the hardest part is doing all the planning and then that first connection between on premises and Office 365,” said Matt McGillen, director of Microsoft infrastructure at Perficient, a Microsoft business partner. “Once you’ve done that: Yammer, SharePoint, Lync, Intune, all these things become more viable… You’ve already done the groundwork, and so it’s just a matter of turning on the capabilities in the cloud.”

IDC predicts that 70 percent of CIOs will embrace a “cloud first” strategy in 2016. ”Develop a ‘cloud first mentality’ to open doors into new accounts,” the IDC report said. “Then up-sell and cross-sell using the success of the first project.” Perficient starts with Office 365 to show early success, and then up-sells customers into more of the Microsoft stack.

Cloud People is a Danish IT service company focusing on selling, implementing and servicing solutions based on cloud products from Microsoft, primarily Windows Azure and Office 365. The majority of Cloud People’s customers start out by placing classic productivity tools like mail, calendar and task management in the cloud in order to benefit from major cost savings and true mobility, said Finn Krusholm, CEO of Cloud People. Later, files and communication tools follow – for instance, by starting to use Lync. The third step is where companies implement automated workflow and processes based on best-practice, he said.

“A lot of these customers have never had professionally delivered IT services before,” said Ben Gower, managing director of Perspicuity, a UK-based Microsoft partner. “You’ve got to do baby steps with them. So moving from on-prem email onto exchange online is a nice step. Moving from Dropbox to SharePoint is a nice step. You’re not going to move someone from Dropbox to full blown intranet/extranet client portal… it’s not going to happen. I think there are a lot of partners trying to do that. Personally, I think it’s a mistake.”

Waldo says Microsoft has assets and capabilities that provide advantages over its cloud competitors, such as its penetration into the enterprise. Partners can drive more revenue with a deeper platform and can drive additional value for the customer.”

“The best partners are moving to cloud first; the smarter, better managed ones are the ones making the jump,” Bibby said.

Indeed, Hans Petter Dramstad, CTO of Norwegian Microsoft partner Visma, noted, “By 2015 our target is to no longer focus on up front software licenses. Both cloud and traditional offerings will primarily be sold on a subscription basis.”

This article was originally published on Tuesday May 6th 2014