OK, I admit it; I’ve had my head in the clouds these last months.

Working on a number of projects for Microsoft, as well as with individual Partners, to help them prepare for the Cloud business opportunity. It’s become very clear to me that what’s needed is not simply an evolution of existing business practices, but a whole new approach, and business model.

To be sure, Partners do not want to (and shouldn’t) abandon their traditional “on-prem” business, but in order to safely transition their practices to meet Cloud demand, they will have to keep their eyes on a few key things. Most importantly:

Developing packaged IP.

• The Cloud customer demands complete solutions, out of the box. Full stop. They are extremely reluctant to ante up considerable dollars for customization or even configuration. This means services revenue will shrink. In effect, it will have to be replaced by packaged IP that rounds out the base functionality (whether ERP or CRM). The Partner who ignores this need, does so at their peril. They just won’t earn the margins required to stay in business.

Lowering installation costs.

• In part related to the reluctance to pony up for services, and the need for packaged IP, is the requirement that implementation processes be streamlined. In some cases, dramatically.

Lowering customer acquisition costs.

• Today, it costs a Partner anywhere from $20,000 to $30,000 to add a single “on-prem” customer. This is totally unaffordable in the Cloud, because there are no revenue “balloons” in the form of services or perpetual license sales. Both sales and marketing costs must be dramatically lower, in order for the Cloud to be profitable. Online demand generation and phone-based sales will rule in the Cloud.
  

Lowering ongoing delivery costs.

• Partners thinking of attempting to solve the technical issues associated with offering Cloud solutions, such as hosting, should think again. Hosting is a scale game. One the average Partner just can’t win. In practical terms, almost all of the time, this will mean outsourcing this part of the equation, and concentrating instead on adding customers, and building a subscriber base.

Good News

The good news is, for those who manage to do these things, the rewards can be very attractive. A subscription-based business model means a growing annuitized revenue stream. That means higher margins in the long run,

and a more saleable business, that commands higher multiples. Finally, an owner has a viable exit strategy, and can contemplate a comfortable retirement, when the time comes.

But this will require transitioning at least a part of the business to the Cloud. And make no mistake, demand will pull a Partner in this direction, ready or not.

So be ready…