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News & Articles

May 10, 2012 |

The Vertical Cloud: Selling Horizontal Cloud Services in Vertical Markets

Channel professionals can turn vertical market expertise into margin-making machines with cloud services.

Channel professionals can turn vertical market expertise into margin-making machines with cloud services.

If you could reduce the future of the channel to a weather forecast, it would be partly to mostly cloudy. Cloud computing is rightly gaining the center of attention in business technology. With the lack of up-front operating expense, simplification of maintenance and upgrades, and speed to react to a company’s changing needs, clouds offer a compelling list of reasons to adopt—and a daunting challenge to the status quo.

That combination can be unnerving to VARs and integrators. How much help would SMBs need going forward? Would cloud vendors, with their leveraged operating models, gobble up all the high-margin opportunities, leaving channel professionals to eke out a living on client device tech support?

The good news is that business doesn’t have to disappear. The channel is well positioned to stretch the cloud vertically with needed industry expertise, gaining new margin opportunities and becoming ever-more essential to clients.

Making the Horizontal Vertical
According to SMB analyst firm Techaisle LLC, the average number of cloud business applications used last year by small and midsize businesses was four, and could reach seven in 2012. CRM has a 55 percent market penetration in companies with 50 to 999 employees, up from 34 percent in 2010. More than a quarter of survey respondents plan to add marketing automation via cloud offerings, and a similar percentage want to obtain business intelligence capabilities.

Techaisle says that cloud computing gives SMBs access to the same type of “sophisticated applications that enable [big competitors] to improve productivity and bring new products and services to market faster.” In fact, 85 percent of early SMB cloud adopters say that they can now compete “with larger enterprises on equal footing.”

At first glance, cloud would seem to be a blow to channel partners: fewer software and hardware sales. Vendors provide services for clients that need nothing more than an Internet connection and a credit card. And some, with names like Amazon and Salesforce, appear to be competitors to VARs. Yet, a closer look reveals something completely different. Horizontal capabilities still need vertical industry knowledge that can ease sales and command a premium.

“Our primary vertical focus is law firms and the legal market,” says Jay Kozie, executive vice president of Chicago-based Keno Kozie Associates Ltd. The VAR resells horizontal cloud-based recovery services from San Francisco-based vendor nScaled and document management from NetDocuments in Orem, Utah.

Unique requirements mean that law firms are “willing to pay a premium” for someone to provide what they need, Kozie says. That includes creating the short list of which horizontal cloud vendors are appropriate and secure enough. Long-term service—training, system monitoring, and disaster recovery failover testing—becomes a big part of the revenue stream.

The Expert Approach
“Every generation of technology has brought horizontal capabilities,” says Jeff Kaplan, managing director of Wellesley, Mass.-based cloud computing consultancy THINKstrategies Inc. PCs, for example, started as general-purpose machines with software aimed at the largest—therefore, broadest—markets possible. Word processors, spreadsheets, general utilities, networks, client/server computing… all could be used by anyone.

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Horizontal offerings by themselves don’t address any industry’s special needs, however. Take accounting software: The perfect setup for a light manufacturer is different from what a restaurant or dentist’s office needs. “To satisfy customer needs, various channel partners have used horizontal technologies to build vertical solutions,” Kaplan says.

Cloud computing is following the same pattern. The first offerings were plain horizontal, whether email, office productivity applications, or CRM. Amazon made its massive computing and storage facilities available. And now a growing number of industry-specific offerings are emerging. “You can gain a competitive advantage by taking and Amazon right off the shelf,” Kaplan says. “If, on top of that, you offer a fourth layer of value—you create something aimed at your particular market requirements—that’s your home run.”

Software Solutions for Business LLC looked for its home run in the manufacturing and distribution niche in which it specialized. Managing Partner Dirk Shimpach says the seven-year-old traditional VAR, based in the Madison, Wisc. area, moved from a heavy Microsoft Dynamics focus to reselling third-party public cloud services: ERP from San Mateo, Calif.-based NetSuite Inc., Dallas-based M-Files Inc. document management, and CRM from Zoho Corp. in Pleasanton, Calif.

“We’ve found a pretty good niche in and around distribution companies that have a light manufacturing requirement as well,” says Shimpach. “To take that one step further, it’s more start-ups and companies that have operations in multiple locations.” NetSuite lets the VAR put all the locations on the same ERP system. Just as important, Software Solutions has created an integration between NetSuite and M-Files that it calls GoVirtualOffice. The VAR licenses the service on a quarterly basis through the NetSuite ecosystem.

Maintaining Margins
Shimpach has maintained margins, though it has taken some adjustments. An annuity has replaced larger up-front sales, so it takes longer to build the business base. It also means keeping customers happy; if not, renewals disappear. Another adjustment is the lack of environment setup for new software and upgrades, and the corresponding billable hours. But that part of client IT budgets has opened for other work. “Now they’re engaging us on building a customer report or streamlining or putting workflow in,” says Shimpach. The revenue is still there, with roughly the same overall margin, but the work requires a different skill set.

Many vertical cloud VARs haven’t seen a margin drop-off. The better they know a given industry, the more readily they can position themselves as trusted sources with reliable insight for clients. Expertise commands trust, respect, and money, particularly when the VAR delivers significant benefits.

Thin Client Computing LLC, based in Scottsdale, Ariz., has focused on the education market for 15 years. Rather than reselling public cloud solutions, Thin Client develops private clouds for community colleges and universities. “This is particularly interesting for higher education because they have limited budgets for field tests,” says President Steve Greenberg. “We’ve seen almost comical metrics, where we can put our entire solution in for the cost of the maintenance they used to see. Higher ed is jumping on it largely because of cost.” And yet, institutions also get advanced cloud features such as enterprise-level, fault-tolerant disaster recovery.

For example, a major university in Arizona replaced legacy desktops and NetApp SANs with X-IO Technologies storage, a software SAN called SANsymphony-V from DataCore Software, and Citrix. “They lowered their capital and maintenance costs significantly while transforming their environment into an internal cloud,” Greenberg says. The NetApp maintenance alone was $50,000; that was about what the university spent for DataCore, which has far lower recurring costs. The total solution, with services and software licensing, was about $150,000.

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“In education, we understand the requirements, we have designs that are proven for education environments, and also we have relationships with the vendors that are very favorable to education,” says Greenberg. “We’re a smaller, nimbler guy able to take business from the big players with a smaller, cheaper, better solution.” And the margins on the products they use are higher in percentage. “We deliver greater functionality, they pay less in total system cost, and we make a higher net margin at the end. You have to be willing to change. Storage just had a long honeymoon of being ‘different.’ You want to be on the new trend.”

Some vertical cloud VARs deliver value purely through consulting and not from reselling. EveryNetwork, of Waltham, Mass., for example, focuses on companies in the venture capital and private equity markets. “We’re not a direct reseller of a particular cloud-based solution,” says Winston Freyre, senior network engineer and project manager. “We establish relationships with cloud vendors in multiple categories: disaster recovery, storage, e-notification, SEC compliance. That allows us to get a better understanding of how they work and then be able to go back to our clients and help them make educated decisions.”

Don’t underestimate the amount of work necessary to stay on top of cloud services that might be of interest to a given vertical. Nashua, N.H.-based Microdesk Inc. provides consulting to architecture, civil engineering, and construction firms. Cloud-hosted software gives its clients the ability to use such capabilities as image rendering, visualization, or energy modeling that previously were either too expensive and demanding of resources to be used in any but the most critical cases, if even then.

“Companies that aren’t able to purchase the processing power to do some of the things new technology is offering can have virtually unlimited power on a project-by-project basis,” says Microdesk President Mike DeLacey.

The channel partner brings value to clients in two ways. One is by reselling blocks of time on the cloud services. “I think we’ll be compensated by the vendors to sell the blocks of time,” DeLacey says. The other is in helping the client sort through available services and then integrating them into a larger workflow. “You can no longer wait 12 months to evaluate whether technology affects your workflow or not, because it’s so accessible,” he says. Clients will have to consider all sorts of services that might offer a business advantage, because they can’t afford to let competitors get ahead in the game.

Although it may be inexpensive to test a new capability, the ease of provisioning doesn’t make it any easier to know how to use it. VARs will help bridge that gap. But again, to do so means significant changes to the way the VARs operate. “Consultants won’t be able to specialize in one or two applications,” DeLacey says. “They’re going to need to be familiar with a wide array of applications.” Someone at the channel partner must constantly look at potential tools, vetting them and then learning how to integrate them into what the clients do.

The change to cloud computing will be as extreme as the worst-case scenario of climate change. Areas once hospitable will become unbearably cold—and may even end up underwater. Others, with the right vertical alignment, will provide fertile ground for channel professionals who learn to remake cloud offerings for their clients.

ERIK SHERMAN is an independent journalist and consultant in western Massachusetts.

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