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Build successful businesses around tier 1 providers of IaaS

When partnering with a tier 1 IaaS provider, overlapping offerings can lead to eroding margins. Experts give advice on how solution providers can create differentiated services and secure businesses.

Merger and acquisition (M&A) activity among technology providers causes a variety of challenges for their IT channel partners. With the majority of M&A activity in the infrastructure as a service (IaaS) space occurring among tier 2 providers, channel companies may think they will dodge a bullet if they choose to partner instead with a tier 1 IaaS provider. However, partnering with a tier 1 provider increases the risk of a different challenge: eroding margins resulting from competing offerings.

Competition between solution providers and their technology partners is nothing new. "It's been an ongoing problem with the channel for well over 20 years: They rely on margin dollars that come from very little value-add that they bring to the table. They rely on the relationship that they have with the client as being good enough. Every time that has been true, that has eroded through the years," said James Staten, vice president and principal analyst, cloud computing and adaptive intelligence for analyst firm Forrester Research Inc.

The IT channel company that used to resell servers made 30 or 40 percentage points of margin, Staten explained. Now those margins are ridiculously thin, and many providers have moved up the stack to hosting or reselling hosting, and making margin off of managing the application. "That's under attack right now. ... So, [solution providers] have to continue to move up the stack … to things that are more unique to them. They always need to be ready to move and ready to change. Wherever there's new margin activity, they should expect there is a provider out there ready to attack. They can be as mad as they want at cloud providers who have moved into their business, but it won't change anything," Staten said.]

The trick is with the big guys, the closer you skirt to things they care about because they affect everybody, the more likely they'll come and disrupt you.
John Treadwayvice president of Cloud Technology Partners

If anything, competition between solution providers and their cloud provider partners is made more challenging by the nuances of the relationship. According to Jeffrey Kaplan, managing director of strategic consulting firm THINKstrategies Inc., there are three ways that the technology provider/channel partner relationship changes in the cloud. "First, they must share the customer relationship because cloud services are delivered directly to the customer by the technology provider. Second, they must share a smaller revenue stream because of the subscription service cloud model. Third, they must develop more streamlined sales and support models to maximize their profitability in the highly competitive marketplace," he said.

Staying out of the big providers' way

With these challenges impacting the solution providers' bottom line, it literally pays to understand what services tier 1 providers are likely to encroach upon. John Treadway, vice president of Boston-based consultancy firm Cloud Technology Partners Inc., offered this insight: "The trick is with the big guys, the closer you skirt to things they care about because they affect everybody, the more likely they'll come and disrupt you." As an example, Treadway said AWS released its own tool to help its customers manage spend and usage of AWS resources to improve return on investment, threatening a whole industry of tools focused on doing exactly that.

"Amazon has a vested interest in making that available to all clients -- and it's available for free. So, if your business was managing Amazon spend, you better find something else," Treadway said. "If it's in [the cloud provider's] best interest, then be careful. You have to manage and think, where aren't they going to go?"

Staten agreed and offered another example: "It does make you have to tune more specifically [what] you're going to rely on for margin. It can't be on commoditized services that will be replaced by cloud services in the near term. There is a belief by channel partners that customers by default want things on premise; they want things to be private. That's a crutch to fall back on. [They think, 'Customers will] use Amazon, but use me for things that need to be more secure.' As Amazon improves security, they'll start chipping away at that."

The solution provider's differentiator

To avoid this type of competition with cloud partners, Kaplan said, "Solution providers should avoid developing and selling basic applications and/or infrastructure services that lack clear differentiation and are vulnerable to price competition."

He added: "Solution providers can add value and create a competitive advantage by providing integrated solutions that specifically target particular segments of the market. These could include industry-, application- and business process-specific solutions."

To this end, Staten advised that solution providers look no further than their customers. "How well do you know your customer base, and how well can you tune the use of the cloud services for that customer base? If you're a channel partner that works with architecture businesses and you know architecture cold, that puts you in a good position," he said.

This, according to Treadway, "is the magic of dancing with the big guys." He said solution providers should "make sure you have enough unique value that is not in the cloud provider's core that they're not going to disrupt you. Each of those tier 1 providers has a different road map and effort and focus in services or solutions that they're providing, but none of them -- with the exception of Microsoft -- are providing vertical applications. They're not building trading systems to sell to the trading systems community."

Next Steps

Insight into how customers size up public cloud services

Learn about the verticalization of cloud applications

Read more about the potential threat nontraditional partners pose to IT service partners

This was last published in October 2014

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