In-Depth

Partner Beware: 6 Pieces of Bad Cloud Advice

The transition to cloud is tough for the Microsoft channel. Some cloud 1.0 pioneers who survived to be cloud 2.0 veterans share their tales from the trenches about strategies that sounded smart at the time, but could have cost them their businesses if they hadn't been nimble.

• By Scott Bekker
• July 28, 2014

The transition for Microsoft partners from deployment-based, on-premises business models to a cloud model is extremely difficult -- there's no two ways about it.

Making it more difficult is the fact that every partner is learning on-the-fly. Despite years of industry hype, the cloud remains relatively new. Very few partners have had enough time to get to the promised land of sustainable profitability in the cloud and point out the obstacles for those following behind.

In the meantime, partners report a complex set of dynamics that they struggle with as they move. There's restructuring sales teams and sales compensation. There are credit lines predicated on accounts receivable that may shrink as the cloud delivers revenues in smaller chunks. There are floats on cash distributors provided for hardware and software sales that go away when the product is cloud services. These are a few of literally dozens of details that can hamstring a transitioning business.

A major theme at the Microsoft Worldwide Partner Conference (WPC) this month in Washington, D.C., is lessons learned and best practices. Microsoft commissioned an interesting study by IDC called "Successful Cloud Partners 2.0" (PDF) based on dozens of partner interviews. Microsoft channel executives recognize that as they push their channel to sell cloud products -- the products that Microsoft believes the industry is genuinely moving toward whether Microsoft really likes it or not -- that partners need more help in making the transition.

In that spirit, we talked to Microsoft partners about mistakes they made or advice they tried initially that they had to pivot away from very quickly in order to succeed in the cloud.

What follows are six prime pieces of bad advice that can wipe out a nascent cloud business inside a partner company. In many cases, it's not that the advice is necessarily bad on its own. Sometimes generally bad advice works in specific situations. Other times, what seemed like sound advice was overwhelmed by secondary or tertiary effects that turned out to be quite significant. Still, other times, what worked at first has changed.

BAD TIP #1: Talk cloud, cloud, cloud with customers.
Buzz can be good for getting a foot in the door, but the conversation very quickly has to get away from the mysterious and into the specific for deals to move forward.

New Signature, the 2014 Microsoft Partner of the Year for the United States, came out of the hosted Exchange market and was among the first partners going after Business Productivity Online Suite (BPOS) deals in the early days. Christopher Hertz, CEO of the Washington, D.C.-based company, says the initial velocity of deals was slower than he had imagined. "Largely I think that was a weird phenomenon of calling it cloud," Hertz says.

The problem remains today. "I think that for a lot of people, the use of the language like 'public cloud' created this fear that somehow there was this new paradigm that was occurring. In a way the marketing has actually caused fear, uncertainty and doubt," Hertz explains.

He says a big part of his job in ushering deals continues to be turning the abstract cloud idea into a concrete infrastructure discussion. In a recent deal with tens of thousands of seats, seven Active Directory Forests and other complex elements, Hertz had to provide this description: "It's Exchange 2013 in a co-lo. That's all it is. What are you worried's not going to work? Outlook's not going to connect to Exchange? The Exchange cluster is being provisioned by Microsoft and it lives in their datacenter in Chicago."

Pete Zarras, president of CloudStrategies LLC, ran into a different problem talking about cloud -- fruitless conversations. "We would get sucked into talking to anyone willing to talk about the cloud because it felt good, right? Early on in those BPOS days, you'd talk to anyone who was willing to talk about BPOS. But that tended to be more progressive businesses, who would be on later versions of Exchange. A lot of it is still about Exchange, but back then everything was about Exchange," Zarras says.

"It took us a long time to figure out that we're wasting our time if we're talking to someone who is deployed on Office 2007. Probably in the previous 18 months they'd cut a not insignificant check, they'd bought hardware and software. They were willing to talk but they weren't willing to move," he says.

Steve Roux, president of Farmington, Conn.-based Innovative Computer Systems Inc. (ICS), recalls pushing cloud too hard after getting overly excited by Microsoft's cloud push at the 2008 Houston WPC. "We always joke about drinking the Microsoft Kool-Aid. I came out of that thing just fired up about BPOS," Roux admits. "We were saying to customers, 'You've got to jump into this.' Our initial strategy was let's get these guys completely free of their infrastructure and get them onto BPOS and CRM Online."

ICS quickly backed off. "Forget about the technical challenges, that wasn't really good advice for our customers. Fortunately, no one made [that jump.] As we were going through the selling process, we realized this wasn't the right answer," Roux says. "I think the biggest mistake we made initially was believing it was an 'either/or' conversation [cloud or on-premises]. What we know today is it's an 'and' conversation."

One potential greenfield for cloud turned out not to be so promising and partners had to turn away from it pretty quickly. Matt Scherocman, president of Interlink Cloud Advisors in Cincinnati, says his company started three years ago with a list of Exchange 2003 users. "We were told that by far the best people to go talk to are Exchange 2003 users because it's time for them to upgrade. But what we saw was Exchange 2003 users were laggards and laggards didn't adopt the cloud," he says.

Like Zarras, Scherocman still finds the biggest inhibitor to new cloud sales is a current on-premises Exchange system in good working order. "Google was supposed to be the biggest competitor," Scherocman says. "The biggest competitor is, 'Eh, Exchange is running fine.' We've lost one deal to Google. The vast majority of people are still using Google as pricing leverage."

Who are the right people to talk to on cloud? Scherocman has a simple answer. "More than 60 percent of my business is M&A." Zarras agrees -- a business event like an office move or a consolidation is the time to talk cloud. "I know somebody moving is going to have to decide in the next month."

BAD TIP #2: Treat your employees like mushrooms -- feed them manure and keep them in the dark.
Few partner executives would put things as baldly as Mark Wahlberg's character in the 2006 movie "The Departed" (he was talking about feds rather than employees and he also didn't use the word "manure"). Of course, few successful partners would think anything so hostile about their own employees. Yet the effect of poor communication can be the same. Partner executives who assume employees understand why the company is making the complicated transition to a cloud delivery model might as well be treating their employees like mushrooms.

Even for partners that communicated very openly, it's a lot of work to keep employees up to speed and on board. ICS' Roux says, "We were very much ahead of the game in the way we started messaging. Guys who had been installing servers for us were our rock stars. We were saying, 'Listen, guys, things are changing. You need to start getting trained on where your career is going.' I think we were really good with our messaging and having our guys looking at management like System Center. Even with all of the great messaging we did, we went through a challenge."

BAD TIP #3: Sales? Just add a cloud quota to your current sales team. They'll make it work.
Tiffani Bova, a channel analyst at Gartner Inc., says adding a cloud quota for your current sales team is a predictable strategy. It almost always winds up with the current sales team selling no cloud products. They'll usually retreat to the customers and sales motions that they know.

New Signature's Hertz saw that recently in trying to hire sales people from traditional solution providers. "We interviewed a couple of salespeople in the Philadelphia area when we were moving into that market. They were interested in coming to work for us, but they had made 50 percent of their quota on hardware. If that's the case, how do you transition your business to where you're doing cloud sales? If you're selling all Office 365, your sellers aren't hitting their numbers and then your sellers might leave."

Ric Opal, vice president at Peters & Associates in suburban Chicago, went young. "We hired an employee who fundamentally had no industry or channel knowledge. The undergrad discipline was business transformation. He was somebody McKinsey & Company would have grabbed. We took the person on, and we said, 'All we want you to do is go through the private cloud immersion experience. What does the private cloud mean? What does the hybrid cloud mean? How does System Center interoperate? Do that,'" Opal says.

Peters & Associates invested in the employee to get certified to perform Microsoft Experience Center demos, in which partners take a fully functioning environment to a group of business unit leaders at a customer for a day of role-playing with the full Microsoft stack.

"The faster he learned the pitch, the quicker he realized some SPIF dollars from Microsoft to regurgitate it," Opal says. "The last thing I teach this person is anything [on-premises]. I have many employees who understand [on-premises]. I can drag anybody along if I need a four-legged sales call to talk about what the brick-and-mortar looks like."

Josh Waldo, senior director for cloud partner strategy at Microsoft, says hiring young for cloud sales was a major trend among Microsoft partners having success in cloud. "You target two to three years out of the university with some really smart kids. They don't have any preconceived notions of compensation or expectation of enterprise software sales. They take cloud for granted. You deliver a comp model that follows your new revenue stream model, and you help them build their worth over time," Waldo says.

BAD TIP #4: Treat cloud deployment projects like on-premises deployment projects.
Waldo turns to the partner interviews from the IDC study to highlight a recurring theme that's relevant to the new world of project work.

"One observation from the responses on the survey and the interviews of partners is that simply adding a recurring model into your existing non-recurring model is fraught with problems and hard to execute on," Waldo notes.

The IDC report has a name for one of those problems -- a cashflow trough. "Many partners will experience a cashflow 'trough' as they move from a transactional/project based revenue model to a cloud or managed services model. The trough is most severe if there is a sudden, wholesale change in models," the report notes.

IDC finds that successful partners report focusing intently on reducing customer churn to help them through the trough, as well as making the shift from project-based work to recurring cloud revenues as gradual and smooth as possible.

Meanwhile, partners say it's important to pack in as many extra services as possible in the cloud.

"This is the fundamental shift in our business," says Roux. "We shifted our approach from tactical to strategic with our customers. [In the on-premises days] we would have thought, 'We just rocked that Exchange 2010 deployment and we got paid for it.' And the customer is thinking, 'That's great guys, my e-mail still works, thanks for nothing.'"

"We just took the story and we said, 'You know what? Your server's end of life. We can do what we've been doing all these years. Or, for the same money, we can move you into a cloud-based infrastructure with additional benefits -- disaster recovery, you name it.' They just spent the same amount of money and now they have full CRM Dynamics, SharePoint, OneDrive, Azure, System Center for system management. The big backfill for us is the productivity story -- Lync, SharePoint, CRM -- and there's some phenomenal capabilities now with rights management and data loss prevention," says Roux.

BAD TIP #5: Post a 'Click to Try' button, and they will buy.
One of the big partner-focused features in the BPOS era was the "Click to Try," functionality. The idea was interested customers would see the link on the partner's page and try out BPOS or, later, Office 365. Then, they'd buy through the partner.

Microsoft's Waldo shared the results of a long conversation with one prominent partner about Click to Try. "They were really trying to drive leads, and they'd follow up with a call. That did not work at all. The customers were really seeking education. In some cases there was a bit of lack of education where partners can add value. The partner upleveled their MVPs, really turned them into thought leaders. They did a series of webinars, field events and Web events for territories they don't cover," he explains. "They are constantly churning out content for educational purposes. It was paying off in terms of people just going on organic search and looking for an impartial, third-party point of view with no strings attached. They started to get leads in places like Alaska and Iowa, where they had no presence."

BAD TIP #6: Reselling the vendor's basic cloud offerings is enough.
One of the hardest concepts that Microsoft is pushing with its channel is an emphasis on developing intellectual property for the cloud. Does Microsoft mean ISVs here, or is it repeatable business for solution providers?

Waldo's answer is all of the above. "Our notion of putting labels on partners is an incredibly outdated and archaic thing. I can't go and say, this is an ISV, an SI, an MSP, a LAR, a distributor. The reality is that these partners all have different revenue streams and different business models," he says.

In any case, the idea of IP hits to a final piece of bad advice -- the idea that just reselling a vendor's cloud offering with no value-add is going to be a sustainable business model. It worked to an extent at the beginning when there are very few other partners. In the far more mature and competitive environment we have now, it's much harder.

Intermedia.net, which as a hosted Exchange provider with a large suite of complementary products and a channel program of its own in some ways competes with Office 365, is a larger company than most other partners. But its recent history shows one way that IP goes a long way.

"What we've done over the last three years is we've substantially increased our investments in R&D," says Michael Gold, CEO of Intermedia. One major example is an Exchange hosting control panel called HostPilot.

"If we were just reselling Office 365, as an example, how are we going to be different from the thousands of other companies that are doing that? It's hard to charge more than the thousands of other companies. By differentiating, it allows us to price differently. And because it's our proprietary IP, we are able to have much lower costs in delivering it," Gold says.

At the same time, by keeping a foot solidly planted in the Microsoft world, Intermedia derives a huge benefit that any Microsoft partner can recognize. "By leveraging the great Microsoft technology, we're able to bring in customers who are looking first and foremost for a great Exchange provider, then we can upsell these other services," Gold says. "Customer acquisition cost is lower."