Cloud Is About Cost Transfer

Cost shifting is an old game but it’s something you have to watch carefully and adjust your model to manage properly. In some cases, whoever bears the cost is just a function of who has the leverage.

As an example, suppliers that have a highly sought-after technology that is easy to sell have more leverage to push partners to accept costs that they might otherwise push back on. Take a look at who charges solution providers for certification training. Oftentimes, it’s those that have a hot commodity.

On the other hand, suppliers that are in a highly competitive area with lots of viable alternatives use free certification training as a carrot and recruitment technique. Top-tier suppliers that understand having lots of certified partners is a competitive advantage in the market also accept the costs on their own balance sheet more readily.

There are other examples here as well. Demo units come to mind.

But now we are seeing a lot more cost transfer because it’s a fundamental piece of the new cloud computing model. When I take on costs, especially costs I need to capitalize, my risk is high. But if I don’t have to capitalize a technology deployment because I’ve transferred those fixed capitalized costs onto someone else, my risk goes down.

The reality is this is a huge selling point to the end user but it’s also going to become a significant selection point on the part of the channel.

One significant decision point for partners building a cloud model is where do you transfer the costs. Are you going to transfer them onto your balance sheet by building out hosting services and data centers and offering them for rent? Or are you going to find hosting suppliers that give you the capability to offer their package as part of your underlying solution? Both models can work, but clearly the former is a more risky proposition, albeit it likely means greater reward if you’re successful.

In the old model, suppliers that were focused on shifting from a direct to an indirect sales model did so to transfer sales and support costs to partners, and hopefully sell to a wider audience that can’t be effectively met directly. But the old model also meant the infrastructure costs ultimately got transferred to the end user at some point.

Now we are heading toward a model where those costs are either going to sit on the suppliers’ balance sheets or on the solution providers.’ With that comes increased risk because customers can cancel, go out of business, get bought and an untold number of other things that can mean a loss of revenue. The new model, therefore, requires diversification of that risk by increasing the number of customers with whom you do business.

It’s necessary in any case because when the revenue generated by a sale is paid out in monthly fees rather than a one-time big check it requires you to have more customers to obtain a similar cash flow.

Ultimately, the more risk you take on by allowing costs to be transferred onto your balance sheet, the higher your margin needs to be. For large hosting companies and cloud-service suppliers there is obviously a tipping point where the risk is spread across so many customers that the next customer on board barely moves the risk needle. But you need to decide where the cost will be before you can make long-term supplier selections.

BACKTALK: Make something happen. Robert Faletra is CEO of UBM Channel. You can contact him via e-mail at [email protected].