XChange: How To Turn Your VAR Business Into A Cloud Business

Many VARs have tried to change their business models around cloud computing -- and failed. Alex Brown, however, is one of the success stories.

Brown, CEO of cloud solution provider 10th Magnitude, outlined the secrets of his success during a peer case study presentation Tuesday at XChange Solution Provider 2014 in Los Angeles. Specifically, Brown talked about the adjustments and changes 10th Magnitude needed to make in order to make money in the cloud services market.

"What are the challenges of moving from a classic solution provider business model to a modern cloud business model?" Brown told CRN. "The P&L is radically different. The way you get margins and profitability are very different, and so are the timelines. And if you don't understand that, then it's going to be very difficult for you to make the transition."

Specifically, Brown said cloud solution providers have an entirely different organizational structure than traditional VARs because of how businesses consume cloud services versus making large, capital expenditures of IT. "There aren't those big, up-front transactions. The cloud doesn't behave like that," Brown said. "It's about building and managing relationships and building new layers of revenue on top of an engagement. Cloud is usually a leaner delivery model with fewer people, too."

To that point, Brown said he agrees with the advice of Tiffani Bova, vice president and distinguished analyst at Gartner, for VARs looking to move to the cloud. At last year's XChange Solution Provider, Bova advised VARs to fire their sales teams and find new salespeople that know how to generate recurring revenue through subscription-based service models.

"The changes that you need to make to a sales model can be hard," Brown said. "You're almost better off starting an entirely new business around cloud than transitioning your classic reseller business."

And that's exactly what Brown did; he previously owned a software-focused VAR business many years ago, which he sold in 2002. After working at Dell for several years for the vendor's infrastructure services business, he went on to start 10th Magnitude in 2010 to leverage the high-growth cloud computing market.

Even though Brown started from scratch to create a cloud solutions company rather than transition his existing reseller business, he said 10th Magnitude had to make a number of changes to its business model and sales approach to find the right mix.

"We had an infrastructure migration and automation practice around Windows Azure when we started in 2010, but customers weren't ready to take that leap," Brown said. "We moved away from it for a while and just recently added it back because there's been a lot of maturation with cloud infrastructure migration in the last year."

And the good news is, according to Brown, small and midsize businesses are adopting cloud services and solutions at a faster rate than larger enterprises. "I think SMB customers are more willing to migrate to the cloud than enterprises because they're smaller and have less IT infrastructure to move," Brown said. "But I think there's been a lot of maturing with the enterprise cloud space, too."

Brown said he's seen a significant number of forward-thinking VARs that are actively changing their business models around cloud. Still, he said, most companies are exploring cloud opportunities and dipping their toes in the water rather than making full-scale organizational changes to their solution provider businesses.

"You can't really back into the cloud," Brown said. "You really have to change."

PUBLISHED MARCH 4, 2014