IBM's SoftLayer Growth Puts Strain On Channel, Partners Say

A year after acquiring SoftLayer, IBM’s cloud business is one of the company's fastest-growing success stories. The $2 billion acquisition of SoftLayer last July has helped IBM, in two short years, go from cloud nobody, according to analysts, to a cloud force to be reckoned with.

Partners say they are eager for a piece of the action. Existing SoftLayer partners tell CRN their cloud business has been booming over the past year under IBM's stewardship. But longtime IBM partners tell a different story. They claim IBM is struggling to fold SoftLayer into its existing channel programs as the fast-paced cloud culture of a nimble SoftLayer collides with the goliath IBM.

"We had early success with SoftLayer, but now we just can't get them interested in engaging us anymore," said one large IBM cloud partner.

Several longtime IBM partners say they have lost lucrative deals because SoftLayer channel account managers have been slow to sharpen their pencils and negotiate complex cloud contracts and bids on large cloud infrastructure deals. Others say referral fees and margins on recurring SoftLayer sales aren't competitive enough.

Tom Blair, senior vice president, global sales at SoftLayer, said IBM has been aggressively hiring to meet demand. "It's still early days. We have seen a tremendous amount of positive growth. The appetite for SoftLayer has been unbelievable. We are one year into this and we are just scratching the surface in terms of what we could be doing."

Blair said SoftLayer is listening and has addressed partner concerns such as updating its Customer Reseller Agreement to include larger margins for top-performing VARs. In addition, Blair said, the updated reseller agreement coincides with a boost to the co-marketing funds provided to partners as well as more training opportunities.

Blair said those efforts have paid off. SoftLayer, at the time IBM acquired it, had 777 partners and at the end of July it had 1,264 partners made up of ISVs, systems integrators, resellers and referral partners.

SoftLayer's direct sales are seeing a substantial uptick as well, growing its customer base of 22,000 to 28,000 over the past 12 months.

"The business partner channel -- as a percentage of overall software revenue -- is the fastest-growing segment of SoftLayer. Partners are rocking and rolling," Blair said. "We have doubled our channel footprint."

IBM'S IMPRESSIVE CLOUD GROWTH

At the time IBM bought SoftLayer the company said it was "predominantly a direct business" with 30 percent of sales driven through the channel. That's compared to other parts of IBM, such as its x86 server business, with 85 percent of revenue sold through the channel. IBM, as a whole, does 20 percent of its business through the channel.

While IBM's SoftLayer business is still a tiny single-digit sliver of Big Blue's overall $100 billion in revenue, its growth has been impressive.

IBM's cloud revenue jumped 86 percent in the second quarter to $259 million, according to a report last month by Synergy Research Group. Compared to behemoth Amazon, with $962 million in cloud revenue for the same period, IBM is outpacing AWS' growth rate of 49 percent and the cloud market as a whole, which is growing at 45 percent, according to Synergy Research Group.

Behind IBM's growth are big contracts and investments. This summer, IBM unveiled a seven-year direct outsourcing deal with public utility company NiSource, worth $600 million. Last August when the U.S. Department of Interior decided to move its IT systems to the cloud, it inked a $1 billion 10-year deal with SoftLayer. SoftLayer also inked a mammoth direct deal, called CalCloud, with the state of California to deliver cloud services to 400 state agencies.

With all that momentum, business partners say they are eager to share in IBM's cloud success. They see SoftLayer as a big opportunity for them to transform their own businesses, juicing them with Platform-as-a-Service, Software-as-a-Service and Infrastructure-as-a-Service offerings.

"Our early engagements with IBM have been very positive," said Joe Mertens, president and CEO of San Antonio-based Sirius Computer Solutions, an IBM partner and No. 28 on CRN's 2014 Solution Provider 500 list. "IBM has been ramping up SoftLayer. I'm impressed with the attention SoftLayer is putting in to getting it done right."

Among a crowded cloud marketplace dominated by cloud providers such as Amazon Web Services, partners say SoftLayer stands out. SoftLayer delivers a unique and specialized offering with a deep bench of complementary services and technologies.

SoftLayer offers a menu of virtual server environments to choose from, including bare-metal servers for large databases and legacy applications. SoftLayer, with 18 data centers worldwide, can provision a server within hours around the world. IBM has said it will have 40 data centers in 15 countries on five continents by the end of the year.

SOME PARTNERS FEEL SIDELINED AMID IBM CLOUD SUCCESS

But it's SoftLayer's rapid growth that has some partners feeling left on the side of the road.

"SoftLayer is outstanding and core to where IBM wants to go. But it's struggling to bring it into the partner community," said another large IBM partner who asked not to be identified. He said IBM's history of complex contracts and long waits for special bids is endemic of an IBM culture that just won't fly in the one-click-and-you're-done cloud culture.

"Getting pricing from AWS for disaster recovery services takes minutes," said the partner. The same quote from IBM can take considerably longer and sometimes requires navigating different IBM fiefdoms, he said.

Meanwhile, many SoftLayer direct MSP and SaaS customers CRN spoke to say their experiences have been positive. For direct customers such as Nexmo, SoftLayer has been key to staying competitive servicing its customers, which range from Airbnb to Alibaba.

A SoftLayer customer since 2011, Tony Jamous, CEO of Nexmo, said his virtualization needs (to process transactions in a server's RAM) and uptime needs (99.9 percent) could only be met with SoftLayer.

"There aren't many companies that can give me IaaS and PaaS solutions with the type of clustering and load balancing that allows me to scale a private network globally across continents and data centers as SoftLayer," Jamous said. "We have been growing exponentially," he said. "We have experienced no hiccups, just solid growth, ever since IBM purchased the company."

BUILDING A STRONG CHANNEL FOR THE CLOUD

But sources inside IBM who asked not to be identified acknowledge that the SoftLayer business is experiencing growth pains as it rushes to expand its cloud services around the world.

IBM sources tell CRN the company is still knee-deep in integrating SoftLayer into the larger IBM business. IBM said in 2014 that SoftLayer will double its compute capacity and has added a new data center somewhere around the world nearly every month.

"I think IBM does care about the channel, but SoftLayer is stressed internally when it comes to understanding channel needs with cloud billing and cloud contracts within multitiered distribution channels," said the large IBM channel partner.

Few partners question IBM's good intentions. IBM has been investing in partners with online training tools that enable them to transition their businesses to the cloud. Blair said 2,000 of IBM's 36,000 North American partners have gone through the SoftLayer Technical Fundamentals online training and that number will double by year’s end.

Another area of investment has been with IBM's Business Transformation Initiative, a series of one-on-one workshops with select IBM partners designed to show them how to transform their business models to selling higher-value cloud solutions and embracing an annuity-based sales model.

IBM Vice President of North America Channel Sales Tami Duncan predicts that over the next year IBM will at least double the number of partners selling SoftLayer from 1,000 to 2,000 partners.

"I think we'll see a ramp and scale [of that business],’ she said. "I haven't talked to a single partner that, when they understand the technical underpinnings [of SoftLayer], aren't blown away by it. They just need to have that deeper cloud positioning conversation with their clients to get more comfortable with it."

Meanwhile, all IBM partners say they want is a chance to transform their businesses -- just like IBM is trying to transform its own.

"More of our customers are looking for hybrid off-premise and on-premise solutions. As an IBM shop, we need that as part of our arsenal. But if we can't start a conversation with IBM, then it makes it hard to be strategic," said an IBM partner.

A midtier IBM partner who asked not to be identified added, "We don't work with SoftLayer, probably because they are still refining their channel program for traditional IBM resellers like us. Once they make it relevant to our customers, we might consider it, but not until then."

"We are in the process of fleshing out the channel program," Blair said. "Talk to us at the end of the year, and if you are still hearing about our growing pains I'd be shocked."

PUBLISHED AUG. 25, 2014