Cumulus Global CEO: Cloud Margins Alone Won't Pay For That Vacation Home

Allen Falcon displayed a picture of a blank box to his peers attending a breakout session Tuesday at the XChange Solution Provider conference, which he described as a photo of the vacation home he could have bought with just the profits from selling cloud software licenses.

The CEO of Cumulus Global, a born-in-the-cloud solution provider based in Westborough, Mass., that partners with Microsoft and Google, said margins pay for overhead, but profit comes from the value-add: services, unique IP, integration and the like.

"The profitability comes from the services you bundle up and the intellectual property you can tie to the deal," Falcon told attendees.

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Falcon, who described himself as a "pragmatic evangelist" of cloud services, told peers his "evangelical zeal is tempered by 25 years in the industry at the management and CIO level."

No matter how cool technology can be, "if it doesn't make sense to the business, it's not going to fly," he told attendees of XChange, being held in Los Angeles this week.

That rule is especially true when serving the SMB market.

Small businesses all identify cloud adoption as a major IT initiative. But when surveys drill down, it becomes clear they are really looking to enable a number of business priorities: collaboration, mobility, social media, CRM, analytics and the Internet of Things.

A major shift is taking place in how small companies obtain those services.

Traditional IT distributors such as Ingram Micro, Synnex and Tech Data still drive a large portion of cloud sales. And new distribution models from cloud marketplaces such as AppDirect are "not just distributing licenses but automating the provisioning process," Falcon said.

"But that's not where we are in the SMB space," Falcon said. "Eighty percent of what I sell to small and midsize businesses isn't going through traditional distribution."

Most ISVs that serve smaller customers, often focusing on a unique market niche, have decided to manage their channels independently. And while many don't work with go-to-market partners, that doesn't mean there aren't opportunities to seize.

As an example, hundreds of CRM vendors target the SMB market, and 98 percent don't have formal channel programs.

"That doesn't mean you can't work with them," Falcon said. Most would be happy to work with a solution provider who brings in a new customer, fashioning a plan for the partner to sell services around their product.

And that's the type of business that drives profit.

"The reality is in the SMB space, your administrative and overhead, cost of money and cost of sales commissions, you're covering your overhead," Falcon said.

As solutions commoditize, margins are shrinking, he said. But there are a number of value-add plays for the channel that can bring those vacation homes closer to reality.

One is services, "providing another source of recurring revenue attached to the licenses we sell," Falcon said. As a Google Apps partner, Cumulus typically generates $7 in gross margin on services for every dollar it sees in licensing.

Another value-added source of revenue comes from enabling business solutions that solve real problems for clients, not just maintenance needs.

Updating an email server, or adding more network-attached storage, is just "unclogging a toilet," he said -- necessary, but not a boon to the business.

Falcon also advised partners to develop packages that add intellectual property, for which they can charge a premium. That doesn't need to be software, he said, it can be a process.

Vertical expertise and customization are two more avenues for greater profit. Companies will pay a premium for integration that pulls together two cloud environments, Falcon said.

Pete Zarras, president and CEO of CloudStrategies, a Cedar Knolls, N.J., Microsoft cloud provider, said he sees Cumulus Global's decision to include services over and above the licensing revenue as "bold and compelling."

"You have to be able to demonstrate that clients need that support and you are there to provide it," Zarras said. "Carving out that service value niche is the direction the whole industry needs to go: upmarket and up the value chain with our customers."

CloudStrategies itself is offering free mailbox migration for any customers that go with Microsoft Cloud Service Provider licensing and then layering support on top of that, said Zarras.