There is an apparent change in the market of IT suppliers. People want to deliver more services, and many companies are struggling with the rise and growth of Public Clouds, such as Azure.
We help many IT companies who want to change their business model from one-time revenue to monthly services. We are looking at more than just a monthly billing model. It requires a change in philosophy, organization, people and commerce. And preferably while maintaining or increasing turnover! It will not be easy, but you can do it. And our conviction is that as an IT supplier you have to do it too!
If I had to name one company in IT that has achieved this globally, it would be Microsoft. How did they do it, and what does that mean for you? Because Microsoft‘s change directly affects you as an IT vendor.
From Software Company to Service Provider. With a renewed corporate positioning. Deep respect. Such a change while maintaining, even more substantial, growth in turnover and profit. A supertanker managed to turn in the Suez Canal and get out again at a profit. It has been a process of years to get to this point. Just look at the financial statements of Microsoft:
Amounts are in millions of dollars
That is a growth in the last five years of more than 50% turnover and an increase in net profit of more than 250%! Who imitates them?
Microsoft did this mainly as a reaction. It was more of a response to market developments than a strategic, forward-looking decision. The result that Microsoft capitalized on was the substantial rise of Amazon Web Services (AWS). What started as selling the server overcapacity of a fast-growing bookstore is now a dominant public cloud provider. Possibly this was seen as a funny development at an online book club, but… that thought was overtaken by reality and posed a threat to Microsoft‘s future growth. Low cost, easy in/easy out and pay-per-use computing services based on a simple credit card payment. That was AWS in the beginning. And that has proven to be a decisive success. Meanwhile, IDC indicates that the market in 2020 will have a turnover of 312,000 million USD. AWS is still the most prominent public cloud supplier worldwide. But Microsoft has now found its slipstream and is hot on Amazon‘s heels.
Microsoft Azure is not directly measurable in terms of turnover, but it is measurable in growth. And that change is considerable. In response, Microsoft has set itself the goal of becoming the largest cloud provider in the world. Adoption by partners must be made much more manageable in order to achieve this goal. So Microsoft is actively working on this.
Agile and Lean, Microsoft develops (quickly) services that are comparable to the competition. Accepting all imperfections, they market this through the Microsoft Marketing Machine, which I have often praised. Across the partner channel, Microsoft stimulates companies to look at a service. That is how they create demand. They can do this like no other, also because, of course, they are Microsoft.
The partner channel is then confronted with the demand for Azure (but also Office365) and has to switch, with… Microsoft. They have solid training and partner programs ready for that, and from there, partners will continue to grow in Microsoft sales.
Gradually the services grow, the teething problems are removed, and the complexity is recognized. Simplification in portfolio, onboarding and administration and management are the result. For example, you no longer need to study to understand and apply the SKU list to your customer‘s IT problems.
After all, the best validation and product board is the market itself.
Value chain integration
Another more critical portfolio innovation is going on at Microsoft for you as a Microsoft partner, which is of future importance for your business model.
The basis of Microsoft‘s services used to be the Windows operating system. An essential addition came with the release of the Office packages and further integration with business software such as SharePoint, Navision and others. With the arrival of Cloud Computing, few companies are still concerned with the operating system. And the growth of Apps, which of course, started with the Apple App Store, has given us a different view on the use of productivity applications.
It meant that Microsoft had to change its position within the value chain. Because although the margins on successful software are excellent, their renewal cycles make them relatively easy to replace. How do you keep your margins high and your customers even more loyal? Precisely, by providing complete service. Not the purchase of the license but the use of the functionality. All SaaS providers understand this.
An excellent example of this is Office365. We „used“ to buy a license to install and use the software; we now buy the right to use the application, including the platform on which the software runs.
This change in the value chain also has a downside for the delivery model. Microsoft used to use a partner model to bring its license to the market. Because of its new position in the value chain, it is also looking for a delivery model that fits its unique situation. And all this has a significant impact on the role of the Microsoft partner, i.e. the part of the Service Provider.
Indeed, in the old situation, the partner earned from the following services:
Margin Microsoft Software License (Microsoft)
Margin Systems on which the purchased software was going to run (Hardware Vendor)
Sales Installation of systems and software (Microsoft Partner)
Margin related software that customer also needed (Software vendor)
Sales maintenance services on the systems + software
Upgrade possibilities when new software or hardware becomes available
Currently, however, it comes down to the following services:
Margin on Office365.
The answer to this, also propagated by Microsoft, is to offer total solutions. Create a bundle of products that together provide a workplace solution for customers. And so, this comprehensive solution has been successfully adopted and implemented by many parties, the Managed Services Providers. But they now run into a whole other problem, namely the comparability of the solution. I will tell more about this in the following blog.
This value chain integration, as just described, Microsoft will also implement on its Azure portfolio. The deployment of Azure is already becoming more uncomplicated, and, in the longer term, many provisioning and management tasks will be further automated. AI and Machine Learning technology will be used to manage customer environments. As a result, it minimizes the complexity, and Microsoft will automate more management tasks. Plug & Play Azure
Who knows….. But then again, what does it mean for the role of Service Providers who make their money from operational management?
And now what?
The value of Azure for IT Service Providers has constantly been changing. At first, Azure offered a massive opportunity if you were knowledgeable about the complexity and, therefore, the platform‘s possibilities. With the use of technology, Microsoft Azure will become more accessible, opening up new opportunities. But also the complexity of Azure will decrease, and therefore the specialist character will disappear. More convenience, but a shift in your revenue model as a provider.
Finally, you ask yourself, how do you maintain your value to your customer with these developments as a Service Provider? What will be your value proposition? How do the actions of Microsoft fit into your growth strategy? I see three possibilities for this:
1. The customer relationship Microsoft is not capable of maintaining a mature and personal relationship with every company on the planet. It does not fit its ambitions and revenue model either. A Service Provider can take this relationship, which means that the emphasis is on your customer and market interaction and less on the technical exchange. So a true mind shift for many Service Providers who have become big using technology.
2. The customer value Azure, whether fully managed by Microsoft or not, remains a semi-finished product. Powerful and valuable, but it does not offer the complete solution for a client. And that is the most crucial role for a Service Provider: The translation of the semi-finished product Azure to a tangible, economic value for a customer. What business dynamics is Azure a good fit for, which applications it requires, and how does the customer‘s business growth develop?
3. The customer choice Finally, the value is in offering choice. As a Service Provider, you can offer a customer more than just Azure. It must be said that probably also AWS, Google and others want to provide more and more value, but… as a Service Provider, you can provide and manage that choice and setup. Public, Private, Hybrid or Multi-cloud: it‘s your call, and you can offer the client the best solution for their availability, compliancy and growth challenge.
As easy as it looks here, it is not that simple. As a Service Provider, you are not equipped for this from your DNA and history. It involves a change in your operation, customer processes, portfolio and go-to-market to make these steps. Does that feel like a mountain to push ahead of you?
I would say, don‘t push too long. Before you know it, you will be overtaken by your competitors or by Microsoft. Or by parties you do not know, have no history with and understand the above possibilities well. Considering these developments, start reorienting, and reason from the value you already offer to your customers. The good news is, you still have some time but don‘t wait too long!
Together with my colleagues at Force21, I can help you with this. Would you like to know more about our view on these developments or how you can take quick steps in this direction? Get in touch, and we are happy to help you.