In the IT vendor market, there has been a marked change. People want to provide more services, and many companies are struggling with the rise and growth of Public Cloud, such as Microsoft Azure.
We help many IT companies that want to convert their business model from one-time revenues to monthly services. This requires more than just a monthly settlement model; it is a change in philosophy, organisation, people and commerce. And preferably while maintaining or growing sales! This is not easy, but it can be done, and our belief is also that, as IT vendors, you should.
If I have to name even one company in IT that has managed this globally, it is Microsoft. How did they do that, 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 change with retention, indeed growth in sales and profits. Managed to turn a supertanker in the Suez Canal and get out at a profit. It has been a process of years to get to this point, though. Just look at Microsoft’s financial statements:
Amounts are in millions of dollars
That is a growth over the past 5 years in sales of over 50% and a growth in net profit of over 250%!!! Who emulates them?
Microsoft did this primarily as a reaction. It was more a reaction to market developments than a strategic foresight decision. developments that Microsoft capitalised on was the strong rise of Amazon Web Services (AWS). What began as selling the server overcapacity of a fast-growing bookseller 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 did this pose a threat to Microsoft in its future development.
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 by 2020 the market accounted for sales of $312,000 million. Still AWS is the largest public cloud provider worldwide. But Microsoft has since found the slipstream and is following on Amazon’s heels.
Microsoft’s Azure cannot be captured directly in revenue figures, but it can be captured in growth. And that growth is significant. In response, Microsoft has set itself the goal of becoming the world’s largest cloud provider. And to achieve this, adoption by partners must be made much easier. This is where Microsoft is actively working.
Agile and Lean, Microsoft (quickly) develops services that are comparable to its competitors. Taking all the imperfections at face value, they market it through the Microsoft Marketing Machine I often praise. Across the partner channel, Microsoft encourages companies to look at a service. This is how they create demand. They can do that like no other, also because it is, of course, Microsoft.
The partner channel is then faced with the demand for Azure (but also Office365) and has to start switching, with … yes Microsoft. Those have solid training and partner programs ready for that, and from there partners will continue to grow in Microsoft revenue.
As the services continue to grow, teething problems are taken out and complexity is recognised. Simplification in portfolio, onboarding and administration and management are the result. For example, you no longer need a study to understand their SKU list and apply it to your customer’s IT problems.
After all, the best validation and product board is the market itself.
Value chain integration
There is another more important portfolio innovation going on at Microsoft for you as a Microsoft partner. Which is of future importance to your business model.
Previously, the basis of Microsoft’s services was primarily the Windows operating system. An important addition to that came with the release of the Office packages. And further integration into business software such as SharePoint, Navision, etc., among others. With the advent of Cloud Computing, few companies are still concerned with the operating system. And the growth of all kinds of Apps, which of course started with the Apple App Store. This has changed the way productivity applications are used.
It made Microsoft have to make sure it changed its position within the value chain. Because while the margins on successful software are very good, their renewal cycles make them relatively easy to replace. How do you keep your margins high and engage your customers even more? Right, by starting to provide a total service. Not the purchase of the license, but the use of the functionality. All SaaS vendors get this.
A good example of this is Office365. Whereas “before” we bought a license to install and use the software, now we buy the right to use the application. So that includes the platform on which the software runs.
This change in the value chain also has a downside. A downside in the delivery model. Indeed, Microsoft eagerly used a partner model to bring its license to market. Because of its new position in the value chain, it is also looking for the delivery model that fits its new position. This greatly affects the role of the Microsoft partner, i.e., the role 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 capabilities when new software or hardware becomes available.
Currently, however, it boils down to the following services:
- Margin on Office365.
The answer to this, also propagated by Microsoft by the way, is to provide total solutions. Create a bundle of products that together provide a workplace solution for customers. This has been adopted and implemented by many parties, the Managed Services Providers. And with success. But they now run into an entirely different problem, namely the comparability of the solution. I’ll tell more about this in a future blog.
This value chain integration, as just described, Microsoft is also going to implement on its Azure portfolio. The deployment of Azure is already getting easier and, in the longer term, many provisioning and management tasks are going to be further automated. AI and Machine Learning technology is being used to manage customer environments. As a result, less work is needed to minimise complexity, and more management tasks will be automated by Microsoft. Plug and Play Azure?
Who knows….. But then again, what does that mean for the role of Service Providers, who make their money from operational management?
The value of Azure to IT Service Providers has been ever-changing. At first, Azure offered a huge opportunity if you were knowledgeable about the platform’s complexity and therefore its capabilities. The deployment of technology will make Microsoft Azure more accessible, opening up new opportunities. But Azure’s complexity is also decreasing, which will eliminate its specialized nature. More convenience, but a shift in your revenue model as a provider.
Finally, ask yourself, with these developments, how do you as a Service Provider now maintain your value to your customer? What is your value proposition going to be with this? How do Microsoft developments fit into your growth strategy? I see three possibilities for this:
- 1. The customer-relationship
Microsoft is incapable of maintaining a mature and personal relationship with every company on the planet. Nor does this fit its ambitions and revenue model. However, a Service Provider can take this relationship. That does mean that emphasis will be placed on your customer and market interaction and much less on the technical interaction. This is a mind shift for many Service Providers who have become big with the help of technology anyway.
- 2. Customer value
Azure, whether fully managed by Microsoft or not, remains a semi-finished product. Powerful and valuable, but it does not provide the complete solution for a client. And there immediately lies the most important role for a Service Provider: The translation of the semi-finished Azure into a tangible, economic value for a customer. What business dynamics does Azure fit well with, what applications does it require and how does the client’s business growth evolve?
- 3. The customer choice
Finally, the value is in providing choice. As a Service Provider, you can offer a customer more than just Azure. It must be said that probably AWS, Google and the others also want to offer more and more value, but … as a Service Provider, you can offer and manage that choice and setup. Public, Private, Hybrid or, Multi cloud:, you are in charge of this and can offer the customer the best solution for their availability, compliancy and growth challenge.
As easy as it says here now, it is not that simple. After all, you as a Service Provider are not set up for this from your DNA and genesis. It involves a change in your operation, customer processes, portfolio and go-to-market to make these moves. Does that feel like a mountain to push in front of you?
I would say, don’t push too long. Before you know it, you are overtaken by your competitors or by Microsoft. Or by parties you don’t know now, have no history and understand the above possibilities well. Start refocusing in light of these developments and reason from the value you already provide for your customers. The good news is, you still have time, but don’t wait too long!
Together with my colleagues as at Force21, by the way, I can help you with this. Want to learn more about our take on these developments or how you can take quick steps in this regard? Contact us, we’d be happy to help you get started….