IT service providers start to see financial daylight in the cloud

Posted by Mike Vizard on Jul 12, 2016 10:19:19 AM

cloud_breakthrough.jpgFor some time now IT services firms across the channel have been struggling with transitioning their business models to the cloud. While recurring revenue generated via the cloud is more profitable in theory, providers of IT solutions that previously ran on premise now face a host of challenges ranging from how salespeople get compensated to cash flow issues that stem from how they recognize revenue.

The good news is that a new survey of 150 leaders across the IT channel spectrum conducted by Nintex, a provider of workflow automation tools, suggests that many more solution providers are finally making the transition to a cloud-first business model.

Specifically, the Nintex survey finds that 29 percent of the IT services leaders recognize that cloud and managed services are a more profitable means of delivering IT solutions. In fact, 22 percent of the respondents said managed services now generate more than 50 percent of their revenue. Another 37 percent say these approaches to delivering services improve the valuation of their companies—a number that can only increase as they take advantage of integration opportunities to drive custom workflows and business processes across multiple cloud applications.

Adjusting to new business models

Josh Waldo, vice president of channel and product marketing for Nintex, says those numbers are indicative of a channel community that is rapidly becoming more comfortable with cloud business models. The main difference, says Waldo, comes down to the organizations that create a dedicated cloud business unit versus those that try to wrap cloud services around an on-premise business model. Too often the interests of the on-premise and cloud teams conflict. Selling cloud services via a separate business unit is not only cleaner from a valuation perspective, Waldo says it eliminates any temptation to give the cloud service away to make an on-premise sale.

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Of course, IT service providers that were born in the cloud have a certain advantage. They don’t carry baggage in terms of how customers expect a service to be delivered or how the people that sold that service expect to be compensated. On the plus side, organizations that already sell IT solutions on premise already have an established relationship with the customer. For them, the cost of sales associated with closing a deal can be a lot less than a born-in-the-cloud provider.

Benefits of a successful transition

The good news is that vendors have come to realize how critically important IT service providers are to their financial success. In addition to absorbing many of the costs associated with bringing on and supporting a new customer, the IT service provider also has a vested interest in making sure that the customer renews its contract each and every year.

One way or another, every IT services firm is making a transition to the cloud. For those IT services firms that are overly dependent on selling IT solutions that run on premise, there’s no doubt that there is still a fair amount of financial pain to be experienced. But it’s also clear that many of those IT services providers are starting to come through the back end of that transformation much better off than they when they went in.

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Topics: IT Services Trends

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