TORONTO – Channel financing expert Bruce Stuart spoke twice at CDN’s Top 100 Solution Providers event, and both presentations underscored the importance of working capital for partners in making a successful transition to the cloud computing model.
Stuart, the president of channel consultancy Channelcorp and a CDN columnist, urged partners looking at the cloud to look at more than just their income statement. The cloud isn’t just a revenue margin business, said Stuart – it’s about return on invested capital.
“We’re in a business that has been focused on income statements and margins for years, but this is a different methodology and a different way of measuring return on investment,” said Stuart.
There’s a lot of concern in the channel about the transition from a transactional business model to a cloud-based recurring revenue business model, and Stuart said it’s important to get that transition right.
“Moving from left leg legacy to right leg recurring is a very elastic process, and if you don’t have extra capital you need to be pinpoint accurate as you move from the left leg to the right leg,” said Stuart. “If you have lots of capital you can shift very quickly.
How much capital is needed? Stuart said according to Channelcorp’s research, the transition will cost about $10,000 to $15,000 per full time employee, per month, and could take at least six to eight months to achieve, if not longer. To allow yourself one year for room to make some mistakes, Stuart said you’re looking at $120,000 per employee to manage the shift in revenue models, and all the attendant challenges.
“The reason nobody is moving (to cloud) is because nobody has the money to move. Half the industry is technically insolvent,” said Stuart. “It’s about redeploying capital in areas where previously there hasn’t been capital deployed. That’s the challenge.”
To make the transition successfully, and as quickly as possible, it needs to be leader-led, said Stuart. It’s not something that’s going to bubble up from the bottom.
“It’s a redeployment of capital and people, and major structural engineering,” said Stuart. “It’s a bone marrow transplant.”
And investing in marketing resources will be crucial. Only about one-third of partners have dedicated marketing resources today, and they’re going to have a head start on the cloud. For the others, Stuart said generating enough prospects to feed their cloud sales pipeline will be a real challenge.
“A cloud business needs five times the number of prospects generated from the marketing business that a typical partner needs,” said Stuart.
Once you get there though, Stuart said one major positive is that it will inevitably mean a higher valuation for your business, with $1 of recurring revenue being valued by the market at 3x compared to $1 of transactional revenue, similar to cable companies and telcos that rely in subscription revenue.
“Every per cent you shift your business to recurring revenue increased your business value by four per cent,” said Stuart.
