Last year at WPC 2013 we launched IDC profitability research to help all partners understand the potential for profitability in the cloud. This study was extremely popular, but we heard from many of you that now that you could see the opportunity, you wanted more guidance on how to make the change.
Recurring revenue: the new killer metric
We’ve just completed a new round of research that takes profitability to the next step and highlights how partners who have already made the transition to the cloud are becoming more profitable. This new study also confirms what we saw in last year’s study and what we’ve seen in working with partners every day: leading, cloud-oriented partners are more profitable. You can find all of the insights from this recent study in the new IDC profitability eBook, Successful Cloud Partners 2.0, which I urge you to take a look at.
One of the most important insights from the study is that recurring revenue is the new, big success metric that IT solution providers should be tracking. Recurring revenue brings predictable cash flow, higher gross margins, and potentially higher valuation of your company – which helps if you plan to sell your company at some point. The question then becomes, how to generate recurring revenue streams? The answer, like so many answers these days, may be in the cloud.
The growth of the cloud industry, which is expected to hit $108 billion by 2017, offers partners various ways to create recurring revenue streams through IP and Managed Services. The IDC research found that cloud partners (those earning > 50% revenue from cloud) had 1.6X the recurring revenue as a portion of total revenue versus other partners, and 1.8X more recurring revenue than the bottom quartile!
The paths to successful cloud transition are as varied as our partners; the research uncovered many creative ways in which partners are transitioning from a project-based business model to a services model that offers contractual recurring revenue. For example, some partners offer clients a bundle of monthly support hours that are discounted if the client pays in advance. The client uses these hours for support, SharePoint administration work, or whatever the partner is offering. If the customer isn’t using the full amount of hours, many of our cloud partners will act proactively by offering training to end users or providing new feature briefings to the key decision makers at no cost to ensure the customer is gaining value from the ongoing relationship to protect the annuity contract.
Transition isn’t always easy, we know, but the research confirms it’s worth the resource investment. For example, it is not uncommon for partners to experience an initial shortage of cash flow as they make the investments to move from a transactional/project-based revenue model to a managed-services model. However, the long-term potential of recurring revenue can outweigh the short-term challenges. Successful partners have found that if you can keep your customer churn rate low, and continue to grow your new customer acquisition, the recurring revenue model can be highly lucrative as you harvest the fruit of cumulative customer contracts over time.
The bottom line is that recurring revenue offers revenue predictability. Why is predictability so important? Well, the stock market and venture capitalists place a higher value on predictable recurring revenue as it translates into meaningful valuation. So whether you are looking for venture funding, to sell your business at some point, or maybe just a more secure income, you should be working on growing your recurring revenue. The research demonstrates – and no doubt many of our successful cloud partners would tell you – that managed services and IP is the best way to achieve that. I encourage you to take a look at the full eBook and to continue this dialogue with us and other partners at the Worldwide Partner Conference in July.
Find more great information on the opportunity for Partners to be profitable in the cloud from the 2013 IDC profitability research.