Cloud Transformation and Avoiding the P&L Trap

When it comes to cloud adoption, there’s no place but up for partners willing to make the necessary changes to their business models without falling into the common traps that could derail a company’s transformational journey.

The biggest pitfall that pops out for most business owners transforming to a cloud business model is the P&L (profit and loss) trap — that’s when new investments required to deliver cloud solutions aren’t immediately offset by cloud business revenue.

CloudSpeed’s Dana Willmer

“The nature of transitioning to the cloud and building a business that’s successful in the cloud is that it requires investments before the cloud revenue is generated,” said Dana Willmer, CloudSpeed founder, who shared the keys to cloud profitability recently at Microsoft Inspire 2017. “It’s a trap that unfortunately I’ve see partners fall into,” he adds.

The key investments Willmer refers to: developing offers and investing in acquiring customers, i.e. marketing and sales infrastructure; running campaigns; and paying direct sales commissions in order to get customers on board; to name a few.

The tough reality: Focus on short-term profitability and it’s going to get in the way of long-term profitability.

“You can’t focus on short-term profitability because it is going to go down as you make investments. Instead think about what’s happening to the valuation of your business — because if you’re doing the right things, the value of your business is going up,” Willmer said.

The key to economic success in the cloud is to focus on business valuation, not short-term P&L impacts.

This begs the question … what drives the valuation of a partner’s business?

The four key business valuation drivers: revenue composition, revenue growth, revenue durability and margin structure. Focusing on the cloud and building durable revenue streams, for example — the objective is to build revenue streams, which are recurring and last well into the future, according to Willmer.

Digging deeper into recent research that he conducted on the evolving Microsoft partner cloudscape, reselling cloud subscriptions was the fastest growing revenue stream, largely driven by Office 365 subscriptions. However, Willmer notes that, “In and of itself, the act of reselling is not enough to grow a business,” because there’s not enough margin.

Attaching other revenue streams to the resell motion is what will drive margin. The biggest gross margins for partners are driven by the development of their own IP, sold in either subscription form or perpetual license.

Why is IP a money-maker? Because you build it once and sell it many times.

“Having worked with ISVs, they report achieving margins that are 70-75 percent, sometimes a bit higher. That’s why IP matters to the partner’s business model,” said Willmer.

Another fast growing revenue stream is managed services – due to the complexity of the cloud coupled with the proliferation of devices, followed by fixed fee packaged professional services.

Adopting some of these fast growing revenue streams will help drive higher valuations for a partner business. That said, there are obstacles that partners face when transforming their business — the biggest is access to capital.