In The IBM i Trenches With: CloudFirst
October 17, 2022 Timothy Prickett Morgan
There aren’t that many companies that are in the IBM i business and that are publicly traded, but Data Storage Corporation, based in Melville, New York, out on Long Island, is one of them. Just down the road from another big software giant with a legacy history – Computer Associates, which is now part of semiconductor design company Broadcom.
Hal Schwartz, president at CloudFirst, got a bachelor’s degree in business administration from California State University in San Bernardino back in 1988, and worked in sales at CAC Leasing outside of New York City before starting his own leasing company, called Systems Trading Inc, in the summer of 1994. Schwartz continues to run Systems Trading to this day, but for the past six years has also been president of cloud services at DSC, which has now been given its own CloudFirst brand as DSC focuses on bringing cloud computing to the IBM Power Systems base, particularly for IBM i and AIX environments.
DSC has been in business since 2001, and started out providing disaster recovery and high availability services to the Power Systems market. We did a profile of DSC’s cloud business and its aspirations back in January, and thought with all of the changes going on in the cloud space in general and in the Power Systems cloud in particular, it would be a good idea to have a chat with Schwartz about what is going on out there.
Timothy Prickett Morgan: The consistent theme I see out there in the Power Systems business is that the big cloud providers all want to find those Power System resellers – who mostly support IBM i environments – and find some way to leverage those resellers, as well as managed service providers and application software companies, to help them build out their businesses while at the same time. Is that what DCS is doing with CloudFirst?
Hal Schwartz: We’ve been we’ve been doing this a long time, especially on the DR and HA side. But back when we started, there wasn’t an appetite for running production workloads at what we now call a cloud. Especially with a smaller company as we were at the time. So there was a little hesitation. But today, we are a full service cloud provider and we have lots of big customers and a slew of smaller ones.
Over the last few years, we shifted from direct sales to 100 percent channel sales. We are looking to build out our partner program.
While Amazon, Microsoft, and Google started a decade and a half ago in the cloud, and it really started taking off in the early 2010s. And companies have now fully embraced their clouds. But the IBM i market is still in its infancy when it comes to cloud adoption. It’s like 2009 with AWS. But resellers and MSPs have to pay attention because this shift to cloud is happening on IBM Power. We have seen our pipeline of customers triple in the past couple of years, and there is an appetite for cloud for a lot of reasons: They have aging staff, or they feel like they can get a better service level agreement. I have had CEOs and CFOs tell me that they can’t get an SLA out of their own CIO, but they can hold CloudFirst accountable and we do all kinds of things to guarantee a 100 percent SLA. And if we don’t meet it, there are penalties that we have to pay back. And the customers don’t have to worry about staffing to accomplish this.
Resellers and MSPs need to be aware that this is happening, and that IBM i clients are going to go with somebody else if they don’t figure out a way to be part of the cloud.
We know it is not an easy thing to build a cloud. The learning curve and capital expense to build out a cloud with best practices is really difficult. We have automated systems to patch IBM i systems, and we have experts looking at these machines and their software stacks 24×7. And that is what the clients are really looking for. We also have machinery in multiple datacenters around the country.
TPM: How many IBM and AIX service providers and resellers are out there? I see every cloud with Power Systems chasing them now, but I don’t have a good sense if this is an indirect channel that measures in the hundreds or thousands of companies.
Hal Schwartz: I don’t know if there are thousands, but someone told me recently that there are around 800 Power Systems resellers in the United States.
Right now, we have 52 partners, but not all of them are IBM resellers. Of these, 42 are what we call channel partners, who receive 15 percent of the contract value for the life of the contract. We also have six referral partners, who receive 10 percent of the contract value. In both cases, we bill the customers and provide metrics that our partners can monitor for their deals. And then we have four value added reseller partners, who are billing the customers. But we don’t allow just anybody to be a VAR partner – they have to have cloud experience, they have to have ticketing systems and so forth, and they have to know what they are doing because we have to know that we are going to get paid. VAR channel partners get our services for 20 percent off and they can mark it up any way they want.
TPM: How big is CloudFirst in terms of money and people? We don’t get a lot of insight into the revenue stream from cloudy sales of Power Systems capacity.
Hal Schwartz: We have 22 technicians on staff, which is bigger than Connectria’s IBM i business, and in fact, we have the biggest service deliver team of any of the IBM Power cloud service providers. And DSC is on track to do $21 million in business this year.
TPM: At the typical Power Systems-IBM i resellers, customers get a new machine every three, four, or maybe five years. They get a cut of the hardware and software sale and then offer various kinds of services, such as system monitoring, PTF patching, and sometimes even break/fix maintenance on the iron to keep the lights on. If they start reselling CloudFirst compute and storage capacity on the cloud instead of on premises hardware, do they have to live on a skinnier overall budget?
Hal Schwartz: No, the numbers actually work.
So we did the math, where it’s about a 20-month breakeven on a 25 percent gross profit margin on a resale. Our typical contract is 36 months, so they would have that extra 16 months. Now, their clients don’t always do every 36 months – some of them do four years, some of them do five. And we offer add-ons that IBM resellers don’t get. For example, we do IBM i security with Precisely’s Enforcive security suite.
This approach is like an annuity for the reseller. Look, I was an IBM reseller for many, many years. And there were times when we needed to do a deal to make payroll and we had to get out there and push it. Now, our channel partners get a steady check every month. We have got partners that we are paying $20,000 a month and if they continue with us, they can be making $50,000 a month. They know that money’s coming in, and they don’t have to go out and sell a box. You’re only as good as your last deal when you’re reselling.
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