Tercera 30

Why working with ISVs that have a consumption revenue model is different

February 15, 2024 by Tercera Team Leave a Comment

A Q&A with Hakkōda, an Elite Snowflake Partner

In every new era of technology, consultancies and services firms have had to adapt to the way their software partners go to market. The shift towards consumption-based pricing models in the cloud’s Third Wave is no exception.

In the late 1990s and early 2000s, software vendors relied on perpetual licenses for on-premise solutions, with their service partners focused primarily on one-time implementations and periodic renewals. This model gradually gave way to Software as a Service (SaaS) subscription pricing, necessitating a greater emphasis on adoption to ensure customer satisfaction and retention.

Today, we’re seeing many of the software vendors across the Tercera 30 lean into consumption-based pricing models, positioning their software as a utility where customers pay based on actual usage. This includes hyperscalers like AWS and Microsoft, as well as data platforms like Snowflake – an ecosystem that we profile in detail on our Tercera 30 report.

Interviews and details around Snowflake's service partner ecosystem — Details, interviews and opportunities within the Snowflake ecosystem. Click for the full profile.

While this approach brings many intrinsic benefits to customers, it’s a different muscle for services firms that grew up in the era of traditional software (or even SaaS) models. It requires partners to take a more thoughtful approach with customers – finding value-added ways to drive more consumption of the platform while making sure that consumption is efficient and cost effective over time.

We sat down with Hakkoda’s CEO (Erik Duffield) and CRO (Ryan Tucker) to talk through this new mindset and how Hakkoda has developed a partnership model that prioritizes long-term value creation over the “lift and shift” mentality of legacy service providers. Hakkoda is one of Snowflake’s top services partners, specializing in healthcare, financial services, supply chain and the public sector. The firm was named Snowflake’s Americas Innovation Partner of the Year, and has grown in the triple digits for the last two years. Full disclosure: Tercera is an investor

Why do you believe the consumption-based business model of Snowflake and others is positive for customers?

Erik: A consumption model is like a utility, the software provider only recognizes revenue when it’s used, which is a huge benefit to the customer. Not only do customers only pay for what they use; it puts a clear focus on the software provider to drive value. It also lowers the cost of entry to modernize technology, leveling the playing field so that both small companies and large companies can have access to the same technology. Large companies can benefit from their scale by contracting for a lower consumption credit cost, but they are both able to leverage the same platform.

As a Snowflake partner, what does this mean for how you engage with Snowflake and their customers?

Erik: As a leader who’s built services companies supporting all different models, I love how the consumption model reduces the quarter-end sales heroics at ISVs. Snowflake and other consumption-based providers think longer term. It’s good for partners like us who think similarly. We are able to bring industry use cases, build on the data customers have, and integrate the various ecosystem technologies around the platform. This leads to more consumption so our strategic partner is happy, and leads to tangible and transformative outcomes for our clients.

Ryan: Traditional SaaS license models put more pressure on ISV sellers to increase the size of deals at the end of each quarter and year, which can reduce the active dialogue with buyers until just before the renewal date. Consumption models like Snowflake connect the buyer to the ISV, and perhaps more importantly partners like Hakkoda, throughout the full contract period as they view consumption as a barometer for actualizing business value.

Does a consumption-based model ever act as a disincentive to increase usage?

Erik: No, there’s always a focus on ‘healthy consumption.’ In every program, we actively try to reduce the usage from inefficiencies which often come from legacy design patterns. Then we redirect that consumption to driving outcomes. This always, 100% of the time, leads to more consumption.

Ryan: Buyers have an ongoing understanding of the value they are getting. Snowflake has built AI-driven tools like SnowPatrol to monitor use and the propensity for use of other cloud applications, which can help drive healthy consumption.

Does this model change the type of clients you seek?

Erik: No. For Hakkoda we are focused on our core verticals: healthcare, financial services, supply chain/logistics, and the public sector. The consumption model benefits our customers but hasn’t changed who we work with.

Ryan: If anything, the model brings our key verticals and buyer personas more into focus, not less.

You have to really understand a client’s business to drive consumption. How do you approach this?

Erik: We bring deep industry expertise to our clients. We know their business objectives, underlying technologies and the state of their talent pools. Our focus is on specific outcomes we outline with each client. The more value we drive, the more they consume, but it’s always more efficient and cost effective than legacy license or appliance models.

Ryan: For example, our healthcare team combines deep data and analytics domain knowledge with expertise in-industry from places like Kaiser Permanente, Scripps Health, Corewell Healthcare, St. Jude Children’s, etc. This brings a unique perspective to a problem like migrating or unifying data from EMR platforms like Epic, not just a migration to Snowflake.

Why are you (and your clients) so gung ho on Snowflake?

Erik: Being very focused as a data consultancy, we aren’t all things to all people. We want to work with the best data tools and platforms on the market, and we believe Snowflake is that platform. It is constantly introducing new capabilities which expands our market as well. For example, we have a big focus on building data apps on the Snowflake platform.

The magic of Snowflake is in making complex things simple. For C-level executives in large organizations, they know adoption and change management are essential to success. Whether it’s streaming data ingestion, data governance, massive performance, or machine learning and GenAI, Snowflake’s lens of the world is to enable these capabilities in organizations as simply and scalably as possible. That’s why they are such a great partner for Hakkoda. This isn’t a science experiment or a PhD thesis. Our shared customers don’t like to admire complexity – they want to solve real problems, real fast.

Ryan: Customers are using Snowflake to do truly transformative things. As an example, we are helping a global logistics company evolve beyond logistics to a productized analytics company so they can meet customer demands and open new revenue streams. Their customers want to use robotics and predictive analytics to optimize their supply chain, but they don’t want their data sent to them – they want it shared directly with them in real time. These are the kinds of things we’re doing for Fortune 500 companies and beyond.

Six trends impacting IT services in 2024

January 26, 2024 by Tercera Team Leave a Comment

Let’s face it, 2023 was a tough year for technology companies – inflation, layoffs, high interest rates, market volatility, and elongated sales cycles. All the fun things.

Technology services fared a little better. Growth in the IT services market was more than double the growth of broader technology spending, and many in-demand specialist firms grew upwards of 30-40% year-over-year. However, with dampened valuations and new logos hard won, even the best firms had to learn how to balance growth and profitability more than ever before.

This year will inevitably present its own challenges, but we’re optimistic about what 2024 will bring to IT services companies. Gartner recently released its 2024 worldwide IT spending forecast, and it expects broader tech spending to double this year (6.8% growth vs. 3.3% in 2023). The IT services segment is expected to see the most growth (8.7%), and at $1.5 trillion, will become the largest segment of IT spending for the first time. IT consulting is especially well positioned, projected to grow 10-15% in 2024 across nearly every industry.

IT services is expected to see the most growth of any technology spend area (+8.7%), and at $1.5 trillion, will become the largest segment of IT spending for the first time.

The growing interest in artificial intelligence (AI) is opening up new opportunities for consultancies that can guide enterprises and modernize legacy data and tech stacks. And while AI is creeping closer to the trough of disillusionment, we believe it’s a catalyst for a number of the trends we’re highlighting for 2024.

We know releasing our view on these towards the end of January gives us a bit of an unfair advantage, but why not build on what so many smart people have predicted before us, and then consider how these trends will specifically affect technology services leaders?

Without further ado, here they are:

AI consultancies get more attention than AI tools.

To date, most of the capital for Generative AI has been doled out to software startups and those working on foundational large language models (LLMs). In 2024, we believe the focus will turn to the professional services firms that are advising, implementing and preparing both people and systems for the disruption AI will bring.

Boards are pushing investments in this area, at the same time lawmakers, employees and customers are scrutinizing the technology. Whether an AI optimist or an doomsdayer, nearly every CEO is trying to figure out how to use AI to work more efficiently, boost profitability, alleviate human resource constraints, and create new revenue streams. And they all need help navigating this technical and political minefield.

Many are turning to the Global Systems Integrators (GSIs), all of whom are committing big bucks to their AI and data practices and partnerships. However, we believe it’s the specialist firms that may see the most attention. Customers are growing tired of the high level “art of the possible” presentations. They want firms with deep expertise in a specific industry, technology platform or functional area that can tell them what they are ready for today — and what they are not.

They want firms that can move faster, separate the hype from reality, and help them make incremental progress on AI initiatives. Early adopters – and we are early here – will gravitate to partners who are early adopters themselves. Teams that are using AI extensively in their own business, not unlike what we saw in the first wave of cloud computing.

Contract sizes continue to shrink, but sales cycles move faster.

One banker with whom we spoke labeled 2023 the “year of the CFO.” As companies looked to conserve capital in 2023 and growth slowed, CFOs delved deeper into spending plans and became a bigger part of the buying committee – even for small deals. This slowed deal cycles and, in many cases, downsized or halted contracts altogether.

The services firms with which we speak are seeing the purse strings loosen a bit, and are cautiously optimistic about 2024. However, few are banking on the large-scale digital transformation projects of the past. The market for enterprise, customer, employee and infrastructure transformation is maturing, and high failure rates for these big bang projects have made buyers (rightfully) cautious.

Companies will continue to spend carefully in the area, focusing on essential projects and approaching transformation with a more phased approach. This means a push to shorter, less expensive projects with a more rapid sales cycle. Technology services companies will need to factor these smaller, more frequent deals into their planning and sales pipelines and start honing their “land and expand” playbooks.

“Artificial identity” takes center stage as AI both adds and alleviates risk.

Deepfakes and voice cloning have made headlines over the past year. Bogus images of Pope Francis meeting with satanic priests, and viral phishing cons featuring Taylor Swift have put a growing focus on how AI can be used to create realistic deep fakes. Expect such artificial identity scams to snowball in 2024, affecting reputations, revenues, elections, and who and how we trust.

However, the real economic impact won’t come from pretend pop stars peddling cookware, it will be bad actors using AI and artificial identities to steal personal data, access corporate systems and target ordinary people. Successful breaches cost in excess of $7 million on average, and companies of nearly every size are now being exploited as an attack vector.

On the plus side, vendors and managed identity service providers are also finding ways to use AI as a means to predict threats and vulnerabilities, investigate them, and remediate cyberattacks in real time. AI-powered passwordless authentication, which uses biometrics to navigate the digital world, will become a bigger area of focus. However, companies with dated systems might be hard-pressed to take advantage of this trend.

Hybrid clouds and edge computing gain traction amidst a growing focus on cost and speed.

In 2024, enterprises will continue scrutinizing their cloud spend, but will also continue shifting more workloads to the cloud. Gartner predicts cloud spending in 2024 will grow nearly 20%, with the fastest growing categories being infrastructure-as-a-service (26.6% growth) and platform-as-a-service (21.5%). This, plus the AI wars among the hyperscalers, should bode well for services partners in the AWS, Azure, and Google Cloud ecosystems. Another key trend driving cloud spending is the continued rise of industry cloud platforms.

However, the expense of running data-intensive applications is also pushing some customers to shift specific workloads back to on-premise data centers or to expand their use of edge computing. Edge computing — where data is processed at the edge of a network close to data sources — is projected to have a 36.3% CAGR between 2023 and 2030, faster than cloud growth but on a much smaller base. This could be a boost for legacy storage, compute, and networking vendors that have lost ground in recent years and the partners in those ecosystems.

Technology services M&A re-accelerates in 2024.

In 2023, the volume of M&A deals across IT and digital services remained surprisingly strong. It wasn’t as strong as the boom years of 2020 and 2021, and valuations were lower, but good firms with solid business performance still found homes. These deals were dominated by large GSIs snapping up firms to fill business gaps, diversify into higher-performing areas, and bolster revenue. We saw much less activity from larger private equity buyers, outside of tuck-in M&A for existing platforms.

We expect PE buyers to be much more active in 2024. Over the last few years, many of these firms have raised large funds that aren’t fully deployed and they are under pressure to put that cash to work. The highest valuations will continue to go to firms that are growing faster than their peers, have a base level of profitability, and focus on promising areas such as data modernization, cloud migration, IT composability and disruptive high-demand software ecosystems.

At least 4 of the Tercera 30 will issue IPOs, be acquired, or go private.

The Tercera 30 – our view of the top cloud ecosystems for building or scaling a channel-oriented technology services firm – includes a pretty diverse group of cloud vendors. It includes large established market “anchors” (such as Microsoft, AWS and Oracle); high-growth market “movers” (such as Nvidia, Crowdstrike, HubSpot and Atlassian); as well as privately held “challengers” (such as commercetools, Databricks, Stripe and Contentstack). We believe at least 2 of the ISVs across the anchor and mover will trade ownership, while two of the challengers will issue IPOs.

We’re not the only ones who believe the IPO market is poised to open up in 2024, and we believe it could be opportunity for some of our privately held market challengers to raise the capital they need to scale and build out their vision. This could open up big opportunities for services partners in these ecosystems.

If volatility returns, low stock prices could present buyout opportunities for some of the larger, more undervalued software companies. This could include strategic acquisitions, such as Cisco’s recent purchase of Splunk, or PE firms looking for opportunities to optimize and re-invigorate a business.

Regardless of how our predictions pan out, we can be certain that 2024 will be an intriguing year for the technology services sector, characterized by a pace of change that continues to accelerate every year. We’ll be expanding on many of these trends throughout the year in our monthly newsletter. If you’re not already a subscriber, you can remedy that here.

Forecast vs. reality: Evaluating Tercera’s 2023 predictions

December 29, 2023 by Michelle Swan Leave a Comment

As we step into a new year, it’s a prime opportunity for reflection and improvement.

Last January, we highlighted seven trends we thought would impact and test IT services firms in 2023. Those trends covered everything from shifting strategies within the Tercera 30 (the 30 cloud software ecosystems we believe hold great potential for services firms), to the rise of IP and AI, to a growing focus on mental health. Quite the range!

So how did we do? Did our insights align with the unfolding realities of the industry? Not surprisingly, some did and some didn’t. But overall, we didn’t do too bad and we’d give ourselves a high B.

Here’s the rundown across each trend (described in more detail in this ebook).

Trend 1. Customers, not talent, will be the battleground

Grade: A

In early 2022, finding and retaining top talent were the biggest barriers to growth. Towards the end of the year, layoffs were on the rise and deals were starting to slow as customers battened down the hatches to weather a potential recession, so we expected investments to shift from employees to customers. And we weren’t wrong.

Tech layoffs continued through 2023, increasing more than 50% from the previous year. Deals and deal cycles slowed and increased in difficulty. Many software vendors revamped their sales and marketing teams as a way to cut costs and find a more efficient go-to-market motion — moves that will likely prove lucrative in the long run, but in the near term hurt services partners who depended on that deal flow.

So why don’t we give this prediction an A+? Because acquiring hot talent is still hard. There may be more available labor overall, but finding scarce talent in areas like data, AI and security remains a battle.

Trend 2. Intellectual property (IP) and automation move from marketing to mandatory

Grade: B-

IP and automation have always been critical for services, but with companies looking to improve productivity through AI and showcase differentiation, we predicted services IP would become a must-have instead of a nice-to-have. This did happen to some extent, but many firms chose to pull back on big investments and system upgrades in favor of profitability.

We did see an increasing focus on AI and IP integration into sales and delivery teams. In a survey we conducted this summer of 50+ IT services firm, 43% of respondents said they are leveraging AI to create efficiencies and scale, using it to write code, create marketing content and support everything from DevOps to RFPs.

A number of our own portfolio companies are piloting internal roll-outs. For example, Zennify, a consultancy specializing in digital transformation within financial services, developed an AI co-pilot called Arti that enables employees to access existing assets and data sources to resolve issues and develop solutions faster.

So, while we did see some investment in services IP and automation, the level of investment was lower than we expected.

Trend 3. The Tercera 30 goes vertical, and deeper into healthcare and manufacturing

Grade: B

One of the biggest trends we see in the third wave of cloud computing is software and services firms delving deeper into industry-specific solutions. By 2022, the most mature enterprise software vendors (companies like Oracle, SAP, Microsoft and Salesforce) had developed industry clouds, with newer SaaS companies following suit. In fact, two of the Market Challengers in our 2022 Tercera 30 were industry-specific SaaS players – nCino and Veeva.

With this as the backdrop, we expected the Tercera 30 to continue verticalizing and to make greater investments in healthcare and manufacturing given post-COVID supply chain challenges and the growing need to digitize dated medical systems.

We did see progress here. For example: ServiceNow launched supply chain workflows, Snowflake launched its Manufacturing Data Cloud, Salesforce announced its Life Sciences Cloud, AWS announced its Manufacturing and Industrial Competency, and Google Cloud rolled out new AI models for healthcare. Just to name a few…

But on the flip side, Oracle warned investors about near-term weakness in Cerner’s revenue growth and we saw the two industry-focused players on our 2022 Tercera 30 drop to make room for nine new ISVs that were more horizontal in nature – most in the AI, data and security segments. So while we got much of this one right, we didn’t knock it out of the park.

Trend 4. Analytics and AI move up in importance and out of their silos

Grade: A+

Unless you’ve been living under a digital rock, you know this prediction couldn’t have been more accurate. In 2022, ChatGPT opened people’s eyes to what’s possible with AI and global adoption was already starting to tick up so we expected that trend to continue.

It did.

Investors poured billions into both startups and well-known AI brands like OpenAI, Anthropic, Nvidia and Cohere. According to G2, 643 new AI-related products dropped between September 2022 and September 2023 alone!

GSIs invested heavily in their AI and data practices, and spent millions hiring and training up AI specialists – partly to capture customer demand but also to prepare their own business for the disruption AI will bring.

In less than a year, we’ve seen AI quickly move beyond IT and data scientists and embed itself into nearly every function within the business, from marketing and sales to accounting and procurement. According to research that Salesforce conducted this summer, 61% of workers already use or plan to use Generative AI, and our bet is that number is even higher heading into the new year.

Trend 5. Services consolidation continues, but deals get smaller

Grade: A

The global M&A market for IT services firms peaked in 2021 and early 2022, but began to steadily decline in the second half of 2022. Heading into 2023 we expected M&A to start ticking back up with cash-strapped firms looking for a good home and well-capitalized firms wanting to fill gaps in their portfolio. At the same time, we expected those deals to be smaller than in previous years.

So how’d this prediction pan out? About how we expected.The volume of M&A deals across IT and digital transformation services did increase year over year, remaining surprisingly strong even through market uncertainty. Accenture alone acquired more than 40 companies in 2023. However, the value of global M&A transactions and overall valuations declined. Great assets in hot markets with good fundamentals continued to receive strong valuations, but they were more the exception than the rule.

Source: Canaccord Digital Transformation Update 2023

Trend 6. Software vendors prioritize partners that BYOC (bring your own customers)

Grade: A+

Software vendors have always looked more favorably on partners that have their own demand engine and can bring deals to the table. However, with growth starting to slow, we expected that balance of trade would become even more important within these relationships, and that services partners would see fewer customer handouts from their software channel partners.

This prediction was right on the money.

In 2023, many software companies restructured and right-sized their sales and partner teams, causing deals to slow and hurting the lead flow to many partners dependent on them. It also forced partners to rebuild relationships – sometimes multiple times within the year. And some software players, hurting for revenue, started to redirect deals to their own internal professional services teams rather than routing them to customers.

Those partners that brought leads and customers to the table, continued to see tailwinds.

Trend 7. Retention and mental health (finally) get more attention

Grade: C

This was, unfortunately, one of the biggest misses on the list. As HR teams shifted modes from “How fast can we hire?” to “How do we keep our great employees engaged?”, we thought retention and mental health would finally get the attention both deserve.

We did see some heightened focus on employee wellbeing, and generally speaking, everyone from entry-level employees to CEOs seem more comfortable talking about mental health. Yet all that talk didn’t (as far as we can tell) translate into more paid benefits, prevention programs, or training.

In 2023, many companies needed to keep costs down and voluntary attrition wasn’t as much of a problem as it had been in previous years. So, in retrospect, it’s not surprising that retention programs and mental health benefits were seen as more discretionary spending. However, as layoffs subside and employees become more open to making a move, it will be interesting to see if the companies that did invest here perform better in the long run.

Final Grade: B+

Overall, we did better than expected and improved on our performance from last year. Our home runs were the greater emphasis on customers and the continued expansion of AI. Sadly, the biggest miss was the prioritization of mental health and retention.

While we’ll take the B+, it’s clear that next year we might need to get a little more aggressive with our predictions if we’re going to live up to our value of being constructive contrarians. If you have suggestions or comments, hit us up on LinkedIn or send us an email at info@tercera.io.

Is it time for a new strategic partner?

October 2, 2023 by Gary Rinedollar Leave a Comment

A smart partnership strategy can be the difference between growth and hyper-growth for a professional services firm.

In the most recent Tercera 30 report, which highlights the top cloud ecosystems for partners, Tercera talks about the importance of picking the right strategic partner, and why who you pick matters greatly. Pick the right one, and you’ll feel the tailwinds. Pick the wrong one, and you could waste time and money.

However, even if you have a strategic partnership that is successful and well aligned to your go-to-market (GTM) motion, there comes a time when you might need to expand or diversify to reach the firm’s full growth potential.

I’ve spent 30+ years building, managing and scaling business development and partner programs for companies like Appirio, Oracle and Amberpoint, and in that time I’ve learned a lot about the importance and complexities of strategic alliances between professional services firms and their software partners.

This blog will pass along some of those learnings, and hopefully help you see the signs for when it’s time to diversify.

The different types of technology partnerships

First, let’s start with the basics. Most firms can (and should) have different tiers of partners — ranging from strategic to solutions to ecosystem partners. Each tier has their own implications for your GTM plan, but the top-tier, strategic partnerships are the most crucial.

Strategic partners are your closest GTM allies. These are the software platforms around which a professional services company can build offerings and practices, and partner with to drive leads and mindshare. Most mid-sized services firms have only one strategic partner. At most, you want two or three strategic partners. A common mistake of young or inexperienced organizations is to stretch too thin in this regard.

Solution partners are a step below in the priority ranking because they help you to fill out the tech stack and provide your customers with a more comprehensive solution. They are typically complementary to your strategic partners, and are often a part of your strategic partner’s own partner network. Ecosystem partners are lower in priority, tangential solutions that help you bridge gaps and expand reach.

As the IT stack becomes more composable and large enterprises rely on an increasing number of technologies to operate, having capabilities and relationships across these solution and ecosystem partners becomes more important.

However, tiering your partners is critical for positioning and internal resource allocation. When prospects and customers visit your website, it should be immediately obvious which companies you consider a strategic partner. Sales and delivery teams need to understand which partners should get the most attention.

For example, Hakkoda, a data modernization services firm, has chosen Snowflake as its strategic partner. Snowflake’s cloud data platform is a perfect solution around which to build an array of services, from data engineering and governance to custom development for data-rich applications. However, Hakkoda also works closely with a large number of solutions partners that are closely aligned with Snowflake to provide customers a richer solution – vendors such as Matillion, Sigma, FiveTran and Dataiku. But it’s very clear from Hakkoda’s partner page that Snowflake is the common thread and the strategic focus.

How do I know it’s time to expand or diversify from an existing partner?

This is definitely more of an art than a pure science. Either way, it’s important to take a proactive approach—don’t wait until it’s too late to make your move. You might want to reconsider your dependence if you see any of these warning signs.

The ecosystem is becoming increasingly crowded. Let’s say you were an early adopter of a partner ecosystem. You had great brand recognition, sales and marketing traction, and a defensible white space in the ecosystem. But now, due to the partner’s success, the ecosystem is becoming crowded. Your white space is becoming harder to defend. Large global system integrators (GSIs) are taking oxygen from the room. Services pricing becomes a race to the bottom as low cost providers enter the market. Uh oh.

You’re bringing more value to the table than your partner. In great partnerships there will always be a balance of trade, where you bring them into deals and they bring you into deals. You help each other build brand recognition and drive customer success. But there may come a time where that balance of trade becomes imbalanced. If you’re noticing less and less sales and marketing support or less executive engagement, that could be a warning sign.

Your partner is trending competitive in your space. As software companies grow and evolve, they may start to build their own internal professional services team or build offerings in areas that compete with you. Whether through strategy or leadership changes or acquisition. If that happens, it could have an impact on your business.

You’re overly concentrated for your situation. Early in a business, where focus and being the best in the world at something matters, it can be smart to concentrate your efforts behind one partner. But there may come a point, often when you reach a certain size, where one wrong turn or market dynamic from your partner could put a big hit on your business. It’s the classic “too many eggs in one basket” scenario.

Your strategic partner is starting to struggle. All companies go through ups and downs in their journey, and if you’re seeing signs of growth slowing, margin pressure, major quality issues with the technology or slowing innovation, it might be time to seek new waters.

What are my options for new strategic partnerships?

Diversifying or expanding strategic partnerships isn’t a decision to be made lightly. At the very least, you need a business plan that thinks through the following questions:

How does the new solution fit into your current GTM strategy?
What does it solve for your customer base?
How will this new partnership bring in new customers or expand existing ones?
How will you fit into the white space within this new ecosystem?
What impact will it have on your existing partnerships?
What resources will you need to invest, over what period of time?

Building new partnerships takes time and resources, so don’t make these decisions without a plan. Once you have that plan in place, there are a few options:

First, you could shift sales, engineering and marketing resources away from your current strategic partner in favor of a new one. This can help make an impact quicker, but a seismic shift like this is also a big risk.

Second, you could keep your current strategic partner while adding on some complementary and adjacent solutions partners. With this path, you might be able to keep your GTM motion, while expanding into a new adjacent category. It allows you to become less dependent on your strategic partner, while you start moving towards one or more newer partners. However, this will likely require additional resources to train sales people, develop new marketing materials, and build a solution for an entirely new market segment.

The third option is bringing on other strategic partners that are in the same segment as your existing partner. For instance, if you’re an AWS partner, you may choose to also partner with Google and Microsoft Azure. This can significantly open up your total addressable market, however, there are some risks here. Going from being all-in on one partner to becoming more agnostic could require a substantial adjustment to your GTM strategy. You may also need to invest more in sales and marketing as you move away from a partner-led GTM to a direct sales model. Finally, you could lose momentum from your current strategic partner if they believe you’ll push deals to competitors.

How do I work through the options of a new partner?

Ultimately, your partner selection comes down to what you believe will set you up for long-term success. It requires data analysis, executive team and investor input, and a thoughtful plan.

You’re also going to need to define both the internal and external criteria for your ideal partner. Here are some questions to get your started:

How do they fit within your corporate strategy?
How do they align with your growth objectives?
How can they expand or complement your current capabilities or offerings?
What’s their position in the competitive landscape?
What’s their geographic coverage and focus?
How mature is their partner ecosystem?
What level of support will they provide?

From there, drill down into specific metrics like growth rates, perceived white space, and what specific services opportunities these partners could open. The Tercera 30 report is a great resource for some of this data. Before your team reinvents the wheels, start with the 30 cloud ecosystems that Tercera thinks holds the greatest opportunity to build a substantial services firm or new practice.

Once you have your short list, think through these considerations:

Monetary cost. Will you need a new sales team, more marketing budget, etc?
Opportunity cost. Will this pull your attention too far from other profitable areas?
Time. How long will it take to see results from your investments?
Channel conflict. What issues might this create with your other partners and how do you prepare for that?
Internal ability to execute. Do your skill-sets cross over? Does the organization have the capacity, budget and will to pursue this new partnership?

You don’t have to boil the ocean, and you’ll never have all the data you want, but you need to see this laid out in a single plan so you can get alignment across the executive team and your investors.

Don’t wait too long. A common pitfall is waiting until it’s too late. Start your research and analysis before crunch time. As you do move forward, remember that these decisions don’t have to be forever. Take the time to do your research, answer the questions that we’ve laid out above, and perform a careful analysis, but don’t get into analysis paralysis mode or you’ll end up behind.

Make an informed decision. Act and adapt.

Introducing the 2023 Tercera 30: The top cloud ecosystems for partners

September 6, 2023 by Tercera Team Leave a Comment

Today we unveiled the 2023 Tercera 30, a growth investor’s view into the top cloud ecosystems for service partners. What has now become an annual report profiles the B2B cloud software companies that Tercera believes hold the greatest potential for technology services firms in the next two to five years.

Picking the right software ecosystem to build a technology services business around isn’t easy, but it can have a massive financial impact on the bottom line. We believe this report will help founders and IT service leaders make more informed decisions about which platforms and partners might hold more opportunity than others.

The report profiles 30 cloud-focused vendors that rely on consultancies, systems integrators and managed service providers to drive both growth and customer success. It includes 10 of the largest publicly-traded vendors (Market Anchors), 10 large and fast growing publicly-traded vendors (Market Movers), and 10 privately-held vendors that have fast growing partner ecosystems (Market Challengers). This year’s report also includes 6 vendors that Tercera considers ones to watch.

To develop the list, Tercera evaluated more than 150 vendors. The 30 finalists were selected through a combination of data analysis, interviews with market insiders, a survey of 50+ IT service firm leaders, and insights gleaned from conversations with more than 100 ISVs and service firm founders. A full overview of the methodology can be found here.

The full report and interactive listing of the Tercera 30 can be found here.

Highlights from the report

Nearly one-third of the names on the 2023 Tercera 30 are new to the list. They include: Contentstack, Crowdstrike, Dataiku, Fluent, HubSpot, Nvidia, OpenAI, Palo Alto Networks and Stripe.

Within the research, we also found significant shifts in growth rates among the Market Anchors, increasing saturation in some partner ecosystems, and several ISVs moving upmarket and more heavily into AI.

Market Anchors remain entrenched, but some struggled this year
When it comes to the largest and most mature vendors on the Tercera 30, Google, Microsoft and Oracle rose in prominence among partners. None of the fastest-growing firms among the surveyed were aligned with Salesforce this year, instead they centered around AWS, Microsoft and Snowflake. HubSpot, a new addition to the Market Movers list and Salesforce competitor, appears to be gaining traction in the market and with partners.

AI is changing the playing field and creating new opportunities
Three of the new names on this year’s list – Nvidia, OpenAI and Dataiku – are making big waves in AI. However, every one of the Tercera 30 companies made announcements around AI this year, underscoring the significant opportunity for service providers to guide customers in this area. More AI insights from the research can be found here.

Demand for cybersecurity continues
Security, compliance and governance vendors continue to be lucrative ecosystems for partners, especially as enterprises look for support and guidance in this crowded, fast moving space. Palo Alto Networks and CrowdStrike joined Okta and Datadog on this year’s list, based on market performance, the traction of their next-gen solutions, and input from industry insiders that their channel partners are seeing tailwinds.

IT is becoming increasingly composable
By 2026, Gartner predicts that revenue growth at leading enterprise software providers will slow as mainstream business investment shifts to more modular providers. In fact, three of the five new Market Challengers – Contentstack, Fluent Commerce and Stripe – are beneficiaries of this move to composable solutions. As systems become more modular, service providers will need to foster a broader ecosystem of partners than they have in the past.

2023 Tercera 30 List

The Market Anchors:
These are the 10 largest publicly-traded cloud-focused ISVs, with mature partner programs that support hundreds to thousands of partners, including some of the biggest GSIs.

Adobe
AWS
Google Cloud
Microsoft Azure
Salesforce
SAP
ServiceNow
Oracle
Snowflake
Workday

The Market Movers:
These are 10 publicly-traded, high-growth cloud ISVs that are actively building out their partner ecosystems, and taking up greater mindshare with buyers looking to modernize systems and processes for the digital age.

Atlassian
CrowdStrike*
Datadog
HashiCorp
Hubspot*
Nvidia*
Okta
Palo Alto Networks*
Shopify
UiPath

Market Challengers:
These are 10 high-growth private cloud ISVs that are grabbing outsized attention from influencers and investors. They represent companies across a wide variety of market segments, and while they may not yet have the market penetration of those in the Anchors or Movers categories, they are making waves.

Celonis
commercetools
Contentstack*
Databricks
Dataiku*
Fluent*
OneStream
OpenAI*
Outsystems
Stripe*

*new to the list

We encourage you to take a more in-depth view into each of these ecosystems and why we selected them by downloading the full Tercera 30 report, or joining our live webinar on Thursday, Sept 21 at 2pm ET/11am PT.

How we identify the best growth opportunities for IT services firms

September 3, 2023 by Michelle Swan Leave a Comment

Discover the methodology behind the Tercera 30, one investment firm’s view into the most promising enterprise software ecosystems for service partners.

With literally hundreds of cloud software vendors vying for coveted spots in the ever-evolving enterprise IT stack, technology services firms have to make difficult decisions about which partners and platforms they should support.

It’s a decision that can’t be taken lightly. In fact, we’d argue that selecting the right vendor to align with plays a huge role in any technology services firm’s future success. Software partner programs can drive demand for services, generating high-potential leads and deal flow to support profitable growth. However, building these partner relationships takes time and money, and not every partner program – or market or software platform – is created equally.

The Tercera 30 offers the perfect starting point to identify the right software partner

Tercera debuted the Tercera 30 in 2022 to help entrepreneurs and services leaders identify the right software partner(s) for their business. This week we’ll be introducing the Tercera 30 class of 2023.

The Tercera 30 started out as internal research to help us better understand which software ecosystems offer the greatest potential for high growth consultancies, system integrators, and managed service providers (MSPs) over the next two to five years. It has since helped guide the investments we’ve made to date, as well as inform expansion opportunities and guide our future investments.

We believe others can benefit from this data, so rather than hoarding it, we’ve made much of it publicly available.

The 30 software companies profiled on each year’s list offer a view into both entrenched and up-and-coming partner ecosystems. The names on the list are a mix of publicly traded and privately held companies, and they span categories that are important in the cloud’s third wave. Categories range from cloud infrastructure and cybersecurity, to data and analytics and AI, to customer experience and business operations (to name a few).

We believe each company on the list can realistically support a growing technology services firm or practice area of at least $10 million. The companies profiled in our Tercera 30 research all offer market-leading products in growing categories, coupled with a corporate growth strategy that depends heavily on a dedicated partner ecosystem.

The Tercera 30 selection process

We start with a list of 150 enterprise B2B software companies that rely on services partners for growth, and analyze them across a wide range of weighted factors. We factor in things you’d expect — total addressable market, year over year growth, innovation and sector demand — but we also consider how a software company views and supports its partners. We believe that matters just as much – if not more.

The Tercera 30 selection process focuses on these four dimensions of a high-caliber partner ecosystem:

1. Market size and potential: What is the current and future size of the market? Is the segment big enough to support a $10M technology services practice or a $50M business?

2. Brand and growth potential: Is the software company perceived as a leader in that fast-growing segment? Is it considered dated technology, or is it taking share? Is the company investing in the product and future growth?

3. Potential for external services: Is the product targeted towards small and medium businesses and easy to implement? Or is it enterprise-grade technology that can be highly customized, paving the way to medium to large projects with high service intensity? Is there a level of talent scarcity around the platform necessitating the need for outside support?

4. Partner support and collaboration: How open and supportive is the partner program? How easy or difficult is it to enter as a new partner? Are Global Systems Integrators taking interest? Is there an internal professional services team with which partners will compete for work?

The answers to these questions are equally informed by data, industry opinion, and actual partner experience.

To tease out each area, software companies are scored using 21 different types of weighted data. Some are hard numbers gleaned from public sources. Others are more subjective and heavily informed by insights and opinions from Tercera partners and portfolio companies, investment banks, and industry analysts. Partner leads at several software companies also weighed in during the selection process.

In 2023, Tercera introduced a qualitative survey of 55 executives from services firms that play within the Tercera 30 ecosystems to better understand their experience. The online survey, fielded between June 5 and June 26, 2023, gauged perceptions of existing software relationships, future partnerships being considered, project sizes, and the role of AI in future business strategy. We also looked at what makes a technology services firm recommend a software company partner program, and what doesn’t. Finally, we gauged the relative importance of criteria like customer referrals and deal size, as well as sentiment and perception around a vendor’s willingness to work collaboratively, quality of partner support, degree of partner saturation, and existence of channel conflict.

The Tercera 30 winners perform across a variety of factors

All the research, data, and findings from these various sources filter into the scoring formula below. Two variations—one for public companies and another for private companies—account for variances in the types of data available.

The results point us to the final Tercera 30 list.

The partner “sweet spot” is a key consideration

Because the Tercera 30 includes both public and private companies, well-established firms as well as new players, the maturity of the partner ecosystems can and does run the gamut from nascent partner programs to highly mature programs.

We believe there is a sweet spot when it comes to new firms entering these ecosystems: the partner program should be mature and established enough to support (and reward) partners, but should still have enough white space for new entrants.

There is opportunity for technology services partners to be had in each phase, however, those opportunities vary significantly and should be carefully considered.

For example, a high-growth player with a nascent partner ecosystem can be extremely appealing to smaller services partners who can be specialists and drive demand alongside the software vendor. For services firms that get in early, it’s an opportunity to become the go-to partner, but there will likely be growing pains in less mature ecosystems.

At the other end of the spectrum, mature partner ecosystems may be harder for a new partner to break into, but they offer more training, support, and potentially, access to larger customers. These mature ecosystems are well suited to technology services firms that can find the right niche, whether that’s a specialist in a certain aspect of the platform or an industry specialist.

Before jumping head first with a new software partner, it’s critical to understand the maturity of the ecosystem and how it meshes with a firm’s own growth strategy and ability to differentiate and support customers.

Dive deeper into the opportunities in the 2023 Tercera 30 full report

We invite you to meet the 2023 Tercera 30 on September 6, and to use this data to inform a short list of your own.