Looking at the resignation letter on my desk, I don’t understand how we got it so wrong. He was our top salesman and was the most vocal about offering a cloud solution alongside our existing product. And now he’s joining our biggest competitor, who haven’t even considered the cloud. Why?

Execution was clearly the issue. The strategy was correct but our implementation was a disaster as new issues kept surprising us. We underestimated how this new offering would confuse customers. We thought they understood cloud computing. But it simply stalled sales. They assumed they needed less consulting support and projects started to fail. The help desk was swamped and customer satisfaction scores went through the floor.

But the worst was the sales cannibalization and changing salesmen’s compensation to be tied into our annuity model. This seemed to be the last straw for our salesmen. If they can’t make money, they will go somewhere where they can.

12 months ago, before we launched our cloud computing strategy we were on the top of our game. Now we are fighting for survival.

There are so many questions, with hindsight, we wish we’d asked.

Could this be you?

As a successful software vendor, are you on the brink of making the same fateful mistakes? Or are you a start up with a great idea? Building on a cloud platform may be a no-brainer but what else do you need to consider to be successful?

Much has been written about cloud computing from a customer’s or technology, and mostly from a security, perspective but little has covered what it is like from the independent software vendors (ISV) viewpoint, particularly those migrating from an on-premise model.

Cloud is here to stay

Cloud computing seems to have struck a chord in a way that ASP, On Demand, SaaS and all the previous incarnations never have. Every analyst is blogging and tweeting about it, there are a slew of conferences and a surprising number of books have already been published. That means it is more than just the technology folks who have heard about it and the benefits. Now that business and consumer worlds are familiar with the concepts and that is driving demand for ISVs with cloud offerings.

The cloud computing evangelists would have us all believe that this is the only future and someday soon all software will be delivered as a service. And looking at the huge investments that some of the largest gorillas in the IT industry are making, maybe they’re right. A 100% cloud world may be true for SMBs but for large enterprises, they will continue to run their core applications such as SAP and Oracle in-house for years to come.

Life for the ISV has just got more complicated not less.

Independent software vendors (ISV) require a hybrid model with some clients 100% cloud, others using it as a platform for pilots/early stage projects and then a migration in-house, and finally straight on-premise purchases.

Benefits and risk – two sides of the same coin

Putting aside the hyperbole that always goes hand-in-hand with new ideas in IT, there are many sound reasons to consider the cloud. Here are a few:

Enterprise capability at commodity costs – By providing the service to multiple customers, utilizing a common centralized infrastructure and a multi-tenant approach, you can achieve economies of scale and therefore provide the service at a reduced cost compared to an on-premise solution. This means that you can then scale down to reach the long-tail. Also, by outsourcing the infrastructure there will be the potential for internal cost savings.

Before, you needed to knock out a software release every six months or so. Now you are responsible for a service that needs to be available 24/7/365. Are you adequately funded, resourced and prepared to do that? Do you have the management and technical skills to handle it?

Speed of availability vs. implementation – With the service already installed and waiting for use, much of the traditional time taken for customers to plan, install, configure and deploy is removed. But don’t confuse availability with their ability to use the service. Simply making the service available, unless it is very simple and of a very narrow scope, will result in chaos. Implementation from a process perspective will be critical for successful projects, which will in turn reduce churn and increase your annuity revenue. Ignore this at your peril.

Anywhere access – Clients can access the service using any device: PC, tablet or smartphone. A hybrid model may answer the question, “What happens when not connected to the internet?” By providing synchronized copies of data. But this has implications on the architectural complexity of the solutions you need to develop.

Always up to date – The centralized management of the services makes it easier for you to deploy updates and once deployed all users will have access to the new capabilities. This also provides the opportunity to have more frequent release cycles, which leads to a more rapid introduction of improvements, bug fixes and enhancement requests. This means that you can move to truly agile development but this may be a very different way of working.

Go to market – Despite all the hype, the dominant delivery model for software is still the on-premise one. This means that there may be resistance from customers to adopt the service. You could be too early. Or you may need to offer both a cloud computing service and an on-premise solution.

For cloud, the presence of industry heavy weights such as Google, Oracle, Microsoft et al, reinforces the validity of the market. Maturity will come, but until it does there are opportunities for new start-ups to steal a march on existing players – namely you.

Commercial arrangements – The traditional on-premise world was simple: customers paid for a perpetual license for the software and some form of optional annual ‘support and maintenance agreement. But the vast majority of the costs were up-front as part of the implementation project.

With cloud computing things are changing fast. There are different charging models varying from free or ad-funded with little or no support through to managed services with on-going annual, quarterly or monthly costs.

You will also find the customer negotiations on SLAs will be far harder. Before they wanted the software to work. Now they want it to work and be available, which is now your responsibility. Your customers will hold you accountable no matter who you have outsourced elements to.

Annuity revenue stream and motivating sales teams – The appeal of long term annuity revenue is compelling as a long term employee or shareholder but they will be far less excited about the P&L, balance sheet and margins all of which are far worse than the traditional on-premise models.

Career-minded sales teams are used to making big ticket sales and seeing equally large quarterly bonuses. They will not be motivated by promise of a far lower annuity commission stream, locking them into the company for years even though they will be better off in the long term.

One product or two? One company or two? – Should you be developing a new cloud application or migrating your existing offering? Do you need separate development, marketing and sales teams who can openly compete? The answers to these questions are strategically important but will be driven by your market and existing customers and the long term opportunity you see.

Not theory – a practical example

Nimbus, where I am founder and CEO, has been offering its process management system as a cloud offering for five years — long before it was called cloud. But we operate a hybrid model. Many clients, including Nestlé, SAP, Accenture, and Best Buy Europe have used the service to get business projects going quickly with a view to migrate in house after 18-24 months. Others are happy with our long term hosting solution.

The ability to offer a hosted service, particularly when selling to business users is critical. It can take as much as six months out of a sales cycle and there are some other, unexpected benefits. Professional services teams can work remotely with clients reducing travel costs but also the stress and fatigue of constant travel. This can super-charge implementations enabling RBI (return before investment) rather than just ROI.

On the flip side, Nimbus has been a cloud customer using Salesforce.com for the last seven years. Now every operational application needed to run Nimbus is on the Salesforce.com platform; Salesforce.com for Sales, Marketing and Support, and Force.com to develop apps for HR, asset management, business excellence, R&D management, PR, and finance using FinancialForce.com.

The benefits are a single integrated system eliminating messy, error prone and expensive integrations between disparate applications. The business continuity and security built into the system is greater than we could reasonably afford to put in place.

But it is not just about cost saving. The opportunity to expand into new markets and territories without infrastructure investment is huge. This strategy made our 40% year-on-year growth possible.

So to cloud or not to cloud?

With all this in mind, should you give cloud computing a wide berth? It depends. Everything we do in business (and life) carries a risk. The key is to understand the risks that we are taking, and the associated rewards so we can make informed decisions and put the appropriate risk management strategies in place. Critically however, there is a fundamental difference between risk management and risk aversion, with the later typically leading to stagnation, decay and failure.

The book Thinking of … Offering a cloud Solution? Ask the Smart Questions articulates the opportunities and the challenges ISVs face in their transition to cloud world.  Start asking the smart questions.


3 thoughts on “Why software vendors should fear the Clouds #cloud #cio #isv #Salesforce.com

  1. Cloud is a reality, cloud is here and not going away, but how you manage the cloud so that it does not evolve from a soft and fluffy friend to a tornadic problem that wipes your enterprise clean.

    When organizations move to embrace services and solutions delivered via SaaS, or cloud based infrastructures they normally encounter new management challenges for those specific services such as how do we measure the technical effectiveness of the new service, how do we report the cost advantages to the business, and how do we integrate those services with data, applications, infrastructure components that are still located on premise.

    And when it comes to support, how do we integrate the new SaaS / cloud solutions into our core IT service management functions such as Incident & Problem Management, Change & Release Management, Asset, Configuration and Inventory Management? Without this integration, many organizations are concerned that they may lose the holistic “life-cycle” control they have established and revert back to fragmented management covering only part of the IT operation.

    We recently produced an article with some of our thoughts and featuring some key research from Gartner. We hope you will enjoy these. You can get these here; http://bit.ly/gCuBkH

    For more information on our ITSM solutions please visit us at http://www.bmc.com/itsm. We look forward to talking to you soon.

    The ITSMguy @BMC Software

  2. Ian,

    What I am seeing around the world when working with ISVs is that the financial side of running a cloud business is neglegted and often ignored and even boards do not have a good grip of what is going on. I have built around 25 international software solutions (as ISV) and have viewed income statements and balance sheets for the past 20 years, but they are looking very different going forward. Also, I believe there will be more wakeup calls for sales people going forward…. and their compensation models.

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