Cloud – it’s all good right? Not for ISVs

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This is an excerpt from our new book  “Thinking of migrating to the cloud? Ask the Smart Questions” which is out in the fall.

Simple decision, right?

As every new software vendor “in the cloud” it would seem that migrating from on-premise to the cloud is the obvious answer.  But it is not so clear cut

Client benefits

  • Try before you buy; in the time it normally take to write a requirements spec, run a beauty parade and make a decision clients than run a real life, low risk trial.
  • Speed of installation (not implementation): the software can be rolled out to different “locations” (geographical, organizational; internal and 3rd parties, working style; office, home-office, mobile) rapidly
  • No upgrades; everyone immediately has access to the latest version of the software – although this may be considered a disadvantage if customized training has been developed.
  • RBI, not ROI: rapid, tightly focused implementations mean that the benefits can often be delivered before the software has been paid for (Return Before Investment). So the projects are self-funding.
  • No need for IT input; rather than completely side-stepping IT, the projects need only a light touch from IT, which the IT department should see as a benefit. It is helping them deliver the “app gap”

Vendor benefits

  • Easier sale to business – you can reduce the sales cycle from months to days or weeks through low risk, pilot projects. And these are an easy way to get a foot in the door.
  • Rolling out updates / out of date software – You know every client is on the latest version of the software. And there is virtually no cost to rolling out the changes that encourages small incremental updates.
  • Geographical reach – Subject to local country restrictions on data center location, you can roll-out to much of the world without having to establish local operations.
  • Lean startup approach to roadmap – With incremental releases you can start with a smaller functionality set and let customer demand help shape the roadmap, rather than invest heavily to produce a “full featured” product and hope it hits the mark.
  • Metrics to see behavior – How are your clients using your software. With on-premise you never knew. Now you can see hour by hour, client by client. Which means you can coach them, hence the rise of the Customer Success teams within cloud vendors.
  • Annuity revenue stream – Over time you can build a strong, dependable, annuity revenue stream. This is valuable asset and has a key impact on the high valuations of established cloud 

But not all good news; downsides for vendor of cloud delivery 

Cloud is not all honey and roses. There are inevitably downsides, especially when compared with the incredible lucrative on-premise software business. There are downside for clients, but let’s just focus on you, the vendor. Let’s pick up a few of the issues. Interestingly they all relate to business model and money.

  • No upfront large license deals – You are used to large one-off license deals which would fund the growth of the business. Annuity revenue stream
  • Really tight margins – Clients are expecting lower per user costs than on-premise software. This is in part by the born-in-the-cloud startups who are entering the market with none of the overhead and funding to allow them to buy market share.
  • Sell deal, then drive consumption – If you going after big enterprise sales then you do all the pre-sales work, the procurement win the deal but the initial order is cents, not millions of dollars. You need to work with the client to drive awareness, support projects and drive the roll-out – for 1, 2, 3 years – before the revenues really start to flow.
  • Engaging top enterprise salesmen – If you are a top enterprise salesman you are used to doing big deals and getting big commission checks. Waiting 3 years will not turn them on.
  • Cannibalization on migration – If you want your existing clients to migrate they will take a hard look at the users who are really using the software and the annual cloud license fees are likely to be less than the on-premise annual maintenance fees that they are happily paying each year.