Sunshine on a Cloudy Afternoon

October 19, 2010

A lot of time has been spent talking about the advantages of the cloud. I thought it might be instructive to explore some of the pros and cons from the point of view of a software company.

There are a couple of things to keep in mind:

  1. It goes without saying that not all software companies (or products for that matter) are the same. There is a significant difference between developing and supporting a complex HR package and a word processor.
  2. The cloud will be viewed differently depending where a company is in its life cycle. Consider traditional software companies life Microsoft and SAP versus companies like Salesforce.com or Workday that have started life as SaaS providers.

Pros
Recurring Revenue / Cost Models - A business model based upon monthly recurring revenue has some significant advantages over the traditional license, implementation and maintain model that many vendors use. The predictability of the model makes it easier forecast revenues and costs, thus making enterprise planning easier.

Expanding the Customer Base - A recurring revenue model is also beneficial for a customer because they do not have to worry about significant upfront costs. In effect the cloud helps to expand the customer audience by potentially making a solution affordable across a broader base.

Scalability - The cloud provides that ability to scale up (or down) dependent on customer demand. This means that a vendor only pays for what it uses. Compare this to a model when Company X is dependent on forecasts to drive server / firewall / storage purchases. The end result is often stranded capital. Certainly these dollars are better put to use trying to find new customers and serve existing ones?

Infrastructure - If your cloud provider is good at what they do (like SoftLayer is!); infrastructure inside the DC (servers, memory, storage) and outside the DC (primarily network) will evolve as the market does. Company X will benefit from innovation without paying for it.

Cons
Pre-existing Business Models - Some software companies will simply be cloud-averse. While the cloud may make sense from a development and testing perspective, it may make less sense from a business model perspective. If the company’s revenue model is based on a traditional license, implementation and maintenance model, a shift to the cloud introduces challenges as pricing models and revenue recognition models (i.e. a move to recurring monthly charges) are likely to change. This is not insignificant and if the market isn’t screaming for a change, then change will not come.

Application Customization - A move to the cloud will mean that significant customization on a customer by customer basis makes less sense. It is more cost effective to service multiple customers on a single platform versus multiple customers on individual platforms, particularly if the traditional license, implementation and maintenance model disappears. At the end of the discussion, many customers may need significant customization. Of course this is dependent upon the solution being sold.

A key consideration with the challenges outlined above is that they are mostly at customer touch points. Use of the cloud still makes sense when the consideration is internalized - development and testing environments will still find a useful home in the clouds.

What do you think?

-Sean

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