The numbers make the point. Migrating from the traditional on-premise model to cloud computing is a painful journey and costs you money. A story brings it to life:
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, which hasn’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. And that, it seems, was the last straw for our salesmen. If they can’t make money, they will go somewhere where they can.
A year ago, before we launched our cloud computing strategy we were on top of our game. Now we are fighting for survival.
There are so many questions, with hindsight, we wish we’d asked.
WHY CLOUD COMPUTING?
With that as a backdrop, why would you go through the pain of migrating? And we haven’t even looked at the financial impact of the move to cloud computing, which is negative. You will lose money.
Why? Do the math. Before, you had a $100k on-premise deal that you booked and recognized this month. Now a cloud or rental deal is probably $40k a year, so you get to recognize only $3k this month. The annuity revenue stream is great, but it won’t help you make your target this year. And it will also hit your profit. Is that what you want?
For some markets, you do not have a choice. Cloud computing or rental pricing is what customers are demanding. So wake up to the new world. For others, a wait-and-see approach may work.
SO DO YOU UNDERSTAND THE RISKS OF MIGRATING?
Marketplace
Despite all the hype, the dominant delivery model for software is still the on-premise one. This means there may be resistance from customers to adopt the service, preferring instead an on-premise solution. You could be too early. Or you may need to offer both a cloud computing service and an on-premise solution.
Sales profile and pricing
Selling a Cloud Computing service may be easier as the traditional barriers put up by IT evaporate. Customers can be up and running in hours, not months. However, the large up front license payments have been replaced by far lower annuity payments. Customer projects may now start as smaller pilots and grow over time.
Companies such as Salesforce.com and more recently Microsoft are offering alternative service offerings, based on a ‘per-user per-month’, commodity pricing model. What will you do?
How will this affect sales compensation and therefore the motivation of your sales teams? Do you pay them when the deal is closed or as the cost of the service is recognized monthly?
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. The offerings are maturing, and although there are some common threads, there are also many loose ends. 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.
Product development
In a pure cloud computing model, the service is only available when you are connected to the Internet, so you may need to provide an offline capability.
The majority of IT workers in the market will be familiar with and experienced in developing software that is delivered on premise. How many of them are able to develop in the new world with the additional complexity?
And there is the two-edged sword of more rapid release cycles. While this is great for ensuring that new features or bug fixes can be provided to the customer more rapidly, the change from annual releases to more frequent perhaps even monthly changes the development cycle.
Hosting
A cloud computing solution needs to be hosted. There are a wide range of options. You can host it. You can find a co-locator that provides a “home” for servers that you own, or you could run your application on a full hosting provider (PaaS). Sometimes the architecture of your solution determines which options are available. If you have a legacy application with a proprietary database, you may not be able to use Amazon or Microsoft Azure. Instead you will be forced to own and run some of the infrastructure. Finally, do you have the skills in house and commitment to run a 24 x 7 hosting operation?
Growing Customer Expectations
With growing acceptance of cloud computing by customers, there also comes an increasing awareness and expectation about the delivered service.
Buyers are being educated about the Smart Questions they should ask, and this increases the requirements on you to deliver a quality service that takes into account issues such as whether you need geo-redundancy for data centers, what legal and geopolitical issues apply to where data is stored, and the expected service Levels, especially where free services such as Hotmail and Gmail are expected to be 24/7.
New generations of end users are emerging from schools and colleges. They have grown up around technology that is now ubiquitous. It has driven a very different lifestyle and expectation.
Here’s a thought: Technology is only technology if it was invented after you were born.
An interesting insight comes from the research from Don Tapscott’s book, “Grown Up Digital.” If you grew up with a service, it is not new technology to “learn.” For Generation X the TV, phone and electricity are not technology. They just use them. So, for the iPod Generation, Generation Y, the Internet and mobile social networking are not technology. The iPod generation is growing up expecting to use these services, not learn or understand how they work.
Strategic options
You need to establish where you are in terms of architecture and commercial model in the diagram at right. Then work out where your customers would like you to be.
What we’ve found is that many customers are uncomfortable about using cloud computing which is why we wrote “Thinking of… Buying Cloud Computing?” Ask the Smart Questions . So you should really question the view that your customers are driving you to the cloud. Don’t just take the account manager’s version of the truth.
The diagram shows that the strategy should be considered along two dimensions. The horizontal is the commercial aspect. How are you charging? The vertical is how much of the solution is hosted in the Cloud. So bottom left is classic ISV ‘shrink-wrapped’ software. Top right is a new Web 2.0 Cloud darling. The question is how far along the arrow to Point A do different elements of your application need to be, and over what time frame. In the interim, can you go via Points B or C to satisfy customer demands?
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