Something I am keen to see more of on this blog is guest posts by “people in the know” on topics relevant to UK software companies. One such “person in the know” is ex-colleague Ulf Avrin.

Ulf knows about ISVs and he knows about Cloud – hence he is a perfect choice for our first Guest Blogger. I will now hand you over to Ulf.

Eric

P.S. Don’t forget to check out other Guest Posts. Also, please do contact me if you have a proposal for a guest post that you would like to contribute to this blog.

Preparing for the Cloud by Ulf Avrin

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Introduction

Cloud services is definitely passed the hype stage and into the mass adoption stage of the technology life cycle. Therefore an ISV must understand what Cloud means for them, in every aspect of their business. And the changes are not small! There are threats, and change management might be difficult, but there are also huge opportunities for those that succeed!

Cloud: no longer just hype!

Cloud has been the buzzword for a long time now. Many are the vendors in the IT business that have used the term to just position themselves as modern, forward thinking companies… while not actually doing a lot more different than what they did before. And many of these less serious users of the term have had difficulties explaining to their customers what Cloud actually is, and what it is good for. As a result, some enterprise customers remain fairly skeptical.

Luckily enough, also more serious players are active in the marketplace, and over time a number of Cloud vendors have started to establish considerable mindshare across the client audience. Salesforce.com has shown that for CRM, traditionally a rather sensitive set of data for an enterprise, there is a quite an appetitive from small, medium and –actually- large enterprise customers for a well-functioning, targeted, software as a service offering. Amazon and VMWare have shown that there is a demand for putting existing, often non-critical, applications on a virtual machine and run them from their Cloud platforms. And lately, but maybe with the highest ambition of all, Microsoft has shown that there is a great deal of interest for all types of cloud based offerings, ranging from their Office 365 software as a service offering to their Windows Azure cloud operating system offering a complete platform as a service to enterprises and developers of all kinds.

Credibility has been built by proving technologies, by getting early adopter customers on board and by establishing solid, and constantly improving “enterprisy” SLA’s. Thus, talk has turned into delivery, skepticism being replaced with interest, and enterprises are increasingly buying cloud based services.

As a matter of fact, IDC (Figure 1), Gartner, Forrester and other analysts all have numbers supporting the fact that IT investments are very biased towards Cloud now. This means that something real is happening: the enterprise adoption of Cloud is increasing and taking share from on-premise infrastructure. Numbers support the fact that the chasm of customer Cloud adoption is crossed, and the Cloud market has entered into the mass adoption phase.

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Figure 1, Cloud is growing fast

Why is Cloud different for an enterprise customer?

For any market to become established there must be important enough customer value, and that is indeed the case for Cloud as well.

It is perhaps useful to discuss these business values in terms of six characteristics of Cloud (Figure 2):

- Flexiblity – the ability for Cloud to provide the capacity you need at any given moment without having to invest for the worst capacity consumption scenario.

- Availability – 24/7, redundancy, and fail-over support usually comes at preventive costs levels for most customer organizations.

- Price (cost) – Economy of scale is a huge in IT. The cost of operating, maintaining and securing your IT environment is several orders of magnitude lower if you run a lot of servers than if you run a few.

- (user)Experience – building solutions used globally avoiding problems with latency and resource bottle necks and that can support the widest range possible of devices and browsers again is really difficult for most enterprises. Only the largest can afford it, but only a few will be willing to. Cloud vendors, however, are.

- Timeliness –traditional development processes are being replaced with template configuration and component assembly, paired with zero time for provisioning of resources

- Security –No company can invest as much in security technology, competence and processes as a Cloud vendor. Indeed, they have to: their business is totally dependent on them doing it.

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Figure 2: Six facets of Cloud, Justin Pirie, Cloud Computing World Forum, London July 1st 2010

In summary, Cloud enables the enterprise IT organization to focus on improving the business of the enterprise instead of managing infrastructure or outsourcing suppliers. (Figure 3)

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Figure 3, Cloud enables IT to focus on innovation, Justin Pirie, Cloud Computing World Forum, London July 1st 2010

Not to mention that managers in enterprise organizations see value in being able to get the IT solution they need…. without having to go through the IT departments, its purchasing policies and backlog. An example: a marketing manager wanting to know what impact their latest campaign has in terms of buzz and sentiment as lead indicators for customer engagement doesn’t need to ask IT for permission; he/she just pulls out the credit card and gets Onalytica or Radian 6 to measure these things. Advanced social analytics as a service; easy enough!

What changes for the ISVs?

With Cloud having crossed the chasm of customer adoption every ISV need to reflect on what Cloud means for their business. Some ISVs will want to create their own Cloud offering because they see it as a business opportunity. Through Cloud and subscription based business models they might be able to address new customer segments, or thanks to the global distribution mechanism of Cloud they might see new geographical markets opening up for them. In some cases ISVs will realize that they suddenly are exposed to global competition where they were previously protected by local solutions, languages and local distribution networks.

However, in making the change – whether done for proactive or for reactive reasons – ISVs need to think before they act! Basically everything in the business model of an ISV will change!

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Figure 4, ISV Business Model Canvas (ref. Osterwalder)

Take a look at the Business Model Canvas of a software company (Figure 4): going to a subscription model means that the revenue model changes. Instead of a fixed sales price for a perpetual license, the ISV charges a very much lower monthly fee. Each customer therefore takes longer to become profitable for the ISV, with implications for the cost structure of the ISV. The lower sales price also has implications for the incentive model for their own sales force and channel partners. Furthermore, the value that channel partners can provide is different. Just being a reseller might not be a sustainable position, just to take one example. From an owner perspective, if it takes longer for a customer to be profitable for the ISV maybe owners need to fund the company longer. And for management, running a Cloud business model is radically different to a traditional software business. In the Cloud world metrics like customer acquisition costs, churn and average revenue per user (ARPU) are key metrics. As in the telecom business, actually!

More and more ISVs are now starting to have concrete and real experiences from this, so best practices can be shared, if you tap into the right forums.

And more…

Cloud is effective because the technologies applied changes the economics of the offering. Scale is important since running large scale infrastructures is a lot (a lot!) cheaper per unit than running a small scale infrastructure. Cloud also enables global distribution. If you have a Cloud offering you are on the internet. Your business is not restricted to your locale, and anyone that finds you will be able to purchase and use your service. Online marketing therefore becomes very important.

Great software companies today are really good at not only taking advantage of the scale economies offered by Cloud, but they are also really good at online marketing and the building of and maintaining relations globally using social media. So, in fact, even a small software company can today be a global company.

Actually, every ISV today must think and act with global markets in mind. If they do not, they are up for a hard time!

Call to Action

Now is a great time to take a fresh look at your business, particularly if you want to be proactive! To get some help in the process, TELLUS International has vast experience and well proven offerings to help companies prepare for and execute on the changes imposed by the Cloud paradigm. You find more information on www.tellusinternational.com and you can get in touch directly (see contact details below)

About the author, Ulf Avrin, TELLUS International

Contact details:

Ulf is reached on email: ulf.avrin@tellusinternational.com

He can also be reached through LinkedIn: http://fr.linkedin.com/in/ulfavrin and you can follow him on Twitter, @Ulfavrin

Ulf is a Swedish national living outside Paris, France and presently working as a management consultant for platform vendors, software companies and service providers in the ICT sector. Before this he worked for Microsoft focusing on the ISV and SW partner business. He is, furthermore, member of the board of Phase Holographic Imaging, a Swedish innovative early stage company in the MedTech sector. Before joining Microsoft in 2004 he was the CEO of Mobeon, a rapidly growing telecoms ISV, and prior to that he was CEO of Ericsson Microsoft Mobile Venture, a joint venture between Ericsson and Microsoft in the area of Enterprise Messaging and Collaboration. Ulf has in the past held various management positions in Ericsson, the last one being VP of Mobile Internet Applications. He has an Engineering Physics degree from Chalmers University in Sweden as well as an MBA from Warwick Business School, UK.