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Summary:

Legacy IT vendors used to dealing with one or two ways of delivering their products and services to market, now must handle four, five, maybe more business models as cloud computing takes off. And many, according to Accenture, are not prepared for that complexity.

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If you think cloud computing confuses tech users,  it has positively flummoxed IT vendors that now must deal with a bewildering array of business models thanks to the proliferation of  SaaS, PaaS and IaaS deployment options. And as cloud deployments continue, the vendors don’t seem to be getting much better at handling these new business models, according to a recent Accenture report.

Back in the day — say ten years ago — most hardware and software vendors only had to worry about selling their software licenses or boxes up front (then selling follow-on maintenance and upgrades). That’s a pretty straightforward set of processes and accounting procedures.

Now, those same IT providers must deal with five, six, maybe even seven ways of selling (or renting) their product, without necessarily bringing on expertise to deal with that fundamental change, said Tim Jellison, a senior executive with Accenture’s software  business. Jellison co-authored a report based on information provided by 30 major tech vendors.

One business model does not fit all

“If you were a software company, you maybe had two models — traditional software license sales and some sort of professional services model,” Jellison said in a recent interview. “Now most [of these] companies have to have some sort of SaaS model, some sort of appliance model tuned to a particular application, some add an advertising-based model, many have a PaaS,” he said.

Microsoft  is an extreme example because of its size and the breadth of its offerings from consumers up to CEOs, has all of those plus models in play. Plus, with  “Xbox and Xbox Live it also has an integrated hardware-and-software offering paired with an online service,” Jellison said.

And yet, many of these IT vendors still try to use a one-size-fits all operating model and that’s where things break down, he said.  One major issue is that top management in these big companies don’t seem to get that these individual delivery models require different billing mechanisms and revenue recognition processes. The level of complexity is off the charts and yet most have not added personnel or expertise to deal with that.

By  2014, big companies will spend close to $35 billion a year (and more than $110 billion cumulatively in the next five years) on SaaS, PaaS, IaaS and other XaaS models combined, according to Gartner data cited in the report. And,  that doesn’t even count the emerging advertising market, which represents another business model, and which will hit the $55 billion mark in the same period.

RightNow: Exception to prove the rule

The report did highlight some IT vendors that have done the transition right. RightNow Technologies for example, which once derived 15 percent of its revenue from on-premises software sales, managed to flip the switch completely to cloud only. That’s probably the main reason that Oracle, in search of cloud credibility, bought RightNow last year for $1.5 billion.

The RightNow buy aside, Oracle remains an example of the kinds of problems mixed business models pose to legacy IT companies. The bulk of its revenue and profit still come from good-old-fashioned software license sales (and the extremely profitable sale of maintenance and upgrades.) That is one reason many see Oracle having a big cloud problem moving forward.

Feature photo courtesy Flickr user Ian Muttoo

For rent photo courtesy of Flickr user Charleston’s TheDigitel

  1. Paul Calento Wednesday, May 2, 2012

    One key is how vendors make the transition. Traditional software revenues are still doing well. While many orgs are moving to a hybrid cloud or converged cloud environment with public cloud, private cloud and traditional IT resources, the latter is still the rule of the day for many. The key may be to focus on the new, while servicing the typical (i.e. traditional IT).

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  2. I’m not sure I would describe it as “confusion”, but rather “searching”. Vendors are still looking for models/packages that will resonate with customers. In time, these models may “shake out” and contract. In addition, I think the comments may oversimplify how it was “back in the day”. Do you remember the mainframe/client-server/PC transition? There were a dizzying array of models and paths that organizations attempted. Companies had mainframe/shared services, were transitioning to client/server architecture with new versions and various database options, and were trying to determine what was possible purely on the workstation level. That does not even account for the software vs. services options vendors made available in an attempt to maximize revenue. It seems there may be some recency bias in some of the comments.

    On the other hand, I do agree that some vendors have been slow to adapt their business processes to new business models, but some of that likely stems from the “searching”. How do you maximize your processes to multiple models when you are still trying to determine those that best meet your customers’ and your organization’s needs? For larger organizations, like Oracle, this typically takes time because there are more variables and factors to consider (e.g. large customer base, product interactions, etc.). However, these same factors also provide a timing cushion. I am quite confident that most of the “IT vendors that have done the transition right” would trade top (and bottom) lines with Oracle every day.

    Organizations need to adapt, but the early-mover (or even the “somewhat-slower-mover”) advantage does not always outweigh the costs – especially for large, established organizations.

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  3. Cloud Computing Sunday, May 20, 2012

    “It’s not Private, Public or Hybrid: 
    It’s Service Constellation and the 
    Cloud Corporation.”
    By Dr Will Venter

    His argument:

    •Long term cloud decisions are strategic decisions. 
    •The current economic climate demands new strategic approaches from IT, not just cost‐saving. 
    •All organisations are service organisations and providing service will involve collaboration beyond the organisational boundary. This is likely to increase. 
    •IT needs to support the ambidexterity of the organisation to improve such collaboration.
    •Therefore I will argue that instead of considering the issue of “Private, Public or Hybrid”in terms of equivalence, we should consider it in terms of service
    • We should focus on the “cloud corporation”as integrated constellations  of service. 

    Source: http://mcaf.ee/epi8d

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