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.