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The big shift 2011 07


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The Cloud, Cloud Computing is a hot topic. I sat on a beach in Cuba and looked out to the ocean and started to write a version of events that drew on books and articles that I had written and of great significance the conversations that I had been part of. Much confusion and uncertainty exists about the Cloud and what it might mean for the future of the IT supply chain. Some are signed up, some are in denial and some are just confused. It was peer reviewed and now in its 7th revision and feedback has been positive. I have no vested interest other than to share my views and invite others to contribute theirs.

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The big shift 2011 07

  1. 1. Technology supply chains are on alert as the Cloudthreatens disruption – will it be business as usual or isan iTunes like event impending?This points to one of the major challenges facing the channel; the symbioticrelationship of the channel with its vendors now needs to discuss the implications ofthe Cloud as a source of revenue, margin, and growth and importantly its impact onexisting revenue streams and profitability. That is one big discussion.Copyright iCloud Limited 2011 1
  2. 2. AuthorFrank BennettIn July 2009 I wrote Thinking of …Selling Microsoft OnlineServices? Ask the Smart Questions and launched the book atMicrosoft‟s Worldwide Partner Conference (WPC) in New Orleansand made available at the conference book store. The book wasrevised in 2010 and re-launched at WPC in Washington D.C buton this occasion Microsoft distributed the book to visitors to itsOnline Services Hall. This book was revised and published againin July 2011 with the launch of Office 365.In July 2011 I was delighted to receive a commission from Googleto write Thinking of…Using Google Apps? Ask the SmartQuestions.From my conversations with senior managers on the supply side of IT they recognizea shift is underway presenting new choices for customers to deploy IT and are tryingto figure out what that means for their own and their customers‟ business.Where do you start that conversation? That‟s why I wrote this document to start aconversation about The Big Shift. It does not offer a solution (sorry); it does look toexpand the mind to a bigger conversation that might jangle a few nerves. iCloud Limited 2011 2
  3. 3. ContentsWho sold you that then? ........................................................................................................................ 4Supply Chain Disruption .......................................................................................................................... 6 Cloud and Clouds ............................................................................................................................ 6 Talk Talk Talk ................................................................................................................................... 8 The Shift .......................................................................................................................................... 8 The Cloud ........................................................................................................................................ 9 Big guns take aim .......................................................................................................................... 10 In the wake of the storm............................................................................................................... 10 Justifying those IT Dollars ............................................................................................................. 10 Who is listening? ........................................................................................................................... 12 The next thing or the next BIG thing? ........................................................................................... 12 The age of the Datacenter ............................................................................................................ 15 Unexpected challenges ................................................................................................................. 16 Changing Buyer Behaviour ............................................................................................................ 16 Channel supply chain – service chain ........................................................................................... 18 Hard choices .................................................................................................................................. 19 The Bet .......................................................................................................................................... 20In Conclusion ......................................................................................................................................... 21Copyright iCloud Limited 2011 3
  4. 4. Who sold you that then?The IT industry has over time established „n‟ supply chains to deliver products andservices from vendor to the end-customer; vendor direct to customer, OEM, vendorvia two-tier distribution, vendor via single tier distribution, retail (customer goes to astore) and online. Will Cloud enabled services be absorbed into the current basketof supply chains or will it be subject to an iTunes revolution like the music industryhas experienced?Just as Apple, a computer company, albeit a highly innovative leader in productinnovation, turned the music industry upside down, is there a predator that will seizethe Cloud at the expense of traditional IT players? A scrap is already taking placeand there are some leaders in certain categories e.g. HR (SuccessFactors), ERP(NetSuite), CRM (, Unified Communications (too many to single out),Collaboration (email, document sharing where a big contest between Microsoft andGoogle is taking place). There is a school of thought that when IT is delivered „as aservice‟ it will no longer be a domain reserved for IT specialist vendors.Any number of businesses that offer services can now recommend, refer and sell ITas a service to their clients to grow their share of wallet because the complexity ofservice delivery is removed (the service provider takes on that role) leaving the saleand customer service to others. To wrap that up in a few words; the availability ofthe Cloud opens up a new services opportunity – IT as a service – but without theneed to be an „IT shop‟.Take for example an accountant, in the category of trusted advisor to a client; theywould not normally advise a client on a choice of accounting software let aloneimplement a system. However, if that were a service (Software as a Service –SaaS) and perhaps one they used in their own business then why not offer theservice and add the cost to the client‟s annual invoice? Go on then to provide anelectronic archiving system (in the Cloud) to ensure the safekeeping of records forstatutory periods. Two incremental revenue streams (that recur just as theaccounting and audit fees do) based on an existing client relationship but with nooverhead of being an „IT shop‟.It is early days to know how this might develop but the rationale is there. Vendorsare looking for more „feet on the street‟. The business opportunity is large, Gartnerforecast1 an industry with double digit growth and three figure $billion revenues inthe 2013/4 timeframe. And, importantly, there is a large audience, as many Cloudenabled services are relevant to business and consumer.A number of studies highlight the creation of businesses and jobs as a result of theCloud and they will be new buyers - but who from? A new business needs a sourceof capital even if that is in a form of micro-financing to meet some of the essentialoperational expenses of a business. This is not the mindset of most IT vendorswhereas the broad services industry operates a model where the customer pays asthey consume, ideal for a new business. For example, a new business needs apurchasing card to manage its expenses. That provider (say, American Express)1 iCloud Limited 2011 4
  5. 5. could also offer access to a mobile phone, Internet access (with web site, email andcalendaring) and a computer all billed to the card? Convenience for the customerand money in the bank for American Express. To put some other names in theframe; businesses with large customer bases with the infrastructure for variablebilling (weekly, monthly, quarterly, annually) and payment collection, a service ethoswith easy to access customer contact points via the Web (email) and phone, andinclude any of the mobile phone operators, Telco operators, utility companies andmembership organisations to name a few. Many of these businesses have businessand consumer customers so their influence is high.The Cloud opens up the prospect of new ways to partner and there is no template fordoing this so it is a time to get creative, to think outside the box and ponder who elsehas spotted the opportunities of the Cloud and to start up a conversation.One last thought, depending on your point of view you may agree or disagree withwhat you have just read while as you read on keep in mind two things: 1. The market for Cloud is large, there are >2.1Bn computer users2 connected to the Internet and >4.6Bn mobile phone users and many already have data access to the Internet and rapidly their number will greatly exceed the number of users connecting via a computer. Many of these „customers‟ have multiple persona with technology pervading their work, home and social life. We carry more and more expense with the use of technology – and it is OK! If every mobile phone user spent $10 a year ($0.83c a month) on services delivered by the Cloud that would generate $46Bn in revenue annually. Who will be collecting that money? 2. It was once the case that IT (computing) was for solely for business who employ highly qualified people to put IT to work. The personal computer brought computing in the reach of the consumer. The mobile phone (a computer) goes everywhere with you and has become an addiction – OMG let me see your new phone. Now we have tablets and „app‟ stores with many free to download or at a minimal price. The computing needs of a business are different to that of a student and the Cloud can serve all so you need to undertake market segmentation and persona analysis so that you can clearly position your products and services with your customer audiences. This is work in progress for most and some have not even started, it is somewhat complex yet vital work to know who you serve, your values and value. If you have no position on the Cloud you take the chance your customers will take that conversation to someone else. Are you OK with that?2 There are numerous online sources for this information including (the spy guys) and theyincrement daily so numbers rapidly get out of date.Copyright iCloud Limited 2011 5
  6. 6. Supply Chain DisruptionThe IT industry is a buzz with talk of the Cloud and that market is now maturing witha vast array of providers and to achieve full market exploitation the role of thechannel needs to be clarified. The channel is all those businesses that orchestrate asupply chain to deliver products and services to business and consumers. There isa shift underway and the channel is alert to opportunity and the threat of newcompetitors attracted to the new business opportunity that is Cloud enabledservices3 where affordability, convenience and service are top of mind for thecustomer.Synopsis: The supply chain for IT products is vast and organized to deliver itsproducts to a customer who installs those products on-premises (a term used todescribe the physical location of IT on customer premises). This is the „own andoperate‟ model for IT with products built to order for a customer to include pick andpack commodity products. As the majority of IT is sold this way the supply chain hadno cause to manage disruption – until now. The availability of Cloud enabledservices with huge customer interest presents a growth opportunity with challengesthat are described here.Cloud and CloudsThe Cloud has variants, private, public and hybrid (combining private and public).Those customers that build private Clouds will continue to make purchases ofhardware, software and services to deploy in the own and operate model. Thesupply chain is already adapting to serve these customers and the customer is easilyidentifiable as they typically have a large IT real estate (deployed assets and peopleand reliance on IT to run their business). The public Cloud presents differentchallenges and potential disruption as customers‟ direct money out of own andoperate into spending on Cloud enabled services. It is more difficult to identify thesecustomers as they span the Enterprise, SMB, start-up et al.For the reasons identified here and that the supply chain is already adapting for theprivate Cloud this paper looks more closely at the public Cloud and its impact on thesupply chain. Before doing that however it is pertinent to look at the characteristicsthat the supply chain presents against the private and public cloud.3 Cloud enables services; an array of computing, storage and data/information services and telephony servicesfrom numerous providers, some are free others you subscribe to (one-off or regular payment) and areaccessible from a computer, a tablet or mobile phone over fixed and wireless networks. In this text Cloudenabled services is often abbreviated to Cloud.Copyright iCloud Limited 2011 6
  7. 7. Private CloudThis is not an exhaustive list but an indication of how the action of customers tomove to the Cloud creates a consequence and reaction from vendors.Customer action Vendor reactionCustomer building a private Cloud with Vendors that have developedre-use of existing IT assets and specialization and earned reputation areacquisition of new assets to deliver predatory for these opportunities„Cloud‟ functionality. potentially displacing existing vendors. Existing vendors scramble to protect their business and learn the required skills to retain the customer.Customer wants to validate the business Vendors want to be part of thiscase for deployment of a Cloud. conversation but may not have the skills/experience/tools to participate. This was not a problem when the customer was in an upgrade/refresh program. The customer did the business justification and the vendor responded with a quotation.Customer is out to market for quotation Vendors need to deliver a quotation thatto buy hardware and software assets – is competitive and proves competency towe are going to build a Cloud. deliver a solution. What opportunities are there to differentiate our bid?Customer wants to evaluate the merit of Does the vendor leave it to the customerdeploying Private Cloud versus Public to evaluate or engage? How will theCloud ahead of an investment. decision affect my future business opportunities with this customer?Public CloudThe accessibility of the public Cloud has made it difficult for IT departments andvendors to know about or even control the decisions to use Cloud enabled services.This is money that is being directed into IT but so often not through the vendors thatsee the IT department as their customer. IT managers will want to bring this undercontrol but that may be easier said than done and in the meantime the Cloud is aclick away to try and buy. Do you write this business off or work the opportunity?How do you balance your interests to be loyal to your IT department customer andbuild relationships with other departments to bag new business?The starting place for any vendor should be to know what the position is of IT towardthe public Cloud, what controls they have or plan to put in place. What Cloudservices are already deployed by department, vendor, application, number of usersand the associated contract term end dates. Easier said than done; yet importantfor the construction of an account plan and the conversation with your customer.Copyright iCloud Limited 2011 7
  8. 8. Customer action Vendor reactionCustomer interested to know how they Where is money in this conversation?can use the public Cloud in the business.Customer wants to understand what Who is driving this initiative? IT?aspects of IT could be delivered in the Finance? Call the customer and askpublic Cloud and what the implications what is going on. We should be leadingare for the business (finance, operations, that conversation it could affect our futuresupply chain, people). business with this customer.Customer: “we are moving our email and What? Why? That has a big impact onconferencing into the public Cloud.” the server and license upgrades we had forecast in Q4. Why didn‟t we know about this?Customer: “we expect to move to a Do we want to be a managed servicemanaged service for all IT within 2 – 3 provider? On the other hand what ifyears.” more customers go down this route then we need to think this through.These examples are by no means exhaustive and indicate that there is much tounderstand about how conversations drive actions and possibly unintendedconsequences. We started a conversation about the Cloud because we thought weshould but didn‟t really have a plan. The customer got excited and startedconversations with lots of people and now they are working with another supplier.There is opportunity and threat. Follow the diver‟s maxim; plan the dive and dive theplan. In other words, don‟t go with a conversation about the Cloud without a plan oryou may end up in a place you never intended.Talk Talk TalkAs with any new market there is tendency for hyperbole to grab headlines andattention.Steve Ballmer of Microsoft, “We‟re all in”. Good for Microsoft but scary for many oftheir partners who are just not ready, willing and able to follow.Sam Palmisano of IBM, addressing IBM PartnerWorld 2011, talked about macrochanges occurring and that “Success is perishable”. Summed up: Innovate or Die.Analysts Frost & Sullivan conclude that the Cloud will put the squeeze on thechannel causing shrinkage. Read, some IT vendors will fail. Who are mostvulnerable? How soon do they fail?The ShiftA shift in the market has been underway that offers customers an alternative to ownand operate. That alternative, depending on who you ask, is told as:Online Services: also the name of a Microsoft business divisionOn-Demand: coined by with the catchy No Software brandingSaaS: computer processing, storage and software via the Internet on „rental‟ termsCopyright iCloud Limited 2011 8
  9. 9. Cloud computing a/k/a the „Cloud‟, Cloud enabled services with many interpretations New words describe ways to serve up IT where the customer „rents‟ rather than „buys‟ with the complexity of IT operations handled by a service provider. Some refer to this as utility computing but jargon aside it is a fundamental shift that changes the delivery and economics of IT for the end customer. In turn this affects the supply chain to the end customer and presents disruption and opportunity.Bolt onto this shift the impact of a world emerging from recession and a new set ofmarket dynamics with powerful new predators vying for customer pockets and youhave the necessity for a game plan to survive let alone prosper.The CloudThis new phenomenon has been a cause of both excitement and derision. Amongthe excited are Microsoft and a host of new entrants while those that deride it claim itis hype and meaningless. Whatever your point of view the Cloud has become theconversation piece of the IT industry4. The Cloud has three foundation services (see diagram) and the access point to these services is the network (fixed and wireless) and that opens up a huge global audience and is one of the reasons why there is so much interest in the Cloud.There is money to be earned by providers of these services whether as discrete oraggregated services. It is pointless to rank the importance of these services as theyare co-dependant (much like a PC and software are) but they do present differentprice points, propensity to commoditize, revenue and margin characteristics andcustomer stickiness to name a few. Those that understand IT will argue over termsand definitions but to Main Street it is the Cloud just as the mobile phone user will tellyou they have an Apple iPhone, HTC Android Phone or Nokia Windows Phonewithout knowing anything about the complex underlying infrastructure that phone isreliant upon – and they don‟t care.The supply chain for the Cloud is quite different to the existing supply chain for mostIT products sold today and the role of the channel to bring the Cloud to market iswork in progress. You will also see the term SaaS used later – read the Cloud.4 Gartner identify Cloud Computing as one of their top 10 strategic technologies for 2011 iCloud Limited 2011 9
  10. 10. Big guns take aimIn a hardened economy the CEO of Microsoft, Steve Ballmer, addressing Microsoft‟sWorldwide Partner Conference 2009 said that growth = share. This statementsignaled an end to growth resulting from customers‟ appetite to invest in IT hurt bythe global economic recession and a new focus on achieving growth at the expenseof competitors. But that was only part of the story as Microsoft presented itsBusiness Productivity Online Suite (BPOS, now branded as Office365) and Azurebusinesses as new opportunity areas for the channel to grow and earn money. Thatmessage was trumped in 2010 when Microsoft went public on its commitment to theCloud announcing; “We‟re all in”. Microsoft is one of the world‟s biggest global brandnames with a vast customer base among business and consumers – they will begetting the message.In the wake of the stormOn 7 September 2008, it was announced in the USA that Fannie Mae and FreddieMac would be nationalized to try to ensure the financial stability of the two firms.One week later, on the 14th September 2008, it came to light that the financialservices firm, Lehman Brothers, would file for bankruptcy after being denied supportby the Federal Reserve Bank. These events precipitated a global recessionresulting in financial turmoil with many business failures and a sharp increase inunemployment. As a result many computers that were once needed by workers layidle.If we look at the actions taken by business it has resulted in a rapid re-adjustment ofcosts to reflect the change in demand and preserve cash to ride out the storm.Investments and jobs were cut; inventory management and credit control became atop priority. Credit dried up and many businesses folded.It is interesting to speculate how business will take the lessons of this recession andwhat that might mean for the supply chain that is the channel. Do we expectcustomers to return to normal pre-recession buying habits or will they have had a re-think? As they look to repair their balance sheets and re-build cash reserves willthey go on a spending spree when things start to return to normal? The truth is; wedont know or at least cant be sure what will happen.Justifying those IT DollarsDuring this recession all capital investment has been subject to hardened scrutiny ofthe business justification. Many IT investments have been justified on productivitygains delivering savings to the business and now the workforce is trimmed backproductivity has boomed. In the USA it was reported in March 2010 that the ratio ofselling prices to unit labor costs has risen by 5.5 percent on a year-to-year basis, thelargest one-year increase in post-war history. So, it may be the case thatproductivity will carry less weight as a business justification for future IT investments.The alternative business justification for IT investment has been sold as deliveringcompetitive advantage but that has been shown to deliver short term advantage thatcan be quickly replicated and so IT investments decisions are becoming morecautionary to the promise of returns based on competitive advantage.Copyright iCloud Limited 2011 10
  11. 11. Studies have shown IT spending represents on average 4% of revenues (variesdramatically by industry) and with revenues flat or declining in a recession that hasput the screws on IT spending. Where the recession left companies with excessequipment and capacity that needs to be burned and so new IT investment mightstall until confidence in sustainable revenue growth returns. So, does SaaS providea better economic alternative to outright purchase during this period of economicuncertainty?It is interesting to make a comparison of revenues (fiscal years 2008 and 2009)earned by companies offering SaaS and licensed software during this recession. 2008 2009 Yr on $0.748Bn $1.077Bn +44%SuccessFactors $0.011Bn $0.015BN +36%Oracle $22.43Bn $23.25Bn +3.7%BMC $1.73Bn $1.88Bn +8.7%For a comprehensive view of the market opportunity and movement a bigger basketof companies would need to be compared. The chart above records top linerevenue growth while like for like comparisons are not made easy by the fact that thecurrent „how are we doing‟ measure for on premise is new license revenue growthand for SaaS deferred revenue growth. Of course some SaaS businesses areperforming well and in particular those with CRM ( and HR(SuccessFactors) applications are highlighted but that does not translate that allSaaS businesses are enjoying success. Even so this comparison highlights thechanging nature of customers‟ spending habits.It is worthy to look at Microsoft‟s Office 365 seen as a solution for SMB customersbut has also had success with enterprise customers. The Office 365 solutiondelivers communication and collaboration with email, documents sharing, webconferencing and other useful get the job done functions. Big companies withhighly capable IT functions are switching, for example; GlazoSmithKline a globalpharmaceutical business is turning on near 100,000 users to Office 365 and in doingso can now switch off their own email servers. Why would they do this? Every business has email and with the assumption that it delivers more or less the same productivity for all customers the only competitive advantage is a factor of what it costs one business over another. And so one change that might now occur is a cold light of day assessment of how IT is deployed; we do this ourselves because we can do it better and it iscore to our business. We prefer others (a partner) to do this because we know theycan do it better because it is there core business and they achieve economy of scalethat we can not and that means we pay less than doing it ourselves.Copyright iCloud Limited 2011 11
  12. 12. This approach focuses resources on what really makes a difference to the businessand drives down costs. If this mentality becomes prevalent then customers willexpect to see their vendors provide a comparative analysis of: own and operate vs.SaaS. And if you are not in a position to present a these choices, unbiased,competently articulating the business justification for the customer then you couldfind yourself at a disadvantage. Conversely, those that develop this aptitude will beat advantage.Who is listening?Is there any evidence that customers want to see the alternatives?Vivek Kundra the Federal Chief Information Officer (CIO) at the White House is astrong proponent of SaaS and was quoted in a Wall Street Journal article in which hesaid: "I‟m all about the cloud computing notion. I look at my lifestyle, and I wantaccess to information wherever I am. I am killing projects that don‟t investigatesoftware as a service first." More recently he has described a future for federal IT as“Light technology” that means you pay only for what you use, scales quicklyaccording to demand, and shares information more efficiently.Bill McCluggage the UK Government‟s deputy CIO is a fan of SaaS of and is busywith the establishment of a UK onshore, private Government Cloud ComputingInfrastructure called G-Cloud. In essence the program will include Infrastructure-as-a-Service (IaaS), Middleware/Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS). In relation to SaaS the government intends to establish aGovernment Application Store, a federal IT online supermarket.Jeremy Vincent CIO of Jaguar Land Rover switched 15000 users to Google mail andcalendar with some interesting observations: We are saving a lot of money but thatwasn‟t the main driver. Cost enabled me to get the approval process signed offquickly but in the future it will give us access to a commodity solution across theworkforce. It‟s been an easy job. Many of our workers use Google at home and aswe know the experience of computing at home is years ahead of the corporateexperience. I‟ve tended to be somewhat skeptical about the ability of consumer styleapplications to cross over into business but in making this clear and unequivocalstatement I have to say: ‟sold.‟One of the golden rules of selling taught at sales school - offer the customer a choice- just took on a new significance as businesses reinvent with the lessons of thisrecession.The next thing or the next BIG thing?Havent we seen something like this before? If you cast back to the period 1999 -2001 we had .com boom to bust. This was period of great innovation and created avibrant online economy that is synonymous with names like eBay, Google andnumerous brand names in financial services, travel and entertainment to cite a fewexamples. Many of these brands are now goliath businesses with global reach tobusiness and consumer audiences.Copyright iCloud Limited 2011 12
  13. 13. I was working for Novell in 1999 and calling on customers to inform them about theInternet and how we saw it would transform connectivity across, what wasthen called, the Wide Area Network (WAN). As with any disruptive technologycustomers flagged their concerns around bandwidth, latency, security and thereliability of a public network for business critical functions. Little did we know andthe words of Bill Gates resonate: “We always overestimate the change that willoccur in the next two years and underestimate the change that will occur in the nextten. Dont let yourself be lulled into inaction.”As Sir Tim Berners-Lee inventor of the World Wide Web (now commonly referred toas the Internet) commented; one characteristic of the web is that it will always be alittle bit broken - yet that has not dampened enthusiasm with >3Bn connections if youcount both wired and wireless connections. The Internet was the next thing thatturned out to be the next BIG thing all inside 10 years. It also fuelled newopportunities for growth with hardware, software and ISP vendors profiting from1.4Bn new Internet connections in the period 2000 – 2010. These are impressivenumbers yet there is ample headroom for growth and SaaS is a key component tothe delivery of affordable online services and its economic proposition is particularlyrelevant to business and consumer audiences in the developing world which hasmost potential for growth.SaaS is building on the success of the Internet. It also has another majoropportunity to deliver services to the vast number of mobile phone users. Manymobile phones support Internet connectivity and it is forecast that in the 2012-13timeframe more mobile phones will be connected to the Internet than personalcomputers. Many of these mobile phone users will already have a computerconnected to the Internet and see their mobile phone as the portable, lives in thepocket or handbag convenience device.With 67% of the worlds population owning a mobile phone5 this is a watch thisspace category. If you needed any convincing; ask yourself why Google hassuddenly become interested in mobile phones?Get it, got itWhat evidence is there to interpret the appetite for SaaS? As always there arethings we know and things we dont know. In the former category we rely on newsand announcements about customer adoption and here are a few FY2010 results stated 72,500 customers now use their On DemandCRM service and impressively added 17,100 net new customers in their FY10 duringa global recession.In June 2009 SuccessFactors announced Siemens AG purchased a globalenterprise subscription of virtually all of SuccessFactors modules to link strategy toexecuted business results with its worldwide corporate talent management vision, for420,000 users across 80 countries in 20 different languages.5 Source United Nations: iCloud Limited 2011 13
  14. 14. On April 2010 Xero a New Zealand based company founded in 2006 who advertisethey offer the world‟s easiest online (SaaS) accounting system announced they have17,000 paying customers in more than 50 countries. Four years to acquire 17,000customers demonstrates the power of online.In March 2009 GlaxoSmithKline said they would move near 100,000 users toMicrosoft‟s online service (BPOS) and in doing so cut operational cost by anestimated 30%. In December 2010 the US Department of Agriculture announced itwould move its 120,000 federal workers to BPOS over a four week period. Both theprivate and public sector „get it‟ as they refresh how they deliver essential „get the jobdone‟ services, like email, to their workforce.In May 2009 Valeo confirmed they would use Google Apps for its 30,000 employeesoperating out of 192 locations in 27 countries.It is highly probable amongst these and other SaaS customers they use multipleSaaS solutions from different providers and so is established as a viable alternativeto own and operate for those customers.In the latter category, things we dont know, is whether customer adoption is confinedto a few applications that are highly suited to delivery as SaaS. This might be anindicator to a finite market for SaaS.We know that some customers are replacing on-premises with SaaS but is SaaSattracting new customers to increase the use of IT in their business (or at home) thatwould otherwise do nothing? The interesting dynamic is to know if the availability ofSaaS is influencing customer decision making and to understand customers‟predisposition to adopt SaaS.In a Microsoft end-user survey (published February 3rd 2010) among SMBcustomers, Microsoft looked at this with an interesting slant as they looked forevidence to correlate a customers adoption of SaaS (referred to as hosted servicesin their survey) and their financial performance. The headline statement for thissurvey was: Microsoft Study Reveals Small and Midsize Businesses Using HostedServices Have Better Financial Performance. In the detail they reported more than 40 percent of the respondents that use hosted or cloud technology reported revenue rises of 30 percent or more compared with 90 percent of respondents not using hosted technology that saw decreases in revenue. Depending how Microsoft use this research to promote SaaS with SMB customers it puts them in an interesting „marketing‟ position with those partners that currently have SMB customers and earn money from the sale and support of IT deployed on-premises. It appears SaaS is turning up the heat and will be the cause ofsome headaches and heartache for the channel.Understanding customer choices and triggers that influence buyer behavior is root tochannel Go to Market planning and sizing market opportunity. It is fair to say thatCopyright iCloud Limited 2011 14
  15. 15. partnering opportunities are abundant and as no template exists this is creatingconfusion for those with legacy partner programs (do we reinvent the old, it hasserved us well in the past) and opportunity for others that think out of the box. Thenew focus is to identify those that are shaping and influencing customer buyingdecisions and figure out why they need you and how you help them with customeracquisition for Cloud services.The age of the DatacenterEnterprise customers‟ datacenters are typically housed in secure environments withmost employees unaware of its physical location, smaller businesses more likelyhave a server room that doubles as the stationery room and micro businesses havethe server under the desk in the corner where nothing will get spilt on it. Some havefigured out there is an alternative and query why you need a server at all. In recenttimes massive investment is being made in datacenters that serve up SaaS andCloud Computing and they dwarf anything built so far by any end-customer.Microsoft has invested $2.5Bn in 6 datacenters around the world. Google, IBM,CISCO, Oracle and HP have multiple datacenters. Apple has been reported asbuilding a $1Bn datacenter in North Carolina. IBM is building a massive datacenterin China with 6.2M square feet of space (almost the size of The Pentagon). Otherdatacenter operators include: UNISYS, CSC, Sungard, Rackspace and Ingram Micro to name a few. The datacenter industry has evolved sufficiently for Gartner to publish a Magic Quadrant for Web Hosting and Hosted Cloud System Infrastructure (On Demand). Those named as Leaders include IBM, AT&T, Savvis (acquired by CenturyLink) , Rackspace and Terremark (acquired by Verizon). It is not just that these datacenters are bigger; they are run on an industrial scale backed with the commitment of a Service Level Agreement (SLA) and their value as a „quality hosted platform‟ for the delivery of IT (compute/storage/web sites/email/voice) is fast gaining recognition. The complex technology stack (see diagram) of the datacenter is optimized for high efficiency and high availability with the operational requirement to be delivered 24x7 against a SLA. For many businesses the operators of datacenters deliver „IT at an affordable price and remove the burden of own and operate‟.It is estimated one-third of global server production is delivered to datacenters and ifclassed as an industry would rank the 6th largest global consumer of energy. This isa big industry backed with big money players who understand how to shape andinfluence customer buying decisions – after all they have big money investments todeliver ROI against.This is IT delivered as a utility at a very compelling price point but no customer is in aposition to throw away what they have already invested in IT so the role of thechannel is evident; it is to advise the customer of the optimal solution for theirIT requirements and that may or may not include SaaS.Copyright iCloud Limited 2011 15
  16. 16. In most cases and for some period of time to come the channel will earn money frommaintaining and upgrading IT that is installed on-premises and from selling andproviding services to customers that make a decision to deploy SaaS, oftenalongside existing IT (for most rip and replace is not an option).Few businesses have the resources to build and operate datacenters on the scale todeliver utility pricing in a competitive market so a process of natural selection willoccur for the channel with those datacenter providers that want to partner. This willrequire the channel to evaluate what their value-added services are with theavailability of SaaS and how they differentiate those services and so a change isunderway and poses some uncertainty for the channel. For example; will Monday toFriday help desk hours meet the needs of customers who can access SaaS fromanywhere and at anytime?If with the availability of SaaS the channel earns less money from selling serverhardware and software licenses how is that replaced?Unexpected challengesOne consequence of this market shift is the need to educate the channel in thechoices now available to their customers and this has presented some conflict. Theupfront revenue and margin from the sale of hardware and software usually earnedis replaced by a monthly recurring revenue and margin stream with the sale of SaaS(Monthly Recurring Revenue (MRR)) with important financial implications for the P&Land cash flow of a business.This has presented a dilemma for the channel; do they ignore these new choices orembrace them? In turn this has presented a dilemma for the providers of these newservices; do they engage the channel or sell direct? There are examples of channelonly, direct only and hybrid sales models. For new to market vendors the choice iseasier made than for those vendors that have worked hard to build loyalty with theirchannel partners and feel tormented by the need to make progress while remainingloyal to existing channel partners. In truth the channel is hyperactive as a resultsearching out partnerships to take SaaS to market. SaaS presents a choice for end- customers with many implications to work through and the channel can play an important role in advising customers. As every business knows; with change there is opportunity and timing is everything.Changing Buyer BehaviourOne time a customer would ask to receive information about products/services andthat that would be dispatched via post, fax or email. Where customers were in anearly stage of information gathering and discovery they would attend exhibitions andCopyright iCloud Limited 2011 16
  17. 17. seminars. Today most customers start with a search in Google, Bing or Yahoo,whichever is their preference. This in turn has changed how the channel conductsits demand and lead generation and allocation of its marketing spend. Moremarketing spend is directed to web sites, Pay Per Click (PPC), Search EngineOptimization (SEO) and more recently social media.The availability of SaaS has lead to a change in how customers can now evaluatesolutions with self-activation of try before you buy offering commitment free - no risk -no cost trials. In turn this has led to a rethink of customer acquisition strategies asthe effort moves from how do we find our customers to how do we ensure ourcustomers can find us. This has changed the sales cycle from one where the vendorwants to assume control to where the customer is put in control, in turn creatinghavoc for sales forecasting.Where the customer can reach a decision without the need to speak to sales, theproposition for customers needs to be highly targeted and crystal clear with noobstacles to prevent easy conversion of a trial to a purchase. Here we see anotherexample of how SaaS is disruptive to the channel as the role of sales is changedfrom upfront consultative selling or order taking to the conversion of a trial topurchase where you may know little or nothing about a customers motivation to buy.The introduction of a SLA with SaaS presents an interesting new dimension for howcustomers evaluate the choices of own and operate vs. SaaS. Take for examplewhere a customer experiences problems with servers this is recorded as downtimewith some interruption in the business and sometimes a cost over and above anypre-existing maintenance fees. Some SaaS providers now compensate customerswhere they fail to meet the SLA and this not only builds confidence in the mind of thecustomer but they see it in stark contrast to where they usually end up paying whensomething goes wrong. That makes an interesting discussion point and is well madeby SaaS vendors during their sales pitch to a customer.If buyer behavior is changing what does that imply for the resources and modusoperandi of channel sales organizations?The impact of SaaS is far reaching and has more ramifications for vendors that offerboth on-premises and SaaS than the pure play SaaS vendor. For the vendoroffering both on-premises and SaaS they face many challenges to build dualcompetencies with impact on sales, marketing, service and finance andadministration departments.It is evident that the skill sets selling on-premises and SaaS have differences. Forexample those selling SaaS need to have hands-on experience using the productwith the benefit of insights they can share with customers; there are a number ofways to do that lets schedule a webinar so I can show you how to.The compensation plans for licensed software and SaaS are a source of contentionwith sales of licensed software attracting a bigger one-off commission payment andSaaS commission payments designed to reward customer retention that isfundamental to accretion of Cumulative MRR (CMRR).Copyright iCloud Limited 2011 17
  18. 18. With the sale of licensed software, sales disengage after the sale is made and handoff to the support team until the customer has a new requirement. In a large part thisbehavior reflects the compensation plans that reward the salesperson upon thesale. With the sale of SaaS the companys revenues are dependant upon thecustomers continuing use of the service that is to a large extent depends upon theirsatisfaction with the service. The sales compensation plan for SaaS reflects thecompany‟s revenue stream from the customer and the importance of customerrenewals. Since compensation plans direct sales behavior there are challengesaround how the compensation model for SaaS is implemented for the salespersonand the company – salespeople prefer sales commission paid up upon the salewhereas the company‟s cash flow from a sale of SaaS does not permit that.The impact of SaaS has many implications for the channel affecting thefundamentals of the business operating plan through motivation and reward of salesteams.Channel supply chain – service chainThe channel has a long history in operating a supply chain from factory to customerand with margins under pressure new opportunity areas are being sought out. Will aservice chain complement the existing supply chain and deliver growth?A wholesale market operates to trade a range of utilities such as electricity, gas andnetwork (voice/data) capacity. Earlier in this chapter I wrote about the expansion ofdatacenters and in time it might become true that computing capacity becomestraded perhaps using eBay (or other exchange) to connect seller and buyer. Is thistoo far fetched to reconcile with todays IT channels organized around the supply ofIT? While it is plausible it is easier to conjecture near term developments based onknown business models and possible business scenarios. It presents a conundrumbecause any points of view and interpretation of future events can be challenged buthere is one possible scenario.When a business equips an employee with a computer, a desk phone and a mobilephone (for some deskless workers) they have the basic tools to do their job. Theneed to replace or upgrade these comes around typically every 3 years for acomputer and every 18 months for a mobile phone. The difference is the mobilephone is under a contract that is invoiced monthly according to usage and the mobilephone industry is expertly set up to efficiently run subscription pricing the foundationbilling process of SaaS. In a recent development they now offer a computer withInternet connection over fixed and wireless networks with subscription pricing.In a world where more and more computing power and software is delivered as aservice the mobile phone operators are well positioned to vie for all of a customersrequirements to include:telephony over fixed and wireless networks,a range of mobile devices with Wi-Fi access,a computer without the upfront capital cost,Internet access (fixed and wireless) and accessto software without the need to install firstCopyright iCloud Limited 2011 18
  19. 19. The channel just got more crowded but with companies that have big brandrecognition that are well capitalized with global operations and collectively have 67%of the world‟s population as customers.Have you ever had to have a mobile phone replaced that was under contract? Theytypically deliver a replacement inside 24 hours usually in a delivery time window tosuit you. The mobile phone industry knows service is key to delivering customersatisfaction and retention (to minimize churn) when the contract is up for renewal.When things go wrong we rely on the service promise of our suppliers and theircapability to do what they say. This may turn out to differentiate a supplier in themind of a customer. Take this story for example, a phone call from a customer totheir mobile phone provider:“Our UK based employee on business in Brazil just had his computer stolen and heurgently needs a replacement. No problem, we will have a replacement with them in24 hours at no cost under the insurance that is included in the monthly subscription.Meantime they can access most of their applications from their mobile phone. Whenthey connect the fully configured replacement PC to the Internet all data will beaccessible with options to download folders that they need to have stored on theirlocal drive. When any attempt to use the stolen computer is made whether or not itis connected to the Internet pre-installed software will ensure the disk is erased. Weare sending a SMS to your employee now informing them of the dispatch of theirreplacement computer. We will take care of everything. Is there anything else wecan do for you? Thank you, we value you as our customer.”As so the product is wrapped with a service chain behind the supply of product andthis I suggest is hugely appealing to a society that has become dependant ontechnology. Once the product is in the hands of the customer the expectation now ison the service they receive and that is a potential source of revenue while deliveringon customer satisfaction.Hard choicesThe poster child of SaaS is founded in 1999 and on record as one ofthe fastest growing software companies to achieve $1Bn in annual sales that is inpart explained by how SaaS companies account for sales. The attraction of SaaS isits revenue model. Monthly recurring revenue (MRR) that is cumulative over time asCumulative Monthly Recurring Revenue (CMRR). For established softwarecompanies with revenue earned from the sale of licensed software (where thecustomer pays for a license to use the software) usually with a recurringmaintenance fee the SaaS revenue model has profound implications.There is a revenue gap in Years 1 - 4 with implications for the Profit & Loss account,cash flow and sales compensation. That is why established software companieswith revenue streams to preserve proceed cautiously to offer SaaS. The choicesare: ignore SaaS for now, switch to SaaS or combine sales of licensed software andSaaS.In reality ignoring SaaS and a switch to SaaS are the hardest to contemplate andmost established software companies choose to combine both, with it has to be said,Copyright iCloud Limited 2011 19
  20. 20. varying degrees of commitment. New to market SaaS only companies have adifferent challenge in that usually costs run ahead of revenue so they need securedfunding through the early years whereas the established business with revenues is ina stronger position to ride out the early years to take SaaS into profit.This points to one of the major challenges facing the channel; the symbioticrelationship of the channel with its vendors now needs to discuss theimplications of SaaS as a source of revenue, margin, and growth andimportantly its impact on existing revenue streams and profitability. That isone big discussion.The BetWith the assumption that all enterprise software will need to be re-written in the next10 - 15 years then you have a software industry in transformation. If as a result ofthe re-write of software more and more software is deployed as SaaS deployed outof mammoth datacenters that changes the dynamic for resources (people andmoney) both supply and demand (customer) side. It will become commonplace forthe customer to look at the alternatives of own and operate versus delegate to aservice provider so vendors will need to be adept at presenting both. Is this a gamechanger? We may not know the answer for another 10 years and the question formany is when to place their bet. Demand for networking is certain to grow while end-customer demand for processors and storage is likely to change with datacenters providing more of this capacity (this is already showing up in data on shipments of servers). And so consumption of hardware and software changes with implications for the channel. This signals a change in the mix of revenue and contribution that the channel earns from the sale of products and services.It will be the case that where SaaS represents an increasing percentage of salesthen services will need to gain momentum as a source of income and the good newsis that it is easier to differentiate services and they are generally less price-sensitivethan products.The network joins everything together and is a potential throttle on the adoption ofCloud with performance and reliability being at the heart of the customer experience.Fast with the promise of faster, and always reliable - nothing less will do. It is areasonable bet and evidenced by demand that investment will continue to pour in todeliver on the expectations of customers.Copyright iCloud Limited 2011 20
  21. 21. In ConclusionIs Cloud the work of creative destruction as described by German sociologist WernerSombart and popularized by the Austrian economist Joseph Schumpeter. There areexamples of innovators taking the place of established companies that enjoyed somedegree of monopoly. Take for example the rise of Google and its challenge onMicrosoft and how that has compelled Microsoft to respond. Will Cloud deliver thenext wave of economic growth for the IT industry and in turn destruct the value ofcompanies that move too slowly to embrace Cloud?In Nicholas Carr‟s book The Big Switch he talks about a revolution in how IT isserved up through the Internet‟s global computing grid pumping software and datainto our homes and businesses calling it a utility just like electricity. And perhaps heis right if we listen to an iPod generation who are interested in using the service(iTunes) rather than needing to understand how it works. With technologyeverywhere we take what we learn at home to work and at work to home. It occurs tome this reflects the thinking of Jeremy Vincent CIO of Jaguar Land Rover and mightbecome more prominent in influencing customer decisions.Whatever conclusions you draw from what you have read here and your ownexperiences it is wise to have a position on Cloud. You need this so you can lead adiscussion with a customer and have all customer facing teams deliver a consistentmessage. It might be that your customers are highly conservative fitting the profile oftechnology laggards and your position is - not yet lets see how this plays out whilewe learn from the mistakes of others. On the other hand you may already be losingmindshare and business to a competitor (and they may not be the usual suspects)?You would know that because they are your customers and you know them well.How do you judge your end-customers; where is your conversation with them?Conversation Vendor description Customer descriptionpoint (Sample description) (Sample description)Watching brief no measureable impact on business needs are being met sales and capability to by existing IT resources – we’re compete for and win business good for now – maybe tomorrow?Minor a few customers have asked SaaS looks interesting but weevolution about SaaS and we have are not sure what it means, we found solutions for them – we need advice and are willing to are in the game experimentSignificant competitors new and existing we are interested to comparechange are offering SaaS and we SaaS with own and operate and need to respond – this could know the economics for the hurt us businessStrategic customers are asking for we are only interested to receiveimportance proposals that require our bids for this requirement that are solutions to be delivered as SaaS SaaS – it’s happenedWhatever you do; do something, success is perishable.Copyright iCloud Limited 2011 21