As a Strategic Consultant, I have worked with the Executive Teams of many Enterprise Software and Independent Software Vendors (ISV) to develop strategies for becoming Software-as-a-Service (SaaS) and Cloud Services vendors.
…and I must say that I’ve come to what I consider to be a shocking conclusion:
Far too many people think the Cloud is magic.
In fact, I came up with this list of 7 ways Cloud Services are not a Magical Success Machine based on my recent experiences… feel free to disagree with me or give me other ways the cloud is not magic in the comments. Here we go.
7. Moving to the Cloud does not magically result in faster time to market
I know… crazy, right? That’s one of the big reasons to “go Cloud” isn’t it?
Look, I know plenty of people, companies, startups, etc. with products that they’ve been working on for years and are “just a few months away” from going live… and these are pure-play, from scratch, “cloud native” products/companies – often actually leveraging “cloud” technology like AWS, Azure, etc. – and they are certainly not getting to market fast.
Here’s the thing… the Cloud itself does not result in faster time to market… it simply allows you to get a production-ready product to a point that is immediately consumable by customers, faster.
Of course you then have to find the people who should want to use your product and convince them to use it… the Cloud doesn’t change that.
But… IMHO (remember, this is all just my opinion, something I AM an expert in), faster time to market isn’t the part that really matters, anyway.
What really matters is that once in-market, the Cloud allows you to get feedback from actual product use faster, so you can iterate on that knowledge and make your product better, faster.
So it isn’t (just) the speed to market that the Cloud offers that matters… its the speed of iterations through the “build-measure-learn” loop and the “validated learning” velocity that matters.
BTW, those are core Lean Startup principles and if you aren’t familiar with all-things Lean Startup, I suggest you become so post haste… and don’t let the name fool you, “Lean Startup” is for anyone looking to bring a new product to market, whether in a brand new company or an existing enterprise.
“The Cloud” – if you’ll take advantage of what it has to offer – can help you leverage those Lean Startup principles in ways never before possible… again, if you’ll take full advantage of it.
And one of the ways to take full advantage of what the cloud offers in terms of speed of iterations through the “build-measure-learn” loop is by adopting a faster, more agile product development methodology, but….
6. Becoming a Cloud Services provider does not magically transform your software development process into agile
So you have 12-month release cycles, provide infrequent, monolithic updates to users, and use a waterfall software development methodology today.
Tomorrow you decide to “go to the cloud.”
The next day you’re a full-blown Agile Scrum eXtreme Programming shop with pair programming desks, sophisticated unit testing frameworks in place, and continuous integration adopted across your entire software development team, right?
Wrong.
It doesn’t work that way.
The Cloud doesn’t magically transform your software development methods or team, product development methods or team, marketing organization, sales organization, management, or executives.
In fact, it is often these teams and methodologies and the “legacy baggage” (which frequently results in a “that won’t work here” mindset) that comes with those teams that hinder a traditional software vendor from fully embracing what the Cloud OFFERS in terms of flexibility and agility.
To fully embrace the Cloud and take advantage of what it offers requires a shift in thinking that must permeate the entire organization… which is why many legacy companies that want to “move to the cloud” often buy pure-play Cloud / SaaS / Web App providers (often after failed in-house efforts) so they can “absorb their ‘cloud’ DNA” because they realize that making such a shift internally is going to be difficult.
I often suggest to Enterprise or Traditional Software vendors that rather than treating it as just another product, that they instead treat their Cloud offering as a separate business unit (or new company) with a new brand and dedicated resources… different software development, different marketing, different sales, different ops to combat this “legacy baggage” problem.
But the “legacy baggage” doesn’t stop at the organizational level; this is product-level, too, and…
5. Moving to the Cloud does not magically happen without some code changes
Most Enterprise or Traditional software vendors that I run into who are looking to “go to the Cloud” have at one time or another considered this a valid strategy:
- Take our existing product as-is
- Spin up an instance of it on AWS or Azure for each customer
- Profit
It appears we have to once again get into the ASP (Application Service Provider) vs. SaaS argument from 7 years ago.
Unfortunately, today it’s much harder to make the argument against ASP from a cost/tech scale standpoint when “all you have to do is spin up some VMs on Amazon… write some code against their API and you’ve got a ‘scalable’ business model, man.”
Ultimately, the argument comes down to Multi-Tenancy…. oh no, the Single vs. Multi-tenant SaaS argument of 4 years ago rears its ugly head once again.
Here’s how I see it (in run-on sentence rant format):
Single-Tenant ASP model using VMs on AWS/Azure as an Enterprise Software Vendors “Cloud” strategy = safe, comfortable, doesn’t require much or any change both technically or organizationally, it’s a short cut, it is risk-avoidance, it speaks to a lack of market opportunity vision and a complete mis-understanding of the business model/revenue streams available with Multi-Tenant SaaS; it is not scalable at the business model level (companies that fail rarely do so because of technology issues… remember that!
SaaS Business Architecture w/ Multi-Tenancy as the “Cloud strategy” = it’s hard, it requires building a business from the ground up, it is completely unfamiliar to traditional software vendors, it is at least perceived to be very high-risk since it requires changes at pretty much every level of the business, though it allows for massive scalability at all levels of the business, it offers unprecedented visibility into user behavior and therefore offers the ability to provided targeted up-sell and cross-sells and allows a vendor to offer proactive customer support both resulting in reduced churn (or higher retention) and higher customer lifetime value; ultimately it requires a compelling market opportunity to justify the upfront investment.
So if you want to go to the “Cloud” – to do it right means you probably aren’t going to be able to take your existing product and slap it on Amazon or Azure as-is.
You’re going to have to not only build a new product but engineer a new business… in SaaS, the business is the product and vice-versa.
But wait… there’s good news.
When you recognize what the Cloud really offers, you’ll recognize that you don’t have to build everything yourself.
In fact, at first – yes, even for (or especially for) large Enterprise Software companies – you can focus the effort and attention in your new Cloud offering on your core product… the secret sauce, the thing that makes your product special… and leverage other cloud providers for everything else.
I say especially Enterprise Software vendors because they are often far removed from things like metering, billing, lifecycle marketing, or even running/managing their own public-facing infrastructure.
By leveraging the Cloud to its fullest, you can use tightly or loosely-coupled ecosystem partners to help you get to market faster by avoiding reinventing the wheel… or a complex metering and billing system, single sign-on, analytics system, etc.
So yes, you will have to re-engineer (or build from scratch) your new product to take full advantage of the “Cloud” – but by taking full advantage of the Cloud you won’t have to build everything from scratch.
But just like the upfront investment to go to the cloud the right way, there’s an ongoing investment by you and your customers which means…
4. Becoming a Cloud Services provider does not magically result in cost savings for your customer
The cloud comes with the promise of “economies of scale” (EoS) – the more there is, the less it costs.
As a SaaS vendor you get to benefit from the EoS of your infrastructure provider and your customer gets to benefit from shared infrastructure assuming you leverage multi-tenancy within your app.
If you spin-up an instance for each new customer, your customers will benefit from EoS at the infra layer in a pass-through fashion, but at your level that won’t be achieved. Bleh… Who cares.
Here’s the deal… the cloud won’t – by default – save your customer money.
Put another way… the cloud shouldn’t – by default – result in a cost savings for your customer.
Think about it… if you take on support in the app for your customers rather than having them run it in their own data center or coat closet, you’ll probably spend more on infrastructure than you ever thought about today.
Which is why you should probably charge more for access to the app (over the estimated Lifetime Time of the customer).
Now, net net the customer might pay less since your app, which might cost more in the cloud over 3 years vs. a straight purchase of the software + maintenance for 3 years, doesn’t come with on-premises support, hardware, and utility costs.
But the “software” amortized over 3 years vs. 3 years of subscriptions might have the SaaS version being more expensive.
Or at least – in many cases – it should.
It just makes sense… charge more for your cloud offering because you will likely spend more to support your customers and they are certainly getting a benefit in excess of just the software “license” you used to sell, right?
Unfortunately, few companies think this way… “cloud” = cheap(er) to them.
They don’t take into consideration the extra costs of supporting and delivering a cloud offering and they – even more importantly – don’t take into consideration the extra value delivered to their customers in this model.
I’ve only ever run into one company who said “we’ll save money by managing the infra for our clients since we already bundle support and supporting on-premises installs is a nightmare.”
Bottom line is… don’t undervalue your offering by thinking “cloud = cheap”…
And if your customers already believe that, then you probably shouldn’t lead with “our Cloud offering” in your marketing!
So if you’re convinced that there is a real business opportunity for you in “the cloud,” how do you make money? Well, first you need to know that…
3. Moving to the Cloud does not magically change your revenue model to monthly, recurring payments
I’ve said it for years… SaaS != Monthly Recurring Payments.
But most people say “SaaS” and mean exactly that… monthly payments.
I’ve met a few Enterprise Software companies recently that offer their software – their installed, on-premises, behind-the-firewall, legacy software product – on a monthly, recurring revenue basis.
Is that SaaS? I doubt anyone would say it is.
Many times the vendor simply amortizes the cost of the software + maintenance fees over some expected lifetime, say 3-5 years, and calls it a subscription. Cool. But it’s not SaaS.
It’s certainly not “cloud.”
On the flip side, just because you put or build your app in the cloud does not mean you’ll sell it on a monthly, recurring subscription basis.
You likely won’t sell a perpetual license to the software, since the customer isn’t actually buying software but rather a complete service, but aside from that, just about anything goes in terms of how you can make money with your cloud offering.
Like everything else you do, you must consider your market… sell your product how your customers can/will buy.
Which leads to the next point….
2. Becoming a Cloud Services provider does not magically change the way your customers buy
What is your ideal customer’s procurement process like?
When you “go to the cloud” will their procurement process change?
Yes, it could… if you offer a monthly subscription and can now bypass the traditional procurement process because individual employees within an organization can subscribe to your product with their company credit card or your fee is low enough to be reimbursed by the company, then you could change they way they buy stuff from you (not to nitpick here, but you aren’t changing the way they buy; you’re fitting into a different buying process).
But what if you don’t want to offer a low-priced product that employees can expense, or you aren’t offering a departmental or utility product and your product is more “mission critical” or just “bigger” like ERP, HCM, Warehouse Management / Inventory, etc.
Simply because you offer a “cloud” product, does the procurement process for those products change? Probably not.
You’re looking at the CapEx vs. OpEx argument and saying “of course they’d like to pay monthly… duh” … but is that how your customer thinks or what you think?
Right… this isn’t about “Cloud” or you… its about your customer.
It’s always about your customer…. Cloud or no Cloud.
And unless you’re the market leader, not just in terms of your type of software but literally, your target market looks to you for the decisions they make, you’ll be hard pressed to change the way your customers buy simply because you now offer self-service, auto-provisioning software they can pay for with a credit card.
Look at Workday… they are a 100%, from-the-ground-up, pure-play SaaS (Cloud… whatever) HCM vendor with a high-touch sales process, no self-service e-commerce model, doing 6 and 7-figure, multi-year deals the old-fashioned way because that is how their market buys.
They could go down-market and be more “SaaS-like” right… more like Basecamp… or they could keep killing it with 6, 7, and 8-figure multi-year deals by selling how their customers buy.
Maybe their customers will change how they buy in the future (I’m sure they’re buying other stuff on the web both in their business and certainly personally) but for now… when it comes to procuring an HCM system, the Cloud didn’t magically change the way customers buy.
How they get TO the buying decision in Workday’s favor… well, that’s a completely different story for another day and it has to do with Workday taking FULL advantage of what the Cloud offers in terms of marketing.
But…
1. Moving to the Cloud does not magically create a new market for you
Recently, I was tasked with helping a traditional software company map out the Go-to-Market strategy for their cloud offering.
But when I joined them they didn’t have a cloud offering identified yet, let alone one ready to plan a G2M around.
They had some ideas, but that was all.
So first things first, we had to figure out which idea to focus on.
Do they bring their current offering to the cloud, do they build a Minimum Viable Product (MVP) based on some subset of current functionality and use that to enter a different market or go after a different market segment, do they create a different product that complements their current offering but is in the cloud, or do they create an add-on to their on-premises product that is “in the cloud” so they can say they have a “cloud” offering.
Lots of options – and they had thought about all of them – but we needed to figure out what the best option was.
Before I could start the process of helping them identify the best opportunity for their cloud offering, one of their team members pulled out a spreadsheet to “evaluate” the opportunities.
And I watched in awe (horror?) when they used only inward-facing things to evaluate their “cloud opportunities”… not once did they mention any external market drivers.
Basically, they wanted to “be in the cloud” and they wanted to choose whatever opportunity was most likely to get the okay of the CEO, not the one that was truly an “opportunity” by market-demand standards.
To which I had to remind them: don’t just “move to the cloud” to move to the cloud… have a reason… the Cloud is not magic and won’t make a market appear.
It seems we’re back to “if we build it, they will come.” Which they probably won’t.
This is one of my favorite tweets from Aaron Levie, CEO of Box:
Remember: Existence of a Problem != Existence of a Good Business Opportunity
— Aaron Levie (@levie) May 3, 2012
My take on it is:
Remember: Existence of the Cloud != Existence of a Good Business Opportunity
Don’t go to the “cloud” just to go to the cloud… know why you’re doing it (it should probably be market-focused) and remember that the cloud isn’t a Magical Success Machine!
Let’s Work Together to Transition You to the Cloud
For immediate consultation and advice on transitioning your software business to the cloud, schedule a 60-minute meeting with me via Clarity. If you feel a more involved engagement is required for me to help you, email me with the specifics of your situation (as much detail as you’re comfortable giving) and we’ll setup a meeting to work through the particulars.
– Lincoln
(972) 200-9317
About Lincoln Murphy
