Can your business afford to move to a cloud delivery model?
The question is no longer whether to offer your services through a cloud model; the question is, how soon.
One of the biggest problems a software provider quickly discovers, though, is that moving from a licensed model to a cloud delivery model has a big impact on the cash flow. Dhaval Moogimane, principal of Waterstone Consulting Group and a specialist in the cloud computing space, said in a recent interview, “. . . moving to a SaaS-based subscription model from the traditional license-plus-maintenance model certainly has a dramatic impact on the cash flow rate of providers in terms of end revenues recognized.”
Yet, companies must face the music and take the plunge, simply because the market demands it. Those huge up-front revenues from big license fees may well be cannibalized, at least in part, by moving to a cloud-based delivery system, and that’s going to take some getting used to—especially for well-established enterprise software firms that are used to license fees in the hundreds of thousands of dollars. But, according to Moogimane, there is a silver lining to that cloud, and that is predictability and long-term booked revenue. “When you think about the short term implications,” says Moogimane, “there are certainly lower upfront revenues, but there is an annuity stream going forward. You fast forward four or five years, and your evaluation looks pretty promising, because you already have a committed revenue stream of recurring revenues.” That makes for a lot more predictability when taking a long-term view.
The challenge comes in the up-front economics, though. “You’ve got to build infrastructure, you’ve got to build your ability to renew, and you’ve got much higher SG&A costs (sales, general and administrative costs).” For a startup, although the costs are higher, Moogimane suggests that it may be easier, simply because a startup has the opportunity to plan their business model and financial plan around that from the very beginning. For a company moving from a traditional licensed business to a cloud delivery business, however, it’s not as easy. “For a company making that transition, it’s a little more difficult, because you now have to change the operating model of your business to shift from what you’re used to.”
One of the big claims about SaaS and the cloud is that it is cost advantageous, and for most end users—especially SMBs—that is certainly true. Today, a small business can get started with tens of thousands of dollars, whereas just 20 years ago it would have taken tens of millions. But, that’s from the receiving end. What about the companies that are providing all that cloud infrastructure? It’s a different equation, and there’s a bigger buildout involved. The oft-cited benefit of lower capital expenditures for companies using the cloud, means that there are higher capital expenditures for companies providing the cloud. For start-up cloud providers, this may even mean a higher funding or venture capital requirement. There are two reasons for this, says Moogimane. “In the case of a SaaS business, if you think about the components that need to get developed, you need to obviously build the software, you need to build the infrastructure to support the software or outsource it to Amazon or somebody else. But at the end of the day you still need to make sure that the run-time and reliability is high. Number two, there is a significantly higher investment in sales, because you have to focus not only on the first few accounts, but also on the renewals, relative to the first two years of operation. I believe there is an incrementally higher investment that needs to happen in a SaaS based model versus a traditional model, though the entry point for the customer is lower.”
The cloud is truly the next frontier, but it’s going to require a significant change in business model and a much longer-term view.
