Jun 20, 2012

How can businesses separate the hype about the cloud from the reality?

Companies make new announcements trumpeting the launch of cloud services on a daily basis, and it is hard to distinguish between the winners and the losers. As companies attempt to develop a comprehensive cloud strategy and launch offerings in alignment with it, what are the fundamental things that should be considered to maximize returns?



As companies make this transition, they need to consider the following critical success factors:


Remake the Product Portfolio in the Eyes of Your Customers with the Move to Cloud

Consumer experience is heavily influencing enterprise technology adoption. As consumer expectations for the Cloud carry over into enterprise, elements such as ease of use, collaboration, and access to anything/anywhere have become key levers of differentiation.


Taking a comprehensive approach towards understanding end-user needs is critical for every provider. It is imperative that providers ask the right questions (i.e. how do customers use the product today and how can that be changed for the better?) as they re-think and innovate their product portfolio to drive value for their customers.


Pricing Takes Time and Effort – Do What is Necessary to Get It Right


Subscription based pricing is status quo for cloud based services. We often see subscription prices set based on a planned 3 or 5 year return of the license and maintenance revenue.


However, our perspective is that the nature of end-user interaction with these services should drive more significant pricing innovation. Providers need to think more about customer dynamics and think less about matching subscription revenue to the traditional license and maintenance model. While models such as freemium and trial-usage are commonly used to accelerate adoption, insights on product usage and micro-segment needs can be used to drive a more granular approach towards pricing - essentially pricing based on the unit value delivered, e.g. usage, add-on features, additional service levels, etc. In addition, providers need to model the impact of the pricing strategy on the overall economics, making sure to understand and manage the cannibalization threat to existing revenue streams. 


Align the Business, Operating, and Economic Model


The economics of a cloud based services model are naturally different from that of a traditional license and maintenance model. While that should not serve as an inhibitor to launching cloud based services, companies need to design their operating model for these services with a view towards their end state margin structure. This includes architecting the product to support hosting scalability, ease of deployment, and serviceability, defining a low cost support and service model that includes self-service and web based options, creating an agile R&D process with 3 to 6 month release cycles, and aligning the sales group and channels to sell subscription based services.


Ken Ewell

Partner at Waterstone Management Group



I think the best thing for companies to do is to utterly disregard all the hype. Smart companies will sit down and figure out what their needs and business strategy is BEFORE even considering a move to the cloud. This includes mapping out a cost-effective plan that actually contributes to the bottom of line of the business before purchasing any specific cloud services.

Companies that fly blind and buy into the hype are probably going to waste a lot of money and time buying cloud services that they don't really need. And they'll probably get taken in by various hucksters that want them to buy far more than they actually need.

The cloud can be useful, but it's not the be-all or end-all. Smart companies will understand that, and will resist the hype.
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