Cloud Computing Pushes Vendors to Seek New Roles in IT Value Chain

Cloud adoption means that companies are increasingly signing pay-as-you-go SLAs and renting servers. This means traditional software and hardware vendors must dramatically reconsider their business models, columnist Bernard Golden says.

By Bernard Golden
Thu, October 11, 2012

CIO — It's obvious that cloud computing imposes vast change within IT organizations. I've written repeatedly on this topic, addressing issues such as cost allocation, job opportunities, automation requirements, security and the relationship between application and operations groups.

Cloud computing represents the most profound change in computing that the industry has ever seen. The reason is simple. Cloud computing is not just a platform change implementing a better price/performance capability based on Moore's Law. It represents, instead, a move to an automated computing capability.

In this sense, it is akin to what mass production brought to automobile manufacturing, a change so profound that our entire society is completely different than it was before Henry Ford married an assembly line to standardized manufacturing.

With the Cloud Comes Small, But Frequent, Purchases

While I've written extensively about the big changes that cloud computing brings to end user IT, I haven't spent much time focusing on vendors' role in this new world. That doesn't mean that cloud computing won't bring equally significant changes to the vendor side of the equation; in fact, the changes will be just as wrenching for vendors, with an equal transformation forced on them by the characteristics associated with the cloud.

The foundation of the change can be summed up simply. Cloud computing substitutes small, frequent, incremental purchases for occasional, large, bulk purchases—and delivering and profiting from the former requires very different skills and organizations than the latter.

The increasing adoption of "pay-as-you-go" or "pay-per-use" by end users has caused this shift. Instead of buying a server to run an app, a user can rent a server to run when he needs it. In many cases, he won't even need to rent a server, instead paying for just the service and leaving ownership and management of the server to the provider, whether it's an IaaS cloud service provider such as Amazon Web Services or a SaaS vendor such as Salesforce.

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As should be obvious, this results in much smaller purchases. Moreover, it commonly results in a subscription payment pattern—that is, a monthly payment. While the overall revenue might be significant, it's going to be realized over a period of time, not in a single payment at time of agreement.

This has several implications. For starters, revenue can be much more predictable. Subscribers typically resubscribe at rates well above 90 percent. Think about how attractive this can be compared to having to find a whole new set of customers each quarter. It's also much less work to get a customer to agree to a small fee commitment rather than a large one-time payment. While the total fee over the lifetime of the subscription may even be more than a one-time payment would be, the smaller initial payment makes it easier to obtain customer agreement.

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