The Journey to Cloud-Based Revenues: What You Need to Know

The Journey to Cloud-Based Revenues: What You Need to Know

The York Group has completed more than 50 Business Design Sessions (BDS) with a wide range of Microsoft partners worldwide, including Global ISVs, emerging ISVs and CSPs.

It has become clear, partners transitioning from on-premise, perpetual licenses to Cloud-based subscription service go through well-defined stages in their journey, and each phase has an impact on their business model transformation.

The Transformation Process

BDS-Steps-2

The companies we have worked with are going, or will go, through the following steps:

  1. Many will first move their on-premise solution to a VM environment, lift and shift without making fundamental changes to the product architecture. It gives them a “Cloud” offering that can be sold on a subscription basis;
  2. They then re-write the application as a true multi-tenant solution. This allows them to scale more cost-effectively, and start to move their clients to a single, standard code base. For many companies this is a three- to five-year cycle;
  3. The next phase is the move to big data and Internet of things (IoT). These are grouped together because they are closely linked, and they generally take place as part of a single strategic initiative.  But different companies come at it from different angles.  Manufacturers start with IoT – they have been collecting data for years – and build applications to monetize it.  Enterprise software companies start with their existing applications, look for ways to identify and collect data, then move into analytics;
  4. The final step is developing an IoT platform, one that extends the IoT strategy beyond a company’s clients and applications.

It is surprising how many Global ISVs, especially manufacturers, are still at the front end of this process.  They risk becoming marginalized. As the world moves toward data monetization, other companies in their space can generate new sources of revenues – making them less reliant on margins from manufactured products or traditional software solutions.

Key Learnings

The trends and strategies that will shape the industry over the next 10 years are becoming clear:

  • Having a strong, multi-tenant SaaS offering has become table stakes for growth. Most companies have exhausted the potential for net-new clients in the Tier-1 market segments, and are using their SaaS products to expand into mid-tier accounts;
  • Software is increasingly becoming devalued. This is driven in large part by customer resistance to multi-million-dollar software licenses and the growth of SaaS applications with lower per-user pricing;
  • As a result, building a large client base with a SaaS offering is essential to success in the next phase of value creation as enterprises move to the next wave of digital transformation – Big Data and IoT. The more data collected across market segments (client size, vertical markets and geographies), the more likely a software vendor will be able to survive the inevitable decline in software license and services revenues by monetizing the data they are collecting;
  • Hardware and devices are becoming commoditized. Data, by itself, will also become a commodity, with the real value coming from the ability to create value-added services from the data, or platforms for others to create the value;
  • Enterprise clients are tired of paying for huge deployments. They are willing to give up functionality for simplicity and lower costs. Vendors that rely on increased services revenues from their installed base are effectively encouraging their clients to look for alternatives;
  • Enterprise clients are reducing the size of their internal data centers. While it is highly unlikely that enterprise clients will move mission-critical applications to a public cloud infrastructure, the definition of what is mission-critical is shrinking.

As a result of these factors, the majority of companies with which we have worked, are well down the road in changing their business model and their corporate culture to focus on Cloud-based solutions and services.  They have been making investments for the past 3 to 5 years, and many of them are now starting the move to build out their Big Data/IoT strategies.

Market conditions and end-user behavior are changing faster than many software companies realize.  Even large enterprises are becoming increasingly resistant to paying for large licenses and million dollar deployments, opening the door to small competitors with more standardized, cloud-based applications that provide 80 percent of the needed functionality “out of the box.”  This, combined with a general trend toward the devaluation of software, means that forward-thinking ISVs are building new sources of revenue from data analytics and IoT.  Those that do not, run a very real risk of becoming marginalized over the next three to five years as software, hardware and devices become commodities delivered at the lowest possible price.

2017-08-07T20:12:58+00:00