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Cloud

Software has a cost, but it may not be as clear as you may think.  Yes, purchasing Excel may be straightforward, but what about CRM, Marketing Automation, a new financial system, or any other core database that requires collaboration across the organization?

In the olden days, it was relatively simple:  the application was usually custom-written, and the support fee was somewhere between 15-20% of the development cost.  Today, it is far more complex.  The cloud promises to eliminate your needs for internal support staff, maintenance, etc.  And cloud vendors entice you with selling propositions such as “Only $125/month”… but the hidden costs can be so much higher.  Consider the following cost elements:

  • Base application
  • “Apps” and plug-ins (usually a subscription)
  • Customization
  • Data cleansing
  • Data migration
  • Connection/integration with other software
  • Testing
  • Customized documentation
  • Training
  • License fees
  • Support fees

Then there are the internal costs that directly impact the value that will ultimately be delivered by the software:

  • Needs analysis
  • Process re-engineering
  • Change management
  • Project post-mortem

Finally, there are two hidden costs that are rarely considered:

  • Opportunity cost of the software not being a “perfect fit”
  • Opportunity cost of not using the software to drive your a unique competitive advantage

It is these last two costs that are connected to one of the most difficult choices an organization must make as it decides on a software platform:  custom development, packaged proprietary software, or flexible framework.

1) Custom-developed software:  This software is built exclusively for the organization by a developer, often because the needs are so unique that there is nothing “in the market” that can do the job.  The advantage is the perfect fit: the software can leverage the unique capabilities of the organization and precisely drive strategic goals.  Two key disadvantages of this approach are the cost, and the significant time that it takes to design, develop, and deploy a custom solution.  It is because of these disadvantages that proprietary  packaged software became so popular.

2) Proprietary packaged software:  Whether it is delivered using client-server technology or via the cloud, proprietary packaged software is relatively simple: there is a feature list in the base application, additional “modules” that might be purchased, and often the option to skin the software with an organization’s colors (and logo).

Advantages center around cost, but also in that many vendors tout that the software embeds functional “best practices”.  The key disadvantages of this approach are the opportunity costs: because the software does not have the flexibility to be customized, the organization will need to change to fit the software – no small endeavor.  Furthermore, because others are using the exact same software, the software itself cannot provide or support any of the organization’s inherent strategic advantages.  Even the assumption that the software truly does embed best practices is open to question: who says that the best practices for others are the best practices for you?  Finally, as the organization’s needs change over the years, there is no ability to have the software adapt to these changes.  It is because of these factors that a flexible framework approach has become so popular.

3) Flexible framework software: Using this approach, the base capability of the software is already developed, but it can be customized by a developer to be a perfect fit.  Examples of this include SharePoint or Salesforce: it is possible to use this software out of the box, but both have very robust development environments, as well as add-ins/apps that extend the functionality significantly.

The key advantage of a flexible framework is that core functionality has already been developed, speeding deployment – yet significant customization is not just possible, but expected; this reduces the opportunity cost, or sometimes removes it completely. The disadvantage of a flexible framework is that when comparing the “feature set” to the packaged software alternative, a flexible framework rarely wins.  And because flexible frameworks are so often delivered via the cloud, not every organization is ready to make this leap.

Back to the cost of software: When comparing each of these approaches, comparing costs means evaluating each of the 16 different cost dimensions identified earlier: they are very different depending on the approach.  At the core of the decision, however, is how you view the software itself: is it a necessary expense, or is it an investment that can drive the business?  Many organizations see an accounting system as an example of the former, and CRM and marketing automation as examples of the latter.

This week’s action plan:  How is your organization set up? Has it started to make the transition to flexible frameworks?  This week, take an inventory of the software that you use: is it custom-developed, proprietary packaged, or a flexible framework?

Note: The Make It Happen Tipsheet is also available by email. Go to www.RandallCraig.com to register.

Randall Craig

@RandallCraig (follow me)
www.RandallCraig.com
:  Professional credentials

www.108ideaspace.com: Web strategy, technology, and development
www.ProfessionallySpeakingTV.com
:  Interviews with the nation’s thought-leaders

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There is no doubt that software as a service (SAAS) holds great promise, but are there downsides?  And for both software vendors and their customers, is it a disaster in the making?  (Maybe.)

If you are not sure what SAAS is all about, it is the movement to rent software on a monthly basis, rather than purchase it outright.

For software vendors, the benefits are huge:

  • Far more profitable: no sharing margin with pesky distributors and retailers.
  • No packaging, shipping logistics, or inventory costs.
  • Direct sales to customers means a more robust, and exclusive marketing relationship that can later be exploited.
  • A one-time sale is converted to a far more valuable ongoing annuity.
  • Incremental upgrades to the software are possible:  no “huge” development cycles are necessary.

And for software buyers, there are other benefits:

  • A capital expense is converted to a “low” operating expense.
  • Lower deployment and management/operational costs.
  • Everyone can be on the identical, most recent version.

Given all of the benefits, it isn’t surprising that SAAS has become such a gold rush, particularly for software vendors.  And with Microsoft’s decision to sell their Office software using this model, it can be said that the SAAS market has finally “matured”, and that the tipping point has finally been reached. But is all well in SAAS-land from a buyer’s perspective?  Or are there rocky shores ahead?

Unfortunately, between vendor greed, many buyers’ unwillingness to commit to an ongoing cost model, and for those that do commit, a growing alarm at the sheer number of hits to their credit card each month, not all is well.

Vendor greed:   As the functionality of the software is the very same for everyone, it seems only reasonable (from the vendor’s perspective) to price it the same for everyone.  Yet, there are really two very different market segments for any SAAS product: new customers, and existing ones.  The existing customers are the ones who have established the vendor’s brand equity, not just through their past purchases and their usage, but through their referrals, recommendations, and word of mouth.  They have loyalty, and often feel a personal connection to the brand.  When this is not acknowledged in any way – and pricing is very front-and-center in SAAS –  there is a disconnection: brand equity (and loyalty) are instantly lost.  Pricing needs to be perceived as fair, and it must acknowledge loyalty.

Unwillingness to commit:  In the olden days, organizations would do a lease vs buy calculation before any major purchase: it is no different today with SAAS, although not everyone recognizes the need to analyze it in those terms.  Recently, a professional colleague was told that there would no longer be any upgrades for his purchased system (audience response “clickers” and the controlling software), but he could “upgrade” to a cloud version and get the needed upgrade that way.  From the vendor’s perspective, moving to SAAS was a way to switch the business model from selling hardware (a one-time purchase) to selling software as well (an annuity).

The original cost was approximately $10,000, mostly for the hardware; the SAAS “offer” was about $4900, per year.  Says the buyer: “for the number of times that we use the clickers, this isn’t feasible. Instead, we will sell the clickers, and use that money to rent a competitor’s system when needed, at a fraction of the cost.”  In this case, perhaps vendor greed was also a factor, but the core of the decision was a desire not to move into a SAAS model with this vendor.  Or said another way, they had done the lease-vs-buy calculation years ago, made the decision to buy, and still felt that way.

Growing alarm: Have you looked at your credit card statement recently, and highlighted all of the SAAS charges? Were these charges there, even a few short years ago?  (Likely not.)  Here is a selection from my card:

  • Evernote (Note-taking software)
  • RingCentral (Virtual telephone switch)
  • Dropbox (Filesharing)
  • eSpeakers (pro speaker management software)
  • Adobe Creative Cloud (Graphics software)
  • Apple (Apple music, iCloud back-up storage)
  • Google Apps
  • Microsoft Office 365
  • Infusionsoft (CRM and Marketing Automation)
  • Done Done (Support Tracking)
  • Moqups (wireframe tool)
  • Invision (prototyping tool)
  • TeamWork PM (Time tracking)
  • Quickbooks Online (Bookkeeping)
  • Many small “plug-ins” for the web

In my case, I can absolutely say that there is value in every single one of these SAAS expenditures.  But that doesn’t take away from my growing personal discomfort with how many are there, nor the growing aggregate monthly cost.  Or that many of these are just simply not available in a “purchase” option, without significant downside.

Notwithstanding these issues, there is no question that SAAS is here to stay – but we are clearly in a market of transition.  What might the future of SAAS look like?  Some predictions:

  1. Switching costs have been reduced, so there will be significantly less loyalty. Vendors will need to continuously demonstrate improved value for their fees; purchasers should be scanning for “better fit” SAAS offerings that deliver greater value.
  2. SAAS adoption is following a “creeping” strategy. In the next few years, many purchasers will wake up to their reliance on SAAS, and begin a wider lease/buy/build analysis.
  3. While SAAS vendors will always say how easy it is to deploy, so has every vendor since the beginning of time.  And like in the past, any new system – howsoever delivered – will require significant change management, internal process change and training.
  4. Pricing will become significantly more complicated as SAAS matures.  Much like the cell phone industry with monthly plans, multi-year contracts, pay-as-you go alternatives, and a myriad of “add-ons”, vendors will realize that different market segments may prefer different pricing models.  Overlaid onto this will be pricing that recognizes loyalty.
  5. Increased integration with other SAAS offerings as well as internal legacy systems.  The more integration, the higher the switching costs.
  6. Hybrid revenue streams.  We are already seeing advertising creeping into SAAS in some cases.  In the future, expect more cross-selling of other services, up-selling to premium versions/extra functionality (want this translated? Pay $1), paid-placement for third party functionality, and behavioral data sales to third parties.  Expect outside-of-the-app marketing and sales partnerships between different SAAS vendors as well.
  7. SAAS fee structures may change – and they may not grandfather existing customers. For example, instead of charging per user/month, they may charge per transaction.
  8. Data sovereignty is becoming an increasingly bigger issue.   Already most governments are requiring that cloud-based data be housed within their own borders; many larger corporations have similar requirements.  Beyond data, with more and more functionality also being delivered via the cloud, SAAS providers will need to find a way to deliver their services “locally.”  If they don’t, they will find themselves locked out of key markets. And those organizations within those markets who cannot access key SAAS functionality because of sovereignty issues, will find themselves at a competitive disadvantage.

This week’s action plan:  Not all SAAS “businesses” are the same.  Like the dot com crash of 2000, and the death of many social media sites 15+ years later, not every SAAS business will survive. SAAS customers must do their due diligence on the financial stability for any strategic SAAS relationship, and have a “plan B” in case of unexpected shut-down. (Yikes!)

More to do:  SAAS has changed how organizations (and individuals) purchase technology forever.  This week, inventory your current SAAS commitments: sometimes the reason for initial sign-up no longer exists, but the charges continue to pile on.  And then look at your legacy software, and consider whether moving them to the cloud has merit.

 

Note: The Make It Happen Tipsheet is also available by email. Go to www.RandallCraig.com to register.

Randall Craig

@RandallCraig (follow me)
www.RandallCraig.com
:  Professional credentials site
www.108ideaspace
.com: Web strategy, technology, and development
www.ProfessionallySpeakingTV.com
:  Interviews with the nation’s thought-leaders

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Viewpoint: Cuba, Data sovereignty, and the Cloud

by Randall Craig February 27, 2015

Information wants to be free.  Unless it doesn’t want to be.  Nowhere was this more clear than on a recent vacation to one of the western hemisphere’s last bastions of non-freedom, Cuba. The Cubans we met were super-friendly, happy, and entrepreneurial.  The culture was replete with amazing music, history, architecture, and national pride.  And the […]

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