Why cloud vendors are hard to beat

via recoveringyou

via recoveringyou

Recent conversations around vendor relationships got me thinking about the reasons why cloud vendors are doing so well in relation to the rest of the tech sector. Buzzword bingo and analyst fuelled hype aside, it seems to me that there are certain characteristics that set cloud vendors apart.

Before getting into this, I need to point out that ‘success’ is relative. When we hear that a cloud company has grown (say) 90 percent, then what does that mean? For instance, FinancialForce.com’s results were highlighted in a press release that said:

Within one year, FinancialForce.com increased annual revenue run rate by more than 90 percent, from $9 million in 2011 to $17 million in 2012

Impressed? Of course. But this is only part of the overall UNIT4 annual results announced yesterday and which talked about subscription services revenue (which includes cloud services) at €50 ($66, £44) million run rate. That’s a much bigger number. But even that pales into insignificance when you consider UNIT4’s total revenue for 2012 was €470 ($624, £410) million.

Among the larger players, Salesforce.com showed growth of 34 percent in Q1 of the current fiscal year, raising its outlook for the rest of the year:

The company broke even in the first quarter on revenue of $504 million, up 34 percent from a year ago.

But when you look at the mega vendors, they only have to grow in single digits to surpass the absolute dollar values in revenue achieved by the likes of Salesforce.com. Even so, the financial markets are rewarding the cloud players ahead of the mega vendors. Salesforce.com for instance is valued at around $25 billion on a revenue run rate of $3 billion. SAP is valued at $98 billion on revenue run rate of around $23 million for 2013. A big part of that reward turns on growth but what supports growth?

panoramam type of ERPMany people have taken the view that cloud businesses represent an opportunity to shift capital expenditure to operational expense while making savings. While that might be an attractive argument for cost conscious businesses attempting to navigate a recession, it is only one element in the sales cycle.

Things that matter

Cloud businesses are fundamentally different to traditional software companies and those differences are far less obvious than you might think. Here is what I observe across all sectors:

Cloud vendors understand that even with a three year lock in, common at the enterprise level, there is no guarantee that your customers will renew. Cloud companies therefore have to continually earn your check.

Service matters. Cloud companies obsess over service to an extent you almost never see among traditional vendors. The traditional vendor sells an upfront fee plus a maintenance contract and then more or less walks away. They will dispute this, talking about keeping customers close. But the cloud vnedor relationship exhibits a very different quality.

Culture matters. Like it or not, the mega vendors have acquired something of a reputation for entitlement and being a tad uncaring. Whether it is beating up on a partner who questions the company line or insisting that a customer buys more licenses to get a deal on discount, it boils down to a cynicism that leaves a sour taste in the mouth. Cloud vendors cannot behave that way. They have to treat their customers well. Why? If you don’t treat customers well then you don’t get paid. It’s that simple.

Values matter. All vendors like to talk about the values they bring to the table. But it is the cloud vendors that live them. Ask anyone who has met Dave Duffield or Aneel Bhusri, co-CEOs at Workday. They ooze care for the customer. At the SME level, Chris McGrath, co-creator of Thoughtfarmer recently told me that nothing goes into its solution unless it meets three criteria:  good, wholesome and accessible. You can only believe that when you see it and from everything I have seen, Thoughtfarmer delivers on its promise.

Brand doesn’t matter. If brand mattered then the smaller cloud vendors would not survive and thrive. One of the biggest complaints I hear from cloud vendors is: we’re not known, we don’t get the coverage. Ironically, the mega vendors have image problems. The flip side is that despite their (relatively) small size, when they do get in front of analysts and other influencers, cloud vendors almost always make a great impression. It is interesting that Panorama reports that 26 percent of those surveyed (login required, free sign up) in its latest research say they selected SaaS and cloud ERP. That is significant.

Add it all up and it reads like an unbeatable proposition. Life is never that simple but it’s a compelling thought.

What should buyers consider?

Making a buying decision should never be based upon fluffy stuff. But the relationship between customer and vendor is important. Some say it is the most important factor.

  1. It used to be the case that functionality trumped everything. That is no longer the case in all circumstances. I frequently see customers make decisions based upon the things that matter. They are betting on a better further tied to a solution release cycle with which they can live and thrive. Will you make a present sacrifice for an improved future?
  2. I am increasingly seeing customers who have been loyal to (name your vendor here) questioning whether the cloud players provide a better overall experience. That should be a wake up call. In one case, the customer felt the incumbent vendor had become entitled to a place at the table. They lost out to a functionally inferior solution. There was a lot of money involved. Is your vendor entitled or earning your business?
  3. In the large enterprise, IT is no longer running the show in the way it once was. In the SME space, the professional accountant is no longer as influential as they once were. The ones who remain influential and are growing their businesses are those that have responded positively to the new value propositions that cloud brings. Do you trust your vendor enough to bet on a transformational future?

3 thoughts on “Why cloud vendors are hard to beat

  1. Your point about Cloud vendors not forcing you into purchasing services you don’t want flies for now. Cloud Providers are in full seduction mode and love is all around.
    Fast forward 5 years when 90% of your infrastructure is owned by two cloud players (company will standardize on few players, they always do) and both of them will know moving out will be much more expensive than agreeing to the new “terms of service” and billing structure…
    Re-read IT history. This is just the love part of the Cloud cycle.

  2. The cloud market is unlikely to consolidate into a handful of giant players with oligopolistic power. Product development and market entry costs are lower in the cloud, guaranteeing vibrant competition.

    Cloud applications are easier to build and deploy on a large scale than premise software. For example, owning complete control over operating environment – eliminating installation and maintenance features, and updating every customer with a single click – are cost-saving benefits that software companies would kill to have.

    Cloud platforms and programming infrastructures are also inherently superior for fast turnaround of incremental features and functions. The ability of cloud companies to respond to customer needs can be measured on a “release cycle” of hours or days, not months and years.

    Room for innovation is vast, permitting hybrids such as managed cloud services that include outsourced, people-driven expertise to solve niche problems and avoid diversion of resources from core competencies. ADP and Paychex are classic examples of delivering technology-wrapped services at lower total cost. We will see more and more of these.

    Quarterly pressure will not cause cloud vendors to change sales behavior to mimic premise software tactics. Subscription pricing is different. They really do need to “continually earn your check.” Cloud companies do not earn profits or grow unless customer churn is minimized. Every day is “quarter end” in the cloud, with little to hold the customer if service slips or prices increase too much.

    Three-year lock-ins mentioned above are typically subject to cancellation if service levels are not met. Implementation of cloud applications is also simpler, making vendor-switching more feasible than with premise software, and there is no capital expenditure to live down. (Sunk cost or not, licensed software is still difficult for most companies to throw out prior to full depreciation.)

    Cloud vendors will remain hard to beat because technology and market dynamics have changed permanently.

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