Danger! Cloud Crossing Ahead
Posted: 5/28/2014 by Norma Watenpaugh
Business model transformation is one of the most disruptive changes a business can face and it isn’t pretty. As often is the case in disruption, those companies with the most invested in the old model have the most to lose since making the shift will cannibalize their existing business. But if they don’t make the shift, their competition will cannibalize their business for them.
The first step, is to recognize what your new business model might look like. Below is an example of how a solution provider might cross over to a cloud computing business model. Your mileage will vary.
The diagram depicts an evolution from 70% of transactional sales to 20%. We assume that there will be businesses that continue operate some applications on-premise or that opt for a private cloud model where they still own the assets. But the bulk of the IT services, in particular, most new services will be in the cloud and consumed monthly.
Recurring revenue creates a more consistent and self-sustaining revenue model over time, but the transition is tough because as transactional sales fall off, the recurring revenue is slow to make up the difference in cash flow. Meanwhile solution providers still have to make payroll and invest in the transition. Many will rely on beefing up services offerings. Their service mix will necessarily change too. Services related to on-site installation will dwindle. Services related to scoping client needs for new cloud services, configuration, user training, etc. will continue. New services must be added to the mix. They may be related to managing on-premise or private cloud assets as businesses move to outsource more of their IT capability.
New services may also be related to deeper subject matter expertise as the buyer shifts from IT to functional users. Solution providers may decide to shift their focus to the functional buyer. This will require a new set of expertise and specialization, but also opens the opportunity to provide higher margin services. These new services may take the form of one-time or recurring services. One time services may consist of helping clients cleanse and migrate their data to the new system, configuring the new system to reflect their business practices and training users on the new system. Recurring services may include out-sourcing processes and managing them on behalf of the functional organization.
Besides reselling SaaS applications, solution providers with some technical savvy can develop their own SaaS offerings. For example if you are reselling Talent Management as a service perhaps you build and sell a LinkedIn extension to search and pull in profiles. That extends the value of the primary application, differentiates your offer from others, creates more stickiness with your customers, and creates a new recurring revenue stream.