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Cloud Leaders Face a Changing Tide

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What do senior software executives predict about cloud computing for the next three to five years? One thing is clear: the software industry is in the middle of a major inflection point not seen since the client-server days. The year 2011 is already proving to be a decisive one for cloud software and services vendors.

Like a tidal force’s change in direction that affects the entire Earth, there are indicators that the world of software is shifting to the cloud. The new market reality is that—no matter their size—software vendors can no longer simply push customers to their products; rather, vendors’ products need to be where their customers want to be—in the cloud.

As evident in the following excerpt, the findings of Sand Hill Group’s new research study, “Leaders in the Cloud 2011,” clearly show that the software leaders of the future are already making themselves very attractive in the cloud.

Executives Optimistic about Cloud Future

During January-February 2011, Sand Hill Group conducted a research study to gauge software vendors’ cloud outlook for the coming year and beyond. The study utilized an online survey to gather executives’ impressions on direction of the cloud market, their cloud strategies, and customer readiness for adoption. A total of 100 software CEOs and senior executives responded to the 24-question survey and provided insight about their cloud revenues today and next year, customer attitudes and readiness, and which products and services are gaining traction. The 2011 study updates the ground-breaking findings of the “Leaders in the Cloud” study from 2010.

On the heels of a major recession and with robust indications that the economy has turned around, software executives surveyed expressed optimism about the growth of the cloud market.

A majority (85 percent) of the 100 software executive respondents said their company already has a cloud product/service offerings in the market. And 40 percent of the companies have had their cloud product or service in the market for more than 24 months.

Forty-three percent of the executives forecasted that their revenues will be dominated (81-100 percent) by cloud-based services and products in five years (see chart).

Cloud Leaders

A cross-tabbed analysis of the revenue data reveals that 61 percent of respondents from companies with revenues less than $250 million are driving towards cloud-dominated (81- 100 percent cloud revenue) business in five years.

The larger companies will grow cloud revenues more slowly. Sixteen percent of the large company respondents indicated that their revenues will be in the range of 1-20 percent in five years, and 67 percent said it would be between 41-60 percent. See the difference between the revenue forecasts between large and small companies in the chart below.

Cloud Leaders

Such a positive forecast stems partly from the fact that a majority of these companies are already generating substantial revenues from their cloud products and services. Cloud offerings are the dominant source of revenues today for 26 percent of these companies (see chart).

Cloud Leaders

Cloud Applications and Platforms will Dominate

At the end of the day, the real value of customer technology investments in cloud computing is in the applications and the platforms on which those applications get developed. Software companies realize that in order to stay ahead in the cloud market, they need to not only attract end users to consume their cloud applications but they also need to create platforms to attract developers to extend and build new applications.

The survey data shows clearly that Platform as a Service is still in its infancy. Enterprise customers already have a rich suite of on-premise development tools and question the value of the platform in the cloud. They also have concerns about vendor lock-in, architectural re-design efforts, and the readiness of PaaS platforms to handle enterprise production applications. Furthermore, CIOs are waiting to see which platform will emerge as the dominant one before committing. In the near term, PaaS will be a favorite for early adopter and progressive companies.

Today, SaaS is a dominant delivery model with more than 93 percent of executives indicating that SaaS generates the highest revenues for them (see chart below). However, PaaS is a strong favorite to dominate in the next three years with 85 percent of executives indicating that PaaS will generate the highest revenues. Once PaaS reaches mainstream adoption, however, it will be a sweet spot for many product and services vendors. Half of enterprise software comprises of custom software developed on software development platforms. PaaS is where almost half of the tools, custom development, and migration revenues will be generated. While the vendors are bullish about PaaS and a few of them will eventually become the main players in that space, it remains to be seen how customers will embrace PaaS for mission-critical production applications.

Cloud Leaders

And SaaS will continue to dominate in the off-the-shelf software/services category for the foreseeable future as it begins to replace the majority of on-premise software solutions. The data also shows that Infrastructure-as-a-Service will continue to maintain traction over the next five years, but the real growth story will be in PaaS.

As the tide is clearly changing, software companies are gearing up to service the expansion of the cloud market. Whether in operations, products, business models, pricing, revenue, or partnerships, executives describe a new reality taking hold in software business leadership.

But as customers move away from traditional licensing models, software vendors—particularly the incumbents—face challenges in adjusting their products, go-to-market strategies and pricing models. How can they move towards cloud computing without cannibalizing their existing product revenues? Even the metrics or methods that software firms use to track their business are evolving rapidly. Moreover, nearly 50 percent of the executives surveyed said the cloud offerings today are not yet ready for enterprise use, and the current lack of standards is a growth inhibitor.

The tide is changing, and software companies have their work cut out for them in the next 12 months to rapidly close the gaps to deliver on customer expectations.

Click here to find out more about the “Leaders in the Cloud 2011″ study which contains further insight on cloud success for software vendors and enterprise customers.

Kamesh Pemmaraju heads cloud computing research for Sand Hill Group. Follow him on Twitter @kpemmaraju.

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