Cloud

ISVs Crossing the Cloud Chasm

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It wasn’t too long ago that many industry observers believed the major independent software vendors (ISVs) couldn’t convert their traditional perpetual license businesses into a Software-as-a-Service (SaaS) model without undergoing a near-death experience. Now, Microsoft, Adobe, Intuit and others are proving the transformation process can make them even stronger. 

When the idea of SaaS started to become popular a decade ago because of the growing success of companies like Salesforce.com, the idea of the major software players swapping their highly profitable packaged applications for a much less lucrative set of subscription services seemed far-fetched. Moving to SaaS required ISVs to give up the tremendous upfront revenues that supported their vast R&D investments and the “free money’” they enjoyed from their maintenance agreements. It also required that ISVs make additional capital investments in service delivery infrastructure to host their applications, restructure their go-to-market strategies and retrain or even replace their sales and support people. 

The on-premises applications had to be rearchitected to be multitenant. Their financial accounting systems had to be reworked to recognize revenue entirely differently. And their channel relationships had to be restructured to accommodate a joint service delivery arrangement. Moving from on-premises software products to on-demand subscription services meant every aspect of an ISV’s operations from R&D to service and support had to be redesigned. 

Even more importantly, the corporate mindset and culture had to change from simply worrying about delivering superior software functionality on an irregular basis to assuming responsibility for customer success with a steady stream of functional innovations. In other words, winning became less about the software and more about the service. 

Compounding the internal challenges was the market reality that only a few enterprise customers were sold on the idea of SaaS a decade ago. And even more daunting was the fact that Wall Street was totally opposed to ISVs sacrificing their quarterly profits for the potential benefits of a more predictable long-term financial outlook based on the economics of subscription services. 

Fast-forward to the present day and we now live in a “cloud-first” environment in which enterprise decision makers from the CIO to the CEO, with the encouragement of CFOs in between, have become infatuated with the economic, organizational and functional advantages of SaaS. Agility, scalability and innovation are now synonymous with SaaS and moving to the cloud is seen as a competitive advantage. 

Wall Street financial analysts have become equally enthralled with the predictability of cloud-based subscription services. They’re now rewarding SaaS companies with higher multiples than their traditional ISV counterparts. 

And the advent of Amazon Web Services (AWS) has made it more economically feasible for an established ISV to migrate its applications to the cloud. Rather than have to build out their own data centers, ISVs can now let AWS host their applications at a fraction of the cost. 

IDC recently announced public cloud services spending will increase to around $141 billion by 2019, doubling the $70 billion last year, and SaaS revenue is expected to account for more than two-thirds of the cloud market through 2019. Frank Gens, IDC’s senior vice president and chief analyst, stated, “This means that many enterprise software customers, as they reach their next major software upgrade decisions, will be offered SaaS as the preferred option. 

So, it’s no wonder that we almost take the recent success of Intuit and Adobe’s cloud services for granted. Intuit has over a million subscribers to its online services. The Adobe Marketing Cloud generated $352 million in its most recent quarter, a 133 percent jump year-over-year, along with a surge in net income of 153 percent on a GAAP basis. 

The most newsworthy transformation occurred at Microsoft, which credits its move to the cloud with Office 365 and Azure being a key driver of its overall financial resurgence. The company reported Office 365 revenue growth of nearly 70 percent and 20.6 million customers using the cloud-based service. 

These impressive numbers clearly demonstrate that moving to the cloud can be a highly profitable decision. However, it is still true that only a few ISVs have truly transformed their business to deliver real SaaS solutions versus simply hosting their same old legacy apps of the past at AWS, Rackspace or elsewhere. 

Even the significant gains that other major ISVs such as Oracle and SAP have made in the cloud have been fueled primarily by an aggressive acquisition strategy rather than fundamentally revamping their applications and operations organically, as Microsoft, Intuit and Adobe did. 

Regardless of the method, the movement to the cloud is gaining momentum and we now have more models for success for other ISVs to follow to take advantage of this opportunity. 

Jeffrey Kaplan is the managing director of THINKstrategies, founder of the Cloud Computing Showplace and host of the Connected Cloud Summit executive forum series. He can be reached at jkaplan@thinkstrategies.com. 

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