As the tectonic shift to the cloud accelerates, the competitive landscape is also intensifying. Although the value of cloud services is generally recognized, the basic principles of delivering quality cloud services is still misunderstood by many players, including a number of major companies.
This reality became clear recently with the latest news from Oracle and Google regarding their escalating cloud efforts.
Although Larry Ellison was notoriously slow to publicly admit that Software-as-a-Service (SaaS) was a viable alternative to traditional on-premises applications, he was cleverly maneuvering many years ago to position Oracle to become a cloud leader. He was an early advocate of the “thin client” concept that envisioned PCs and other devices accessing applications and data from a centralized source such as the Internet. He supported Oracle’s application hosting business in the 1990s. And, he personally invested early in Salesforce.com and NetSuite, the most prominent SaaS pioneers. He also supported Oracle’s acquisition of Sun Microsystems to power Oracle’s Infrastructure-as-a-Service (IaaS) capabilities, along with a series of SaaS company acquisitions to catapult the company into the on-demand applications market.
So, when Larry Ellison publicly proclaimed that Oracle was going to become a cloud leader, the company had plenty of assets to fulfill his promise. The company not only stoked up its marketing campaign to promote its cloud capabilities, it revamped its sales compensation structure to incent the organization to aggressively win customers.
The success of these efforts has been clearly demonstrated in Oracle’s most recent financial results in which the company reported that its cloud software and Platform-as-a-Service (PaaS) sales were up 57 percent from a year ago, equaling $583 million. The company’s Co-CEO Safra Catz said, “This dramatic revenue increase drove our non-GAAP SaaS and PaaS gross margins up to 51% in Q3 as compared with 43% in Q2.” Co-CEO Mark Hurd added: “We had more than 250 customers go live on Fusion SaaS HCM and Fusion ERP in Q3 alone.”
While these are impressive numbers, they are being achieved on a tenuous base of below-average renewal rates. A ZDNet analysis of Oracle’s fiscal third quarter results included studies by a number of Wall Street analysts that discovered a higher-than-average churn rate among Oracle’s cloud/SaaS customers. For example, Wedbush analyst Steve Koenig reported: “Our partner checks suggest that cloud renewal rates are running significantly below industry-standard levels for SaaS and PaaS (e.g., 85%), and well below on-premises renewal rates in the 90%+ range. Also, our checks indicate that a portion of cloud customers are using less than 20% of their contracted capacity…”
These low renewal rates are important for a number of reasons. First, every lost customer in the cloud business has a significant impact on long-term financial success. David Skok, a managing partner at Matrix Partners, has published an analysis of the economic impact of churn on a SaaS company. Skok’s analysis suggests that if a SaaS company cuts its churn rate in half, it can double customer lifetime value (CLTV). For instance, a SaaS company with a Monthly Recurring Revenue (MRR) of $10k in the first month that is increasing its sales by $2k/month can produce $180k or 60 percent more revenue in five years by reducing a three percent per month churn rate 50 percent! The opposite is also true.
Oracle’s renewal issues also show that aggressive sales campaigns don’t guarantee customer satisfaction. Strong-arming customers to try cloud services and not ensuring their success is no different than the old techniques of making promises that too often were not met during the legacy on-premises software era. As every leading SaaS/cloud vendor knows, ensuring customer success is essential to achieving business success in the cloud marketplace.
There have also been recent reports that Google is considering an aggressive acquisition strategy to bolster its position in the cloud market and catch up with the tremendous growth experienced by Amazon Web Services (AWS) and Microsoft Azure. Although I know and respect many of the companies that are supposedly on Google’s target list, I also know that buying your way into a market doesn’t guarantee a quick path to the top. Having been through a series of acquisitions that failed to achieve their business objectives and seeing very few others that fulfilled their promise, it is doubtful that Google will be able to jumpstart its cloud initiatives with an acquisition-led strategy alone.
Ironically, Google was one of the pioneers of the cloud and demonstrated the virtues of SaaS with its Google Apps. However, the company has failed to capitalize on its early advantage to retain a leadership position in the cloud marketplace. For instance, many companies that adopted Google Apps have boomeranged back to Microsoft Office 365 because Google failed to continuously enhance its offering.
I’ve always believed that Google’s biggest problem was cultural rather than technical. The company has plenty of brilliant engineers that built the largest and most scalable service delivery system in the world. However, it is hard for a business customer to make a corporate commitment to a company that only provides a beta version of its applications.
Today’s cloud leaders are intensely customer-centric companies that designed their solutions and business processes to be user-friendly and engaging. They understand that the user experience goes beyond the online interface of the application. It is also shaped by the interaction the customer has with the service provider when they need help or want to provide feedback about the service.
Many people would suggest that Google is an engineering company that doesn’t have to worry about the usual trappings of a successful cloud company because of the power of its automated systems. I believe that Google is worse than an engineering company because it is populated with mathematicians that continuously try to improve the algorithms that are aimed at disintermediating the human factor. As a result, Google doesn’t understand the strategic value of customer support to achieve customer success.
The bottom line is that even the biggest players are still learning the fundamental steps to success in the cloud. Having the best technology or most-aggressive sales tactics doesn’t translate into long-term success in the cloud. Instead, it’s even more important to deliver user-friendly functionality and quality customer service. Ultimately, it’s about demonstrating your customer empathy and giving them a sense of community among like-minded peers.
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.