It seems that everywhere you turn today you hear about software in the cloud. Considering all of the marketing you might begin to think that the cloud business model, or software as a service (SaaS) was the only way left to purchase software. Of course that's not the reality of the software world though. Certainly most, if not all new software companies that have launched over the last few years are leveraging the public cloud and the SaaS subscription based business model. But that's only a small fraction of all of the software that is available today. Even considering the high profile SaaS only companies like Salesforce.com and Netsuite, SaaS still only makes up less than 10% of the total dollars spend this year for enterprise software. (I should make a note here that comparing SaaS revenue to on premise revenue isn't the best metric to use for comparison, seats would be better but unfortunately seat data for most enterprise software vendors is very difficult to get. The difference in the payment models, subscription usually over an agreed term of a few years versus perpetual license that is mostly up front loaded with annual maintenance of 18-24%, means that a $1 of SaaS isn't = to a $1 of on premise.)
If the bulk of the existing software companies sell mostly in an on premise / perpetual license model, but more and more companies want to buy in the cloud, then there is a compelling reason for these companies to transition to the newer model. All of our survey data on software purchasing points to a growing trend for companies to desire SaaS and the subscription model. It's still early in the transition of course, and with so much on premise software already deployed, the period of transition will be very long. Still, if you're a vendor that doesn't have any SaaS offerings, there's a lot of evidence that you need to be figuring out how to move to the cloud to stay competitive.
Taking an on premise application and offering it in the cloud is not as simple as just setting up data centers and selling the product in a subscription model. There are architectural, performance and scalability issues that have to be addressed and general wisdom indicates that this process can take up to a few years. There is also a very real concern for publicly traded companies of disrupting revenue growth during the transition, something that must be handled very carefully. So what are leading software vendors doing to address this need to offer more applications in the cloud?
There are two basic plans that a vendor could use to make the transition, 1. go cold turkey, shifting everything to the new model at one time or 2. building a hybrid business where products are cloud enabled and offered in both models for some period of time. While #1 has been done, IMHO it's not a wise choice for most vendors, with option #2 offering a much more "gentle" transition path.
Let's look at two examples of companies that are in the midst of a transition, tech behemoth Oracle and a mid-size software vendor, Deltek. Oracle is attacking the cloud in two distinct ways. First it is aggressively pursuing an "arms dealer" model where it sells necessary infrastructure software and hardware to other cloud vendors. For Oracle this is a natural extension of its database business, middleware business, hardware business including Exadata and Exalogic, and even its existing applications business. Secondly Oracle is building a SaaS application business out of some of the existing apps like CRM on Demand and also its new Fusion Applications offering. Fusion Applications were architected to be deployed in both single and multi-tenant SaaS as well as on premise. The applications were in beta last year and this year in a controlled general release. Initial customers are choosing both on premise / perpetual models and SaaS subscription models. For Oracle this transition will take a very long time, with customer choice driving its offerings and a substantial amount of revenue coming from the arms dealer model. For the foreseeable future Oracle will continue to operate in this hybrid model.
Deltek is taking a similar approach for the transition. Last year Deltek started adding talent to its staff in cloud including an experienced VP to oversee the strategy and execute the plan. Through acquisition it has already added several cloud offerings including GovWin, INPUT/Fed Sources and a new complete end to end government contracting business solution called Deltek First. On the professional services side of the business, Deltek is aggressively building a cloud based product and I'd expect to see something in the market by next year. Deltek will also have a long transition path with much of its business in a hybrid model for many years. This slower transition allows the product teams the cushion they need to get the products "right" and helps smooth the revenue transition while meeting new competitive challenges.
Across the board we're seeing traditional on premise vendors move their business to a hybrid business model with both on premise and cloud offerings. This includes Oracle and Deltek, and also companies as diverse as SAP and Infor. For cloud pure plays it makes sense to only offer cloud based solutions, but for companies with substantial revenue from on premise products, this hybrid model is a good middle ground, and offers prospects and customers flexibility and choice. Hybrid also extends into the enterprise IT stack, where many companies are operating with some of their software in their own data center in a perpetual license model, and some of their solutions in the cloud. For both the vendors in transition and the businesses in transition, this model is likely to continue for many, many years.
Tags: SaaS, cloud, software, business models, subscription
