On-Premise can't win (and neither can some cloud providers)

Summary:The economics are getting clearer. Individual IT shops can't acquire and operate hardware with the same scale and economy as larger cloud providers. But, not all providers are the same. Some are clearly driving costs the right direction.

Can your IT solutions deliver 19 consecutive price reductions in 6 years?

Scale is a beautiful thing. Companies can use scale to create more streamlined processes, greater efficiency, lower per unit costs, etc. What these firms do as a result of these operational godsends is up to them. They can choose to:

  • Increase dividends paid to shareholders
  • Reinvest the savings into new product development, new plant & equipment, geographic expansion, etc.
  • Pass along the savings to customers

Companies often choose the latter when they operate in highly competitive markets and/or when they want to increase market share.

Recently, Amazon announced they are reducing prices for their AWS offerings. This is the 19th consecutive price reduction they've made in 6 years.  (see: here )

It's interesting to note the trend in play here. Amazon, along with other cloud providers Google and Microsoft, is lowering costs to customers of its cloud services. They are clearly dropping prices (because of scale efficiencies and dropping commodity hardware prices) to garner more customers, that will drive more volume and present more opportunities to scale, which will eventually generate more opportunities to lower costs further.

These vendors get it. They can grow these businesses further by relentlessly focusing on reducing costs. IT departments generally can't do this. Their IT footprint is what it is. Their scale opportunities are capped. And, as a result, they are facing a no-win situation. Cloud providers will likely continue to widen their cost advantage over in-house technology. It's simple math.

Smart CIOs already see this. And, the smarter ones are seeing that not all cloud providers are the same. Some, with extensive captive hardware businesses or proprietary software, just aren't cost competitive. Their scale opportunities are limited. Worse, some of them are years behind Amazon, et.al. The big boys already have large scale operations that are getting bigger and cheaper. Latter entrants don't have scale and will have a tough time building scale especially when they won't be price competitive for some time.

Who wins or loses in the new IT economy? Well, it looks like:

Winners

  • Cloud vendors of scale
  • Cloud vendors that embrace very low cost hardware and open source software
  • Early cloud provisioners
  • Cloud providers with low cost access to electrical power

Losers

  • Cloud vendors who'd prefer to sell you on-premise hardware (of their making) instead
  • Cloud vendors that make brand name hardware and proprietary software
  • Late entrants to the cloud space
  • Cloud providers without a focus on low-cost locations for cloud centers

What I didn't put on the list of winners and losers was anything to do with existing customer base.    Vendors with extensive CIO connections aren't necessarily in possession of any real advantage here. Yes, they may have long-standing contractual relationships with CIOs but will these ‘relationships' really carry the day? I don't think so.

CIOs are exceptionally logical. They also know how to shop. AND, contrary to what some software or hardware sales pros think, your firm just isn't that strategic to those CIOs. That's right - you won't win future business with them just because you did so in previous years. A while back I was contacted by a long-time software sales pro who was complaining that he could no longer get meetings with his CIO customers as his employer was no longer considered to be a 'strategic' vendor.  The leader board may be changing and some of the old guard vendors could find their previous place of importance has undergone a demotion.

If these sales pros want the possibility of bidding on these deals, they'll need to:

  • Really come with a sharp pencil
  • Prove they can continue to produce future price reductions (a la the ones mentioned previously) and be willing to put these reductions in writing
  • Convince prospective buyers that they can quickly catch up to Amazon, Google and Microsoft on scale, cost AND technical abilities
  • Change their stripes and become big users of open source, lower cost software (not of their own making)

This should be a fun time .....

Topics: Amazon, Hardware

About

Brian is in a unique position to diagnosis the winners and the losers in technology and services. He was the longest running (10 years) and most senior director of Andersen Consulting's (now Accenture's) global Software Intelligence unit - a position that required him to pick the best possible software solutions for hundreds of clients gl... Full Bio

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