5 ways cloud computing is transforming software vendors

Thin margins, 24-hour customer care, and other concepts were alien to the software industry before cloud came along.

It's never easy being a software vendor. Demanding users, incredibly smart competitors, and rapidly evolving technology mean constantly being on top of one's game. Now, cloud and Software as a Service have added a whole new dimension to what it means to be a software vendor.

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Photo: IBM Media Relations

For starters, it means more, much more, than simply shifting the delivery model from on-premises installation to online download. A new report from PwC -- its Global 100 Software Leaders report -- states "cloud computing changes how software vendors run their companies. Sure, there are technical issues such as reliability and security. But there are also business and cultural issues affecting all phases of a company, from product development to marketing and sales, extending to customer service and support."

This shift has accelerated since PwC issued a similar report two years ago. At that time, the report's authors state, "it was clear that cloud computing was already starting to change the software industry. It wasn't clear how much it was going to change the industry."

This year, cloud is sweeping into every corner of the industry. "SaaS/ PaaS revenues of the Top 50 software vendors now approaches 10% of their total," PwC reports. The cloud model, of course, means lower revenues, and perhaps cannibalizing existing business. But market realities are pushing this transition. "Software vendors who've made the transition are well on their way to restructuring their operations to the new realities of lower average sales prices and margins," according to Mark McCaffrey, PwC global software leader. "The companies that haven't done so may not be on the 100 list anymore -- and we haven't seen the effects shake out yet."

Moving business to the cloud "means more than just a change in pricing," the report continues. Success in the cloud/SaaS arena means vendors "must retool their operations and remodel their business structures to achieve greater efficiency and adapt to the new realities of lower average selling prices and lower margins. At the same time, customer expectations are higher and the risk of turnover is higher due to agility the cloud offers." The pressure is on to deliver greater customer satisfaction as well.

At the same time, the PwC report's authors acknowledge that many vendors are still finding their way through the transition, and there is no single path or formula to success. "There are no tactical requirements to thriving in the cloud, only the need to execute well," they observe.

Here are the most pronounced ways cloud is changing the software business:

Reliability becomes a key part of every offering: Software vendors use to ship CDs and occasional updates. But now they must also become data center operators -- or at least contract with a data center. "Even a global company could shift maintenance and downtime to weekends or local holidays, but when customers expect round-the-clock availability for their applications on a hosted system, that becomes a different support paradigm than most software companies are used to providing."

Customer service and support becomes a 24x7 commitment: Customers also now expect 24x7 response time to trouble tickets, the report states. This calls for having well-trained staff -- astute in technical issues -- available at all times.

Product development takes on a quicker pace. CIssuing a new release or a patch every few months no longer cuts it. Customers using the cloud demand continuing innovation. This means "vendors may be forced to adopt agile development protocols to upgrade software more frequently," PwC notes. "Because vendors may be taking on more of the support function from the customer's IT staff, the software they offer must become more like consumer software--more intuitive and task-oriented."

Marketing and sales changes mindsets -- and compensation models: "Not only must salespeople be compensated differently -- based on subscriptions rather than licenses -- but vendors may have to rethink their sales strategies. Because customers want the cloud to solve business issues, software sales teams may be dealing more with business people than with IT people--a shift that will require changes when it comes to the vocabulary and style necessary to sell. These are no small matters."

Revenues will shift: "The cloud shifts revenue from big upfront fees to subscription payments over time, which may affect vendors' quarterly sales reports," as well as potentially affect valuations. There is also a need to structure the types of plans and offerings being extended to customers, along with support tiers. Plus, there will still be customers with on-premises systems for some time t come as well.