One-third of vendors would cannibalize their sales to get to cloud

Survey finds service providers intend to sacrifice short-term revenues to make the move, but are they really ready?

We all know cloud is disruptive, but it's getting especially disruptive to vendors' sales plans.

As everything from ERP to collaboration to IT platforms are offered cloud-like, as-a-service from third parties, those vendors with on-premises offerings and services have been scrambling. Should they move their offerings to subscription models, and eat into what were lucrative licensing or on-site service revenues?

Photo: Joe McKendrick

The decision, actually, hasn't been too hard, as competition is pushing providers in this direction anyway.

The net result has been a great deal of cannibalization taking place. This is especially evident among IT and business services providers and outsourcers who are seeing the rise of a bevy of cloud services that provide relatively cheap online alternatives to their bundles of services. A recent survey of 372 service providers by HfS Research shows that 33 percent would "proactively cannibalize [their] own revenues in the short term to deliver as-a-service solutions to [their] clients."

On the software vendor side, Gartner released data last year that projected that within the next three years, software-as-a-service will cannibalize up to 40% of vendors' maintenance and support revenues.

Or consider a study from a couple of years ago by Baird Equity Research Technology, surfaced by Dave Linthicum, in which they estimate that for every dollar spent on Amazon Web Services means "at least $3 to $4 not spent on traditional IT... In other words, AWS reaching $10 billion in revenues by 2016 translates into at least $30 to $40 billion lost from the traditional IT market."

It turns out that Amazon Web Services had revenues of $4.64 billion in 2014, up 49 percent from the year before. If that growth rate continues, that puts it right on track for $10 billion by 2016.

As for sourcing and service providers, they aren't doing near enough to prepare for the cannibalization process as they move to the as-a-service model, says Phil Fersht, author of the HfS study. The most common strategy is to invest in more marketing, while only about one-quarter are actually looking at ways to build technology on which to re-purpose their services. As he puts it:

"It's almost impossible to tell apart most of the service providers - they all have a digital story, an outcomes strategy. We can't continue in this vein for much longer - we're all getting increasingly bored hearing the same old guff. We need to hear about the incremental steps and investments providers are making with their clients to start that long transition from legacy world to that far-off as-a-service nirvana."

Both IT vendors and service providers are at a crossroads, in which they need to make choices about diving head-first into cloud-based offerings. It appears many are ready to take the plunge, and are willing to risk shaking up their revenue bases. But it's going to mean making the leap to full-functioning cloud platforms. It means becoming 24x7 data centers as well. This is a world in which everyone is becoming both cloud providers and consumers.