Cloud Places Service Providers on the Horns of a Dilemma | Sherpas in Blue Shirts

The Promised Land of SaaS and cloud models in the services world is clearly visible, but it’s frustratingly difficult for service providers to get there. The new models are the land for service providers’ growth and profits, but providers are finding it painful and frustrating as they try to move to the new models.

Software companies are shifting from the traditional on-premises licensing/deployment model to SaaS and cloud subscription models, and it’s not a trivial matter to make the switch. They have to change operational practices and investments and stop doing some activities to be able to do the new models’ activities. The transformation pulls them in two different directions.

Outsourcing service providers have the same problem as the software vendors. As SaaS takes hold, it changes customers’ expectations, and they want to buy services on a consumption or subscription basis instead of buying a set of components. They want to pay only for what they use rather than a take-or-pay model where they have to buy commitments.

In attempting to accommodate these increasingly vocal clients, providers are forced to move in two opposite directions at the same time. First they have to accommodate their original client demands with their existing service contracts structured in a business model where the provider charges customers on the basis of service components (e.g., buying 30 applications people, 15 servers, 50 licenses). But new demands require that these components are bundled, delivered and priced on a functionality on demand, or consumption basis. Their SaaS or Saas-like expectations require different approaches and even different customer support.

These two different business models are driven by different customer adoption patterns and also often driven by a different set of stakeholders making the decision. The new business stakeholder buyer is less concerned about cost per unit and more concerned about meeting the business needs. And they are increasingly influential in driving new opportunities.

Hence the dilemma for incumbent providers. The traditional business model won’t support a SaaS model, and the SaaS model won’t support a traditional model. The result? The provider is like a carriage drawn by two horses pulling in different directions. It’s not good for the carriage and quite frustrating for both horses.

Providers, thinking the dilemma is just a pricing issue, try to make their existing teams and business operate in both worlds and price services on a consumption basis the way new customers want to buy it. But they quickly find that’s not the case. To succeed, they need to backwards-engineer their entire delivery platform so it can work that way.

The alternative is to have two “carriages.” But then they have double the costs. There’s the frustration in getting to the Promised Land: they’re faced with having one carriage and two horses pulling it in opposite directions or having two carriages and twice the cost. The trip to the Promised Land of growth in the cloud world isn’t as simple as it appears.

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