SaaSification: A Brave New World for IT Professionals
The old IT world is undergoing a seismic shift: data centers, mainframes and perpetual software licenses are giving way to cloud computing, subscription payments and grabbing capacity when you need it. Our clients are under intense pressure to make the shift to the new model happen fast. With the disruption of the coronavirus pandemic, the need to pivot is all the more urgent: CEOs are demanding their IT organizations harness the power of the cloud for fear of getting left behind.
But the new model requires massive change. Existing equipment, costs, skills, governance and legacy relationships will not be enough for success in the new world. Companies like Amazon, Netflix, Uber and Google are re-writing the rules of engagement and using technology to upend the game for everyone. The old ways of doing business have suddenly become too slow, too cumbersome and too expensive for buyers, and financially unsustainable for vendors, as shown in the following chart.
So, along came a new model, in which the risk is shared, payments align better with value capture, buyers can scale faster, and suppliers share in the value capture over a longer period of time, as indicated in the chart below.
The new model promises buyers the flexibility to scale up and down as needed, offers low cost-of-entry, reduces the need for internal infrastructure and increases the speed to market with always up-to-date solutions. The concept of cloud computing and consuming IT as a utility is attractive, but how well organizations handle the shift will determine if the cloud’s promise is fully realized. Furthermore, the bigger and more successful you were with the old model, the tougher this shift will be.
We call this massive transition “the SaaSification of IT." Paying for only what you need sounds great, but is it simple? Definitely not.
Consumption-based solutions come with term licenses. The “solution” is “ready-to-go." But we’re still dealing with highly complex legacy technology, and once you get going on this path, you have enormous switching costs to move off your solutions. The combination of switching costs and term licenses yields enormous pricing power for suppliers. This is the inherent risk to buyers.
The cloud solution is built to deliver what we want, but many of us on the buy-side are not equipped to deal with the commercial risks that come with the cloud. There’s a chasm between where we are and where we want to be:
We want the flexibility, but the reality is, we’re getting locked into strict license commitments with no ability to downturn;
We want the lower entry costs, but we’re actually signing up for everlasting price increases;
We don’t want to manage a slow, expensive infrastructure anymore, but we find ourselves committed to inflexible arrangements we can’t turn off;
We want to be able to deliver rapid innovation, but we don’t want to be forced to buy constant upgrades that we neither need nor want.
How is it possible to successfully navigate this move to SaaSification? It calls for new discipline and new governance. Most people are now customers of AWS or Azure, consuming many of their different service offerings. We have observed that very rarely is there any competitive process when customers buy these solutions. Subsequently, there’s little or no buyer leverage.
The governance necessary to control these spends isn’t yet fully baked. Customers are getting trapped by ease-of-use promises, service-level sprawl, APIs, and discounts that only come from very high level spend commitments. The suppliers get you to sign up for multi-year deals and force you to pay upwards of a 40% premium because there is no competition in these deals. Customers get locked into long-term commitments and escalating costs that cannot be undone at renewal time. You cannot win this game with the old traditional approach; you’ve got to start early and get out in front of these suppliers to neutralize their advantages. Otherwise, term licenses plus high switching costs equals pain.
The major players in this new world – Amazon, Microsoft, ServiceNow, Salesforce, Workday and Splunk – have strong sales playbooks, offer only term deals and are constantly expanding their market presence. These suppliers compensate their reps on cloud utilization, they force upgrades, limit price protection, change packages and SKUs frequently, and make throttling down your spend very difficult.
The old guard – IBM, Oracle, Dell, VMware, Broadcom, Citrix, Cisco and Palo Alto to name a few – are trying hard to stay relevant. Few will make the transition to the new model. They’re making offers that sound cloud-friendly, but they’re really obstructing your path to the innovation. We’re seeing lucrative tactics like divorcing hardware and software products, then offering you ELAs for software that doesn’t match the expected lifespan of the hardware, offering perpetual unlimited license agreements, shifting part numbers and metrics frequently, auditing you, loading bundles of products into deals. They’re offering some elements of the new consumption-based model, but they’re not really delivering on the cloud’s promise.
Whether you’re dealing with a supplier from the old camp or the new, rather than focus on price, we urge clients to concentrate on a singular objective: maximizing your leverage. Only leverage will deliver the value and optimization you need from these deals. And we know that leverage comes from having three things: enough time to set up the deal, alternative options to the deal to provide competition, and a sense of uncertainty surrounding the deal.
Unfortunately, a recent survey we conducted indicated that:
Deal timing is being controlled by the seller 70-75% of the time
Deal alternatives are being used by the buyer only 10% of the time
Supplier uncertainty is occurring 0% of the time – the sellers consistently know too much
What are the root causes of this sad state of affairs? Our survey revealed three major obstacles:
Buyers lack supplier knowledge
Buyers have limited time to execute deals
Stakeholders are unaware of the supplier sales process AND the deal maker process and value
These challenges are not insurmountable. The IT deal leader has got to take control of these leverage creation and supplier management activities to effectively engage, manage risk, and win in this new model. The chart below illustrates the recommended process and best practices.
The call to action is this: Deal leaders have to own this process and commit to mastering leverage management. The risks inherent in SaaSification demand it.
Jack Garrahan is Founder and President of ClearEdge Partners. This blog post is based on his keynote address at the 2020 IT Deal Maker Summit on May 5.