The Cloud’s Tipping Point

The Cloud’s Tipping Point

I always enjoy hearing from those of you who have come to the conclusion that Cloud computing will not work, and decided you will not be developing plans to shift your business to the Cloud.

Sometimes the analysis is sound. More often than not, it omits key variables.

Perhaps you relied too much on vendor input for key variables in your analysis, or on your own in-house staff that may not necessarily have the skills, experience, or vested interest in such analysis. After all, how often do they undertake such an analysis in the first place? How well does it compare to an unbiased, independent consultant?

As I mentioned in, “Cloud Computing Economics: 40-80% Savings in the Cloud?”, your best bet is an independent analysis by an objective 3rd party.

Though instead of debating the merits of an analysis, the extent of cost savings, or other business benefits of migrating to the Cloud, I would like you to consider an another perspective.

What’s your alternative?

The inevitable answer that I usually hear is, “We’ll just continue doing what we’re doing”. That answer is quite telling. It’s clear that they have not considered Cloud computing’s tipping point.

You see, as Cloud computing continues to gain traction in the market, and Cloud interoperability improves, the value of its network effect increases, creating a bandwagon effect, and ultimately driving software providers to change their legacy business model, or into decline.

Some business leaders assume that they will be able to continue their legacy IT consumption practices unimpeded, and that their costs will not be impacted by the Cloud’s success. On the contrary, remaining on unsupported software will increase your IT costs. Finding skilled resources to support and develop on legacy software, and systems is not easy or inexpensive.

Today, the Cloud’s tipping point, may not be an issue for you unless you want the benefits your competitors are deriving from SaaS applications, as you can’t consume them any other way. No, Salesforce.com will not be sending you any shrink wrapped software by mail. You’ll have to sign up for the service like everyone else.

In any event, whether you consider the Cloud now, or later, at some point, for many software vendors, the economics of developing, shipping, supporting, maintaining, patching, and releasing upgrades to software will change. That is, those software vendors may discontinue their legacy software business model in favor of a SaaS model.

As early adopters take to the Cloud, the number of on premise customers for software vendors will decline. A small business may shift all 10 of its employees to Google Docs or Office 365, no longer buying Microsoft Office and implementing it in-house. Multiply this scenario by thousands of early adopters and it’s not hard to see the decline of the installed customer base for on premise software.

In the near term, this isn’t an issue for large software vendors as their installed base can keep revenues flowing for years even as they lose part of their large installed base. Smaller players don’t have the same advantage. Even a 10-20% hit, or one large customer, may be enough to drive them out of business or to a Cloud model, creating a domino effect.

Fast forward 3 to 5 years. Lets say 20-25% of smaller software vendors have shifted to the Cloud model.

Will this impact your business?

Even if you believe that it will not affect your business, you can see the effect will continue – as other businesses are impacted by the shift, they will have to address the issue, and make a decision whether to keep and maintain unsupported software, look for an alternative software vendor, or shift to the Cloud.

In turn, their decisions may continue to drive more business to the Cloud, more software vendors shift as their installed base erodes, more developers focus on the Cloud, and 5-8 years out it could be 25-40% of the smaller software vendors no longer shipping shrink wrapped products.

Are you impacted now?

By Ray DePena

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