Software Vendors Have Many Tracks Leading to Success in the Cloud 

In my last column for the Digital Manufacturing Report, I described how some Independent Software Vendors (ISVs) have neglected—at their own peril—to make the software licensing agreement changes that will allow their applications to run in the High Performance Computing (HPC) Cloud. Because that column generated many comments, I will stay with the HPC Cloud topic and describe several business model scenarios that can successfully lead ISVs into the Cloud, based on real-life experiences I’ve had with early Cloud adopters.

ISVs must accept Cloud technology is here to stay. It’s not a passing fad. Of the many factors I can cite as proof, the most significant is the simple fact the U.S. government wants Software as a Service (SaaS) to become reality for its own sake and that of small- to medium-sized enterprises (SMEs). Bi-partisan federal policies, legislation and regulations already are pushing the traditional software developers in this direction.

Secondly, the ISV also must understand the Cloud is more than just a new delivery platform. The Cloud is an entirely new route to market, and possibly a channel to new customers, that will provide its application(s) more flexibility while also requiring a sea-level change in strategies related to pricing, reseller relationships, licensing and revenue streams. In other words, the Cloud represents a completely different business model.

Most importantly, however, the ISV must wrap its head around the idea that now is the time to begin making the transition to the Cloud. The HPC Cloud train is leaving the station, and if you don’t hop on now, you will get left behind. And the transition can’t be completed overnight. Changing an entrenched business model can takes years. The first step of this journey begins with setting a baseline (Figure 1).

Figure 1. ISV Cloud Lifecycle: Baseline Snapshot

For most ISVs, the first foray into the Cloud begins with a simple pilot (Figure 2)—generally sponsored by (or demanded by) a key customer. The software vendor makes its application, or just a portion of its functionality, available to the customer via the Cloud while continuing to offer their standard software product through normal sales and distribution channels.

Figure 2. ISV Cloud Lifecycle: The Pilot

But where many ISVs go off the rails (Figure 3) is failing to understand the signs of a successful pilot. As customers realize the benefits of Software as a Service, they stop buying the traditional software packages or seat licenses – and the ISV’s revenues decline!

Figure 3. ISV Cloud Lifecycle: Happy Customer, Tough Times

Unfortunately, some ISVs pull the brake, switch tracks after the Cloud pilot, and even derail back into their old ways of doing business (Figure 4). Their fear of short-term harm locks them in the age of the steam engine for the long haul.

Figure 4. ISV Cloud Lifecycle: Steam Engine Scenario

Progressive ISVs, however, realize the decline in sales means their Cloud offering is gaining traction and remaining on track with the new business model. Moreover, they use this pilot period to not only advance their technology, but to experiment with different sales, licensing and marketing strategies (Figure 5).

Figure 5. ISV Cloud Lifecycle: Maglev Scenario

These progressive ISVs are retooling and reinventing themselves. Most importantly, they determine how to charge for Cloud-based services by asking fundamental questions (Figure 6). Some will quickly develop a business model that matches their traditional revenue stream, cutting short the drop in cash flow that can last several years (I generally estimate this transition period around three years).

Figure 6. ISV Cloud Lifecycle: The Fundamental Questions

Cloud Pathways to Success
Software vendors understandably fear having the customer base of their traditional product line cannibalized by the new offering in the Cloud. Going into that first pilot, many are not sure they can make a profit selling their software as a service. To avoid cannibalizing their cash cow, I’ve seen some ISVs take creative routes into their new Cloud-based business models.

Rather than offer an identical version of an existing software application in the Cloud, some ISVs add new capabilities and functionality just as they would for any upgrade or release of their software. They keep their original product in its traditional format and offer the new software via the Cloud. This gives customers the option of making the jump now or sticking with what is comfortable to them (at least for the time being).

Some customers, of course, will make the jump right away, but the ISV will also gain net new customers who are attracted to their Cloud deployment with all of its inherent innovations. Rather than cannibalize the existing revenue stream, the ISV establishes a new one which they advance as the old one matures and obsolesces over time. This may be the most common approach to transitioning into the Cloud—same track, new train and schedule approach.

I’ve also seen software vendors buy a competing product that is complementary to theirs and offer it via the Cloud—twin track approach. This is another way of creating two revenue streams. ISVs over time can enhance their Cloud products making it progressively more appealing while gradually deprecating the traditional ones. Customers will gravitate to the Cloud platform during that time. Another variation of the twin track approach is for the ISV to launch an entirely new product line, available only via the Cloud, which places their company on a different, more profitable route.

Before the Cloud transition, ISVs judged profitability by number of seats, licenses and packages sold. With the Cloud, they will need new metrics by which to measure success. Each ISV will find its own revenue and deployment model.

Yes, there is uncertainty, but by making the transition to the HPC Cloud, the ISV will have built sustainability into its product line and business model, positioning itself to take advantage of the next big innovation in advanced modeling, simulation and visualization.

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Earl J. Dodd is the president of Ideas and Machines in Houston: www.ideasandmachines.com.