Accenture: High Tech Firms Need Multiple Business Models

The cloud changes much more than we have been prepared to admit. Some of the possibilities are just too disruptive and jarring. (Resistance may be futile, but it’s busy, nevertheless.)

IT teams inside companies are just starting to absorb the changes cloud computing might bring. Now Accenture comes along to say the big tech vendors are underestimating the cloud. Tim Jellison, an Accenture senior executive, has not named names. But in an interview he concedes that he exempts few of the big technology companies -- Oracle, Microsoft, IBM, HP and SAP – from being behind the curve. The convergence of technologies known as cloud computing – the multi-core servers, virtualization, global broadband networking, multi-tenant applications, the ability to grant automated access to such resources – is pushing technology companies out of the groove in which they are most comfortable.

That is, big tech vendors like to sell and deliver high touch technology equipment and services, stuff that includes a lot of specialized equipment unique to the manufacturer that comes with proprietary software and installation services. Such companies have a one-size fits all business model. But Jellison says it is rapidly becoming a world in which each company must offer multiple faces to the customer and let him pick the one that fits. Some customers can extensively self-service and as a result, pay less; others like hand-holding, and are willing to pay for it. To miss the difference may mean losing the customer in the future.

“We fully expect that most of the industry’s largest players will require at least five different business models to maintain their leadership positions,” wrote Jellison, in a new report called “Where the Cloud Meets Reality, Operationally Enabling the Growth of New Business Models."

I think he’s hit upon the challenge of the cloud age. If I remember lessons learned from the Harvard Business Review, it used to be pounded into our heads that to not know your core business model and stick to it was a recipe for failure. Jellison is saying to have only one core business model and not realize it is a recipe for failure.

While he is talking about big high tech companies, in my mind, this conclusion is eventually applicable to companies of all sizes in many other industries as well. “Few technology companies are prepared to effectively deal with the operational complexity caused by this impending proliferation of business models,” says Jellison. The three that he thinks have to some extent dealt with this are Microsoft, Cisco and Google.

Instead of just selling lifetime software licenses with big upfront payments, software companies may now deliver software as a service as well. Microsoft is proceeding cautiously on this front.

It obviously takes more than the addition of another Web server to the data center to get SaaS up and running. The development method is different. The waterfall development method typically rules license software development, with upgrades coming out at predictable intervals. The agile method is employed in software as a service and it gets updated monthly or weekly, if not daily. That’s a major cultural shift within a development staff.

“Add to that the fact that technology companies’ traditional businesses still have plenty of room (and need) for substantial investment—and that, in many cases, the customers of these same technology companies are well ahead in figuring out their own operating models enabled by cloud computing—and one can begin to appreciate the magnitude of the challenge technology companies face,” he writes. In short, one or more new business models needs to be added to the mix without disrupting the company as the traditional business continues to generate its own ongoing demands.

Jellison didn’t use this example but it seems to me that Apple is a company that has transitioned to multiple business models. Thanks to the tight control it has kept over its products, and even more so, the hip style associated with them, the business models producing customers for its Macs, iPhones and iPads are to a large degree vertically integrated. The sale in the bricks and mortar store leads to self servicing in the cloud (the iTunes software download) leading to sales in the online App Store, with data synched to the desktop. Multiple, integrated business models helps explain the remarkable run up in Apple’s market value from $6.8 billion in 2001 to $324 billion in 2010. For a while, the cloud seemed just like a new channel that could be grafted onto existing business operations, something like the Web site was originally an extension of the sales force brochureware, until e-commerce came into force. It’s not just a delivery mechanism. It’s enabling new businesses. To me, two recent events illustrate why the cloud's more than a delivery channel for a traditional business.

Dell has studied the growth of cloud computing, as well it might, and is now investing a $1 billion in a global set of data centers. In addition to sending out compute cycles in individual boxes, and selling cloud servers in giant shipping containers to Web companies, Dell in the future will offer compute cycles as a service in the cloud as well. That’s a new business model that builds on the skills and inherent processes of the old one.

Likewise, VMware has tried to transition itself from virtualization into a cloud company, and in the process, has decided to offer platform as a service to developers – its Cloud Foundry. Instead of just selling virtualization software to run applications, it is offering an ESX Server compatible environment in which to develop applications, which will then be deployed in similar partner ESX Server environments. VMware is making use of the Spring Framework with its many Java users as a springboard for this effort. If it works, this will build VMware’s value -- less directly than the Apple example -- but it will enlist many partners in building a VMware ecosystem. That helps insure VMware’s transition to a life in the cloud.

Rod Johnson, who joined VMware through its SpringSource acquisition, is the face of this effort, but it hasn’t been left to SpringSource staffers to implement Cloud Foundry. That job was assigned to Mozy-experienced specialists, the implementers of an online data backup as a service who became available when parent company EMC acquired startup Mozy. In other words, VMware has recognized that the new business model of PaaS takes experienced PaaS skills to implement.

Dell and VMware are branching out their business models. It seems to me HP is trying to build on its success as a volume PC shipper with a new business model that leverages that position into a mobile device business. The WebOS operating system that will be on its tablets will be pre-loaded onto the PCs that it ships, but HP will need consumer design engineers and consumer service and support technicians, all disciplined to implement new business processes, to make the new model work. We shall see.

Oracle has started producing appliances, a new business model on top of its licensed software business. But none of the high tech giants is doing as much as it needs to, the Accenture report concludes.

One company it cited as an example of the future is Google. It has complemented its advertising-funded search business with new businesses, including SaaS (such as Google Apps for businesses) and PaaS (Google App Engine)," with more likely to follow,” the report says.

At the same time, I would add that Google is also an example of the hazards of adding business models. It is not yet clear that Google Apps will gain traction with enough paying customers to be considered a long term business under a new model, or for that matter, that Google App Engine turns a profit for its parent. Suffice it to say that 97% of Google’s revenue is still ad-driven, not software subscriptions or cloud chargebacks.

Jellison also makes the point that these transitions are both risky and expensive. For a licensed software vendor to become a SaaS vendor, the company would need to invest at least $10 million, he estimates. Add more business models with their operational implementation costs, and price rises to $50-$100 million.

“Most companies have dramatically underestimated the magnitude of investment required” to get the new models into operation, Jellison wrote.

The challenge before the largest technology companies – and many other companies as well – is to maintain their traditional lines of business, which in many cases are still generating 80% of revenue, while transitioning themselves into the new businesses that have been made possible by the cloud. They need to implement the operational means without running up ruinous expenses and payrolls. At the same time, holding back the employees who understand the need to transition and failing to make the investment may prove ultimately devastating to the company if it misses the opportunities for growth.

“Companies that started out in software as a service seem to have the skills that more easily allow them to become platform as a service companies as well,” Jellison says. He didn’t name any one firm, but Salesforce.com easily comes to mind as it adds its expanding Force.com platform as a service to its growing software as a service business.

Banking, investment services, insurance, even automotive sales are all finding they can offer many more aspects of their business as on-demand, online services and interactions with customers. The future for tech companies is XaaS, “anything as a service.” I would say that same principle will apply to a broad swath of the existing nuts and bolts, brick and mortar economy as well.

When that future arrives, those who have struggled with a previous transition into a cloud business model will be better prepared than those who have held back.