Big technology firms like the monolithic business model they're familiar with; Accenture says they'll need five.

Charles Babcock, Editor at Large, Cloud

April 12, 2011

8 Min Read

The cloud changes much more than we have been prepared to admit. The possibilities are just too disruptive and jarring. Resistance may be futile but it’s powerfully busy, nevertheless. This is understandable for businesses with small, beleaguered IT staffs. Then along comes Accenture to say the big tech companies are underestimating the cloud’s impact. Tim Jellison, an Accenture senior executive, has not named names, but he’s concluded that technology companies of the ilk of Oracle, Microsoft, IBM, HP and SAP are not ahead of the curve but behind it. The convergence of technologies known as cloud computing – the multi-core servers, virtualization, global broad band networking, multi-tenant applications running in inexpensive memory, and 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, they like to sell and deliver high touch, technology equipment and services to customers able to pay. 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; others like hand-holding. 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 one of his key conclusions.

I think he’s hit upon a paradox of the age. It’s not enough to stay the same, but change has to occur in exactly the right ways or the business risks failure. As a matter of fact, 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.

In an interview before its release, he said Accenture has concluded that any technology company’s preference for a particular business model is now suspect. “We think the day of the single business model is fading fast,” he says. Most will need to implement three, four, or even five models, while maintaining their traditional lines of business. What he says, applies to big high tech companies, but in my mind, this conclusion is eventually applicable to companies in many other industries as well. For now, we’ll stick with the tech giants. “Few technology companies are prepared to effectively deal with the operational complexity caused by this impending proliferation of business models,” he says. The three that he’s willing to concede that have to some extent are Microsoft, Cisco and Google.

Each model, such as direct sales, software as a service, platform as a service, implemention through consultant services, etc. has its own business imperative, its own methods of operations. The model must work according to its own rules, not that of a predecessor model. Given the way the world works, the implementers of new model, however, are likely to be some who succeeded with a predecessor. Don’t look now but they are in unfamiliar territory.

Instead of selling lifetime software licenses with big upfront payments, software companies may now deliver software as a service, SaaS plus auxillliary services or platform as a service, such as Salesforce’s, where a development language may build an addition to a Salesforce application and attach it to a database service. Or a company can offer its application on Amazon’s EC2’s infrastructure as a service, letting the customers come to them rather than be pursued by a field sales force.

The acronym, XaaS, has come into play for the technology industry’s presumed future ability to deliver anything as a service, whether hardware compute cycles, networking bandwidth, storage, software, or services based on a combination of them, Jellison noted in his report, issued Tuesday[[April 12]], “Where the Cloud Meets Reality: Operationally Enabling the Growth of New Business Models.” “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.

That is, software as a service as a new model for a software company is not something that should be left to the internal IT staff to implement by itself. It will need a lot of help from the development staff, marketing, customer service, and the development staff.

I think Apple is a company that has transitioned to multiple business models. Thanks to the tight control it has kept over its products, and the hip style associated with them, its models are to a degree vertically integrated. The sale in the bricks and mortar store leads to self servicing in the cloud (the iTunes software download to an iPad) leading to sales in the online App Store. Mutliple, integrated business models helps explain the remarkable run up in Apple’s value. In addition I see two things this week that confirm the likelihood of technology companies needing to move to multiple business models. For a while, the cloud was reckoned to be 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 ecommerce came into being.

Smart companies, however, are realizing the cloud provides its own form business, or businesses, in addition to the traditional business. Dell has followed the expansion of cloud computing and is now investing a $1 billion in a global set of data centers. In addition to shipping compute cycles in individual boxes and cloud servers in container packaging, Dell in the future will offer compute cycles in the cloud as well.

VMware has tried to reinvent itself as a cloud company, and in the process, has decided to offer platform as a service for developers, a cloud business where its virtualization software will be put to use. The leadership of its SpringSource acquisition, Rod Johnson, is the front end spokesman, but it hasn’t been left to SpringSource staffers to implement PaaS. That’s the job of Mozy-experienced specialists, the implementers of data backup as a service who became available when parent company EMC acquired startup Mozy.

Dell and VMware are branching out in their business models. IBM and HP have both recently placed both feet ankle deep in the cloud. Oracle has started producing appliances. 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 historical advertising-funded search business with new businesses, including SaaS (typified by Google Apps for Communication & Collaboration) and PaaS (Google App Engine), with more likely to follow,” the report says.

“We think the challenge is the high tech firms have underestimated the attention and investment needed to bring new models to market,” Jellison says.

The task isn’t trivial. They must maintain their traditional lines of business, which is still generating 80% of revenue, in many cases. But future growth lies in the services made possible by cloud computing. To fail to invest in them and grow their revenues may prove debilitating in the long run. It may seem obvious that it’s fine to offer software as a service as an adjunct to selling lifetime licenses, but real SaaS is a different business model. The company will only be paid for what the customer uses, not what the salesman sells. So any effort put into creating shelfware – software sold but not used – while highly profitable in the traditional model, will be wasted effort in the cloud. In the cloud you pay only for what you use. That’s one of its attractions.

“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 suspects but he surely had in mind with its expanding, platform.

As the addition of business models occurs, an operations staff has to fully implement it. Easily said, says Jellison; plenty of opportunity for missteps as operations proceed.

All of this might seem a little abstract. Business models are not necessarily business saavy, teamwork and boots on the ground. But to fail to think through and plan how your firm will advance into a future with multiple business models may prove the downfall of otherwise sound companies. The cloud is a new resource and a new method of operation. Ignore it at your peril. Resistance really may be futile.

About the Author(s)

Charles Babcock

Editor at Large, Cloud

Charles Babcock is an editor-at-large for InformationWeek and author of Management Strategies for the Cloud Revolution, a McGraw-Hill book. He is the former editor-in-chief of Digital News, former software editor of Computerworld and former technology editor of Interactive Week. He is a graduate of Syracuse University where he obtained a bachelor's degree in journalism. He joined the publication in 2003.

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