SOFTWARE PROVIDER CHALLENGES IN TRANSITIONING TO SERVICE-BASED BUSINESS

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1 WHITE PAPER SOFTWARE PROVIDER CHALLENGES IN TRANSITIONING TO SERVICE-BASED BUSINESS The Changing Economics of Software The software market is currently experiencing unprecedented levels of change. Cloud computing - and particularly Software as a Service, or SaaS - have fundamentally changed the economics of the software industry. The ability to offer applications over the Internet that are shared by many customers has completely changed the price structures, value proposition and business models for software delivery. Increasingly customers are realising that they no longer need to settle for complex, costly and slow models of software purchase and can instead adopt the rapid, low cost and flexible terms offered by SaaS. This movement is further driven by an increasing understanding of the commodity nature of many IT applications and a broadening scope of open source software; as customers understand the lack of differentiation that comes from IT ownership, so they are looking to access shared services at a much reduced cost over the Internet. Such economics drive a vicious cycle for software providers - as more customers adopt shared services so prices continue to fall; as prices fall so the commoditisation of that application domain accelerates. Software providers with complex, on- premise offerings requiring capital outlay and expensive operational assets and staff plus complex and uncertain implementation timescales and costs - will rapidly be driven out of the market. page 1 of 7

2 Three Big Challenges for Software Providers In transitioning from on-premise, license business models to online, service-based models software providers will meet several challenges. Three of the biggest of these challenges are: Architectural challenges: : How do we take an application built for individual customer deployment and make it suitable for the use of many customers in a standard way? How do we implement all of the complex business support services required to manage an online software business? Operational challenges: : How do we develop the capabilities and assets required to deploy, manage and scale the application on behalf of customers? Business challenges: : How do we transform our current rent business model to a new one based on recurring revenue in place of licenses? How do we create an online service catalogue for sales and implement price modelling, billing and payment collection with the flexibility required to successfully publish a service offering and operate a service business? Architectural Challenges A move towards cloud business models means that a software provider will have to support many customers through a single logical installation of the software. Many SaaS pioneers have created new models of software architecture that implement a pattern know as multi-tenancy tenancy the ability for a single application instance to support the needs of many users. For new ISVs the implementation of multi-tenancy within their software architecture makes a great deal of sense; for existing ISVs, however, it may be that the work required to achieve such an architecture cannot be completed quickly. In many cases a complete rewrite of existing applications may be required to achieve such an architecture, especially if the software provider decides to make the move to a platform as a service offering that requires the use of new tooling and languages. Beyond the preparation of the core application itself the software provider must also consider how they will wrap the application in all of the support services required to operate a service-based business. Implementing online sales, account management, subscription management, billing and payment collection for a broad variety of customers and segments are development intensive activities that can quickly overwhelm a software provider for little differentiating value. page 2 of 7

3 Operational Challenges Delivering applications through a cloud model means that the software provider takes responsibility for the operation of the application on behalf of the customer. This requires a whole new set of skills and assets that will be unfamiliar for the software provider. In particular software providers will face significant difficulties in building the operational infrastructure required to deliver their applications at scale across the Internet to customers and in acquiring the staff and processes necessary to ensure stable operation of this infrastructure. Business Enablement Challenges Whilst service-based business models offer a world of opportunity, they are also complex, dynamic and unlike anything a traditional software provider will have experienced in the past. Whilst often starting out with simple 'per user - per month' price models that can be easily handled through manual means or in-house development, service providers quickly discover that they must find other ways of charging to differentiate their offerings - e.g. per-use, a combination of fixed and variable charges, special offers and campaigns etc. - across a broad range of individual customers and channel partners. Such issues are often overlooked in the rush to get an offering out to the market and their difficulties not given sufficient consideration; software providers who do not treat the complexities of service business models with sufficient gravitas rapidly find themselves overwhelmed and unable to reliably reconcile their invoices to customers or their financial systems. Worst of all such software providers often find that internal billing solutions are increasingly consuming more development effort than core products, damaging the company s ability to grow. We only have to look at the history of telecoms companies to see the complexity of billing that can become necessary in a subscription-based business. page 3 of 7

4 The Cloud s Silver Lining Whilst for beleaguered software providers the situation can appear bleak, we believe that the increasingly rapid transition to cloud models will bring great benefits to end user organisations, software providers and society as a whole; easy global access to services will drive increasing specialisation, creating new opportunities for service providers of all kinds and growing the overall market. Furthermore existing software providers have the great benefit of existing relationships with customers, something that should not be overlooked given the high customer acquisition costs for new entrants. If these customers can be migrated to new models that bring greater benefits and lower costs before they are lost to alternative providers even to the short term detriment of the software provider s own interests - then such transparency and customer-centricity centricity can strengthen the relationship and gain great word of mouth recommendations as a provider committed to customer benefits. Most importantly of all software providers do not need to make the transition to service business models alone and without support. Whilst cloud disrupts the software provider s business on the one hand it also brings two exciting opportunities in compensation firstly by growing the overall market and opening up global opportunities but secondly through increasing the opportunities for partnership and specialisation. This latter opportunity is a great benefit for software providers as they take their first steps towards service-based business models rather than have to build all of the non-differentiating assets that are required simply to enable the delivery of their service they can rely on partners to provide such services on their behalf and thereby concentrate on their core IP development. Architecture Enablement In terms of enabling their applications for service based models, software providers can choose to implement multitenancy natively within their application or to use less disruptive techniques such as virtualisation to separate their customers application and data. Whilst in the longer term it is likely that software providers will need to recreate their applications in a multi-tenant tenant model, in many cases they cannot wait to do this before bringing new offerings to their clients. As a result any SaaS roadmap will likely involve a short-medium term deployment of their existing application to a cloud hosting platform with a longer term re-development for new models. In many cases the choice will depend on the extent to which the application is already built and the speed with which the software provider wants to move to new models to protect their business. In either case the provider will need to build or gain access to the supporting capabilities required to deliver service based business. This is a complex area and represents significant complexity and risk for little differentiation. As a result it makes a lot of sense for software providers to consider scoping their architecture in such a way as to source these components from a specialised partner. This leaves the software provider free to concentrate on building their business whilst being confident that they can find, manage and receive payment from customers. In sourcing these components externally, however, the software provider should consider the level of change required to their application, the ease with which they can be integrated and the level of application lock-in they experience as a consequence of their use. We ll look at the actual business services required in a bit more depth in the section on business enablement below. page 4 of 7

5 Operational Enablement Software providers generally do not have the assets or expertise in-house required to build and operate a physical hosting platform. Again the cloud comes to the rescue here by making it easy for a software provider to leverage external platforms for the operational delivery of their software. Depending on the starting point of the application the software provider can choose to target a Platform as a Service (PaaS) offering with managed middleware and tooling - accelerating the creation of new applications - or Infrastructure as a Service (IaaS) offerings that better match the needs of existing architectures and which require less disruptive changes. In both cases the software provider delegates the provisioning, operation and management of the underlying platform and takes responsibility only for the application itself again this is their primary source of expertise and therefore it makes sense that they manage this part of the service. For an optimum experience it is beneficial ial if there is a close integration between the architectural components providing the business enablement services and the underlying technology platform, as such integrations can facilitate a greater degree of customer self service by supporting automated provisioning. Business Enablement Once a software provider has decided to create one or more services they must be able to create, manage and monetise these offerings. Essentially they must undertake all activities that are required to wrap their software IP into a servicebased business model. As we discussed in a previous section, business enablement capabilities are complex, unrelated to software providers core business and often not given sufficient consideration until it is too late. Often this is because of the complexities inherent in building and delivering service-based business models - in traditional businesses like telecoms that came into existence before the advent of the cloud, businesses had to implement, manage and support these complex capabilities for themselves. This has invariably turned out to be an expensive drain on scarce resources and to be fraught with risk, error and delay to product launches due to the difficulties of delivering a suitably dynamic set of services capable of supporting changing business models. In the absence of any acceptable alternative, however, it was always a necessary drain. Delivering software as a service requires the same set of business enablement services traditionally required by telecom companies, since service offerings are far more dynamic than traditional license business and require the frequent creation of new price models, discounting schemes and loyalty programmes; fortunately, however, the ability to source services from partners will free software providers from the risk and complexity of building and supporting such bespoke and non-differentiating services for themselves. page 5 of 7

6 WHITEPAPER FUJITSU CLOUD SERVICES In searching for a partner who can take on the business enablement aspects of their business model, software providers need to look for both breadth dth of capability and reliability; entering into a relationship with a new or unknown organisation for such a critical capability could be worse than implementing it yourself. Fortunately there are a number of providers emerging into the market, however, both experienced service companies like Fujitsu and promising start ups who are consolidating their position; as a result software providers have a good range of providers to consider and select and have no incentive to literally risk their business on poor poo and unfocused internal developments. The full set of capabilities that software providers require to deliver service-based service based businesses are outlined below; as a result software providers can use these capabilities as a check list with which to evaluate potential p partners or combinations of partners. page 6 of 7

7 SUMMARY Service-based business models enabled by the shift to cloud computing are rapidly going to become the primary business model for software. Traditional software providers therefore have to quickly develop a plan to transition from the license models of today if they are to survive. This transition is not an easy one and requires the software provider to overcome architectural, operational and business challenges. On the positive side, however, cloud models drive all IT providers to change the way they deliver value, opening up opportunities for software providers to leverage the expertise of others to accelerate their transition and to greatly lower their risks. In addition there are a number of interim architectural and operational patterns that can be utilised to enable rapid progress without large scale re-engineering engineering of successful products in the short term. Most important of all, however, cloud computing brings opportunities for new customers, new segments and even new global markets by driving the creation of service-based business models. Meeting the needs of these new opportunities requires an ability to deliver targeted, flexible and adaptable business models that meet the changing needs of the market, however, and therefore one of the most critical cal elements required to succeed are those we class as business enablement. As a result, instead of focusing all of their attention on architectural or operational concerns, software providers must make time to implement scalable business support systems s that can change in line with their business models - at the end of the day a simple inability to sell, manage and bill for services reliably and with the flexibility required to rapidly meet the needs of a changing market will destroy a software provider as surely as a bad architecture or poor operational platform. Fujitsu is a business IT powerhouse, operating globally and one of the few unified IT companies able to offer hardware, software and services to large enterprises. Cloud Computing represents the potential for a unified hardware and software services offering, including delivery through professional services. Fujitsu is in the unique position to dominate this era of Cloud Computing as it applies all experience the company has gathered throughout the years in their Cloud offerings. Cloud Enablement Services from Fujitsu bring together a world class data center practice in the form of Infrastructure-as-a-Service, which hosts leading Cloud Enablement Middleware delivered by professional services excellence with more than 70 years of industry experience. This enables Fujitsu to efficiently move any software vendor s application to the Cloud. BES from Fujitsu offers transitioning paths for existing, on-premise applications to the Cloud without the need to rewrite the software. It provides a low cost, low-risk approach for software vendors to offer their software online. At its core, Fujitsu s BES pursues the objective of keeping existing applications development environments and simplifying the transition into the new Cloud paradigm for software vendors to open new sales channels. CONTACT FUJITSU TECHNOLOGY SOLUTIONS Address: Schwanthalerstr. 75A, Munich, Germany Phone: +49 (0) Fax: +49 (0) Website: ts.fujitsu.com/bes Here follows the legal disclaimer of your organization: e.g.: All rights reserved, including intellectual property rights. Technical data subject to modifications and delivery subject to availability. Any liability that the data and illustrations are complete, actual or correct is excluded. Designations may be trademarks availability. Any liability that the data and illustrations are complete, actual or correct is excluded. Designations may be trademarks availability. Any liability that the data and illustrations are complete, actual or correct is excluded. Designations may be trademarks and/or copyrights of the respective manufacturer, the use of which by third parties for their own purposes may infringe the rights of such owner. For further information see ts.fujitsu.com/terms_of_use.html Copyright Fujitsu Technology Solutions GmbH 2010 page 7 of 7

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