Transitioning to Cloud Business: Best Practices for ISVs

Transcription

1 Transitioning to Cloud Business: Best Practices for ISVs

2 TABLE OF CONTENTS Introduction: A Continuous Transition Six ISV Cloud Transition Challenges #1: Executive/Financial Challenges #2: Technology Challenges #3: Operations Challenges #4: Sales and Marketing Challenges #5: Partnering and Alliance Challenges #6: Organizational and Culture Challenges In Conclusion Figure 1: The Boundary-free Enterprise Master Architecture SIDEBAR: Management Metrics to Consider Figure 2: Sales & Marketing Among the Top ISV Transition Challenges SIDEBAR: Case Study Figure 3: Cloud Transition Challenges Partnering and Alliances Figure 4: The Cloud Aggregator Spectrum About This Report This report is a compilation of ongoing Saugatuck Technology research programs, including our global survey, interviews, and briefings with traditional and Cloudbased ISVs. Saugatuck Technology Inc. is solely responsible for the content of this report. Unless otherwise cited, all content, including illustrations, research, conclusions, assertions and positions contained in this report were developed by, and are the sole property of, Saugatuck Technology Inc. Mike West is the lead author of this report, with key contributions by Bill McNee and Bruce Guptill. About Saugatuck Technology Saugatuck Technology, Inc., provides subscription research and management consulting services focused on the key market and business trends and the technologies driving change in enterprise IT, including Cloud IT, Mobility, Social IT, and Advanced Analytics, and more. Founded in 1999, Saugatuck is headquartered in Westport, CT, with regional offices Boston, Silicon Valley, and in Frankfurt, Germany. For more information, please visit or call To request a briefing with our analysts, contact: chris.macgregor@saugatucktechnology.com Saugatuck Technology Inc. i

3 INTRODUCTION: A CONTINUOUS TRANSITION Saugatuck s work with hundreds of independent software vendors (ISVs) indicates that for many, the technical aspects of the transition to the Cloud are often fairly well understood even if the roadmap for success may take some time. However, what is less understood, and more dangerous to IT providers, are changes that are required in other areas of the business that are typically much deeper and harder to execute, and often entail much more risk. In fact, this is not merely a move to the Cloud but rather a transition to entirely new ways of doing business. An emergent business and IT architecture now enables a highly-interwoven, loosely-coupled business and IT environment that Saugatuck calls The Boundary-free Enterprise. This new Master Architecture, depicted in Figure 1 on the following page, is driven by Cloud, and also by its sister business technologies: Mobility, Social and Advanced Analytics. Central to this future will be loosely coupled approaches linking systems, people and business processes on a dynamic, as-needed basis with hybrid Cloud and on-premises deployment models common for most business and IT environments. This Saugatuck Strategic Report provides guidance to ISVs in transition not just to the Cloud but to entirely new ways of doing business, new requirements from customers and partners, and new opportunities that enable significant reward, and related potential risk. This report shares not only Saugatuck s analysis of key market shifts, and the key challenges faced by ISVs in these transitions, but also provides ISVs with critical success factors and best practices from more than seven years of Saugatuck Technology research and business consulting with a diverse range of software providers around the world. SIX ISV CLOUD TRANSITION CHALLENGES The shift to the Boundary-free Enterprise demands significant changes in the way that software companies organize, manage, and run. The Cloud demands a services-centric mentality, across all of the domains that shape a company s success. In this Strategic Report, we consider not only the challenges of the initial ISV transition to Cloud-driven environments, but also the additional challenges that await ISVs as the terms of competition in the Cloud continue to evolve. This typically requires that ISVs focus on six key areas, as follows: Executive/Financial Technology Operations Sales and Marketing Partnering and Alliances Organization and Culture 2013 Saugatuck Technology Inc. 1

4 Figure 1: The Boundary-free Enterprise Master Architecture #1: Executive/Financial Challenges Unlike Cloud-based startup software providers, established ISVs have legacy, on-premises software businesses to manage. Retaining customers and cash flow while launching a new Cloud business can mean striking a delicate, and shifting balance in managing resources. This entails a series of significant management challenges from the executive level of the business on down. Saugatuck sees the key ISV Executive / Financial challenges as follows: Source: Saugatuck Technology Inc. Executive support. Securing and maintaining executive support for the Cloud transition initiative is critical to resolving conflict situations that inevitably will arise. Without strong and consistent senior executive support, ISVs will struggle, and often fail Saugatuck Technology Inc. 2

5 Regulatory compliance issues. The Cloud may introduce regulated business practices because of specific vertical market and customer requirements such as health care, pharma, government, or financial services; or because the business will reach into unfamiliar geographies, which may have stringent requirements for data handling, financial reporting, etc. Funding approval. As a Cloud venture may require several years to reach profitability, a variety of funding approaches, from venture or equity capital to funding through established product revenue streams, may be necessary. Legacy solutions and strategy for transition. Managing the current product portfolio while transitioning to a new set of Cloud offerings may lead to spinning out a subsidiary, which will introduce organizational issues, or maintaining parallel sales and marketing divisions, each with its own strategy, business plan and compensation structure. Acquisition vs. Organic growth. Whether to grow the Cloud business from within or acquire an existing Cloud business will introduce very different approaches to managing the venture. Brand strategy. Is working to augment an established brand or building an entirely new brand with Cloud associations the preferred path to take? Financial processes / Revenue recognition. Cloud businesses typically introduce very different financial models, based on recurring revenue streams, rather than large license fees and ongoing maintenance streams, and understanding how to manage Cloud financial processes will prove a challenge. Profitability strategy and metrics. Traditional Wall Street metrics, such as EBITDA may be relevant for established Cloud businesses operating as public companies, but small and growing Cloud businesses or businesses in transition to the Cloud will require an entirely new set of financial metrics. Executive / Financial challenges are of critical importance, as they pertain to the conception, funding, compliance, profitability and financial oversight, choices of acquisition versus organic growth, the maintenance or transitioning of legacy offerings, and management of brand image with respect to new Cloud offerings. Thus, successfully meeting and managing the Executive / Financial challenges sets the tone for all other dimensions of this complex transition. In fact, the correct way to view the Cloud transition is as a series of organically interrelated activities. Technology impacts Operations, Culture impacts Organization, Partnering and Alliances impact Sales and Marketing all in various permutations of mutual impact. Therefore, there can be no one-size-fits-all formula for success, as each stems from the Cloud business strategy and from the opportunities that new technology platforms create. However, the Executive / Financial challenges and how they are met will set the tone for success or failure in the Cloud Saugatuck Technology Inc. 3

6 MANAGEMENT METRICS TO CONSIDER Saugatuck has long been a fan of Bessemer Venture Partners (BVP) and their approach to management metrics. Bessemer identifies five key metrics as essential top-level performance indicators for Cloud providers (see the 2012 version of BVPs 10 Laws of Cloud Computing). Saugatuck is a strong believer in applying and integrating these types of metrics into ISV Cloud business models and management. BVPs five key metrics are as follows: CMRR. Committed Monthly Recurring Revenue MRR plus newly-committed revenue minus de-committed revenue or churn provides an ongoing view of financial health. Cash Flow. Gross Burn Rate (monthly expenses debt and finance charges) and Net Burn Rate (monthly cash received minus expenses) are two metrics for managing cash flow. CAC. Customer Acquisition Cost / Payback Period is a metric for managing the efficiency of sales and marketing investment. CLTV. Customer Lifetime Value is the net present value of the recurring profit flows from a given customer net of the acquisition cost. Churn. Logo Churn, CMRR Churn, and CMRR Renewals are percentages over a given period. CMRR 2013 Renewals Saugatuck Technology can exceed Inc. 100 percent in the event of upsell. Bessemer points out that these metrics apply especially well to pre-public companies, and are often used by Cloud CEOs for their executive team objectives and bonus plans. Nevertheless, Saugatuck believe these metrics will continue to be useful internal management metrics for Cloud-bound ISVs, even as leading Cloud providers embrace GAAP Revenue, Gross Margin, and EBITDA on the road to going public. In our experience, most ISV leaders also need to pay better attention to emergent market trends and influences that are re-shaping what customers buy and how they use it. A prime example is Saugatuck s Boundary-free Enterprise (BfE) model, which indicates how the convergence of Collaboration, Social, Mobile, and Analytics, as well as integration between Cloud and on-premises data assets, is reshaping how customer enterprises are doing business, and therefore how they value ISVs offerings. What the BfE trend is telling us right now is that simply offering a Cloud solution is not sufficient, unless the solution includes advanced capabilities that buyers expect. This can include support for mobile devices, for social networking, for data analytics, either embedded or loosely coupled, as key platform elements of the Boundary-free Enterprise. Best Practices In the long run, there are no substitutes for practical, real-world experience. Therefore a great deal of Saugatuck s ongoing research with Cloud ISVs and markets involves discussions, interviews and briefings with ISV executives. These interactions help us develop and refine realistic Best Practices that can assist ISVs in their development and expansion of Cloud-based services/offerings. Below are five Best Practices in dealing with the Executive/Financial challenges explained above Saugatuck Technology Inc. 4

7 Don t focus on replicating previous offerings. Traditional ISVs that are most successful in building Cloud business are those that either completely rethink a business process or identify a new or adjacent business opportunity. Rather than replicating traditional on-premises offerings, they target the Cloud with functionality that delivers Cloud-specific value, e.g., support for geographically-distributed organizations or for mobile executives and knowledge workers. Make and keep regulatory compliance top-of-mind. Managing regulatory compliance requires achieving and managing the essential certifications, not only those relevant to the U.S. markets and specific verticals, but also management of high-impact global concerns such as Data Security and Privacy in European countries, for example. Plan for multiple legacy transition approaches. Transition strategy for legacy solutions may take several paths. Two proven successes: 1) spin out a subsidiary either for the Cloud or for legacy products; 2) create Cloud solutions that link to and add value to legacy products in a Cloud - on premises hybrid architecture. Take advantage of scale. An ISV s ability to scale (and to take advantage of highly-scalable partnering capabilities) significantly improves the economic, organizational, operational, customer service and go-to-market strategies. Consider a different name. Re-branding, or branding a spin-out, is one frequently-chosen approach for breaking with legacy associations and projecting market currency, especially when new customer segments or a new functional scope are involved. #2: Technology Challenges Any ISV s long-term, hybrid-cloud technology strategy should take into consideration not only the initial deployment platform, but the ongoing plan for delivering the solution that includes efficiency of infrastructure services. Depending on which path an ISV takes to the Cloud (virtualization, single tenancy, multi-tenancy and/or combinations of these), the chosen Cloud technology platform should position the ISV to respond to change, economically and quickly, in order to keep pace with competition. ISVs that expect little need to update their offerings frequently, or to respond to competitive challenges, may feel that an approach utilizing virtualization or multitenant emulation will suffice. However, the economics and speed of response required by ISVs in more competitive industry segments will dictate the need for multi-tenancy. Single tenancy in a hosted Cloud environment is at best a temporary solution for ISVs transitioning either to virtualization or multi-tenancy solutions. 5

8 Most Cloud solution providers that Saugatuck has studied have opted for multitenancy, but the other approaches may be feasible in specific circumstances. A Cloud ISV will also need to have a plan for managing the transition between legacy on-premises platforms, and their customers, to the evolving Cloud platform. Other key challenges include R&D management for innovation and efficiency, solution development and enhancement, extending solution customization capability and the ease of integration with other Cloud and on-premises solutions. Perhaps the two biggest gotchas to watch out for are security and regulatory compliance. Once these basic challenges are well in hand, the Cloud ISV will need to address the role that Mobile, Social and Analytics platform support can play in delivering differentiated value, whether through embedded platform support or through a loosely-coupled, integration-driven partnership approach. Performance, too, and the reliability and robustness of the ISV s Cloud solution figure in here and in a big way. Reliable and robust operations are critical to customer confidence. A Cloud provider using loosely-coupled links to other Cloud or on-premises services should thoroughly test the efficiency of the compound solution and design for failure to ensure that customers will not be left hanging should a glitch in a subsidiary system occur. Trust is the first essential imperative of a Cloud solution. However, operating costs are also extremely important. While the drive to efficiency should not sacrifice maintainability, the second critical design imperative is efficiency. Moreover, we have learned over the past ten years of studying what we call today Cloud ISVs that managing operational costs down to around 20 percent of revenues is a proven path to profitability. Those Cloud providers that do attain low-cost-of-operations in the 20 percent range will in most cases devote R&D spending toward improving the efficiency of technology operations. We can summarize the above into the following key ISV Technology management challenges: Technology Strategy for the Cloud, e.g., Platform, Infrastructure Services Multi-tenancy vs. Virtualization Managing both Cloud & On-Prem Versions Integration / Customization Strategies Social / Mobile / Advanced Analytics Embedding vs. Loosely Coupled Managing R&D for Solutions & Efficient Ops These Technology challenges are of critical importance, as they pertain to the technology advantages, long-term architecture, platform, portfolio migration, integration, performance, security and regulatory compliance, among other things, of the Cloud solution. Thus, successfully meeting and managing the Technology challenges needs to be in harmony with all the other dimensions of this complex transition Saugatuck Technology Inc. 6

9 Transitioning ISVs, however, need not reinvent the wheel. There are many proven best practices for meeting technology challenges. We provide below capsule views of the six we think have the most universal application. Best Practices Understand/ and re-think. In creating new Cloud Business solutions, the first step is to understand the nature of the disruptive technology. The second step is rethinking the current business value proposition in the terms the new technology of the Cloud dictates and enables. This has implications for the role that Mobile, Social and Analytics platform support can play in a differentiated competitive strategy. Long-term view. Be cautious about quick fixes that don t provide you long-term leverage and scalability as your client base grows. For example, fully understand the challenges associated with rolling out schema changes, bug fixes and upgrades without the benefits of a full multi-tenant architecture. Consider the longer-term plan for managing the on-premises and Cloud solutions and how to transition customers to the Cloud, when to stop enhancing the on-premises version, and how to build synergy between the Cloud and on-premises solutions, if their functionality is complementary. Cloud advantage. In adapting existing on-premises business solutions to the Cloud, the key is to provide a Cloud advantage, whether it is functional or economic in nature, not merely to migrate customers to the Cloud but to retain them there. Mobility support would be one hook that will deliver customer value over time. Secure platform. No Cloud Business solution can succeed that is not secure. And it must not only be secure, but also must be perceived as secure by its potential customers and partners. Regulatory compliance. Cloud Business solutions require not only worldclass security and privacy but the regulatory certifications for key markets (e.g., SSAE16 (SAS70), HIPAA, GLB, FedRAMP/FISMA, ISO27K). This is table stakes. Solid performance. Cloud solutions bring elastic scalability and the potential for fail-proof systems. Designing for the Cloud means taking advantage of elastic scalability, whether in the public or in private Clouds, and systems can be designed to add capacity as necessary to ensure they will not fail under high volume demand, at least from a server point of view. Networks still have to be optimized and code architected to prevent damaging bottlenecks. Loosely coupled exchanges will have to be tested for failure scenarios. The goal should be an agile and robust solution that delivers solid performance. Cost of operations. IT infrastructure is a key means by which you can continuously lower your per-units costs and increase customer value. Bringing 2013 Saugatuck Technology Inc. 7

10 cost of operations down below 20 percent of revenues is essential to achieving sustainable long-term profitability. Use R&D investment to develop more efficient operations in addition to enhancing core solutions capabilities. #3: Operations Challenges The Cloud world requires a different kind of business model - a service vs. a product model of operations. At its foundations, a Cloud solution is a promise to the customer to deliver superior functionality, predictably and responsively. It is not just about being secure, robust and dependable. Cloud solutions are about service excellence in all aspects that touch the customer. That includes service levels and service-level transparency, the availability of operational metrics, and billing capability that provide the customer with data and inquiry capability. Cloud operations may be inward-facing, tuning and ensuring the performance, security and integrity of Cloud solutions, or outward-facing, directly engaging the customer in the onboarding process, in soliciting improvements or providing the complement of customer support that ensures customer loyalty. These two views of Cloud Operations must work together smoothly in complementary fashion. Because profitability is in part based on the length and increasing depth of the customer relationship, retention-oriented practices are strongly recommended to ensure profitability. These may include solution innovation and enhancement, technology advantages such as integration APIs, and service excellence. Operational metrics may provide a quantitative basis with which to understand how the solution is performing, as well as where it is valued. Operational challenges are at the heart of the Cloud solution and also the main difference between developing software for sale and offering a Cloud business solution While Operations may be the most significant departure from the ISV s previous on-premises business model, it has in common with manufacturing the ethos of continuous improvement. Many Cloud providers invest heavily in Operations, knowing that it is the crux of the Cloud value proposition, the route to more efficient Operations -- and profitability. To summarize, the key Operational Challenges that ISVs must manage are: Security, Performance, Service Levels, Back-up & Recovery Managing Billing, Payments and SLAs Delivering Continuous Innovation & Ongoing Functional Enhancements Delivering Technology / Platform Advantages Delivering Service Excellence Exploiting Operational Metrics Best Practices Operational transparency. Transparency regarding operational outages and security breaches is essential to building credibility as a Cloud provider. Communicate openly with customers. Monetization. You cannot monetize what you cannot bill for. The choice of a Billing and Payments solution can make or break a Cloud provider. Ensure that the solution you use is fully-functional, adaptable and will continue to 2013 Saugatuck Technology Inc. 8

11 evolve. Should you change sales strategy, be sure your solution can change with you. Continuous innovation. Delivering ongoing innovation and functional enhancement for the Cloud solution means staying in close, intimate contact with your customers, understanding what they value most and responding to their requests for improvements. Integration enablement. Your Cloud solution is unlikely to stand alone, therefore its ability to exchange data with other solutions will depend upon proprietary and non-proprietary (Open) standards, the capability for integration with other leading platforms and solutions (via APIs, toolkits, partner solutions, and SIs) and the operational efficiency and robustness of those integration solutions. Recognize the power of synergy is an important part of what your customers are buying. Service excellence. Service excellence means more than an SLA policy posted on the Web. Expect potential customers to ask for historical uptime and response-time metrics, backup, recovery and disaster planning solutions, and your track record for managing service levels and failures. Be proactive about these valid concerns. Operational metrics. Capturing and managing operational metrics not only is essential to delivering world-class customer experience, but may also provide insight into usage that has market value, either by tuning pricing to match periods of use, or in identifying functional patterns that lead to new revenue-generating capability. #4: Sales and Marketing Challenges Transitioning to a Cloud or hybrid-cloud business model requires that all of Sales and Marketing will need to change as you move from selling and supporting a software product to a service. Figure 2 summarizes survey research conducted by Saugatuck in 2012 among ISVs that had gone through at least the initial stages of transition from traditional software business to Cloud. Note that three of the top six Source: Saugatuck Technology Inc Saugatuck Technology Inc. 9

12 transition management challenges are directly related to Sales and Marketing. Others, such as Satisfying legacy customer needs, could also be included as at least partly as Sales and Marketing challenges. Figure 2: Sales & Marketing Among the Top ISV Transition Challenges The Cloud environment forces Sales and Marketing leaders and groups to see and address things in new ways. Meeting the needs of legacy customers during and after the transition will be critical to customer retention and upsell. Building new channels for sales and marketing reach and transforming sales compensation for direct sales staff will ensure the Cloud solutions will receive the attention in the marketplace that they will require. To summarize, the key Sales and Marketing Challenges are: Pricing Strategies and Metrics Adapting Sales and Marketing to the Cloud Managing / Migrating Legacy Products, Customers & Partners Overcoming Customer Resistance Building and Managing new Channel Partnerships Product Roadmap Continuous Innovation & Enhancement Developing Up-sell / Cross-Sell Managing Sales Compensation Strategy and Models Best Practices In addressing the challenges facing the Sales and Marketing function, we suggest the following best practices, which are by no means exhaustive, but nevertheless essential. These include input from those Cloud ISVs with whom we worked in the above research program, and are the ones they considered most important. Pricing based on perceived value. New ISVs struggle with pricing, as it is an entirely new ballgame. Base Cloud solution pricing on perceived value, not costs, not the marketplace. Costs establish the lower limit for prices. Furthermore, the marketplace is too broad a view. Profit margin should be based upon the willingness to pay in a specific customer segment. One key pricing element is the value metric. The most effective Cloud pricing exploits metrics that successfully relate to the value the user perceives varying relative to the nature and value proposition of the Cloud solution. While appealing to the customer s perception of value, value metrics should also align with the Cloud provider s business model. Adapting the marketing to the Cloud. The Cloud is not only the source of new business solutions, but also of information about potential solutions. Successful Cloud ISVs ensure visibility in the Cloud for their solutions through mastery of messaging, SEO, blogging, tweeting, Facebooking and otherwise deploying their marketing information to targeted groups of buyers Saugatuck Technology Inc. 10

13 CASE STUDY One re-branded Cloud company that Saugatuck studied found it necessary to spin out their onpremises offerings under a subsidiary, in order to create two separate organizations responsive to different user expectations and to build credibility as a Cloud brand. Migrating existing customers to the new Cloud offerings was managed in a three-step process: Segment the on-premise customer base and identify those who are most likely to migrate to the new platform; Offer pricing incentives to motivate customers who may be undecided whether to move; and Provide proactive assistance and help customers plan when and how to do the migration. That same Cloud ISV spun out to an indirect channel responsibility for servicing (distribute, support, train) that platform and its legacy customers. With the Board s backing, the CEO was able to focus internal resources entirely on the new Cloud business, while preserving the revenue stream from existing on-premise assets. Complementing the legacy solution. When a legacy solution is more viable in current markets as an on-premises offering, design functional enhancements that can not only deliver complementary value in the Cloud, but also validate and signal the viability of the eventual legacy replacement.. Overcoming resistance. Overcoming customer resistance to the Cloud means hearing customer concerns about a wide range of issues, ranging from Security Concerns to Regulatory & Regional Data Privacy and Fiduciary responsibility. Customer advisory panels not only make the customer a part of the process and increase the stickiness of the relationship, but can also yield very useful and practical solutions to business problems. Retain and upsell. Focus on keeping your customers happy. Renewals plus upsells are the lifeline to long-term growth and profitability. Quality of service, service improvement, and continuous innovation are all critically important to ensuring renewals and opening the door to upselling. Measure your results continuously. Separate sales organization. For larger ISVs, with both Cloud and onpremises solutions, a 'Cloud-first' mentality can combine a separate, matrixed (overlay) Cloud sales organization that can sell on their own but also team with the major accounts reps with double comping for all Cloud deals. #5: Partnering and Alliance Challenges Moving to the Cloud affects every aspect of an ISV s organization, from management practices to Finance to Sales and Marketing to Partnering and Alliances. Consider the importance of leverage in building a successful Cloud business. Clearly the same margins ISVs have been used to in on-premises software will not be there. Customer retention, harvesting the returns from customer acquisition costs, and upselling from the initial set of solutions will play an important role in making profitability possible. But critical to Cloud profits will be the leverage gained through partnering with more efficient providers of non-core capabilities and extending geographic reach through alliances with already-established distributors Saugatuck Technology Inc. 11

14 One critical lesson that we have learned in working with ISVs is that no one can manage the Cloud transition entirely alone. Even global market leaders bring in partners to help with their transitions. Focus on your value, partner for the rest. There are three important benefits from partnering: Lower costs. Don t spend unnecessary resources getting up to speed. Better solutions. Get the very best the market has to offer in terms of experience, expertise and innovation Faster results. Don t waste time while others move past you in the Cloud Partnering and Alliances can help with both top-line revenue and the costs that will impact the bottom line. To drive this point home, we offer the views of experienced Cloud ISV executives: The Cloud s a growing network of channels -- hosting partners, IaaS, PaaS, SaaS, aggregators, resellers. We explore every channel, but there is the issue of margin. We need 2000 customers for it to make sense. - Product Marketing Manager, Cloud ISV We are looking for the right app partners. We do not want to build our own - it's too complex, especially when we get into Social Let the Social specialists make that work. Our architecture is solid and we don't want to mess with it - and why should we when we can get Social as Cloud functionality? SVP, Product Planning, Cloud ISV Figure 3 illustrates the relative importance of effective partnering to the Cloud transition as reported by the same ISVs noted previously. These experienced ISVs see the need for, and the difficulty in finding, partnerships that help them execute Source: Saugatuck Technology Inc Saugatuck Technology Inc. 12

15 and manage transitions to new or more complex technologies, as well as to new or different markets. Figure 3: Cloud Transition Challenges Partnering and Alliances The two key Partnering and Alliance challenges in Figure 3 also underscore the importance of looking at the transition opportunistically. Partnering and Alliances can provide leverage in expertise and speed to market and reduce unit costs through outsourcing to a more experienced and cost-effective provider. Through Partnering and Alliances, the transitional ISV can also take advantage of well-established market relationships in unfamiliar geographies or those too distant for efficient operations at the given scale. One highly effective approach to Partnering and Alliances arises through aggregation of solutions. In targeting the Boundary-free Enterprise, Cloud ISVs may deliver the synergy of a Cloud Business Solution, e.g., Marketing, together with Data Analytics through partnering, as Marketo has done with its partner Pentaho. These may be embedded or loosely coupled synergies, but by aggregating the two solutions Marketo has significantly improved its appeal. The spectrum of such integrative Cloud partner synergies is suggested in Figure 4. The range of relationships from reseller to MSP is adaptable to any situation a Cloud ISV may encounter in the marketplace. This spectrum illustrates options for leveraging a partner s expertise or vertical market or geographic presence. Figure 4: The Cloud Aggregator Spectrum To summarize, the key Partnering and Alliance Challenges are: Partnering Strategy Source: Saugatuck Technology Inc Saugatuck Technology Inc. 13

16 Managing Development Partnerships Managing Ecosystem Role Managing Hosting Relationships Distribution Channels for Value-added Services and Geographic Reach Best Practices In addressing the Partnering and Alliance challenges, we suggest considering the following best practices: Pick your battles. Cloud Business solutions require skillful partnering that can enable world-class experiences and performance. Success in the Cloud means success in partnering. Pick your battles in terms of what you need to own or control, and how you can rely on third parties to help support your Cloud business. Core competency. Stay focused on delivering value based on your defensible core competency. Focus on core value; outsource the rest. No provider can economically maintain expertise and control over every aspect of its solutions, e.g., Cloud hosting or distribution in all market segments and geographies. Select partnerships for non-mission critical functionality to leverage partner expertise for lower costs and higher quality functionality than you can regularly provide. Who owns the customer. The broad area of customer ownership must be addressed when building a partner ecosystem. This includes how internal sales and the partner are compensated and who is responsible for customer and product support. Compensate all partners. In a Cloud Business solution that involves the participation of multiple partners in addition to customers, acknowledged and sustained value must be delivered to all solution participants in the value chain. Consider impact on long-term partners. Be prepared to deal with a channel that has grown used to the financial structures, the process and the issues of control associated with the on-premises model. As you move more of your revenue capability to the Cloud and form new partnerships, think through carefully the impact on your long-time partners. #6: Organizational and Culture Challenges While transitioning to Cloud and hybrid-cloud environments affects every aspect of an ISV s organization, from management practices to finance to sales to customer support, the Organization and its Culture are dramatically affected. Many onpremises ISVs moving to the Cloud have found it necessary to create a separate organization, involving not just direct sales, but also channel management, customer support, partner management, and R&D and IT that reports up to the CEO, separate from the legacy organization. As one senior manager at a transitioning Cloud ISV with an indirect distribution model remarked: 2013 Saugatuck Technology Inc. 14

17 Our key challenge has been to bring internal and external stakeholders along with us when talking about revenue recognition and short-term cash flow implications versus long-term revenue benefits. This has been particularly challenging as this is a product not sold directly, and our Partner channel is one of our biggest assets. This uncertainty regarding change and, in this case, management of the distribution channel, often has significant impact on the smooth operations of a transitioning organization. Building awareness among the internal stakeholders is one important way to manage this challenge. Moreover, in the example above, it wasn t so much the functioning of the channel organization, but how changes to the overall business model, including the channel, would impact the organization. Would there need to be a separate organization, as we have seen in other Cloud ISVs? Some enterprises spin out the Cloud organization as a subsidiary; others maintain a hybrid. Hybrid organizations with both Cloud and on-premises offerings face special challenges, as Cloud buyers expect more than on-premises buyers in terms of service and support. In organizations with direct sales models, one key challenge in moving to the Cloud is around customer intimacy. Culturally, there are significant differences in customer expectations that the Cloud ISV must be prepared not only to accommodate, but encourage. For example, increased customer intimacy in the Cloud is something often unanticipated by on-premises ISVs that migrate. It is critical to understand that customers will interact directly with the Cloud ISV every day that they use the Cloud Business Solution. So to be competitive, the Cloud ISV must promote customer intimacy, whether through social networks, through user communities, or through other means. This may mean partnering with organizational consultants to help create and then manage customer communities. Equally important is building an internal culture to drive that intimacy. To summarize, the key Organization and Culture Challenges are: Executing a Smooth Organizational Transition Plan Building Key Stakeholder Consensus Managing Coordination of Resources Across Multiple Units / Subsidiaries Managing an Effective Support Organization Communicating & Managing Organizational Change Understanding Cloud vs. On-Premises Culture Building a Service-centric Culture 2013 Saugatuck Technology Inc. 15

18 Re-Branding A New Cultural Identity Reinforce Excellence around the Core Cloud Competency Evolve the Cloud Culture (Collaboration, Community, Customer Intimacy) Best Practices In addressing the challenges facing the Organization and its Culture, we suggest the following best practices: Transition Dream Team. Pull together a dream team across the organization -- line-of-business executives, technical experts, project managers, marketing and sales executives, and customer support managers -- for planning, evaluation, and implementation oversight of the Cloud Business solution during the transitional period. Manage internal stakeholders. Consensus building among those who may serve as resource gatekeepers will smooth the way to successful execution of a Cloud transition strategy. Internal resistance can lead to lower service quality and increased costs. Identify key stakeholders, communicate the Cloud transition strategy, and partner across organizational boundaries for mutual success. Consider a spin-out. Larger organizations are often more successful creating a separate group within their companies not bound by the same P&L restrictions and measurements during an incubation period. At the end of this period, companies often face the decision of whether to operate a hybrid model, or spin out into a separate entity. Build Social networks. Because Cloud Business solutions are servicesbased, they usually bring multiple organizational units into play well after these solutions are in place. Social networking tools can make ongoing intraorganizational coordination more effective. Reward customer support. While customer support is more than an organizational function and touches on the cultural expectations of customers nothing will have a greater impact on customer satisfaction and on the profitable retention of customers than a well-run customer support organization. Metrics and reward systems can ensure success. Build innovation culture. Innovation is at the heart of Cloud business solutions. Encouraging and managing the innovation process using social media is one key to maintaining a steady stream of Cloud Business innovation. The Cloud is a very dynamic business environment that demands continuous improvement. Build a culture that understands that. Manage Cloud vs. On-Prem conflicts. If your business has both onpremises and Cloud solutions, be prepared to manage the cultural differences (not to say conflict) among the two cultures. Practice knowledge-work as a team sport. Embrace knowledge work as a team sport. It is the synergy between the functions, rather than any single capability or platform that delivers the business value. Internal team work and collaboration is the cultural flipside to building customer intimacy and loyalty. Enable mobility and boundary-free operations. Understand information mobility and encourage it. The Cloud is about enabling information mobility 2013 Saugatuck Technology Inc. 16

19 and the coordination of distributed and mobile knowledge workers. Enabling knowledge workers to move outside the constraints of organizational boundaries and allowing them to bring their mobility tools with them into the workplace and beyond encourages their commitment. BYOD is something to manage, not prohibit. Manage talent for retention. The Cloud has precipitated a competitive market for talent. Be prepared to hire and develop the best people you can find. Moreover, the Cloud is a service business, and a service business has distinctly different needs from a product business. Talent acquisition and retention should target innovative, collaborative and customer-centric service values. IN CONCLUSION The overall transition of new IT to the Cloud is accelerating. Every week that passes makes the learning curve more challenging. Yet those challenges can be surmounted, as our examples of best practices have illustrated. Those business and technology challenges affect both pure-play startups and established on-premises ISVs transitioning into Cloud-enabled environments. And their impact is often felt most keenly in combinations, as meeting Executive/Financial challenges can restructure Organization and Culture, as Technology challenges can impact Partnering and Alliances and as Sales and Marketing challenges can transform Operations. When we boil down everything that ISVs have learned about building toward and transitioning into Cloud business in the years up to this point, we are left with the following: Managing a Cloud business solution is not like managing on-premises software; The nature of the solution and the ISV s resources will dictate critical choices; It s not just Cloud anymore - the boundary-free business and IT environment matters most; and Synergy is critical and not just technology synergy. As we observed above, in discussing Executive/Financial challenges, the correct way to view any business and technology Cloud transition is as a series of organically-interrelated activities. Each organization will find its own formula, stemming from the kernel of its business value proposition, but no organization can afford to overlook any of these challenges, as the whole will suffer keenly from a failure of attention to any one of its constituent parts. About This Research This independently developed research was originally published as a deliverable of Saugatuck's Continuous Research Services (CRS) subscription research service. Progress Software has been granted the right to reprint and electronically distribute this article through its website, as well as through various -based marketing initiatives, through May 31, Entire contents , Saugatuck Technology Inc. All rights reserved. Opinions reflect judgment at the time and are subject to change Saugatuck Technology Inc. 17

20 SAUGATUCK OFFERINGS AND SERVICES Saugatuck Technology provides subscription research / advisory and consulting services to senior business and IT executives, technology and software vendors, business / IT services providers, and investors. Our Mission is to help our clients make better business decisions and create new business value through trusted and objective insights into the key market trends and emerging technologies driving real change. Over the last few years, this has included a major focus on Software-as-a-Service (SaaS), Cloud Infrastructure, and Social Computing, among other key trends. CONTINUOUS RESEARCH SERVICES (CRS) Subscription research / advisory services that provide independent / unbiased analysis, insights and guidance into the most important emerging technologies driving change in business computing. We are experts in Cloud Business and Cloud IT, among other key market trends / technologies - with a balanced view that is valued by both providers and consumers of technology-enabled products / services. USER STRATEGIC CONSULTING SERVICES Leadership and Planning Workshops Strategy and Program Assessments Vendor Selection / Evaluations Cloud Transition / Migration and Mgmt Best Practices VENDOR STRATEGIC CONSULTING SERVICES Market Assessment Strategy Validation Opportunity Analysis Positioning / Messaging / Go-to-Market Strategies Competitive Analysis THOUGHT-LEADERSHIP PROGRAMS Custom research programs targeting key technology and business/it investment decisions of CIOs, CFOs and senior business executives, delivered as research reports, position papers or executive presentations. VALUE-ADDED SERVICES Competitive and market intelligence Investment advisory services (M&A support, due diligence) Primary and Secondary market research. To learn more about Saugatuck consulting and research offerings, go to or Chris MacGregor. While there register for our complimentary Research A lerts, which are published on a weekly basis, or visit our Lens360 blog Saugatuck Technology Inc. SAUGATUCK LOCATIONS: US Headquarters: Westport, CT Silicon Valley: Santa Clara, CA Germany: Wiesbaden, DE