Addressing Need-Based Consumerism for Cloud Services Robert Bates SMAC Architecture Group Head, Advanced Technologies & Solutions

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1 Addressing Need-Based Consumerism for Cloud Services Robert Bates SMAC Architecture Group Head, Advanced Technologies & Solutions

2 Table of contents Abstract Introduction Disappearing Upfront Fees Shrinking Top Line and Purchase Cycles Stay the Course Changing Landscape About the Author About Wipro Ltd.

3 Abstract Cloud service vendors are facing new challenges in today s IT landscape. As the global economy struggles to emerge from the financial crisis, customers are demanding need-based solutions that shift operating risks almost entirely to the service provider. Vendors who can address such demands without hampering their ROI are the ones that will emerge ahead of competition. Introduction Today, cloud can mean any of several different things -- ranging from storage space, processing power, CRM systems to managers. A cloud service provider can be anyone who provides a service to enterprise or individual clients. As the global economy tries to wriggle out of the financial crisis, cloud computing assumes a greater significance. Businesses are increasingly opting for a need-based purchase model for their IT requirements. This means that they no longer want to spend in advance for their future technology needs. The implication of this for the service providers is that they can no longer depend on large upfront fees for revenues. In fact, as customer preferences change, they might opt out of the service before the provider is able to realize adequate returns on the initial investment. Cloud computing first emerged as time-sharing of large mainframe computers in academia or businesses. Sharing of physical access and CPU time gave a greater return on investment by reducing idle time. 3

4 Disappearing Upfront Fees Traditionally, service contracts involved an upfront commitment from the client and continued service delivery from the cloud provider. However, as services become increasingly more commoditized and the market more competitive, a subtle change has come about. Clients are becoming averse to paying large upfront fees for service contracts, instead, opting for fee structures directly based on consumption or usage. The spot pricing model recently introduced for Amazon Web Services (AWS) is a typical example. Users only need to provide a credit card number to start using the cloud computing platform that includes exchange hubs and industry supply-chain services. The problem gets compounded if companies want to court the individual consumer with their service offering. This is because the consumer space is typically characterised by demand seasonality or phases of peaks and troughs. For instance, mobile phone carriers typically see a surge in app downloads around the December holiday season, but demand drops in the work months of January and February. Video game companies generally see a jump in sales around sports events, creating a significant degree of unpredictability in revenues through the year. Similarly, as blockbuster style items hit the markets, infrastructure may become overwhelmed momentarily. The last few iphones were so popular that Apple Store servers came crashing down at the time of their release. Service providers must ensure that they have the capacity to deal with such surges, but their infrastructure spending should not be so high as to make a dent in return-on investment. All this means that cloud service providers have to bear a greater risk related to talent acquisition, capital expenditure, equipment purchases, etc. They have to ensure that they can match the client demand pattern as closely as possible. If they ramp-up their infrastructure too fast then their profitability will be hampered. If they are too slow, they could invite penalties for not meeting the requirements. It is here that service partners can help offload some of the business risks. In fact, if organizations are alert to the changing scenario, challenges stemming from need-based consumerism can be transformed into revenue generation opportunities. Indeed, there is a huge, yet largely untapped, market for services that allow clients to buy what is needed, only when needed. Stay the Course To alleviate challenges associated with today s need-based consuming patterns, cloud service providers can work on ways to mitigate risks. For starters, they can diversify their business. Service providers should try to reach out to as many customers as possible and in as diverse markets as possible. Diversification can be achieved by altering the product (or service) portfolio and also by marketing existing products to new customers. Even the most popular social networking app runs the risk of become obsolete if it satisfies a very specific need. A better replacement can easily encroach upon its user base. Shrinking Top Line and Purchase Cycles Businesses are facing risks to their revenue streams due to changes in customer tastes, number of users, etc. These risks are further aggravated by the fact that purchase cycles are getting shorter by the day. Three year subscription periods are being replaced by annual or even monthly cycles, forcing CSVs to bear nearly all capital (CAPEX) as well as operating expenses (OPEX). Managing geo-distribution is another way to control risk. Cloud vendors typically provide technology stacks in partnership with other firms. They might have sub-contracts or rental agreements with such partners. By making sure that they have access to resources local to their clients, they can better manage the geo-distribution of the overall infrastructure. This can make it easier to scale-up and scale-down their business at each location. 4

5 Firms must strive to create longevity of revenue. As cost of compute continues to reduce every year, vendors can enhance profitability by making it attractive for customers to commit to longer-term contracts. Margins might be low in the initial stages because of incentives added to make the customer commit for a longer period. However, as the vendor s costs reduce over time, profitability will rise. AWS is again a good example of this practice. Start-ups will be attracted by the little upfront fees and sign up for, say, a one-year contract. This would allow Amazon to net a healthy profit over the course of the contract. CSPs can avoid long-term support commitments to keep risks at bay. In an environment where customers can come and go as they please, vendors have little to gain from offering longterm support commitments. Support, even if it is paid, generally slows down innovation. To avoid this, most CSVs only maintain one version ahead and one version behind its current production platform, decommissioning any older software. Customers must upgrade in order to continue using the platform. This is particularly relevant to the high-tech computing space for which continuous innovation is important. Changing Landscape Today s brand landscape is very different from the one 10 years ago. Consumerization of IT means votes are cast with dollars spent. Properly setting the course to deliver a value-platform can catapult a new brand to the top of the pecking order. While a poorly thought out plan can push them out of the market. The CSVs should adopt one or more strategies to maintain a healthy level of profitability and risk even while keeping-up with increasing customer demands. To shift the balance of investment and returns, the opportunity realized in both revenue and risk avoidance will need to be translated into hard balance sheet numbers for CSVs. 5

6 About the Author Robert Bates SMAC Architecture Group Head, Advanced Technologies & Solutions Robert Bates is the head of Wipro Technologies Global SMAC Architecture Team. As the principal technical advisor and lead to the Wipro Advanced Technologies & Solutions organization, Robert is responsible for advising on all service design, delivery and technology programs. He and his team evaluate and recommend co-investment customer research programs. Robert is a veteran technology leader, performance advisor and a business architect with a deep background in process and technology stacks. His technical experience includes technology strategy, enterprise architecture, operations, information management, solution/product development and process/technology selection. 6

7 About Wipro Ltd. Wipro Ltd. (NYSE:WIT) is a leading Information Technology, Consulting and Business Process Services company that delivers solutions to enable its clients do business better. Wipro delivers winning business outcomes through its deep industry experience and a 360 degree view of Business through Technology - helping clients create successful and adaptive businesses. A company recognized globally for its comprehensive portfolio of services, a practitioner s approach to delivering innovation, and an organization wide commitment to sustainability, Wipro has a workforce of over 140,000, serving clients in 175+ cities across 6 continents. For more information, please visit 7

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