Part 1 - Introduction - TheCloudGuy Series on Transforming your Company into Cloud and SaaS

In this series I’ll be focusing on the transformation companies need to undergo to become Cloud/SaaS , sharing my experience and thoughts on this process based on 20+ years of work in hardware, software and mostly Cloud/SaaS companies. During this time I’ve developed many Cloud/SaaS products and lead some transformations of Integrated systems (HW+ SW) to Cloud/SaaS.

?I will cover these topics:

1. Why Cloudify? An itemization of the benefits, risks, and key considerations
2. What products are ideal for cloudification and what aren’t?
3. What happens to my packet on the way up and down to the cloud
4. Born in the Cloud vs. Legacy applications : Vendor Side, Customer Side
5. Driving the Change internally
6. The Move to Subscription
7. The Market Upside
8. Risks
9. PE opportunities?
10. Summary

I’m starting with some basics for completeness, but feel free to skip to later sections

?Disclaimer: I am not affiliated with any of the sources referenced

?I’ll start with a brief history of cloud followed by the rest of the series in future posts:

1. Why Cloudify?

Background:

• The earliest of computers used Server/Client “thin” text terminals (or even dot punchers/readers in earlier times) as the?interface to a much larger machine located anywhere from in the same room to the same campus (University/Enterprise). These systems were essentially a keyboard/screen input/output device where the bandwidth needed was low. See https://en.wikipedia.org/wiki/Client%E2%80%93server_model#Early_history
• As applications grew richer, and graphical expectations grew, ubiquitous connectivity was not fast enough for Server/Client models so applications moved to the desktop vs. staying on servers and relying on connectivity. Where there was ample connectivity, like in universities, there were rich Server/Client setups with Xwindows as an example but this was not the UBIQUITOUS case (e.g. in every home). See https://en.wikipedia.org/wiki/X_Window_System#History
• With the Advent of High speed Dial-up (28.8Kbps and above) followed by DSL/Fiber/Cable high speed internet connectivity again became sufficient and processing started moving back to the Server such that in the last 20 years a majority of applications are either completely run, or largely run, in the Cloud vs in private networks. See https://en.wikipedia.org/wiki/Cloud_computing#Private_cloud
• The internet is the liberalization of Servers allowing anyone to connect through the internet tens of thousands of networks connected to each other. This is called the modern Cloud. But it’s been around for a long time

Vendor Side:

Financial Benefits for Moving to Cloud & SaaS:

• Move to Consumption Based usage provides Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR). For growing and profitable companies, as a rule of thumb, shareholder multiples on ARR can be in the 5-15x range vs. perpetual license/HW sales which can be in the 0.5-2x range. More on this here:
• https://merger.com/8-factors-driving-software-valuation-multiples/
• https://www.investopedia.com/terms/p/price-to-salesratio.asp
• Revenue Smoothing as a result of moving to a recurring payment model vs. a more lumpy income stream.
• For Example: Company X buys products from Acme Products for $600K every five years. In a perpetual model this would show up as 600K in revenue every 5 years for ACME and as a CAPEX (Capital Expenditure) spend of $600K every 5 years for Company X. Using the same dollar spend (excluding for inflation) this could be moved to an MRR model of $12K a month over 50 Months which Company X would record as an OPEX (Operational Expenditure) spend.?
• For ACME there is assured revenue of $12K/mo. for 5 years. Assume ACME has hundreds of customers each with a 5 year renewal cycle (excluding for churn/expansion for simplicity) , Acme gets to start each year with 80% (4 of 5 years) guaranteed vs. having to bring in a full year of revenue. This means even in a bad sales year ACME will have 80% of previous years revenue. Usually more. In a perpetual model this income would be far more lumpy and less smooth
• See https://en.wikipedia.org/wiki/Revenue_stream#Recurring_revenue

Faster Development cycles?

Easier Deployment

• Because there is no shipping and installation latency for cloud products, every upgrade happens instantly as it’s done once on the vendor side. This allows for reducing a lot of the delivery/packaging overhead of shipping products or even downloading/installing them in multiple environments - something that always raises the support burden due to the fragmentation of environments. With Cloud it’s one environment, secure, known, run by the Vendor for all customers.
• Faster development cycles mean more modern Agile development methods

Version Testing and controlled rollout

• As with Cloud the vendors systems decide where to route customer requests, new versions can be rolled gradually starting with a handful of customers, to 1%, 10%, 50% and 100% where the gates from moving from one phase to the next are based on reliability and quality. This enables lower risk rollouts as the rollout can be stopped and reverted at any time (this is an oversimplification but directionally correct)
• Fast reaction times:
• Another benefit of one central environment is the ability to react quickly to changes/bugs/security challenges. Whether it’s upgrading to the latest CPU’s, Storage and Software stacks or patching for the most recent security threat.?
• Data and Business Benefits
• Cloud services, depending on the user agreement, offer vendor the ability to see in real-time the use of their products and other customer data. This provides insights informing new product launches, usage, popularity of certain features vs others and more
• Having access or in some cases storing the customers most critical information provides stickiness from customers as the financial cost and/or effort of moving to another vendor can be high. Imagine moving all of your Google Drive or Drop Box data to another provider not to mention 20 years of Facebook photos/memories and posts. High Stickiness

?Customer Side:

• Instant access from just about any connected device - be it a laptop, tablet or phone - most services will work on all of these
• Regular updates without the need to install them on a local device (mobile phone apps being different but still highly automated
• Reliability and Cost effectiveness - as the compute/storage lies in the Cloud a cheap simple end device will do much of the time

In Summary for this section, the benefits in cloud for both Vendor and Customer are clear but not everything is a good fit cloudify, or at least not completely cloudify. In the next part I will explore that more.

?*** Feel free to contact me at [email protected] if you’re looking to engage with me on a consulting/advisory basis around cloudification, transformation, turnaround, growth, product strategy, VC & PE advisory, or start-up mentoring ***