Is Billing Aggregation the Nirvana in the Cloud?

If you want to buy Salesforce.com the most common way is to work out what you need in seats and the types of user, then work out the monthly total charge, multiply it by 12 to get the annual fee then add any project management work to go in and you have your first bill. Eh? You mean that despite the advertised monthly fee you actually pay annually up front?

Actually as a residue of the world of SaaS this is exactly how Salesforce.com operates. As did my company, PlaceWare. Even with a minuscule discount for cash offered, most companies paid the annual charge up front rather than pay monthly.

Here's the even dafter thing, companies buying the Salesforce.com actually accrued the charge monthly to the profit and loss account despite paying annually. Meanwhile, Salesforce.com themselves smoothed the revenue recognition equally over the 12 months for the seats while recognising any project management fee up front.

So why this difference in the cash and P&L? The old way of buying software was on the capital account - pay up front but depreciate the 'asset' over 36 months. Salesforce.com offered to not use the capital account but to pay for the software through overheads as a service while saving the cash account the extra two years. So to some extent, paying annually up front represented a positive on the cash-flow versus the old way. And it stuck.

Until now there hasn't been that many mainstream successful Cloud software offerings with the exception of Salesforce.com, and maybe NetSuite, Taleo, Workday and a few others. SaaS has kept its little notion of paying 12 months up front as a peculiar thing to software. You even get it to some extent in buying storage space as Dropbox, Box.net and others all advertise monthly costs but charge annually.

The next wave of the Cloud, where many more software packages will migrate to the Cloud, is reckoned to be offered a different way. Gone will be the days of up front annual charges but monthly invoices will be payable for all the software licences consumed by companies. Currently, firms average less then 2 or 3 Cloud based software services each in the US and that's considered relatively high adoption. Most SaaS is offered directly from the vendor and so there is no middle man reseller involved in the main. So it is easy to provision and charge in a certain way.

But the next wave could be very different. For one, it's likely to use channels to a much greater extent. Why? Because most of the new entrants into Cloud based software will be traditional software vendors migrating their offerings as a web alternative. They will most likely leverage the channels they already use to service customers and so resellers may be selling multiple SaaS offerings from varieties of vendors to lots of end users. Pretty soon, keeping track of all those licences in play will become a pretty intensive task.

But if the end users are only buying 2 or 3 SaaS offerings, why would they be worried by over complexity of bills? Might they still be happy to buy the service paying annually but smoothing the charge over the P&L monthly? In the case of larger companies that may be the case - they have deeper pockets and can negotiate harder. But SMEs will be different. For one, they are greater credit risk to resellers and vendors and secondly they have less inclination to pay up front for 12 months, is the theory. But secondly, one of the great advantages of the Cloud to SMEs is that they can smooth costs for IT as they scale rather than having pump, cash-intensive periods of investment - each incremental user is a simple additional monthly cost.

So the aggregation of bills on a consumptive basis is seen as the way forward. Companies offering billing platforms which will take all that sold licence information, storing the history and producing one monthly bill based on the amalgamation of all that information per end user is important.

Well, not actually as important as it will be for the resellers who will have to produce bills for all their customers. It's actually the layer in between which has the greater need. End users may be happy to consolidate bills as usual - after all they have multiple bills coming in from multiple suppliers already with enough staff in accounts to deal with it. SMEs may appreciate an amalgamation service but realistically isn't that what their credit cards are for?

If an SME buys its SaaS on a monthly credit card account, all the bills will be in one place with an average 30 days credit.

Resellers, meanwhile, will have tons of data to deal with and those distributors who offer an aggregated billing service will be adding significant value in the supply chain. The question is - how much will that service be worth? 

Today, if you want to pay for Salesforce.com monthly, you can get it with a finance charge through a select band of resellers or you can play really hardball with the vendor themselves and they will cave in if the deal is big enough. But will all vendors operate the same way?

What if the aggregators offered monthly billing to resellers but the resellers charged up front for 12 months? What if the aggregators bought all licences with 12 months in advance but billed monthly with a finance and service charge added? In general it means that software bought via aggregators will inherently be more expensive as the cost of the service and any finance will have to be added. This reduces the reseller margins. Some high end resellers will possibly be able to afford their own aggregation billing platform and make more money in the long run.

Most companies have not considered the transformation of billing services required to support the Cloud. Things are going to get complicated and most current billing systems do not perform well on monthly recurring billings and the burden on cash collections is heavier. Meanwhile, if cash collected is only one twelfth of the annual fee then cash-flow is hit a little harder for the reseller making that hyper jump to the Cloud all that much harder.

The end result is that there is a lot yet to play out in the world of Cloud software billing. Services like cohosting already have moved to monthly billing and cash but software has not. Will it really change or will the original SaaS vendors' models of annual collections up front pervade?

Will aggregators provide enough value to charge for their service to resellers and possibly end users? Will this new billing model negate some of the cost benefits and ROI that Cloud purports to offer over on-premise solutions? All this has yet to really play out.

However, if you run the numbers on Microsoft Office 365 over on premise Exchange or even Hosted Server Exchange, there is little or no cost benefit of moving to the Cloud. The only saving could be monthly billing and payments. Surprise, surprise - Microsoft's most popular payment method is 12 months in advance.

Either the end users are a strange lot or some assumptions about the monthly billing models are wrong. The answer has yet to be clarified.

Laptop Only Required

As a veteran of the SaaS (Software as a Service) industry, I can tell you everything is rosy until the darn Internet gets in the way. For all the benefits in the world you just need the unavailability of the Internet for a short while to evaporate the lot.

Or so it would seem. Recent studies on availability of Exchange Servers or inhouse networks show that internal network or component failure is more common than major Internet outages and it's just that they are seen as 'usual events' rather than complete failure to work. Anecdotally, how many times have you been told that a business or individual within has had trouble sending or receiving mails or lost important data or files, worse still, has had major applications inaccessible for periods? It seems that internal shortcomings of applications or networks are so run of the mill as to go largely unreported - yet the self same people who experience that level of poor internal service are the first to speak out against the advance of SaaS or the new phenomenon of Cloud Computing.

The Growth And Dangers Of SaaS

Salesforce.com is one of the major successes of SaaS and it has popularised the use of high availability centrally accessed information for particularly mobile users. As a former user of Salesforce.com, I can safely say it is streets ahead of all other dedicated applications for contact and sales management I have ever used. The beauty was that whenever I logged on I had direct access to all my information, with the latest revision of software and in the form of the application itself so I could do all the things I needed to manage my own contacts and my those of my reports anywhere in the world.

And with the growth of Mobile Broadband, it means that you can do this without the need to be static. Now you can go onsite to a customer presentation or meeting and have full access to all information needed and you can catch up and work in a coffee shop or over lunch, while updating the central database for everyone else to see what is going on.

The obvious downside is the reliability of the connection or availability of the Internet or more frustratingly, if the Vendor suffers an outage or failure at their end. It has happened - as recently as January Salesforce.com suffered problems leaving 900,000 users without access to their application and information while Citrix, Webex and others have had problems. In my particular companies, Genesys and PlaceWare (now InterCall and Microsoft RTC respectively) we had many instances of failure.


Cloud Computing is an extension of SaaS - it is also the concept of having online storage and processor power highly available, as an when you need it. This is a superb solution for small businesses who find it difficult to cope with the cost of scaling their business - particularly if you have to start flexing server, storage or licence muscles in order to cope with growth. At early stage, the cost of adding an incremental, fully kitted out user is very high in proportion to over all costs, once you have grown to a certain size, the cost as a proportion to overall costs gets progressively smaller. Equally, the cost of failure of any one component is disproportionately high or the cost of insuring against such failure. Maintenance contracts are at minimum 20% of the hardware value which typically over 3 years amortisation is cheaper to replace and this does not allow for the cost of application support.

Cloud Computing takes that strain away. With the growth in things like Google Apps, you can not only have a full suite of Office applications at your finger tips, but all the associated storage and computing power needed, anywhere in the world for a single monthly fee. It takes the hassle away of worrying about scaling as it is simple and less of a proportion of your costs, while maintenance and upgrades are taken care of and the whole system gears in size in exact proportion to your own requirements at every step - there are no sudden jumps as you go from 100Gb to 1Tb storage or requiring a new server as you hit the limit of the old one - it's all taken care of for you.

I dealt with one client in the US that had 20 staff in 20 different cities in the US allowing them to 'appear' like a national organisation and they supported the whole lot through Cloud Applications even their Accounting System and Budget/Forecasting system as well as classics like Salesforce.com. No need of an internal network or costly server, everything was hosted in the cloud complete with a hosted VoIP centralised phone system from RingCentral. Meeting me at the IOD Hub in London he showed me how he could run his business in exactly the same way from London as in California, right down to answering the phone.

I also host my Exchange server at Fasthosts who also host my web site - this means that anywhere in the world, as a small business, I have full access to a full Outlook client as if I were on my own network, fully maintained and backed up for me for a single annual cost which allows me up to 10 email accounts and plenty of storage - and it is a fraction of the cost of having my own server with maintenance and storage - plus someone to run and support it for me.

I also use Spare back up which automatically runs each day no matter where I am and backs up all files which have changed and I can restore any I accidentally lose at a single touch easily - this covers all my PCs for a single charge of £29 per year for a huge storage space that I have only used 19% of so far.

Not Just For Small Businesses

In ComputerWeekly last July, Taylor Woodrow announced they would be migrating all 1,800 employees from traditional desktop applications to Google Apps. The estimated saving to the company would be £1m over 3 years according to Rob Ramsay, the IT Director, just on Office applications. He said that Google Apps will allow Taylor Woodrow to scale up and down much more easily and in a more cost efficient way.

In these tough times, Rob Ramsay's logic is sound. Not only does Cloud Computing support expansion efficiently but also contraction. This recession has hit very hard with many industries having to lay off staff. When that happens, typically the money spent on supporting the staff lost is itself wasted or at least until the company can re-use them again. In things like Microsoft Office licences, you typically pay an Enterprise licence fee so you are stuck with the cost whether the people use the licences or not. Cloud Computing allows you to simply add up the numbers and pay for what you use only, so downsizing actually produces savings, while scaling back up for the upturn becomes a less onerous task in terms of people time and cost.

New Kinds Of Business

Cloud Computing is also allowing the introduction of new types of business. Huddle is an Enterprise 2.0 start up that not only uses Cloud Computing for its own use but uses it to deliver services to its clients, some of whom are Boots, Centrica and MasterCard. Huddle is a secure, online collaboration and networking service for companies of all sizes - not dissimilar to the likes of Citrix and Webex but it started because of Cloud Computing.

If you use applications like LinkedIn or Facebook as your contact management system, then you will understand these are also gifts from Cloud Computing as is Google Apps. With packages like Huddle, Webex, Yugma or Skype plus applications like Vonage or RingCentral or Yak.com you can have a full communication and collaboration suite at your disposal for a reasonable cost without the costly outlay for capital purchase or lease of telephone equipment and use your PC or WiFi or mobile phone as your only telecom apparatus. Accounting packages like http://www.freeagentcentral.com/, budgeting packages like http://www.adaptiveplanning.com/ or CRM packages like Salesforce.com start to complete the picture - you can have your entire business run by a single laptop, anywhere in the world for monthly charges.

High Availability, Low Down Time

The Internet has come an awful long way since the heady days when I ran PlaceWare Europe Ltd. Then Internet outages were rare but frequent enough to cause angst and doubt in customers' minds. Things have changed dramatically and now the Internet is nearly ubiquitous with the advances in WiFi and mobile broadband. As a small business, I am completely reliant on access to the web and I don't have a problem with it, being able to work offline when required and online when I need to with equal effect and a fraction of the cost of if I had to fund and maintain it all myself.

Now is a good time to consider the alternatives, whether you are a large business or small. Feel free to give me a call or drop me a mail if there is anything you would like to discuss further on +44 (0)207 193 2356 or nigel.dunn@calxeurope.com.

A Sign of The Times

If we needed a confirmation that the recession has really bitten then the news that Microsoft earnings dipped by 11% on the same quarter last year to $4.17bn for the quarter ending 31 December was certainly it.

'We Are Not Immune'

CEO, Steve Ballmer, was unusually contrite in announcing the figures and declaring that even Microsoft is not immune to the markets but he also felt 'The strength of the portfolio and the soundness of their approach' would see them through.

That soundness of approach would be the tactics that Microsoft uses to often beat customers into their way of thinking. That they make so many versions of product that are not backward compatible and got away with it has always been a mystery but the latest Office 2007 is a classic case of 'Follow - there is no other choice'. That has always been Ballmer's way and it is perhaps interesting that this is the first quarter's results since Bill Gates quit his day job, and they are not very good.

The First Cut Is The Deepest

Even more humiliating was the announcement of 5,000 jobs to be cut, 1,400 immediately. This is the first time that most analysts can remember Microsoft having to do anything like this on this sort of scale in their entire history. I am humbled to see Microsoft following my advice on cutting expense on travel though I dare say Steve and Bill are not regular readers of my blog, perhaps they got it from a friend.

The Focus Ahead

If you talk to anyone at Microsoft on the sales side, they will tell you that the pressure is definitely on, perhaps for the first time. Microsoft are not a big commission company and so they don't attract hard-nosed software salespeople but more those who are easily programmed to slip into Microsoft-speak and use phrases such as 'Selling the Office stack' and getting 'Deployment' which is reference to those customers (well nearly all of them) who have actually paid for a whole series of new versions of Microsoft licences some way in advance but have yet to actually deploy the new versions. A whole generation of Corporates will probably skip Vista, which is arguably Microsoft's biggest flop. Meanwhile, the take-up of MS Office 2007 and all the 'stack' of products inside it is a more worrying phenomenon as some time in the future it will leave a gaping hole in revenues if customers are unwilling to pay for the next set of upgrades if they are still on a version earlier than the current. That alone has Microsoft executives worried.

There are other issues as some large customers have paid for an Enterprise Licence for all products yet many departments don't use anything like the whole suite of MS products. Call Centres are good examples of this this as they use multiple, purpose-made systems which don't use standard MS products. At some point, some eagle-eyed CFO will think about asking for a credit for licences not used but to date I don't think anyone has had the guts to stand up to Microsoft.

The Cracks Appearing?

For those who have seen Microsoft virtually print money off the back of owning such a massive proportion of the computer operating system market at the desktop level, you have to ask questions as to whether the future is as rosy for Microsoft as it has always seemed in the past. Constant chipping away at security within Windows, a clumsy browser prone to failure, an inferior search engine to the market leader, Office programs that still have the same bugs in them as when they first came out, new programs that are a shadow of the performance of market leaders and a very slow drag to get into Software as a Service (SaaS) means that for the first time in a while, Microsoft is not dictating the future so authoritatively - in my humble opinion.

The next year is a big one for Microsoft with pressure at the Corporate end building, the gaming and consumer aside is also creaking. We shall see about that 'Soundness of approach'. Certainly Wall St was not convinced and their stock price dropped nearly 8% on the news.

Yahoo! - This Should Be Interesting

After a period when it seemed nothing could wrong for Yahoo! it did toward the end of 2008. It resulted in one of Silicon Valley's whizzier kids resigning and making way for an industry powerhouse, Carol Bartz. But can this software veteran turn around Yahoo!?

The End of The Yahoo! Era?

It seemed not much could go wrong for Yahoo! in the early 2000's. A steady stream of revenue announcements showed the company was growing along the lines everyone thought was the future - effectively an internet play that made its money on the marginal returns on advertising. It wasn't the only form of revenue but over time it became overly dependent. In 2008, when the global markets started to dive, this model was exposed. Yahoo! had to shed staff and suddenly Jerry Yang, once the brighest of CEO's in the Valley, was being ridiculed for his folly.

Enter Carol Bartz.

Autodesk - The Software Phenonemon

Having worked for Datech in the 90's, albeit setting up and running a specialist Videoconferencing Division within the company, I knew that Carol Bartz's name was already being revered. At one time Autodesk was a sleepy CAD company which had indeed brought design to the desktop and so had collapsed not only the price of CAD software but had also brought down the cost of running it. Soon CAD, which had always been associated with huge software costs and heavy computing power to run it, was running on Intel based PCs. It brought about a quantum shift in sales.

But under Bartz's control, Autodesk was not content with CAD only sales. Soon a whole raft of associated products hit the market that helped the company drive revenues from $300m to $1.5bn and become the fifth largest software company in the world and one of the most profitable at that.

Carol Bartz became widely respected for her hard-nosed and often uncompromising style which ensured Autodesk became one of the great success stories in software instead of being a niche also-ran. The company, situated in the picturesque Bay town of Sausalito, had a great view of the rat race of Silicon Vallay over the Golden Gate Bridge and South of the majestic City of San Francisco across the water. It remained quietly apart from the often incestuous and inbred feeling the Valley has and maybe that was a part of it's success.

Whichever way you cut it, Carol Bartz presided over a dramatic growth in sales at Autodesk and is rightly credited for her tenure there. Now she sits on the Board of prestiguous companies like Cisco, NetApp and Intel. Her resume is very powerful indeed.

The Web

There is one thing that is missing in Carol Bartz's superb success story - she has little or no exposure to the web. Autodesk was essentially an off-the-shelf software in a box company which leveraged a great deal of after sale revenue on complimentary products and services like training or maintenance. It had a very traditional feel to the sales effort and while at Datech we often talked in terms of 'How many CADs had been sold' which referred to licences shipped.

Yahoo! is very, very different. It is a 100% web 'pure play'. Classic Web 1.0, Yahoo! grew through giving away software and services to a vast web community that lapped up its email and directory services amongst other things. Now there is messenging, video calls, communities, blogs, websites and much more. The sorts of things Carol Bartz will not find are boxes of software, lots of juicy, high margin services and no third party Distribution companies to woo.

Growth or Turnaround?

Some still think Yahoo!'s current predicament is one of lacking growth - a minor blip in the upward trend that the web offers clever companies. However, there is more of a concensus that Yahoo!'s model has been the issue and that continuing in the same way will not be the right thing. Critics of Bartz, and there are a few, say that she is a CEO who is fine managing an upward trend or even an 'even keel' as Rob Enderle of The Enderle Group describes her. For him, growing a company fivefold is actually just manning the tiller. But he does have a point - Yahoo! is not just an entirely different company, it is a serious turnaround situation.

Very different from Autodesk, which was entirely in control of its operating margin by adjusting the price of its product and production, Yahoo! is a marginal player entirely dependent on the supply and demand of online advertising - and that is up the creek at the moment. Supply and demand means that pricing and margins are much more sensitive and you cannot easily change the operating costs by sacking programmers, it means wholesale redundancies as there is little Intellectual Property (IP) that Yahoo! gains revenue for - and that's the nub of the problem.

Freebie Business Models

Perhaps this was an obvious outcome of a freebie business model and we have seen the last of these. I am not so sure. I think Yahoo! went far too far down the path of earning from marginal sales and did not get some core technology it could obtain revenue from as Google has done. The giants of this space have all got a crown jewel, a black box of core technology that has to be paid for - Yahoo! bypassed that and went for an advertising biased model for which it has paid a big price.

Will Bartz Succeed?

It's a huge ask, that's for sure. It's new territory for Carol Bartz - as head of Autodesk, and even on the Board of such companies like Intel and Cisco, she has always been associated with businesses with traditional models and IP, which can shore up its profits by flexing its pricing model because it owns the technology. Not so Yahoo! - it's a different ball game.

The jury is out, but as someone who saw at first hand the company she transformed, I think the lady who shook the masculaine status quo and became one of the first female CEOs of a software giant has a great deal more up her sleeve than most think. I think she may just prove the sceptics wrong (no rhyming slang intended).

SaaS vs Premised-Based Solutions - A Shootout

The big debate - SaaS vs premise-based solutions. As the wave of SaaS increases with the recent announcement in Information Week of the largest SaaS order ever of 200,000 seats of Workday Human Capital Management Solution and in the wake of the stellar performances of such pioneers as Salesforce.com and Webex and upcoming applications like Adaptive Planning for business planning it seems SaaS is not only here to stay but it is making inroads on the likes of the giants of software like Oracle.

From a sales perspective, I have lived the dream having been the European end of PlaceWare (now Microsoft LiveMeeting). I saw at first hand the benefits of SaaS and how to sell against traditional premise-based solutions. More recently, a very prestigious headhunting firm claimed to me that SaaS salespeople are lesser mortals than premise-based ones as they command the massive, high ticket sales. Firstly, he had never sold either so it was a speculative comment and secondly I think he's wrong. The reason why SaaS is doing so well is that the salespeople are having to sell very differently and based on commercial values such as bottom line impact or long term, sustainable impact to the business rather than the technological, FUD-led selling of traditional software.

Here's a quick insight into the PRO's and CONs of SaaS - it isn't exhaustive:

PROs

* Cost of Trialing

It is easy and cheap to trial SaaS based solutions. You don't need to wait to have access to expensive quarantined networks, you can just get a few licences, choose some users and you can be up and running in a few hours at most.

* Cost of Deployment

Once trialed, the cost of deployment is relatively low for SaaS. No extra infrastructure is required, no mass software downloads from the IT department, no Helpdesk guys going around each desktop to make changes - SaaS is downloaded at login. There may be some firewall issues to solve and possibly some browser compliance annoyances but in the main, thousands of users can be switched on to the new application overnight.

* Cost of Maintenance & Upgrades

SaaS is served from the application source and delivered refreshed each time you login. This means routine bug fixes and even major upgrades can be made available to all users, simultaneously and as fast as they are made available. It means new features can be delivered faster and easier. For the application vendor, it means that, in general, most users will be on the same version and so legacy support is kept to a minimum. This helps keep costs down.

* Ubiquitous Availability

In the modern,geographically disparate world of global businesses, the idea that everyone will have the same image on their computer at the same time is increasingly unlikely and certainly much harder to maintain. SaaS means that as long as you can log into the web, your application is served to you refreshed at each login. It means you have access to the latest information while on the go and not have to wait for long downloads of new data if you are working remote.

CONs

* Ubiquitous Access

This means just that - you have to have the ability to log onto the web prior to having access to the application. While mobile computing is pretty much a reality it is not entirely ubiquitous as yet.

* Stability

One of the age old issues with SaaS is not just the stability of the application itself but the constant availability of internet access. Bandwidth fluctuations or even lack of availability of connectivity can have a direct impact on performance - still.

* Security

SaaS is hosted outside Corporate firewalls at highly secure and many times redundant hosting centres with the highest levels of security both physically and IT wise. However, this does not get over the fact that your sensitive Company date is stored on servers beyond your sphere of security and control. It is an act of trust.

* Single Points of Failure

We can argue that such points of failure are potentially ubiquitous in business today, such as a router getting into an illogical loop and needing to be reset. However, that router may reside within your network, on your premises and within your direct sphere of control. SaaS may have the same issues, but then it comes down to the performance of the SaaS provider and possibly other third parties to rectify problems and most certainly you are less in control. Further, such a single point of failure may affect multiple customers simultaneously.

* Integration and Compliance

SaaS brings huge benefits of being able to react quicker to market changes and build in new features and integrate with more applications faster. However, there may, at times, be drawbacks. Such new features may require updates to the operating system, a new release of something like messaging applications, a certain level of Office Software. Such things can, in the extreme, render the benefits not applicable or worse, even cause conflicts.

There are so many variables that it is difficult for SaaS Vendors to accommodate all, but therein lies a certain rub. In the race to overwhelm premise-based solutions, the real world can be awfully complex.

The Case on ROI

This is where the SaaS salesperson comes into their own. The cost of SaaS is an annual licence fee per user or concurrent user at best. It means that upfront costs may be cheaper than the equivalent premise-based solution but that fee is an annuity and repeats each year.

BUT, within that annual fee is all the maintenance and costs of upgrades. Premise-based solutions will have maintenance costs at typically around 20% of the seat cost per annum plus the cost of upgrades. THEN, comes the cost of infrastructure and deployment and this is where SaaS starts to move ahead. Typically, the speed and ease of deployment and lack of impact on the infrastructure will make SaaS easier on the bottom line.

One other aspect to consider - the cost of application support. Typically, the cost of support and training of users will not only be built in but actually the responsibility of the SaaS Vendor. But premise-based solutions will also have Helpdesk support and possibly even people assigned to application support; an overhead often missed off in calculations.

Each application fares differently, but the SaaS ROI and impact on the bottom line is developing a very strong case over premise-based solutions. What has happened at companies like Workday and salesforce.com is that chasm has long since been crossed and the impetus is there.

Ride the wave! I would love to hear views and actual experiences - let's challenge these views on SaaS v premise-based and ROIs from real users. Please post your comments.