Cloud computing has become a ubiquitous term inclusive of everything an IT services organization can provide. From storage space to processing power, CRM systems to email managers; a cloud service provider can be anyone, with any portfolio of technology assets, delivering consumer driven services to the largest of enterprises down to individual subscriber. As the global economy has emerged at different rates from last financial crisis, cloud services assume a greater significance in the revenue portfolio of IT organizations. As an industry, we now grapple with cloud financial models elevating very familiar and fundamental challenges: value vs. volume, profit vs. margin.
Cloud service providers (CSP) are constantly facing new challenges in today’s IT landscape, the most daunting of which effects both innovation and revenue: Elastic Demand. On the consumer side, businesses are increasingly opting for a need-based purchase model for most if not all of their IT requirements. This means that they no longer want to spend in advance for their future technology needs nor carry the technical debt of operating that platform to its end of life. The implication of this pattern dramatically effects CSP’s revenue realization tied to larger ‘sign up’ fees early on for revenues nor premium service assurance as a platform ages. In fact, as customer preferences change, they might opt out of the service before the provider is able to realize adequate returns on the investment for initializing services.
Many CSP’s initially looked to familiar financial arrangements to engage cloud consumers; service contracts with discounts for minimum service levels and length of contract. This model still produces and upfront fee with an extended cost for subscription. This worked well when consumers were slow to make changes in their IT landscape. Large corporate consumers today are becoming averse to paying such upfront fees for service contracts and are instead opting for fee structures directly based on consumption or usage from time of service initiation to termination. This is the core challenge for CSPs facing an enterprise asking for pure elastic demand of IT.
The problems for the service providers get compounded as they look to the individual consumer with their service offering as an expanded market segment. This is because the consumer space is typically characterized by demand seasonality - phases of peaks and troughs. This elasticity demand by corporations and wanted by the public, is putting much more risk on the CSP due to changes in customer tastes, number of users, etc. This trend will most likely get worse for CSP as companies to consumers will also experience shorting buying or revenue cycles themselves, thereby wanting to pass even more real time purchase pressuring for elastic services on to a CSP. This means dark clouds ahead for CSP as they take on a greater risk related to talent acquisition, capital expenditure, equipment purchases, etc. all in the name of meeting the demand elasticity for both price and performance.
However, if organizations are alert to the changing scenario, challenges stemming from need-based consumerism can be transformed into revenue generation opportunities. The need of the hour for cloud service providers is to overcome the challenges associated with today’s need-based consuming patterns. Automation, IoT, AI, M2M, machine learning and Analytics could all help answer the questions of deployment and performance.
The question that needs to be answered is that will cloud service providers be able adopt both technologies as well as strategies to maintain a healthy level of profitability and risk even while keeping-up with increasing customer demands? Do share your thoughts in the comments section below.