As I write this, I’m approaching it from the perspective of someone who observes and is part of the evolving Microsoft Partner ecosystem and how Microsoft is evolving their product and service offerings with the recent launches of Windows Azure and previously BPOS (which we use exclusively for our email / collaboration etc).

I have interest in their success (and Microsoft’s) as we collaborate with some of the established partners as part of the specialist services we offer at Knowledge Cue. I also have customers who are using IT services from these partners who provide compute, storage and network services from on premises data centres or the customers themselves have significant investments in hardware and software to establish and run computational infrastructure themselves. 

Your perspective will significantly influence how you view these developments. For instance, my standpoint is that a large percentage of the IT industry discussed below revolves around the sale, deployment, and maintenance of Microsoft-based systems. I’m not delving into specific vertical applications (e.g., Xero or other SaaS products) or considering the impact on companies focused on non-Microsoft technologies—although I’m sure they too will be affected.

Evolving (Business) Models Enabled by the Cloud

The cloud represents one of the most significant shifts in the IT ecosystem since the mainframe market transitioned to the PC market of today. While I don’t think it will be as monumental as the mainframe-to-PC transition, it will likely be the most significant change since then.

Let’s look at the business models that are possible with the cloud. Currently, there are potential six viable business models in the cloud (as far as I can see):

Consumer

A consumer in this context is someone who creates an application leveraging cloud-based technology to offer a solution that customers are willing to pay for. A good example is Xero. While this is the focus of many entrepreneurs (startups), I won’t elaborate further beyond stating that I believe this is where the cloud offers the most potential.

In this context Knowledge Cue, which is a consulting services business is a consumer (rather a paid subscriber, but you get the gist) of Xero and it’s a no brainer for us to use this to run our business. Even our accountants love it.

Consultant

The consultant I envision here is someone well-versed in cloud technologies, the opportunities and cost savings they provide, and who sells their expertise to help customers develop a cloud strategy. An example here is we provide specialist consulting on how to realise platform value of SharePoint, so we are SharePoint consultants.

In my view, this role is valuable while there’s still uncertainty and a general lack of understanding about the cloud and its implications. However, within a few years as people acquire skills, the basic cloud consultant role may become obsolete.

You might argue why/how could that be, I say this because as the IT industry gains a better understanding of the cloud, consultants may no longer offer substantial value for money compared to in-house architects, who will likely be capable of handling these tasks themselves. As companies with in-house expertise are more inclined to hire consultants, this opportunity may diminish. See my previous post re “Elite Skills” – major cloud providers will drive skilling so more people will be able to leverage cloud. (It’s in their interest to do so and rightly so)

Reseller

A reseller is someone who markets the services of a cloud provider. This role can be likened to the cloud equivalent of a procurement specialist. While this might seem like an obvious entry point, the financial rewards are limited. For instance, Google apps resellers earn approximately US$10 from every US$50 annual sale—a healthy 20% margin. Our friends at WaveAdept do this as well as a few niche players. For comparison, Microsoft resellers earn 18% in the first year and 6% for the subsequent two years. (We are thinking of diversifying into this but not sure)

This may sound appealing but consider how many users you would need to sign up to make a modest living of, say, US$40k. With Google apps, this means signing up 4,000 individuals. Before you rush to draft a business case, keep in mind that this is a commodity market. Expect prices (and your commission dollars) to decrease year after year, meaning your customer acquisition requirements will increase significantly over time.

Implementer 

Implementing cloud-based solutions presents a twofold opportunity. First, there’s the opportunity to migrate customers from on-premises solutions to cloud-based ones—such as moving from Microsoft Exchange 2003 to Microsoft Exchange Online (or a similar competing offering). Or leveraging compute resources for SharePoint which is quite significant but there are complexities with this. (Probably a different post for this entirely as the market evolves)

The second opportunity lies in migrating customers from one vendor’s cloud solution to another. I have seen considerable interest in this area recently (mainly for Email / Collaboration), but generally, once a customer is in the cloud, I would expect it to be challenging to migrate them out of it—even to a competing solution.

If your business depends on implementing solutions, you shouldn’t expect much repeat business. Once a customer has migrated, they typically don’t require ongoing server maintenance, licenses, or hardware procurement and won’t be asking you to upgrade them because that’s handled by the provider—without needing a System Integrator. In other words, once a customer has moved to the cloud, your role diminishes significantly, as their IT requirements are much lower and largely independent of the implementer—at least for that specific solution.

Arguably there is an opportunity to drive automation of value add services. That will require some changes in thinking plus a different skill set.

Provider 

A cloud provider is a company that hosts servers and offers a product-based service to customers. Google, Microsoft, and Amazon are prime examples of cloud providers, along with several other companies. Today, many organisations have invested in data centres and plan to leverage these facilities to become cloud providers. This approach makes sense as a way to capitalize on existing investments and capacity. Locally I think that as demand increases some of the bigger providers will find an addressable market if the investments are made at the right time. (i.e. Now?)

However, the long-term outlook for this model is (probably) not particularly good. Being a serious cloud provider involves significant risk and cost. Providers bear the expense of power, cooling, space, hardware, software, and technical expertise to keep their solutions running—all the things that customers used to pay for. Plus factor in the need for multiple redundant options—if a data centre in one location is compromised by an earthquake (a real risk in NZ), fire, or other disaster, your customers will still expect their businesses to keep running—even if they are in a different city or country unaffected by the disaster. Additionally, pricing for cloud-based solutions will be driven by the companies with the scale to do so—the big players—and the trend will likely be downward. Over time, the cost of being a provider will increase (as your customer base grows), but revenue per customer will decrease. This will impact all providers—large and small alike—but the larger providers will be better equipped to weather the market’s fluctuations of demand vs supply.

Over time, I believe that being a cloud provider for core solutions such as email, collaboration, infrastructure, and platform will become a “commodity platform game.” Ultimately, I expect a small group of large companies to provide 80-90% of these cloud solutions, leaving a declining market share for others. This trend will be driven by the scale these companies can achieve and the expansion of data centres by current big players to meet their customer distribution (and demand).

Currently, there is a short-term opportunity in verticals like government, but over time, the major players will likely dominate these areas as well (for example, Microsoft recently announced a government-only option in the US).

I expect smaller cloud providers will either be acquired by larger companies (primarily for their data centre presence or customer base) or will struggle and, in some cases, fail.

Combinations

For companies that currently provide consulting, procurement, and solution implementation for on-premises software, expanding into the cloud might seem like a natural progression. In reality, this is the only viable path for IT services firms to embrace the cloud. However, as more workloads transition to the cloud (for example, email ala Exchange online), the services revenue from traditional IT will diminish. The same will happen as more and more workloads migrate to the cloud.

Companies that specialise in cloud-based services today will likely either be acquired by a larger IT services provider (assuming they can achieve critical mass with customers) or struggle to differentiate themselves from their larger competitors, potentially fading away except in niche areas.

What does all this mean?

The obvious prediction here is that as the cloud takes off and gains customer acceptance, and more and more of today’s on-premises applications go into the cloud, the IT services industry will also shrink for email and collaboration. It is highly likely that things like Calling, Meeting etc will be available on a model similar to Xero (i.e.: SaaS, Software as a Service) where customers will have the flexibility to rent what they need.

The end result is that I think business consulting (rather than just IT consulting) will be an increasingly important part of the business model of the current “status quo” IT services company. In time we may see consolidation between consulting firms like of Deloitte and PWC with today’s System Integrators or new “specialist” practices within those firms, but then there are challenges there too.

My personal view is that this transition will take several years to make, and there is plenty of opportunity to work through this transition, we (Knowledge Cue) definitely are thinking this now on how we adapt our services and add value to our service portfolio we offer, being a small outfit helps here a lot.

There are also some scenarios where customers simply won’t or can’t make the move to the cloud for various reasons such as data or security concerns. I see this to be predominantly related to govt entities that have compliance and or legal requirements. Eventually though I think that major providers such as Microsoft and Amazon will provide localised services as demand increases, to me this is obvious.

The firms that adapt quickly and strategically will thrive, while those clinging to traditional models may struggle to stay relevant. The key to long-term success in this evolving market will be agility, innovation, and a deep understanding of the unique value propositions that the cloud can offer.

Thanks for reading!