Now that we understand what the cloud is, the types of cloud services, the difference between true cloud and hosting, why true cloud matters greatly, and how it makes you nimble, the inevitable question is, how do we get there?
Or, to use our question from our last article, how do we get to say, “YES”, to the customer who offers us $500,000 – or $5MM – if we are ready to run tomorrow?
Unfortunately, you cannot answer the question in just one short article, any more than you can get there in a month with some small changes. We can, however, give a short overview of what needs to be in place for you to have a true cloud offering… and all of the nimbleness, responsiveness, margin, speed and valuation benefits that come with it.
Everything will be different.
There is no aspect of your business that runs the same as an on-premise or hosted company as when you are a cloud company. Perhaps your janitors, or the bathrooms, or maybe the coffee machine and elevators… and even those, in the end, will change.
The very reason for that change is because you are no longer in the same type of business as you were before. Indeed, the overriding principle, and one that most companies or executives coming from products often forget, is the following:
Cloud companies are not product companies; they are services companies.
How deep does this run? To the very depth of the company itself. Let’s look at various areas of the company, and how they operate differently.
Products company differentiate and sell their products based on features. You buy Microsoft Word (or not) instead of OpenOffice or Mac Pages because of its features, its capabilities. Yes, some services matter, such as delivery time and customer support, but these are all within limited bounds.
Services companies differentiate and sell their offerings based on operations. Indeed, the customer is paying you to operate their products for them. There is a certain baseline of feature customers need to do the deal. But beyond that minimum, it is all about the operations.
In the cloud, operations win over features every single time.
Let’s say you are in the market for an online payroll system. Company A has amazing features, but has issues with stability, or perhaps has maintenance windows every evening. Since you are running your fast-moving company, you don’t always have time to run payroll during “normal business hours” – if you even remember what “normal” used to mean – so their lack of availability often hinders you. Company B has far fewer features, perhaps its 401k match requires a separate form, or employees cannot retrieve their pay stubs via integration to your internal HR, instead needing to go to a separate Website. But Company B’s system runs 24x7x365, and never goes out for maintenance.
No matter how important you may think HR system integration is, you are going to pick Company B. Your customers for your cloud service are no different.
A product manager for a cloud offering needs to be extremely well versed in the nuances of operating a service, service levels, availability, competitive offerings, even non-competitive offerings that set the bar, and need to be able to work extremely closely with the people running the service, not just the people designing the product. This is a completely different kind of product manager.
In the section on product, we already described how it is operations, and not features, that determine whether or not customers purchase.
As a marketer, this same principle affects how you appeal to your customers, how you get and measure market share. Should you tout your product’s great features? Sure. But always remember that a customer will come to you because they want you to run it for them. Your primary appeal isn’t features or capabilities; it’s making their operating costs and headaches go away.
On a more strategic marketing level, this may completely change who your customers are. If your product required a team of 5 over 3 months – or 15 person-months – to install on each customer site, it is highly likely your typical customer was a large enterprise. On the other hand, if you can offer it without any custom install at all – something that is possible with true cloud but not with hosted – then you can open up the midtier market as well. You can target non-consumption.
There are plenty of enterprises… but there are many times more small and midsize companies. Your entire market may change just by virtue of being in the cloud. Your marketing will have to adjust not only how it appeals, but to whom it appeals.
Which leads to…
In the product business, your sales team earned some level of commission based on deals, and measured its output by new logos or bookings. In the cloud world, customers may commit upfront but they rarely pay upfront. It is the lifetime value of the customer (CLTV) that matters, not the value of the current deal. Further, often you will not be paid the first year’s price upfront, but instead throughout the year.
- How does this kind of deal impact a customer’s budget? Do your salespeople know how to manage it?
- How do you compensate your salesforce in this environment?
As the marketing department leverages cloud to open up new markets, does your sales force have the right structure to handle different kinds of customers with different profiles and sales cycles?
Cloud has great margins, an incredible ability to scale, great strength in opening up new markets… but the cash flows can be challenging. In order to support your first 10 customers, you need to deploy all of the servers, databases, software now, you need to engineer and build the product now, and yet you do not get paid until the deal is done, and not upfront at that.
Expenses upfront + revenues over time = cash flow crunch
- Are you prepared to handle that type of cash flow environment?
- Can you measure the health of your cloud business correctly?
- Can you finance your way through growth?
- Are you reporting correct leading metrics for growth, so your investors know how successful you will be going forward, rather than how successful you were last year?
- Do you know how to value your company using cloud metrics?
The nice thing about great finance people, like great engineers, is that they are flexible and smart enough to make the transition fairly quickly. Cloud, however, still requires an entirely different financial mindset.
Most business love professional services. Who wouldn’t like an additional 15-25% of revenues, your own people inside the customer, lots of customization that makes it hard for them to leave? For product companies, the professional services arm is a great asset (if it is run well, at least).
Cloud companies are all about operations and speed. You want those cloud margins to give you profits, and you want that cloud speed to respond quickly to customers. In that sort of environment, professional services has two big drawbacks:
- You are absorbing the ongoing cost of operating. Every customization means additional complexity and higher cost.
- You want to move quickly. Every customization means additional time to deploy initially, and to test and apply every change.
Your number one priority is to reduce customization to keep your operating costs down and speed up. In that environment, professional services is a liability. To many, this may sound like heresy, but it is a liability.
Not all liabilities are bad; we all carry liabilities on our books. The question is how large a liability is acceptable.
In the ideal cloud world, professional services are 0% of your revenue and 0% of your costs (it doesn’t help if you give it away for free, thus 0% of revenue, and still have its costs!). However, we all operate in the real world, where some amount of customization may be necessary for some large customers. Each business is different, but as a reasonable rule of thumb, a cloud company’s consulting revenues that exceed 13-15% of total revenues is a red flag. And, yes, investors will look at that as well.
Even that small amount of professional services you do needs to be viewed as a burden. Instead of solving customer problems as quickly as possible, your consultants need to work closely with product, engineering and operations to identify every productizable item on the list. Everything should be given, in descending order of priority, one of:
- A pass to engineering, so it can be come part of the product.
- The boot to the corner.
- A reluctant nod and implementation
- Do you have the right kinds of consultants who can do this? Most are driven either to maximize consulting revenue for the firm or minimize time to customer delivery.
- Do you have the right VP Professional Services? It takes a certain kind of person to run an organization that is crucial to the business yet a liability, all at the same time.
- How do you compensate your consultants? If it is on consulting revenue, you are motivating them in a product fashion, not a cloud fashion. Expect a further drag.
Yes, even Human Resources is different.
- You need to hire a different kind of person across the company, one much more attuned to services, 24x7x365 and rapid changes.
- You need to compensate differently. We already looked at sales, marketing, product and professional services, but it is across the board. We will look at the technology organization in the next article.
- You need to provide support for a global non-stop workforce. The idea of a “business day” disappears.
Your technology team is as dramatic a change as the rest of the company, perhaps even more so. We will explore the changes to the technology team in the next article.
Running a cloud business is completely different from running a product business. Everything will change:
- Your services will be purchased because of how they operate, not because of features
- Your people and incentives need to be different
- Your cash flow and income behaviours will be different
- Your metrics will be different
- Your sales process will be different
- Your professional services will be different
- Your marketing – and your market itself – will be different
- Your product management will be different
Have you changed all of these to get to the cloud? Do you know how to structure them all together to grow a cloud business? We can help you get there. Call us.