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Thought Leaders In Cloud Computing: Mark Settle, CIO Of BMC (Part 3)

Posted on Wednesday, Aug 4th 2010

By guest authors Shaloo Shalini and Pablo Chacin

SM: Exactly. That leads me to the next set of questions related to the business models in cloud. The license software, where you pay for upgrades and maintenance, has changed with the advent of SaaS. What are your thoughts about these business model changes? In your conversations with vendors, do you see new business models emerging?

For example, I hear the notion of true utility computing where you pay on a “per user” or “per concurrent user” basis. It has been floating for a while but we are not quite there yet, right?

MS: Yes. Well, of course! You have got IaaS, where this is exactly what is happening. You really hang a subscription fee to use certain computing assets for a certain period of time. It is like getting a taxi ride. The meter starts ticking when you start using the asset, and you are charged exactly for your usage.

SM: What about SaaS, is it the same model or a variation of that?

MS: Well, no, not in SaaS. Those are on a “per seat,” “per month” basis.

SM: If you buy the seats and you are not using them, you don’t get credit for that, right?

MS: Right, that is correct. I think some of the contracts have so called “collars.” There is a certain amount on pricing that holds true if you go up and down a certain range. When you cross the range, then the pricing changes. In some contracts you can pre-negotiate deeper discounts, say if I said that BMC is 6,000 employees today and will be 20,000 in the next five years, then I would negotiate my contract to be able to capture better discounts as the company grew. There are other companies that worry about, say, What if we were to sell one of our divisions and get smaller? How is that going to work? Can I avoid my pricing going up?

SM: Basically you are saying, look at your company’s roadmap and decide which way to steer the contract?

MS: Yes, so I don’t know that is the new business model as much as it is just a contractual or pricing model.

SM: It is kind of a business model, because these kinds of flexibilities and options didn’t really exist for you when you were buying most of your technology through licensed software.

MS: Right, that’s correct.

SM: When you think about it against that backdrop, how do you calculate ROI? When you have to report to your bosses, how do you justify ROI or how do you represent ROI; have you seen any difference in the cloud?

MS: Yes, it is, in a couple of different ways. In the SaaS model, you are not buying hardware. Also, your implementation times are typically shorter. When developing a business case, that crossover point between net costs vs. net benefits should happen sooner rather than later. Implementation cycles are generally shorter than for licensed packages. A lot of it depends on whether you are looking at a three-year or five-year business case. If you think of licensed software, or the on-premise model, the longer the period once you depreciate the initial investments in hardware and the one-time cost of implementing the application, the lower the ongoing cost. In the subscription model, if the benefits keep coming, those accrue to you earlier but again, the longer the time, the higher the associated costs. So a three-year business case would look quite different from a five-year business case. Companies typically don’t look beyond three years in current times. Three years is a reasonable planning horizon. I doubt if many organizations are doing five- or seven-year business cases around purchasing SaaS applications.

SM: You just said that of course your implementation cycles are significantly lower; how do the roles of consulting firms and the folks who have been doing the implementation on behalf of your IT organizations at Fortune 500 or Global 2000 evolve?

MS: I think they all follow the money. There are vendors like with a very large, growing customer base. Also, there are also big companies like Accenture and Deloitte that would assist in implementing something like that, and then there are a lot of smaller applications where there are much smaller consulting firms available to do the work. They would partner with the SaaS vendors to provide such functionality for customers.

SM: Can you elaborate on what kind of help companies such as Accenture are providing, say in implementation, above and beyond what itself offers in the cloud today? What are some such value-added services?

MS: It would be a more fundamental or transformative look at the processes – how to transform these processes. So look at what is the complete sales force automation process or challenge here. This doesn’t necessarily hold true for BMC, but let us pick up a number here, say current average target per sales person per quarter. If it is $2 million and we want to improve that to $2.5 million per quarter, how we are going to change our lead generation process, our pricing and the bidding and so forth? Here the SaaS tool becomes an enabler to achieve such goals. Obviously, big consulting guys want to look at the more fundamental business process and how someone can re-engineer those, adapt the tool to their process. The mid-sized and smaller consulting firms are really the ones that help us to understand the tools and figure it out.

SM: You mentioned replicating data on your site and running analytics report on your site. What is the integration perspective here? Is there a great integration need and requirements to build bridges in the context of cloud along those lines?

MS: Yes, I think that’s true. One aspect of that is managing the data and the other is managing security. Single Sign-On is one of the key factors here you don’t really want users to reauthenticate users every time they move to different applications within a company. We try to avoid that. Another aspect is how real time an application is. If there are API that can open on SaaS applications, whether you can exercise those API to gather data or link other processes through the Web package on a real-time basis, or is it a batch process, where information builds up one time and there is a handshake that occurs once or multiple times during the day?

SM: Are integration projects are being done by third-party providers, or you are doing them in-house?

MS: Well, because most of the knowledge is in-house, for instance, the single sign-on is in-house. Our data warehousing tools and others are in-house. But it is actually a little of both. Vendors will come and talk about best practices that they observe in other organizations, but ultimately it is going to be a kind of partnership between the implementing vendors and your own in-house resources.

SM: What is your assessment of the costs and risks of these integrations? How do you weigh them against the cost savings and the advantages of cloud computing?

MS: That work needs to be done. In many cases, a lot of the same work will need to be done even if you bring in a licensed piece of software and implement it on your data center floor, so it is not necessarily new work in the cloud.

SM: No, it is not new work, but do you think that the costs and risks are significantly lower in cloud environment because of standardization?

MS: No, I would not say the integration costs are significantly lower in the cloud. There are significant savings in the workflows and tools (in SaaS). Those are generally pre-configured and there’s not as much latitude. When you get these constant SaaS application updates, what you really want is more discipline in the organization about avoiding customization that would keep you from leveraging those updates.

SM: What are your observations on vendors who do integration? Which vendors are really showing thought leadership and have a better understanding than others of cloud integration issues?

MS: There’s a company called Appirio that partners in this space. I think they have a lot of relevant experience in this domain. That is the one that comes immediately to mind, there are lots of other smaller companies that compete in this space.

[Note to readers: You may want to read more on Appirio on our Deal Radar 2010 here.]

This segment is part 3 in the series : Thought Leaders In Cloud Computing: Mark Settle, CIO Of BMC
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