By Sramana Mitra, guest author Shaloo Shalini, and Bhavana Sharma
Thus far as part of our Thought Leaders in Cloud Computing (TLCC) series, we have been exploring different pricing models that are in vogue when it comes to adopting cloud-based solutions. We have seen many varieties of pay per use and were pleasantly surprised to come across a real example of ‘pay per percentage of sales’ as one of the models adopted in reality at Inteva for its ERP SaaS solution. Read on for more details on how this pricing model is structured in this part of the interview.
SM: Do you think standards or lack of standards is an issue in the adoption of cloud computing?
DH: Yes I think the adoption of standards will become even more important, especially on this integration piece. Right now we are lucky that Plex decided to go with the SQL server – open database connectivity (ODBC) type interface for its connectivity to the outside. But there have to be standards take care of such issues. I don’t want to have my team being the integration specialist and pulling out data from one system and another system, integrating it and giving it out to someone to just present it; I don’t want to do that. It is definitely that the standards be developed, be they extended markup language (XML) or whatever that can help in this integration piece.
SM: What are your preferences for pricing models in the cloud? Do you prefer fixed monthly fees or license per user, usage-based fees, fees as a percentage of revenue, or maybe fees as the function of number of clients any thoughts?
DH: Well, I have seen the named license-based model – that is a terrible model. Companies try to limit the number of users so that they can save money, and it drives the process to be very inefficient – which is the old SAP model. The model we work with right now is more of a six monthly cost-based on very close to percentage of sales. Because I have been able to lower costs and as company shrunk over the past two years with the economic crisis, we wanted to lower our costs. Now, if we buy another company and double in size, I would be expected to pay more money, but I don’t have to give in to the process whereby I need to know and work with whether I want 30 users or 3,000 on the system. I don’t have to get into that that kind of game. We can now take the best process and implement it.
SM: Tell me more about how your pricing model is structured.
DH: It is based roughly on the percentage of sales yearly.
SM: This is for your ERP system?
SM: Interesting. I have never seen that before. Is it something that you renegotiate every year to adjust to the sales figures, or does the percentage remain constant?
DH: The percentage remains constant, but it is reviewed every year to see where we are on the sales value with the previous year and then we go forward to new value. Let me give you a perfect example – here it is – we announced three days ago that we are doubling our size by acquiring a new company. We are now thirty sites and 5,000 employees. Now, if I were a SAP shop I would be worried about adding additional thousands of SAP accounts. The question for me to answer would be, Do I just work with the business we have, which is perfect? As I double in size my cost are going to go up, but as a percentage of revenue for IT spending it did not go up. We are still the same percentage. World-class in our industry is probably around just under 2% of revenues for IT spending. At this point we are running at just about 1%. Now we are not the largest IT shop in the world. As we double in size we have to add a little bit of corporate layer on the top, but not enough to change this 1%.
SM: You said that you have cut your IT costs to about a third of what they were by adopting cloud computing Do you think that kind of cost saving will continue as you keep acquiring more companies? It sounds like you are into acquisitions.
DH: Yes, I think we will. I am looking at new acquisitions, and I have already done some rough net present value analysis (NPV) on moving to Plex away from its existing system. The NPV that I see is very positive and ROI. We are talking about less than two years to implement the new ERP part to beat!
SM: Based on your estimates on use rates and patterns, what is your perspective on infrastructure as a service (IaaS)? Could it be partial replacement or a complement to your existing infrastructure? Are you considering IaaS for Inteva?
DH: Yes, I am. It would be more of complement to the existing infrastructure. The reason I say this is not because I am fundamentally opposed to IaaS. Our concern is we are a manufacturing company, so we actually have a number of manufacturing sites that are time critical, for example, we supply Mercedes with the cockpit for its SUVs in Alabama. We give a signal and within two to four hours we have to have a cockpit on the line in Mercedes. So, we have to have the system at their plant to process it. I couldn’t do IaaS and have it all off-site. Now, as far as my data center is concerned – Microsoft SharePoint, e-mail, and others – those are definitely considerations for IaaS, and as we grow as a company we will look at IaaS as a possibility
SM: What about workloads like backups and file transfers? I am sure you are using a variety of CAD files?
SM: CAD files are large files. When you need to transfer CAD files across your organization, such large file transfer functions are pieces of that are easily movable to the cloud as IaaS. Is that something you are doing already or are considering?
DH: Yes, we are definitely considering it.
SM: What percentage of the data center budget do you think will be diverted to IaaS?
DH: As far as the number goes, let’s say it would be about a third.
SM: That’s interesting.
DH: I am big believer in letting other people worry about things.