Seeking Alpha
Profile| Send Message|
( followers)  

For everyone in the U.S., Labor Day weekend represents the spiritual end of the summer. It is also a time when many of us sit back and take stock of our lives and the world around us as we prepare to re-enter the regular work routine.

The first thing to be said about the current state of our world is there is nothing routine about it. Obviously, the economy has had a major impact on the business environment and everyone’s psyches as well. But, even if we are fortunate enough to see an uptick in the financial climate as we approach the last quarter of the calendar year, I believe the rapid migration to cloud-based services will continue to accelerate and fundamentally transform the competitive landscape of almost every industry, including the public sector.

Although I remain a vehement proponent of the cloud computing and on-demand services movement, I also have growing concerns about the long-term impact of the commodization process which this trend is producing. As Tom Foremski blogged on ZDnet in June, the Internet devalues everything it touches.

I think this reverse alchemy is already having a detrimental effect on the SaaS and broader cloud computing market, either pushing down prices or putting an artificial cap on price levels. The price sensitivity of this market is due to three forces,

  1. Customer perceptions of value are declining.
  2. Technology advancements are reducing the operational costs.
  3. The proliferation of players is creating greater price competition.

Given these realities, who will be most likely to sell the value of their solutions and avoid the death spiral of commodization in the cloud?

Here are a few candidates:

  • Strategic vendors who offer end-to-end solutions or multi-dimensional portfolios. Customers will pay a premium price for the convenience of obtaining a set of solutions from a single source in an integrated fashion.
  • Brand leaders who offer the promise of long-term financial viability and potential of a broader portfolio of solutions (organic or third-party) over time. Customers will gravitate toward proven vendors who are unlikely to disappear in an industry shakeout even if their solutions are not market leading.
  • New Breed SIs/VARs who can cobble together cloud computing components or cater horizontal SaaS apps into industry-specific solutions. Appirio is the premiere player in the cloud-based systems integration arena. Veeva Systems (formerly, Verticals OnDemand) is a good example of a new breed VAR who has reconfigured salesforce.com’s CRM solution to satisfy the unique requirements of the pharma industry.

The strategic vendors and brand leaders may be one and the same. They may also be many of the legacy vendors who might have been late to the market but benefitted from their timing, tradition and being able to tap an existing customer base. What these companies have learned in many cases is how to make up for their technical deficiencies by offering stronger customer support capabilities. (You can read more of my views on this point in Ecommerce Times.)

While some traditional HW/SW vendors may be able to survive the on-demand services and cloud computing movement, I don’t think traditional SIs and VARs will be so lucky. They are too costly and cumbersome to succeed in an increasingly streamlined sector.

I hate to say this during Labor Weekend when we are celebrating the achievements of workers, but it is no secret and it is not news that the value and relevance of many workers is disappearing. This includes tech engineers, consultants and salespeople boasting old-world skills and high salaries.

Therefore, labor-intensive SIs and IT/business process outsourcers (BPOs) along with legacy system/software-centric VARs are at risk in today’s rapidly shifting world.

Ironically, more streamlined SIs and VARs who leverage a new generation of web-savvy workers may be in the most advantageous position to capitalize on the SaaS and cloud computing opportunity. This new breed of worker will not only have the right technical skills, but will also possess good analytic and people-skills to understand how to cater today’s cloud computing and SaaS capabilities to the specific business processes. But, in order to be effective, they will also have to be backed up by an efficient, cloud-based operating environment which also leverages the best attributes of SaaS…ubiquitous access, information-sharing, agility and scalability.

So, as the differentiation between various horizontal applications diminishes, it will be those SaaS and cloud computing companies which offer the most specialized skills and strongest customer support services that will attain a competitive advantage.

The baton has been passed to a new generation of workers and SIs/VARs with new skills and business models which can address a different set of technical complexities and deliver a new set of solutions in a more rapid and cost-effective fashion.

Unlike the cliche of the gold-rush era that those who sold the shovels got rich while the prospectors went home poor, in today’s ‘cloud-rush’ the tools vendors may not do as well as the tour-guides…the new SIs and VARs.

Source: Avoiding the Cloud Computing Commoditization Death Spiral