Are software vendors about to become Netflix-like? Well, sort of

Off premises is vulnerable, while on-premises is obsolute, so perhaps its time to combine these two models into one, says Artjoms Kascejevs, business development manager at Comarch

March 2, 2021 | Comarch Finance

These days, there are three main software delivery models on the market: out the box, off-premises, and on-premises. 

In the out of the box delivery model, the user buys a disk containing a software distribution kit and installs it. Simple as it may seem, the main disadvantages of the model are: the need for a machine that’s powerful enough for the software to run, free disk space requirement, and the lack of access to the software from devices other than the said machine. The advantages are data storage on personal servers and minimised risk of data leaks.

The off-premises model, often referred to as “software as a service” (SaaS), is based on the cloud. It has become a real breakthrough. Users no longer need to install .exe files on a piece of hardware since all left to do is to log in to an online platform and pay a recurring subscription fee. The best part is no software licenses, databases, workstations or network devices to worry about. In turn though, there are data leaks and data control issues, as well as connection issues too.

The on-premises model stipulates a subscription payment, and data storage on personal servers, so it’s kind of like 2-in-1 deal. You need to own a server or rent one. This model provides the highest level of corporate data security or uninterrupted data access, even with no internet connection. However, the the need to maintain the IT infrastructure is an issue.

The makeover

The on-premises model remains an established standard for complex IT solutions. It is common for on-premises software to have the following pricing architecture:

  • Implementation: cost of installing and implementing software
  • Integration: cost of integrating the software with client systems and applications, likely to be higher than the cost of software itself
  • Licensing: fees paid by the client for using the software for a defined amount of time
  • Maintenance: cost of repairs and changes made to the software after it had been delivered

For an on-premises IT provider to recreate the Netflix model, it would have to compensate the implementation, integration and maintenance cost with licensing cost. The license-related payments could then evolve into subscription-based model with an option to subscribe any time.

That’s very attractive in theory. However, in practice, it’s nearly unachievable due to extremely high operational risks:  

  • Moving to the on-premises subscription model would make a perfect sense for software vendors allowing them to offset subscription-based costs with subscription-based revenues and provide better financial stability for the company. The catch is, only the vendors with good liquidity will be able to live through the period when one-time sales drops and subscriptions only start rolling in.
  • In the on-premises and perpetual license model, an IT company can maximise profit in one shot, at the moment when software is sold to a client. While in the off-premises model, there is a risk that the client leaves without the company reaching a breakeven point in terms of revenue.

The IDC expects that by 2022, 53 percent of all software revenue will be purchased with a subscription model. It’s conceivable that the subscription business model will become a norm for different kinds of IT products. IT vendors must think now about different ways of how to go about it.

Hybrid approach as leverage

The main focus of the hybrid approach is the combination of the on-premises and off-premises software, highlighting the importance of the intensively evolving SaaS model.

IT companies whose business is largely scalable and consists of selling and upgrading their own software will take on some business characteristics from service companies. Such organisations will gather the necessary skills related to software development under the same roof. That spans integration, system configuration, and most importantly, comprehensive business and market knowledge of their clients. This will allow them to experiment with the off-premises model for some of their products – or product modules – without removing the on-premises model.

The hybrid approach acknowledges that customers are interested in the on-premises feeling of security but at the same time are interested in SaaS delivery and billing. The value proposition here consists in the fact that they will be able to change both ways between the physical infrastructure and the cloud when their needs change – without losing historical data and business configurations.

New clients, new horizon

By adopting a hybrid model, IT companies will have an opportunity to create new self-onboarding channels and attract new clients – those who would not consider on-premise version due to high entry costs. In the self-onboarding scenario, clients don’t need to communicate with sales for getting access to a certain IT product. Of course, it does not mean that direct and indirect sales can be forgotten. The more complex the product or the service is, the more the company will have to rely on its salespeople.

To keep the client for life, the company will naturally adapt a long-term partnership positioning and invest in a product or service tailored for maximum client satisfaction. And as the SaaS products are much more affordable at the entry point, there is a great opportunity to develop the offering for the entire lifecycle of the client.

IT vendors showing the highest flexibility in their different delivery propositions and subscription policies, and proposing entire ecosystems around their products will remain competitive in the long run without completely reinventing their business strategy – or going directly all-out SaaS.

Many IT vendors for corporate software transition throughout a hybrid stage on their way to become SaaS providers, thus approaching the Netflix model in the medium-term. Comarch is not an exception.

For maximum flexibility, the Comarch Factoring platform is available both in the on-premises and cloud versions. 
Author: Artjoms Kascejevs, business development manager at Comarch

 

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