To Charge, or Not To Charge: That, Is The Question

An acquaintance of mine recently commented to me that "...startups that offer freemium services are doomed to fail..." Google defines freemium as follows: "Freemium is a business model that works by offering basic Web services, or a basic downloadable digital product, for free, while charging a premium for advanced or special features." This would seem to settle the discussion, but the argument that was made was that the vendor is basically giving away the product. We see this today in various cloud service providers and especially so in SaaS providers.

Ultimately, this is true: a company with no revenue is not likely to succeed. However, a company with no customers is equally unlikely to do very well. The idea behind the freemium model is that users of the free product a) see the value of the product and decide to buy the premium version so that they are supported (freemium users may not be entitled to vendor support); or b) need access to some feature that is locked and only available in a paid subscription.

Logical, no? To an extent. Success as a vendor in this case is measured in the conversions of freemium users to paying subscribers. This metric, depending on the vendor's business plan, should be used to decide how aggressively the vendor should pursue users in order to try upselling the premium version.

The bottom line is this: customers will use a product for free, but for how long before they move on; vendors should upsell their customers and entangle them as soon as possible to avoid high freemium churn rates and to increase the conversion rate. The trick is finding the feature balance between the free product and the premium product.

Fear Rogue Workloads!

"Enterprise IT is under pressure to transform from bottleneck to business enabler. The rise of public cloud services such as Amazon EC2 have provided a clear example of what enterprise IT is expected to become: A simple, self-service on-demand infrastructure provider. IT organizations that fail to make this transformation will watch in vain as rogue workloads follow the path of least resistance to the public cloud."

How's that for using fear as a marketing tool? That was the introductory paragraph for an invitation to join a webinar on transforming the IT organization into the purveyor of on-demand services.

Of course, they're right at a certain level. Anyone with a credit card can spin up an instance and have your data crunched, client information or sensitive documents stored off your secure network, or generally in an environment that has not been vetted according to your organization's security practice.

So, how then, does one go about transforming the IT organization into a 'business enabler'? It seems to me that this same question was posed a decade ago when IT budgets were running rampant and accounted for a significant chunk of an organizations expenses.

This particular situation has arisen not because IT is not a business enabler, but because of a perceived lack of flexibility, long delivery times for IT service requests, and expense policies that, while originally robust, now have loopholes that allow anyone with a credit card to acquire off net compute power.

Any potential solution should include the following:

1. Revise IT processes to increase flexibility in meeting user requests.
2. Review IT service metrics to determine delivery times and work to reduce them.
3. Refresh expense policies to take into account this new reality and educate employees about the new policies and how they will help reduce risk for the organization.

In general, this requires an update of the organization's governance structure to ensure that its processes are adequate to manage this new technology, whether it is a planned introduction or not.

Another way that IT can help resolve this problem is to partner with a cloud services provider or identify an approved vendor for future demand of cloud based services. Of course, this requires that the organization have a more mature level of understanding of what cloud based services can offer as well as the will to adopt these services before such a relationship can be created.

Employees under pressure to perform and meet goals will follow the path of least resistance to achieve them. Perhaps management should consider clarifying employees' roles in this context as well and in parallel to all other efforts.

City of San Diego Reported to Outsource IT Services

GovTech reported that the City of San Diego is ready to outsource some IT services including help desk functions, laptop, desktop, and database server management.

Within the article, the City reportedly consolidated five email systems into one. Oddly, there is no mention of migrating any services into the cloud as various city and state governments have already. It would seem that migrating to a SaaS model, such as Google Apps, would generate a cost savings by simply reducing removing  license fees/maintenance contracts and person-hours required to maintain on-premises servers and productivity apps on upwards of 10,000 desktops and laptops.

That said, the article doesn't mention whether the City's licenses are up for renewal nor the asset lifecycle. So, it is entirely possible that such a migration is being considered. We may yet see an announcement to that effect in the near future.

More on ROI and the Economics of Cloud Based Services

InformationWeek::Analytics issued a report earlier this month entitled, "Cloud ROI: Calculating Costs, Benefits, Returns," which compares the costs of acquiring hardware and the costs of utilizing cloud based services and the associated ROI. While the basic analysis of the costs makes sense, the comparison is flawed: the difference between the two is cost savings, not ROI.

The spreadsheet attached to the report is fairly straightforward. All costs involved in the acquisition of capital assets vs. leased assets (i.e., on demand) and the related costs are listed and compared. A present value calculation is performed to show the total cost of ownership over a number of years. It is evident that cloud based services are cheaper than acquiring capital assets for the same purpose. This forms the basis for the ROI calculation but the report never actually calculates the ROI; it gives the reader just enough information to be misinformed...

To make the numbers make more sense, the report needs to add a revenue stream. That revenue stream would allow the reader to find the breakeven point. And, if there was enough time, the report could go further and examine the impact of asset lifecycle and the replacement of capital assets versus using leased assets over time. In this case we would see the economic value of using assets on demand instead of acquiring them.

The one statement, from Lew Moorman, Chief Strategy Officer of Rackspace, with which I agree is that organizations need to evaluate how to make cloud based services fit into their IT service catalog rather than whether they can save money by migrating everything into the cloud. The latter discussion is probably not going to be very productive since not all services can be or should be moved into the cloud though, financially, it might make perfect sense. IT and Finance often butt heads.

In previous posts (here and here) I discussed ROI of Cloud Based Services and how it is often confused for cost savings, touching briefly on the concept of breakeven.