Aug 31, 2010

Bill You, Bill Me

@benkepes tweeted about Aria Cloud Revenue Adapter for VMware vCloud Director which led me to his article on GIGAOM on the topic.

I agree with much that Ben says in his article (including the fact that the industry is perceived as commoditized, the erosion of revenue by third party services layered over top, and how utility based billing is an emergent market segment) and think that he's right on the market's movement.

What I can not agree with his assessment that billing is a "non-core function". This really shouldn't be the case; billing is core to every business' operations. Why, then, should cloud service providers have to rely on third parties to provide them with a solution?

The way I see it, there are three options:
1) License a complete solution that you will leverage to provide your services,
2) License a billing solution and develop the cloud offering (or vice versa),
3) Build your own solutions.

Of course, this is a classic 'build-or-buy' scenario. It is true that buying is sometimes cheaper. However, relying on a third party's services is not without risk and costs. By some accounts and from personal experience, vendor/partner/contract management often accounts for perhaps 25% additional costs that are often not captured correctly or understood completely. Not to mention switching costs when a cheaper alternative comes along.

In the end, the decision is a financial one that considers the costs involved in the development of such a tool, and I understand that. The bottom line for me is that the billing tools should be built alongside the product offering. Many organizations could be eligible for R&D and/or HR tax credits to offset the additional expense. For those organizations that have been around a while (like VMware) it probably makes more financial sense to buy than to build. Those organizations who are new to the market should consider building while their operating costs are relatively low. (No, billing spreadsheets are NOT the answer.)

To paraphrase and echo Ben, using tools from a third party is fine if you have high margins, but these costs, however low they may be, will cut into profits faster for a lower margin product. Develop your own solution then sell it to those who can't or don't want to. See? There's a new revenue stream!

Aug 12, 2010

ROI Can be Higher in a Private Cloud

A random white paper I read used the words, "...increase infrastructure ROI..." when discussing virtualization of servers. These words are not typically used in the context of cloud based services because everyone is so preoccupied with the benefits of using the public cloud.

In public cloud parlance, ROI us usually used in a comparison of the costs to buy infrastructure vs. the cost of using resources on demand in the cloud. In private cloud vocab, ROI means just that: return on investment. So, how does an organization "increase" the ROI for capital assets? By virtualizing and adopting cloud best practices for automated provisioning and deprovisioning-in other words, creating a private cloud. If usage of the asset is increased, then the return on the initial investment can be increased as well.