Cloud Providers Must Watch Costs to Keep Customers


The cloud vs. on-premise question is shaping up to become the "chicken vs. the egg" of the IT industry. Folks in IT seemingly never get tired of discussing whether cloud-based services are more cost-effective than in-house systems, as I wrote earlier today.


As if that question isn't complicated enough, cost comparisons among the growing number of cloud-based services are now beginning to emerge, writes Vinnie Mirchandani on his deal architect blog. In light of this, implies Mirchandani, providers such as Salesforce.com may have to make changes in their own internal infrastructures to lower their costs. He says:


So, last week in our conversation with Parker Harris of Salesforce, the question came up-why would customers pay its storage costs compared to rates Amazon and now Microsoft with Azure are bringing to market? Will it need to rethink its EMC infrastructure? From there the conversation moved to whether it needed the Oracle DBMS-whether it could afford to keep passing along those costs when vendors like Zoho and RightNow aggressively use open source components.


It's a good point, one I raised about a year-and-half ago in a post in which I shared comments from Ken Bender, managing director of the Software Equity Group, who predicted SaaS providers would need to raise their subscriptiion fees, create new fees for support, maintenance and other "value-add" services, or suffer shrinking margins.


In theory, this is important for on-premise software and infrastructure providers as well. But then again, few of them tout the ease of switching systems as a selling point.


Companies that can most successfully reduce their own cost structures, and in turn pass savings along to customers, will win the cloud stakes, says Mirchandani. One expenditure he questions is the cost of hiring sales talent from industry on-premise titans. He writes:


Not sure that is smart. Because that continues to assume your competitors will continue to be Oracle and IBM. In the meantime, their future competition - other cloud vendors - are scheming how to drastically lower their SG&A.