IT vendors are all addicted to the subscription model, but can it survive an economic downturn?
Subscription has been the consumption model du jour for some time when it comes to software. In the cloud era, we’ve seen software subscriptions explode. This includes subscriptions for cloud infrastructure from Amazon Web Services (AWS), Microsoft Azure and the Google Compute Platform. In more recent years, traditional infrastructure providers like Cisco, HPE and Dell have also come on board. The reasons for that are various, but the biggest is a reliable and repeatable revenue stream. The other reason is that value has moved from hardware to software to control infrastructure, ie the “software-defined” movement.
Demise of data centre is premature
Cloud proponents have for years predicted the demise of the data centre, with every application being ‘cloudified’. This pie-in-the-sky prediction was always just a dream, but enterprises moving some mission-critical applications to the cloud has been undeniable. Not software as a service like Salesforce, which was born in the cloud, but applications that used to reside in the enterprise data centre. But what happens when economic times darken, and the accounting department starts hunting for expenses to trim?
We have not had an economic downturn in the cloud and subscription era. In the past, companies saved money during economic downturns in two essential ways, by piling up technological debt and by increasing the amount of risk to the business they were willing to bear.
Debt and risk
Technological debt occurs when companies put off normal upgrades that occur during the life cycle of a piece of software or hardware. Small patches get applied, but the plan for a big version upgrade get delayed until conditions improve. Infrastructure hardware like servers, storage, and networking equipment scheduled for replacement is left in place for a few more years. On the risk side, equipment is taken off vendor support, which often can cost up to 20-25% of the product’s original price per year. Sometimes as a hedge against risk, IT departments would even buy used equipment and keep it on the shelf as a replacement. In some instances, companies would even instantiate small software coding products to replace a planned off-the-shelf purchase, with an eye on retaining developer talent they were already paying and saving money.
But in the cloud and subscription world, all the old tactics are not going to work. If you stop paying your AWS bill the applications that reside in that environment are simply going to stop. Your fancy new cloud AI-based security needs to be fed money every month. The infrastructure you have in your data centre …. well much of that relies on subscriptions for the control and management systems that save so much time. The old tactics are not going to work.
Frank conversations with IT vendors
So, what do you do? Pull applications back to your data centre? Push farther into the cloud, as the mantra for the cloud has always been that it is cheaper, despite the eye-watering monthly bill from your cloud provider. For every company, it will be different. For companies that are expenses sensitive, it may make sense to try and reduce cloud spend by moving applications to your private cloud. For others, capital outlay may not in the cards due to accounting practices or excessive technological debt in the existing data centre. For them, re-negotiation with the cloud provider to lower may be the way.
The takeaway here is that enterprises need to think about what can be done in the event of an economic downturn. This must include having a frank conversation with all those IT vendors you pay every month. Knowing what they can and cannot do for you, what their plans are for customers who need to shrink spend is important. Are they going to defend every dollar? Or are they going to work with you, lowering rates temporarily until the storm passes? It is also important to know your options vis a vis their competitors. If your favourite cloud vendor can’t or won’t work with you when times are tough, do you have an alternative available? In many ways, planning for reduced spending is a lot like business continuity and disaster recovery planning. Nobody wants to talk about it, it is not glamorous and it engenders a certain anxiety. But this planning can and must be done with the involvement of accounting and senior management. Economic downturns happen and being prepared can provide differentiation between you and your competitors.