Dawn of the Consumption Revolution

We're standing at the dawn of a new era for buyers and sellers of technology, brought about by the convergence of a series of macro forces.

Over the last decade, operating an IT environment that supports business agility, profitability and productivity has become an increasingly complex and costly endeavour. IT leaders need to run business productivity and communications applications that connect their people, partners and customers - many of them geographically dispersed - all in a secure manner.

The corporate network's evolution into becoming the core trading platform for businesses brings a need for hefty capex outlays for infrastructure to support current capacity and projected growth, and the right skills to deploy and manage it. IT skills are notoriously hard to find and retain, and internal teams require relevant, regular training. Then there's the need to ensure the appropriate level of governance, and operations best practice, for your systems - how often do you perform backups? What are your guarantees for availability for business-critical applications? Running a 24/7 operation is time- and resource-intensive. Any change takes time and requires discipline in terms of structure and process.

Against this complex backdrop, business units are increasingly approaching IT with a growing list of demands, which IT teams are struggling to meet within the expected timeframes, given their existing workload and limited resources. As good as IT has become at automating certain tasks, in recent years an impression has emerged within many organisations that IT is holding back the business and impeding its agility in the market.

Feature overload

To understand how we arrived at this juncture, we need to have a look under the hood of the typical ICT environment. For the last 30 years, the majority of functions that IT vendors have sold as the 'next best thing' are never used, whether on a phone, computer or server. Technology companies have been adding features and complexity to their products at a far more rapid rate than their clients have the ability to consume them. The average effective usage rate of enterprise software is only 54%. Almost everyone uses Microsoft® Word, but how many of us use all 1,200 of the features it offers?

Until now, technology companies have sold software or hardware, and pocketed the cheque upfront. In this traditional model, the majority of their revenue for those product sales is realised at the time of the initial purchase, with some level of modest follow-on revenue activity. The onus - and risk - for extracting value from the technology after the sale lies with the IT department, rather than the vendor.

The rise of IT outsourcing has changed this dynamic to a degree. In outsourcing arrangements the service provider assumes ownership and responsibility for the client's ICT assets and outcomes, and is required to demonstrate value in order to get paid. However, oftentimes in long-term monolithic outsourcing contracts, service providers made their profits only during the last few years of the contract - by which time the IT assets had been sweated and innovation was scarce.

The rise of cloud computing, followed closely by the global economic recession changed the ICT landscape forever. With mounting pressure to do more with less, the notion of being able to buy IT as a service, in just the amounts required, when it's required, was a highly attractive to enterprise IT. Cloud gives buyers the option of paying only for what they use rather than for what they're given as 'part of a package'. It also gives them a way to cut out lengthy and unwieldy IT hardware provisioning processes and gain the benefit of per-hour pricing and low-risk initial deployments. Gone are long-term commitments. IT teams can enter into and extract themselves quickly from contracts, thereby improving their ability to support the ICT needs of internal business units.

Risk shift

While the emergence of consumption-based models for IT services has business buyers smiling, things look less rosy for technology vendors. For the first time, they're having to shoulder responsibility for demonstrating the value that their products and services can deliver. In the cloud business model, there's little revenue at the time of the initial sale. Revenue is realised over the lifetime of the client relationship, driven by the client's level of adoption and the intensity of their usage. Now, when vendors signs contracts there's no guarantee of consumption and, therefore, of revenue. There's only the potential to earn revenue, and that's directly dependent on their ability to drive high volumes of low-value microtransactions. Successful sales models in this world need to focus on driving consumption on a daily basis.

The role of services in this new business model becomes even more critical than ever. The services organisation becomes the primary driver behind a client's 'consumption' of a cloud-based solution - ensuring that clients are continually expanding their number of users and that users increase in their intensity of use. In this scenario, where lifetime revenue is completely dependent on microtransactions, the services organisation and its engagement with a client becomes the revenue-driver over the long-term.

In this new model, complexity also shifts from the buyer of IT services to the seller. Technology vendors need to figure out how to provide the capacity and orchestration to make it possible for users to consume their services, as well as the metering and billing of microtransactions, to ensure they draw revenue.

Long overdue

The ability to microtransact has huge benefits for businesses, considering the complexity of where we've come from. It's a change that's long overdue. This new consumption-based model is enabling enterprise IT to reinvent itself, and become more responsive and relevant. For technology companies, this is a wave that they need to find ways to ride - or risk being swept away.