This XaaS stuff is great, but, wait, what's the catch?

Blogger: JP Morgenthal

It's really difficult to be objective about XaaS when it seems that no matter what technical argument you can make against it is ultimately trumped by cost.  Yet, look at the success of companies like NetSuite and Salesforce.com; how can you argue against the model with so many customers reaping value?

It's probably unfair to lump all "as-a-Service" offerings together in this way given that each has pros and cons that are distinct.  But, I've discussed the concept of business having a Neanderthal brain, and XaaS is a great example of that brain at work.  Great technical positions regarding trust, data ownership, availability issues are responded to with the equivalent of "I'm rubber, you're glue, anything you say bounces off of me and sticks to you!"  Even worse is the vendors playing the parental role in this childish repertoire scolding the technologists for even raising these issues; admonishing them for restraining progress and being blind to the eventuality of life in the cloud. The hard-sell, if ever I've heard one.

The good news is that none of the technical arguments cannot be overcome.  Indeed, most of them can be handled through service-level agreements, legal contracts and the rise of domain-specific XaaS environments.  Still, I believe, the ardent pushback to raising technical issues stems from the fact that XaaS providers have yet to solidify the business models underlying XaaS and fear rejections at this point that may shut off avenues of funding before they even get a chance to figure out how to deliver value and protect the consumer all at a reasonable cost factor that still delivers profitability.

In this CNet piece, "The cost of cloud adoption", the author does a great job of explaining the misconceptions regarding the underlying accounting principles of XaaS, without losing the value for business or the impact of running a large data center.  But, this blog posting applies primarily to IaaS (Infrastructure) more than PaaS (Platform) or SaaS (Software).  However, buying compute time is not a new concept.  It used to be the only way businesses could afford to own a computer.  Now, it's a realization that the cost of running a data center for even slightly above average utilization is not cost-effective.  Moreover, the ability to scale on demand is very useful in shops that see spikes related to specific business-oriented milestones, e.g. end of month reporting.

So, where's the catch?  Personally, I practically live out in the cloud now.  I can set up shop at pretty much any computer and get to my email, feeds (e.g. RSS, Twitter, etc.), social networks, instant messaging and business documents.  With the exception of my business documents, which are hosted by my company, I realize that I don't pay anything for all the other services; they are supported primarily by advertising revenue or venture funding.  In a recent dialogue with another analyst we both admitted, if these companies needed to charge to survive, would we pay for these services?  Both of us admitted we would not.  I suppose that means that I would revert to using desktop client applications and Microsoft Outlook as the primary means of communication.  Sadly, if this did occur, I believe many recently rekindled friendships on Facebook would once again dissipate; collateral damage of a bad economy.

While there is a major difference between my personal life in the clouds and business in the cloud, I do believe the one attribute they share is the response to failure by XaaS providers ability to thrive.  As I would be returned to using traditional desktop-oriented applications that I pay for once versus pay-by-use or pay-by-subscription, so would organizations that have made bets on the cloud be returned to alternative means of delivering IT functions.  This does not have to be devastating, but it certainly can be disruptive and, for some, terminal.  While fiscal responsibility is important to the lifeblood of business, betting on XaaS to save money now may mean paying more money in the future as you need to be rescued from a failing platform.

As my Uncle Louie liked to say, "There's no such thing as a free lunch ... unless you pull it out of the garbage can." ;-)

Comments

[Peter Yared]

The pay-for-software model turned out to not be sustainable either. Once you pay for it, you've got it, so vendors had to keep adding features to get people to upgrade, and ended up delivering complete bloatware. A lot of SaaS companies are actually viable freemium businesses, they are just not viable venture-backed businesses since they do not have large exit potential.

[JP Morgenthal]

Yes, but with pay-for-software model, I have the option not to upgrade. That may mean that I am not covered by warranty any longer and cannot get support for my version, but a) I can still use it and b) if the company goes under I'm not scrambling to find an alternative.

It seems to me that that PaaS and SaaS have a customer trust issue. You have to believe the company is rock solid or the company has to have some sort of escrow account to ensure operations for a period of time if they are failing.

At least with IaaS, most of it is virtualized and you can hopefully move your image to another provider in minutes.

[T. Fustos]

I work for a european Telco. We looked several times into Salesforce Automation software, and made feasibility studies for our situation, including "XaaS" models. I don't know why, but for our 500 Sales Reps, the "aaS" Model came in very expensive, plus the vendor could not satisfy our needs for data protection. I know of another case where the re-branded webmail of a big provider is offered to telco customers, but the wellknown company does not comply with the local telco LEMF rules, so the telco is running a parallel email platform and re-routes the emails to the global player. So there are limits.
Still, the most striking for me was the missing business case in our Salesforce Automation project, and finally it's going to be a normal, on-premises solution.

[Alexa Weber Morales]

Hey JP, nice job! I haven't given this market much thought (I actually was lured by the acronym XaaS, as I didn't know what that stood for) for some months, but last summer I wrote a piece on it for SD Times: http://www.sdtimes.com/content/article.aspx?ArticleID=32212