Site Loader

by Klaus Ehmke

The Cloud Computing service model, boarding (SaaS – Software as a Service, PaaS – Platform as a Service, IaaS – Infrastructure as a Service) it is challenging IT companies pricing departments. It is a great sales model that may increase sales of services and recurring service contracts, but requires an experienced pricing department. 


The Cellular companies implemented this sales model a long time ago. Cell companies deliver a mobile to customers, along with the provision of their services. You are buying your mobile as a service. 

Likewise, in the Cloud Computing model IT companies are delivering their services along with some hardware, software and infrastructure. This model removes the CAPEX – Capital Expenditure from customer’s hands and shares the gains of a shared infrastructure. 

It is the perfect setting for everyone. IT companies will increase sales, recurring revenues and increases services margins. Customers on the other hand no longer need to spend high sums in CAPEX (Capital Investments) and should receive an ongoing up to dated infrastructure paying a smooth monthly fee. 

Klaus Ehmke from Akurat Consulting warns that although it seems a perfect model for everybody, this model imposes significant challenges on IT companies pricing teams, and if all the risks are not properly considered, it may end up in future negative surprises. 

IT organizations must consider numerous financial variables that impact significantly on the final pricing and profitability.

The right level of equilibrium at those many pricing assumptions will determine whether you win or lose the contract against competitors and will avoid future negative surprises. Some examples are:



  1. Availability of Capital and or funding
    – The initial
    investment (“CAPEX” – Capital Investment), that all your customers
    wants to avoid now it is on your companies hands. Tech companies must have available
    cash or bank funding to finance clients’ infrastructure investments.  Small & Medium companies will probably be
    out of big contracts per lack of funds to finance the required contract
    investments.
  2. Contract term – Contract term significant
    influences the final price. A 5-year contract is going to dilute investments in
    60 months, and of course, the monthly price is lower than a 3-year contract for
    example.

  3. Termination Fee – Obviously, the contract term
    impacts on the final price, as mentioned above, but a long-term contract
    without a penalty for early cancellation, covering all investments may results
    in significant losses in case of early termination. Determining the right penalty
    for early termination is a major challenge in the Cloud Computing model. 

  4. Hardware lifetime – The useful life of the hardware supplied
    in the contract is a determining factor in the pricing. In trying to win, the
    contract is a great temptation to include an additional year in the life of the
    hardware, but if you need a refreshment before the end of its useful life, for
    sure your company is going to face a contract margin reduction.

  5. Shared Infrastructure – A basic principle of Cloud
    Computing is to share the infrastructure and this is another challenge in
    defining the price. How to make the correct apportionment of shared
    infrastructure? Who pays the idle infrastructure? How idle infra should be
    included in the price of each contract? In summary, another variable that can
    make final prices go lower, but may end up in significant losses if erroneously
    estimated. 

  6. Cost of Capital – What is the cost of capital to be
    considered in the price? As contracts tend to be long-term, Tech companies must
    estimate the future rate of interest, consider the average rate of its capital
    funding, consider the country risk, inflation, etc (basically “WAAC”).
    A few percentage points of difference in the estimate interest rate may
    determine a lower price to win the bid, but can also end up in future losses.

When pricing
a project there is always a dilemma: be more aggressive on some assumptions to
have a more competitive price and win the contract, or be conservative, reduce
risk and run the risk of lose the contract to your competitor. How to balance this
dilemma it is the big challenge.
Sell IT
solutions in the new Cloud Computing model is becoming a financial challenge
more complex than the technological challenge, and requires attention because
the great contract closed today may became a big financial problem of tomorrow.

Author:
Klaus
Ehmke
Partner
and Director of Akurat Consultoria
Financial
Executive at Technology companies
Associate
member of IBGC


Post Author: Akurat

Deixe uma resposta

O seu endereço de e-mail não será publicado. Campos obrigatórios são marcados com *