Hybrid commercial models for hybrid ITBlog
Consumption-based pricing is a reality today – for some things
There’s a lot of hype around consumption-based pricing in hybrid IT, but the reality in the enterprise market is mixed – and rightly so. I believe hybrid IT calls for hybrid commercial models.
We offer consumption-based pricing today on a number of utility products. Our multi-tenanted public cloud platform is priced per resource per hour. Clients pay per gigabyte per hour for memory, per hour per virtual CPU, and per gigabyte per hour for storage (of different types, depending on the technology being used).
Likewise, our O365 pricing is completely usage based, billed per user per month by feature. Our customer experience services run from the cloud and are subscription based, though some clients still like us to run them from the cloud but licence them as if they were on premise.
Most enterprise clients prefer a more balanced approach
It’s different with enterprise private cloud. The provider needs to de-risk to some extent here because it’s a dedicated environment. So, we charge a baseline six-monthly fee, and then on top of that there is a flexible pricing structure, in which clients can balance fixed and variable costs according to their predicted usage profile.
Some clients who know their usage will fluctuate, and want their costs to align with usage, opt for low monthly charges, and a larger proportion of usage-based charges. Others who can’t make such certain predictions about their variable usage, prefer higher monthly fees and a smaller consumption-based component.
Pressure is building for utility pricing in managed services
Pricing of managed services has always been a matter of where the risk sits in the transaction. Traditionally, the provider de-risked the contract for themselves by charging the client a large up-front fee to cover set-up costs, and then fixed recurring fees (or sometimes variable monthly fees, but blocked rather than fully usage-based).
Today clients are saying ‘It’s a utility world. I want to consume resources on a rate card.’ They don’t want to commit to any level of usage, want to pay only for what they use, and for the provider to take the risk.
This client desire for consumption economics is an understandable backlash against having had to bear more than their fair share of risk in the past. Cloud has given the market an appetite for consumption-based pricing, and now they want it on everything – even if they don’t actually use it.
Don’t forget to turn the lights out
One of the surprising things about consumption-based pricing is how some clients don’t turn off usage-based resources when they’re not using them. This seems to be a matter of psychology more than anything. Just because you have the option to turn the lights out when you leave a room, it doesn’t mean you will. Many clients like to come back to a lit room, and don’t mind paying to keep the lights on while they’re out.
Commercial architecture is the new deal winner
We work constructively on a case by case basis with clients who want a greater degree of usage based pricing in managed service contracts. We understand their desire to offload risk, especially if they sell on a consumption basis, then they naturally want to buy on a consumption basis as well.
For most established enterprises, the business model is mixed. Part of their business depends on consumption buying to match changeable revenue streams. Part of their income is more stable, and predictable costs suits this very well. Some public-sector clients still have 100% capex budgets and want to pay for everything up front.
Our commercial analysts look at how our clients want to buy, as well as how we want to sell, and find the inflexion point where risk and reward are reasonably balanced between both parties.
And increasingly it makes the difference. Different providers’ technology solutions can look pretty much the same as each other. But a flexible (yet sensible and sustainable) commercial model can be a deal winner.
We can do these deals because we’ve invested in automation
There’s an assumption in the market that managed service providers are more automated than they really are. The reality is that most managed service providers don’t have the ability to take on variable cost as the client ramps up usage – so they can’t price the deal the way the client wants.
Our managed services platform actually is highly automated, and so we are able to accommodate more flexible commercial constructs. We’ve invested in a lot of abstraction and automation already, for infrastructure management and workload deployment in hybrid IT environments, and we’re continuing to invest.
We’re also using a Lean Agile approach to how we develop our cloud and service management platforms, adopting a DevOps style of continuous software releases. This is accelerating the rate at which we can apply automation, granular metering, and consumption-based pricing to more of our services, and allow clients to consume technology the way they want to.
Only service providers like us who have invested in abstraction, automation, and DevOps can currently satisfy the growing client demand for consumption-based pricing on managed services.
As technology becomes more software-defined, it will become more usage-priced. It is a trend that’s started, and is continuing. It’s just not happening quite as fast as some people thought.