The software industry is going through a fundamental change at the moment. Almost all stakeholders in the industry are in agreement on that cloud services will cause changes to existing distribution structures and as described by my business partner, Petri I. Salonen, the financial structure of the industry in general and software companies in particular will undergo large changes [
Law #2 Bessemer's top 10 cloud computing laws ]
U9G5FRQ7YFT3By developing cloud based offerings software companies will have the opportunity, thanks to internet as a distribution mechanism, to address global markets. Distribution will be less of an issue, compared to the traditional software business model. The fact that you can address global markets is in most cases presented as an opportunity and if you want and are willing to think globally you are in a good position. There are, however, at least two reasons why a software company today must start to thinking globally:
- The economics of the cloud services model
- Increase presence of international offerings in your home market
Let us take a closer look at them:
The economics of the cloud services model creates strong incentives to internationalize
The economics of the cloud services model is built on that customers pay a relatively low price on a regular basis (per transaction, per month, or similar). Instead of customers paying a larger upfront license fee they will pay the corresponding price over a period of time. As a consequence it takes longer for a customer to become profitable. Present experience shows that it will take well beyond one year before a customer is profitable for a cloud based solution.
The development costs will probably not change in the same way. Development costs are mainly people costs and they will remain largely the same for cloud based offerings as for traditional ones. Since customers become profitable later the breakeven point for your solution will come later, too. It will therefore be very important to acquire customers quickly, in many cases much quicker than in the traditional software model. To achieve this the addressable market must become larger and for software companies outside North America, where local markets are typically relatively small, this leads to that they will have to address international markets earlier in the commercial development cycle of their solution.
Increased presence of international offerings in your home market
The distribution mechanism for cloud based offerings is by definition through the internet. Customers already today increasingly use internet to research and discover software solutions to their needs. Since distribution of software is less dependent on local presence more customers will discover solutions created by international companies through search and other online mechanisms. If these solutions are presented in a language the customer is comfortable with and fulfill the needs the likelihood that customer will purchase them are not negligible. This is especially true if there is an opportunity to try the solution at low cost, since that reduced the perceived risk of an unknown solution or vendor.
Companies that have previously served mainly a local market will suddenly discover that international competition arrives at their doorstep. Unless they are prepared for that, increased competition will put pressure on the local incumbents.
Think globally or die?
As an advisor to software companies specialized on their growth strategies I experience an increasing exposure to both these factors.
However, many software companies have yet to realize the gravity of the situation. If an organization has not previously had an international or global mindset it will not be very well equipped to adapt rapidly. The product will not be adapted to it, organizational structures will not be adapted, the organization might have a gap in competence to understand international aspects, etc. I have come across quite a few companies where language skills only will be a huge obstacle! - but more importantly the organization will not have the culture of thinking globally.
Every product, marketing and recruitment decision will be affected by the introduction of a global perspective, the board of directors and executive management teams even may have to be complemented with people that have a global perspective. This is not a small change for any company!
Every software company will have to start thinking globally, either because they want to grab the opportunity to fully leverage the potential of the cloud or because they realize that they risk being exposed to global competition on their own turf. The sooner they start to prepare themselves the higher the likelihood they will continue to be successful companies.