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More technology companies are using the cloud to woo new and smaller customers. Are you sold?
Alix Stuart, CFO.com | US
September 19, 2011
Intellicheck Mobilisa is a small public company that makes a widely used security application that helps sniff out fake IDs, by scanning driver licenses and cross-referencing the information it gets with government databases. But despite 16 years in business and brand-name customers including JFK Airport, Caesar's Palace, JPMorgan Chase, and the U.S. military, Intellicheck has seen revenues stagnate, at about $12 million.
One major limitation for Intellicheck: its price tag. A typical sale requires a $1 million-plus investment in items including an enterprise software license, high-end servers, and top-notch scanners. "That limits small and midsized companies from purchasing our technology, even though it may pay back in the long term," acknowledges Intellicheck CFO Peter J. Mundy.
To broaden its market, Intellicheck is now offering some of its products through the cloud, meaning customers no longer have to purchase the server or the license. (Intellicheck is also working on ways clients can substitute smart phones for scanners). By eliminating such up-front costs and instead charging per usage, "we think we're going to be able to add new customers, and we anticipate we'll start to develop a more recurring revenue base," says Mundy.
Intellicheck is hardly alone. Thanks to the cloud, more and more enterprise technology companies are finding they can offer affordable versions of their products to a broader market, with benefits to their bottom lines and valuations. Many larger ones, like SPS Commerce, Ariba, and Callidus, are making or have already made the switch from licensing software that's loaded onto a company's own servers to offering their applications as a service accessible through a browser. Most technology start-ups now begin with cloud-based products. And a number of mature midmarket software-based firms are currently plotting their transition strategy to a cloud model, also known as the software-as-a-service model, or on-demand model. "We see growing interest in the SaaS model," says Ralph Nefdt, leader of the software-industry practice for Grant Thornton.
So far, CFOs aren't rushing into such purchases. A recent Microsoft report found that about one-third of small and medium businesses currently buy one or more cloud services, a number the tech giant expects to increase fairly slowly in the immediate future. But finance executives may want to accelerate that pace, as the cloud increasingly allows access to a world of sophisticated applications like business intelligence tools that were once out of their reach.
So is the cloud for your company? To make a wise choice, it's important to do some research.
The main issue with cloud-based systems is that customers can't customize them very much, and have very little control in general over what appears on their computer screens. The fact that "you're always on the latest version means [a software provider] can make changes to the software and they don't necessarily have to run it by you," notes Dave Sobel, founder and CEO of Evolve Technologies, an IT outsourcing firm for small and medium businesses in the Washington, D.C., metro area. Those upgrades may be minor, or they may create the need to change business processes, as was the case for one company that works with Sobel.
Then there's the bandwidth issue. "If you move to the cloud, you are now fully dependent on your Internet connection," says Sobel. He's found that many firms end up with the hidden cost of having to increase bandwidth or add more Internet connections, in order to keep cloud-based applications working at an appropriate speed.
Sobel also suggests a number of legal and contractual questions that CFOs should think through before signing up for cloud-based services, including: (1) How is data protected, for the purpose of privacy or other laws? (2) What happens to service during a billing dispute? (3) How do you remove your data, should you decide to stop service?
"These aren't issues that should stop you from using the cloud, but they're issues you want answers to before you're in a dispute," says Sobel. "Don't believe in the hype — do the investigating and find out what is really happening."