Digital Transformation
cancel
Showing results for 
Search instead for 
Did you mean: 

The next SaaS evolution: Are you ready to stop buying functionality and start buying value?

BI_Guest

HP20140317782 (1).jpg

 

By Kees van den Brink

 

It's not news that in the SaaS era, we're seeing a shift in software from a CapEx purchase model to an OpEx consumption model. But based on conversations I've had with clients of HPE Software Services, I think we're on the cusp of a further evolution: Moving from paying based on consumption to paying based on value. Call it the transition from Software-as-a-Service to Value-as-a-Service.

The SaaS model charges you for access to a piece of functionality, either by actual consumption or the number of licenses you buy up front. Yet nothing guarantees that you get the actual results you want. Further, with open-ended consumption models, there might be no limitation on how much a service costs you. For instance, what happens if your business takes off and your consumption increases exponentially? You have no real control over total cost of ownership.

The logical response is to ask how you could tie cost to success. Can you link the cost of your IT to the actual savings you get from it?

 

How automation enables value-based consumption

With automation, it's definitely possible. Say you spend 100 hours every month vetting and patching certain mission-critical systems in your business. If automation cuts that burden to 20 hours a month, you save 80 hours. That labor has a specific value, and you could then negotiate payment as a fraction of the hours saved—the success delivered, rather than the number of licenses.

I expect models of this kind to take off. Buying a result instead of a piece of software is possible where value can be defined by measurable efficiencies. (Learn more in this brief about Automation-as-a-Service.)

 

Making value-based consumption work

If you’re going to work with a vendor to negotiate a cost based on your savings, there are many factors you need to weigh. I see four core considerations:

  • How do you discuss value? Automating a certain activity or workflow will have overhead and efficiencies, and as the buyer, you must calculate the net benefit. This forms the basis of negotiating how much you're willing to pay the vendor. Most organizations are not ready for this type of discussion.
  • What's the baseline for calculating that value? It's important that both parties agree on measurable baselines up front. That requires you to have—and share—clear data on labor and technology costs around a given process.
  • How do you tie growth to results? Suppose you spend 100 manual hours a month patching. With automation, you bring those hours down to 50 a month. But then your business grows, so total hours go back up to 100—even though your patching capacity has doubled. You need take into consideration the causes of growth—or reduction—and still measure the efficiencies of the automation.
  • How do you achieve the value? You have to factor in the implementation process, because the actual steps of the transformation have costs. Traditionally, the vendor isn't concerned with either the initial rollout or the ongoing value. In this model, both sides have a cost-related stake in seeing that the planned value is realized.

 

Value-based services will require both the buyer and the vendor to do a fair amount of due diligence to understand the value they're after and the forces affecting its realization. Both sides, particularly the buyer, also have to know where that savings is going to go. If a vendor’s automation saves you 80 hours, will that 80 hours go into staff reductions (saving you the easily measured cost of labor) or will workers be reassigned to a high-value innovation effort (whose greater value may be harder to calculate)? 

 

Where to get started with value-based models

There's precedent for this, of course. Value-based pricing has been applied to products already—from a cup of coffee to a bottle of water—so applying it to services is a natural, perhaps inevitable, evolution. But not every IT department or tech vendor is ready for this. Certain forms of automation, such as test management and event management, lend themselves to a relatively easy value-based conversation. That's where I expect to see this thinking first take off. Then it’s likely to grow as the model matures.

Every recent evolution in IT and the business-IT relationship has tried to simplify and strengthen the connection of cost and value. Cloud and SaaS models have made great strides by linking cost to access or usage, but in the coming years, I think we'll increasingly discuss the direct link between cost and value. I think it'll be a good conversation.

Getting to true value-based pricing is not the simplest task. It requires both the buyer and the vendor to go through a process to get to a common agreement. Your best first step is to get the discussion started with your vendor. Reach out to your counterpart. One way of starting is to begin measuring the base data so you will be able to make an informed decision.

 

To learn more, read our service brief about Automation-as-a-Service.

 

Kees van den Brink is a solution architect for HP Enterprise. He helps customers across Europe improve and standardize their IT operations. Kees is an active member of the IT4IT consortium (www.it4it.com). Follow him on Twitter at @kvdbrink01.

 

Related links:

HPE Software Consulting Services

Blog post: Why automation can help IT get out of the ITIL straightjacket

Blog post: Stop making this mistake if you really want value from automation

Blog post: Goodbye, plain vanilla software services

 

 

  • IT Strategy and Leadership
0 Kudos
About the Author

BI_Guest

Labels
Events
28-30 November
Madrid, Spain
Discover 2017 Madrid
Join us for Hewlett Packard Enterprise Discover 2017 Madrid, taking place 28-30 November at the Feria de Madrid Convention Center
Read more
See posts for dates
Online
HPE Webinars - 2017
Find out about this year's live broadcasts and on-demand webinars.
Read more
View all