How are we going to make Enterprise Cloud profitable?

The largest provider of enterprise software solutions, SAP, has made a bold statement on cloud. First it claims it will be the largest cloud provider in the world. Second it claims it will be the first large cloud provider to be profitable. Here is the article: SAP Sure of Profitability in Cloud Business – Co-CEO Snabe

I had a very open and honest conversation with an SAP Sales Director about this (who’s name will remain anonymous for obvious reasons) and he suspects that the Enterprise move to cloud will do a few things:

  • Expand the reach of software to encompass more markets
  • Reduce the cost of sale (or pay-per-sale) of new customers

Unfortunately these are based on two assumptions about cloud:

  1. Hardware costs are efficiently allocated. This means efficiencies in cost for servers, disaster recovery, network, infrastructure, etc. Amazon seems to be on the only ones who are doing this right and yet still have razor thin margins. I don’t see how this is reproducible model at Amazon’s scale and efficiency, while still competing with Amazon’s prices.
  2. The people developing the software continue to support the software going forward. Cloud isn’t just about economies of scale in hardware. We need to get our heads of the Industrial Revolution thinking – economies of scale aren’t possible with human information workers. Engineering software is not like engineering a kitchen cabinet. It’s a craft.

Remember enterprise licenses yield roughly a 90% profit margin on support and companies like SalesForce are still not profitable. A couple of scenarios I see playing out:

  • In order to get margins back in line with the previous ones the software will no longer be supported by the people who built the software. Customers will get disgusted with their poor support and just leave. This has happened in on-premise software, but the external exposure was mitigated by support teams (such as my previous role within SAP, where I served as a De-Escalation Architect).
  • Cost of sale must go down and therefore expensive middle-management (VPs mainly) will need to be cut out. Unfortunately this means large vendors such as SAP will have less clout when speaking it enterprise clients.

The challenges I see is that SAP is not following the Innovator’s Solution, which is to keep disruptive technology in isolation and are clearly they are trying to integrate it: SCN Blog – My Attempt to Explain SAPs Cloud Strategy  This would motivate a smaller company to keep better knowledge workers and build better efficiencies in hardware.

I still believe SAP should have invested (or outright bought) SalesForce half a decade ago, left it alone and then let it cannibalize itself.