10 February 2021
Many organisations have long held the assumption that locally hosting IT systems provided them with greater security, believing their software and platforms were more resilient to, and safer from, disruption than remotely managed alternatives.
Economic lockdowns, a sudden requirement to support flexible and remote working, and mass consumer migration to digital platforms over the past year have, however, shattered those assumptions and underscored the advantages of having a cloud-first digital strategy.
Frederick Havemeyer, Senior Software Analyst, Macquarie Research
Following their biggest-ever test of operational resilience, organisations now recognise the necessity of their systems and data being securely accessible from anywhere and on any device. Especially so if they are to remain operational during disruption by providing employees with secure access to essential systems and continuing to service customers in new ways. ‘Digitise or disappear’ as a strategic philosophy has taken on a whole meaning.
Organisations with strong digital transformation strategies are set to grow their spending on cloud services – which have been shown to offer clear and discernible benefits. Those, meanwhile, that have traditionally lagged will look to play catch-up to ensure operational continuity and relevance in a reshaped competitive environment.
Either way, the aggressive adoption of cloud-based technologies that allow businesses to respond to disruption and operational limitations in an affordable and timely way will see a substantial increase in demand.
“Disruption caused by the COVID-19 pandemic underscored the competitive advantages of strong cloud-first IT strategies and laid bare the constraints of legacy on-premises environments. Taking a ‘digital-first’ approach is no longer sufficient; organisations need a ‘cloud-first’ approach that meets these new tests of resilience by providing flexible working arrangements and allowing for quick adaptation to fast-changing external conditions,” says Frederick Havemeyer, Senior Software Analyst at Macquarie Research.
Enterprise software has, historically, been off-limits to mid-sized and small businesses, typically because the price tag was too high, or because the complexity of managing it in-house required a high level of expertise. Cloud-based, managed solutions, however, are breaking down these barriers and making it accessible and affordable. In doing so, they are helping facilitate their digital transformation and sparking a small business digital renaissance.
Subscription-based pricing models allow organisations with limited budgets to digitalise the essential components of the customer journey, and internal processes and operations. Where once heavy up-front investment was required to install, manage and host IT systems, and then again to replace or upgrade them, the cloud offers access to more modern and lower-cost solutions that can be customised and scaled to meet business needs as they grow.
The breadth of cloud-based solutions available promises to revolutionise the way smaller organisations operate. From HR management systems to intelligent automation tools, machine learning and big data analytics, they offer new workflow automation opportunities, better decision-making and real-time customer insight.
For the first time, powerful enterprise-scale digital tools are now accessible by small businesses looking to improve their competitive advantage, flexibility, and ability to capitalise on opportunities at short notice.
“Small businesses are undergoing a renaissance of software uptake made possible by software-as-a-service offering enterprise-grade software and IT services as affordable subscriptions. Something made necessary by the business resiliency challenges of 2020. As the small business digital renaissance enters full swing, most will be using at least some cloud services by 2024,” adds Havemeyer.
Adopting a ‘digital-first’ strategy was once considered radical. However, the IT paradigm shifted durably during 2020, and ‘cloud-first’ is the new normal for software, thanks to the agility and automation benefits it offers users and the fact that it is universally accessible and automatically updated and upgraded.
For providers themselves, a move to cloud services can unlock more customer budget by monetising portions of the IT stack – such as hosting equipment – and related personnel that previously sat with the client. And the ‘annuity-style’ recurring revenue business model – in which subscription renewals and upselling are the twin engines that power long-term growth and margin expansion – makes ‘-as-a-Service’ models far superior to the ‘licence and maintenance’ model of legacy software.
Renewals tend to be predictable and high margin as they typically have little to no sales or marketing costs. Therefore, as a provider’s renewals base grows, its margins tend to expand, and its revenue becomes more predictable, making them increasingly appealing investment opportunities.
According to Havemeyer, subscription models unlock larger potential markets for software by making it affordable for businesses of all size and scale, while also offering stability and predictability within vendors’ business models
“Investors recognise how consistently renewing subscription revenue can provide businesses with a stable foundation for future performance and act as an engine to generate both expanding margins and cash flow,” he adds.
With clear benefits now visible to parties on both sides of the offering, Macquarie expects digital transformation leaders to expand their cloud presence and for that to lead to a big wave of cloud spending. Whilst those who have and continue to ignore the growing importance of digital infrastructure will need to play catch-up with significantly accelerated plans.
Estimates are that public cloud spending combined - that on Software-as-a-service (Saas), Platform-as-a-service (PaaS), Software Infrastructure-as-a-service (SIaaS), and Infrastructure-as-a-Service (IaaS) - will grow by ~$US305bn over the next four years, to reach $US585bn by 2024.1
Migration to the cloud represents the next big shift after the generation of mobile app companies that defined the last decade, believes Havemeyer.
“Cloud-based providers are enablers of business resiliency and agility – both more sought after than ever – and are on course to benefit from higher spend by organisations looking to accelerate their digital transformations, cementing their place as the future of software.”
Frederick Havemeyer is a Senior Software Analyst at Macquarie Equities Research, based in New York.