In the previous Industry Insight, I reviewed critical aspects of the risk-based billing model that makes cloud computing work in the South African context. I will consider a few more of these now.
Will an ERP vendor agree to a deal where it is paid a minimum fee for installation and a set monthly fee once the software is installed and running? Or will the company insist on being paid for delivering a CD with some software on it? The answer is simple: users pay for the CD and then they pay more during and after the installation, and then they simply keep on paying.
With the risk-based billing model, vapourware can't be sold, as payment is only made when services are delivered. The process of hardware and software installation and configuration is hidden from the customer, as all it wants is to run its business. This model forces IT companies to assume financial risk themselves and earn the customer's faith in their competence.
Accountability
Providing SaaS means the vendor takes full responsibility for implementation, configuration and development. It is only once the system is up and running, with users satisfied it provides the functionality required, that financial returns are truly achievable. And should the system fail after going live, penalty clauses ensure prompt action to get the system running again, or the repayment of previous monthly sums until the system does go live. Once the vendor has repaid much of the money it received in previous months, the client is left in a neutral cash position with only the cost of time being lost.
As the vendor foots the bill until implementation is complete, all specifications and requirements will be written in plain English.
Richard Firth is CEO and chairman of MIP Holdings
Not only does this model place the risk squarely on the vendor's shoulders, with real penalties for non-delivery, it will also refocus technical managers on the benefits of experience.
Today, most IT managers have a host of young, newly certified IT skills running their data centres. When profits depend on delivery and uptime, not who can reboot the latest version of an operating environment, the most valuable people will be those who have years of experience making technology work.
Shorter delivery time
Since the vendor shares risk and is only paid when the system is online and supporting the business, project plans shorten, with definite timelines and review periods (measured in days rather than months). Projects doomed to failure will not drag on for ages consuming funds, but will quickly be identified and killed. The ongoing investment decision is not left purely to the board of the client, but must be made in conjunction with the vendor. The vendor's appetite for investment is a good barometer of the confidence the party has for making the company money and meeting deadline promises!
As the vendor foots the bill until implementation is complete, all specifications and requirements will be written in plain English to ensure everybody understands what is expected.
Like all IT projects, good project management by the vendor with involvement and commitment of the customer are mandatory. The risk factor drives the vendor to make certain that concepts are clear and deadlines are managed and delivered. The vendor cannot simply rely on a well-known brand - for example, “no one ever got fired for buying IBM” - but has the same vested interest as the customer that a functional system is delivered.
Long-term relationships
Vendors are paid by deliverables based on agreed KPIs. It is therefore in the best interests of the vendor not only to provide a good service beneficial to the business, but also to ensure a long and fruitful relationship - a necessity if it is to regain its investment upfront and gain profit from the deal.
The relationship will benefit both parties for the long-term and foster true collaboration to deliver the best service possible. Political finger-pointing will also decline, as there will be no potential benefit from playing games at the expense of the business.
According to Forrester Research: “Companies are finding that in order to grow they must form partnerships or collaborations with companies that are part of their ecosystem.
“These ecosystems increasingly specialise and rely on the intellectual property of partners, suppliers, financiers, inventors, transformers and brokers.”
* In the next Industry Insight, I will look at how this risk-based billing model is changing the dynamics of IT.
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