Let’s say you’re the owner of a tire manufacturing company that’s been in business for more than 70 years. You have some great proprietary logistics systems you’ve used for decades and systems that are famous for optimizing the supply chain that contributes to manufactured goods in your vertical market. It would be beneficial to your customers and even your competitors to use your logistics systems in their own internal systems. For your business, the new revenue streams would far outweigh any competitive disadvantages that might arise from monetizing this aspect of your company’s proprietary assets.
When this type of opportunity presents itself, many enterprises look at the competitive implications and take a hard pass. At the same time, they recognize that most businesses don’t want to recreate the wheel when a well-known wheel manufacturer can provide a key piece of the knowledge pie for a nominal fee. If all goes as planned, the well-known wheel manufacturer’s own systems improve because of expanded usage, its revenue stream diversifies, and the company gains as much or more competitive knowledge as it releases.
Monetize your in-house expertise
Today, more and more enterprises want to explore the opportunity to market their industry-specific knowledge as on-demand data services or software systems to other organizations via usage- or fee-based models. This model of selling data products and services is more commonly known as SaaS (software as a service) delivered via a SaaS cloud.
Most companies that consider this type of revenue stream know very little about how to create a SaaS cloud. They must also implement monitoring, billing, and other services required to run and monetize a SaaS cloud. Does this sound like a recipe for failure or a huge opportunity to increase the value of the business as well as enhance the multiple?
Although it might sound strange for a tire company to become a cloud company, it happens more often than you might think. When Salesforce.com arrived on the scene more than 20 years ago, enterprises began to accept that valuable cloud-based services could exist outside of the enterprise. With the rise of industry clouds, off-premises IT systems became commonplace and even more desirable in many cases (i.e., pandemic work-from-home requirements).
Don’t forget about the other 1990s company that made this hybrid business model the norm. Amazon has been in the business of providing technology tools to other businesses almost from its start. Oh, and they also sell books. Does this idea still sound crazy?
Become a hybrid traditional/technology company
Companies that have nothing to do with cloud computing now see opportunities to become a cloud provider of data products and services that can enhance another enterprise’s operations within their specific market segment or other markets. Unrealized opportunities abound in traditional fields like healthcare, finance, manufacturing, and more.
Aside from Amazon, many of today’s successful transitions from traditional enterprises to hybrid ones happened very stealthily, and you just haven’t heard of them yet. Some are currently in flight and will gradually appear in the market. Others fell flat on their face and they’re still busy hiding the bodies.
In many instances, outside investors will convince a traditional company to take some risks and become a hybrid traditional/technology enterprise. In other instances, consulting firms want to partner with companies to SaaS-ify their systems into sellable products. However, most of the systems that undergo SaaS-ification are self-funded, and the initial ideas come from executives who quickly wade in over their heads.
What does it take to succeed in this space?
Modernize your in-house system
Start by assessing the current state of the system(s) or data the enterprise wants to sell on demand. The data is almost never a problem because we’ve learned how to expose the most cryptic data as a set of services that can be sold as public APIs. However, most of the value will be in the business processes that are bound to the data.
In my quest to help enterprises navigate this hybrid enterprise journey, I’ve encountered systems that were built on a myriad of platforms—everything from mainframe assemblers, to systems that were still on PDP-11s with lots of COBOL, to countless other platforms that are difficult to move to the cloud. It’s no surprise that most systems with hybrid enterprise potential are decades old and were usually built with outdated development approaches. The good news is that we have emulators, code conversion systems, and other tricks to make the old stuff seem new again in the cloud.
You’ll also have to determine if it’s possible to shift a system to a cloud-based provider or perhaps to other, more modern systems in a private data center, colo, or managed services provider. If that shift is possible, it’s time to ask a few questions.
Decide who handles all the ops
The second step is to determine if the system can scale to support thousands of simultaneous users. Can you track usage for billing and operations? Do you have the people and tools to run this system long term? Remember, this software could be very important to the companies that will use it, and thus could lead to risk and even liability.
The third step involves some core business decisions. Can this product spin out as another company? Is there more benefit to partnering with an existing SaaS player? Should the product stay in house as a new offering?
The problem with keeping it inside the traditional company is that, although the sales team is good at selling tires, it’s unlikely they are as good at selling cloud services. You’ll need a new sales force, new purpose-built marketing, and don’t forget cloudops and a cloud financial operations team (finops) to keep things running and send out the bills. Ask the hard question: How well does your company deal with change?
It’s often easier to build sales, marketing, and operations from the ground up as a stand-alone spin-off SaaS business, or partner with an existing SaaS company that already has those mechanisms in place. However, resentment can arise inside the traditional company if the SaaS product inflects. It’s not unusual for new technology companies to be valued higher than existing cash cow businesses. For example, if the traditional tire company does $1 billion in annual sales, its valuation could fall well below the tire systems SaaS spin-off that does $100 million in annual sales.
More and more organizations will consider their hybrid enterprise options as industry clouds become more popular. The temptation to move into the technology space with its high valuations may prove too much for many traditional companies to ignore.
All said, I’ve seen hybrid enterprise transitions go very well and go very badly, but few end up in the middle. The ones that succeed tend to do a great deal of strategic thinking and planning, collaborating with experts inside and outside the enterprise. Those that fall flat typically go in with guns blazing and exit without a clue as to why they failed. Choose wisely.