However, solutions “in the cloud” are here to stay and will grow in relevancy. If you are not at least considering them for your enterprise software product you aren’t doing your job.

A few reasons to be considering it

• Revenue models: Can you say “annuity stream”? Makes maintenance revenue look sad. Of course it is challenging to forfeit the up front cash of license sales if the business has been built around it. But if it can be managed (or if it was never there), hosted solutions look really good in succeeding years.
• Reduced market friction, Increased adoption rate: Hosted solutions can make it easier for a business user to start using your application. No need to justify the large capital expense, engage IT etc. This helps you accelerate your growth.
• Scale: From the customer’s perspective, a hosted solution can generally be scaled rapidly and infinitely. There is significantly less need for complex, long term IT planning to ensure availability of the service.
• Update cycles: In classic enterprise software, the vendor releases regular updates which enhance and improve the product. However, most customers don’t adopt each and every update for expense, logistical, training and other reasons. As such, they don’t maximize the advantage from the maintenance money they are spending. In contrast, hosted solutions are generally updated for them immediately thus yielding benefit to the customer immediately.
• Functionality: Now for the most intriguing one. Hosted solutions can do things differently that might be game changers in the market. Think collaboration or community functions. For example, no longer must baseline data come from a single customer instance.

Objections to consider

• Doesn’t address a buying objection in the market. This is a big one. If your prospects don’t have any interest in the merits of a hosted solution, this may not be for you. However, understand it well. You may very reasonably conclude that the infrastructure costs/hassles of a traditional deployment are not significant to your customers. You might even want that as part of a lock-in with the organization. But, you might be missing an opportunity to reduce friction in the adoption cycle particularly in these financially challenged times.

• Perceived need for data ‘ownership’. This is often one of the biggest ones. How can your customer be expected to trust you with the customer data, patient data, financial data, whatever. You aren’t under their control. Blah blah blah. In my opinion, for all but defense security applications, this one is really just a ruse of inertia. Here’s the reality: 1) By buying your software, particularly web UI software made available to customers, suppliers etc., they are already depending on your good security design to protect their proprietary information. 2) If your company is good at its job, you should be able to be at least as good at administrating and securing the information as their in-house IT. In fact you might be more secure because you will get more independent oversight. 3) There are ways to design in backup and data retention in such a way that your customers can trust that they will still be able to access data if you fail in some way.

Factors to consider

• Operational readiness: Running a SaaS or hosted business isn’t just a matter of spinning up your software and signing up customers. The business has to be ready to define and deliver on the service levels that customers expect. This requires additional staffing, processes and infrastructure far beyond the normal IT needs.
• Technology: Is your application built on a technology stack that is easily deployed in the cloud or other dynamically scalable infrastructure? If not, hosting options will probably end up costing a lot to actually run as you spin up wholly separate instances for each customer.
• Architecture: This is where multitenancy comes to the fore. A hosted application needs to be designed from the start to support multiple, segregated data sets for each customer. There are multiple ways to do this, but it is quite hard to retrofit in a cost effective manner. (see this MSDN article for a detailed overview)
• Business models: I alluded to this above but this is one of the biggest issues. Can your business sustain itself on deferred revenue? The nirvana of ongoing revenue streams is pointless if you run out of cash.