Gartner Blog Network

This post is updated from work originally posted on the Gartner blog network in February 2017. You can find the original post here

As organizations face dramatic variations in use cases and user quantities of applications while confronting impacts of COVID-19, the potential fit of consumption billing with requirements is arguably more prominent than ever before.

By definition cloud computing should deliver an elastic solution which is metered by usage, thus requirements to increase or decrease consumption are measured and costs adjust accordingly.

Whilst these attributes are considered synonymous with cloud computing, in practice they are largely absent from SaaS offerings, whilst being core within the majority of PaaS and IaaS.

In an era where most organizations have a number of SaaS enterprise contracts in place, a degree of disillusion and dissatisfaction with SaaS commercials has already surfaced. Such a view, or emotion, is an outcome of a sequence of actions, whereby original commitments to SaaS are made and incentivised by initial contract discounting, however on renewal prices escalate.

In cases price protection will be integral following the initial contract for multiple terms, however that protection in turn will regularly be conditional upon maintaining up-front quantities. Accordingly, clients trade price risk for any scope to scale down commitments, thus losing integral elasticity benefits of cloud computing.

In 2017 I asked the question – As the SaaS market matures will this sequence continue? Or will an alternative equation prevail? Perhaps, whereby SaaS consumption (active usage) billing based on active usage enables a stronger match with the notion that cloud computing will enable matching of costs with value.

There may be a series of influences behind SaaS consumption billing emergence.

1. Firstly, client demand for a better deal, arguably driven by large enterprises.
2. Second, greater investment in SAM discipline including employment of subject matter experts and use of capable SAM tools. Collectively growing SAM maturity and driving awareness of wastage and shelfware, whilst enabling predictability of future consumption based costs.
3. Third, competition, new market entrants or disruptive providers choosing to use active usage to differentiate and dislodge incumbent providers.
4. Fourth, SaaS available through marketplaces extending the consumption based model of the platform upon which the application resides.

Enterprise contracts retain virtue, by means of providing long term price commitments to clients whilst reflecting aggregated value of business for providers. The degree to which they incorporate flexibility will likely be questioned in the months ahead as organizations seek to pivot, changing direction to meet a dramatic alteration of requirements. The Gartner phrase ‘Winning in the Terms’ has become apt in dramatic fashion.

Gartner clients wishing to investigate the potential of SaaS consumption billing for the enterprise (including hybrid commercials) should see COVID-19-Induced Downturn Will Disrupt SaaS Pricing Models and Consumption-Based Pricing Is Emerging From Leading SaaS Providers, but Beware! 

For service provider clients, see our research published this month addressing the same subject SaaS Active-Usage Billing Provides Opportunity to Disrupt Software Application Markets.

We also address the notion of managing Shelfware as a Service in the following Software Asset Management for the Cloud: Consumption Management and Optimization Take Center Stage and 3 Best Practices to Avoid Costly Shelfware in Your SaaS Deal

Category: asset-management  budgeting-planning-and-forecasting  cloud  it-cost-optimization  licensing  sourcing-procurement-and-vendor-management-leaders  

Tags: cloud  cloud-contract  cost-optimization  enterprise-agreement  licensing  saas  sam  software-asset-management