How Do Tech Companies Get Their Legacy Customers to the Cloud?
Three steps to best enable cloud migration
For technology companies with a legacy perpetual license or on-premise model, the decision to move products and solutions to the Cloud is often difficult and born out of necessity. The R&D or acquisition costs to enable Cloud functionality are substantial, and the potential (temporary) disruption to in-year revenue is real. However, the link between recurring revenue growth and valuation in the tech market, in addition to the competitive pressures from startup XaaS (everything-as-a-service) companies, make the transition to cloud subscription or consumption models more of an inevitability than a choice for most tech companies.
So, you’ve decided to invest in a set of Cloud solutions. What now? How do companies grow their XaaS businesses, and more importantly for this topic: how do companies think about migrating their existing customer base to the Cloud? Alexander Group works with many software, hardware and services companies on this issue, and our experience suggests that there are three steps that a company should take in order to make the right decisions around how to best enable Cloud migration.
- Examine the Benefits of Cloud Migration for Your Organization
- Examine the Benefits of Cloud Migration for Your Customers
- Determine the Pace and Approach for Cloud Migration
Step 1: Examine the Benefits of Cloud Migration for Your Organization
Most legacy tech companies begin their forays into Cloud with net-new customers. This makes sense because there is considerably less risk associated with gaining new business as opposed to potentially upsetting existing contracts. This “path of least resistance” strategy is an easy way to bank early Cloud wins, but ultimately not as sufficient for companies to realize their recurring revenue objectives.
At some point, companies are usually compelled to consider strategies around migrating existing customers to the Cloud for several reasons. First, existing customers represent the most profitable source of revenue growth in any company; walling off existing customers (particularly large ones) from access to Cloud potentially creates barriers to profitable expansion. Second, whether you realize it or not, your customers are being continuously bombarded by XaaS companies promising to ease the administrative burdens associated with your traditional solutions, lower the total cost of ownership and provide ease of connectivity with other cloud-based applications that are complementary to your solutions.
The pace at which companies choose to migrate their customers to the Cloud depends on a myriad of factors but some of the most important include:
- Benefits of moving customers to the Cloud. Common benefits include enabling you to administer less code; providing a better platform for potential expansion; allowing you to engage different types of value-added partners who will co-develop with you to create new, differentiated solutions; providing enhanced ability to track usage patterns via telemetry, etc.
- Competitive pressure customers are encountering to migrate to the Cloud. It can be tempting for companies to hang onto profitable M&S (maintenance and support) contracts for as long as possible, but eventually those streams may evaporate entirely if aggressive XaaS vendors convince customers to switch solutions.
Step 2: Examine the Benefits of Cloud Migration for Your Customers
One pitfall of cloud migration strategies that we often observe in the tech industry is that companies don’t always take the time to define a solid value proposition to get customers to convert to a Cloud solution. After all, the customer theoretically “owns” a perpetual license solution outright; why would the customer buy the solution again if there is no compelling reason to do so?
Companies should attempt to identify and quantify the advantages of converting to the Cloud. For example, are there embedded improvements to the underlying solution, e.g., easier backend integration with other cloud applications, better UI or UX capabilities, easy, more frequent upgrades or product enhancement, enhanced customer success capabilities to speed adoption and effective product usage, lower TCO over time, etc.? If you can’t make the case to customers as to why it’s in their best interest to migrate, it’s likely that migration will be spotty and episodic rather than programmatic.
If there is no clear customer benefit in features, functionality or performance (e.g., we’re selling the same product, just in the Cloud rather than on-premises), companies will often attempt to engineer a financial value business case for Cloud migration. The obvious advantage is moving the customer from a CAPEX to an OPEX expense item and eliminating the residual M&S payments, which can potentially draw scrutiny during budget cycles.
Best-in-class migration strategies harness the capabilities of product and field marketing, finance, sales and technical sales to create a compelling motivation for the customer to migrate.
Step 3: Determine the Pace and Approach for Cloud Migration
Once you’ve quantified the business value for both the company and the customer, you’re ready to build a Cloud migration strategy. Some important considerations here include:
- Pacing Customer Migration. Do we want customers to self-select and migrate when they want, or do we deliberately want to provoke the transition? If we want to move customers deliberately to Cloud, do we start with all existing customers, or a subset?
- Driving Conversion. Many companies stumble because they fail to provide reps with a compelling reason to drive migrations. In many cases, a migration essentially constitutes a new sale requiring the requisite effort of a new sale. However, the incremental sale may not represent incremental ACV or ARR to the rep, particularly if the overall TCV of the deal is less than under the legacy contract. If you’re using your existing reps to drive migrations, it is important to ensure compensation structures do not provide a built-in disincentive.
- Migration Ownership & Responsibility. Should we take the cloud migration out of the responsibility set of our legacy front-line sellers? Many companies utilize “tiger teams” that sit outside the existing sales force to accelerate Cloud migration. This structure can have several advantages, notably clarity of focus and an ability to drive expertise of the value propositions associated with moving to the Cloud (which may not be resident within the existing sales team). A dedicated migration team can also be explicitly (and solely) compensated on migrations as opposed to legacy sellers who must be compensated across a broader array of objectives. To enable cooperation and a seamless customer experience, existing reps should not be adversely affected from a compensation perspective by migrations. Generally, “tiger teams” operate for a set period of time and are disbanded, repurposed or absorbed back into the core sales force.
Some companies have shifted migration responsibility from front-line sellers to other members of the commercial team. One potential solution is to have customer success managers (CSMs) identify customers that may benefit from migration. In this instance, the CSM would then align the technical and selling resources required to complete the migration while acting as an advocate on the customer’s behalf.
As with many go-to-market decisions in the technology space, there is no one-size-fits-all solution for Cloud migration. Each company must consider its own revenue growth strategy, customer base, market, competitive landscape, product capabilities and other factors to build and enable an effective Cloud migration strategy. That strategy must be buttressed with the right sales motions and rules of engagement, messaging and value propositions, and incentive structures to maximize the benefits of Cloud migration to the organization and its customers.
If you’re interested in learning more about Cloud migration or what the best migration strategy is for your organization, contact the Alexander Group Technology team to discover how Alexander Group can help.
Case Study: Benchmarking Guides Migration to Subscription-Based License Model