A cloudy 2014 for enterprises? Three trends to watch

Clouds over Seattle. Flickr photo via Dan Hershman

Clouds over Seattle. Flickr photo via Dan Hershman

We are in Seattle and thus deep in the world of clouds: Amazon Web Services, Microsoft Azure, CenturyLink Savvis, and more.

But even for us, the experience of the Amazon Web Services re:Invent conferences has been an eye opener.

The first conference in 2012 was a developer’s heaven and a coming out party for AWS —complete with rocket scientists singing the praises of the cloud.  2013 re:Invent was all about enterprise IT jumping into cloud computing and understanding the implications of AWS and its growing ecosystem for their business.  (You were just as likely to run into a CIO or VP of Infrastructure IT as a developer or startup in 2013).

Coming out of this this years’ experience, which telegraphed how the cloud will figure prominently into enterprise plans, here are three trends that we expect for 2014 in the enterprise technology market.

Significant shift to Pricing-as-a-Service

2014 will set forth a significant shift in how software and hardware technology is priced, which will put incredible pressure on incumbents, throwing the advantage to companies that price “as-a-service.”  For several years, software-as-a-service for everything from marketing automation to managing sales cycles have been largely priced on a subscription basis.

But, subscription-based pricing has now gone far beyond SAAS to infrastructure “as-a-service” and new forms of managed services.  Pricing-as-a-Service changes almost every dimension of software and hardware transactions.  It changes how sales reps get compensated, revenue gets recognized, channel partners get alignment and “products” get supported just to name a few examples on the “sell side” or vendor side.

Pricing-as-a-Service also changes the buy side.  While many purchases for both hardware and software will still come out of capital budgets, we see a major swing in budgets toward recurring operating expenses.  And, that changes budgeting processes, economic buyers (moving from “IT” to “line of business”) and, of course, IT operations and support.

In fact, a whole new breed of data-driven, “managed services providers” will emerge who will combine software and services in delivering value.   Innovative companies who can build subscription services into their products and pricing strategies are the best equipped and are at the forefront of driving this trend.  Incumbents, with their legacy sales forces, revenue models and profit margins to maintain, will come under pressure from customers to make a change or lose the race.  Customers are demanding empowerment and agility, and pricing-as-a-service facilitates both!

Enterprise IT is held to a higher standard of performance

The second and related trend is an embrace of agile processes in the Enterprise IT departments.  CIOs, IT directors and other corporate operators and developers of IT services are encountering new expectations and alternatives as their role is changing.  Internal business users, who are their historical customers, are now empowered to go find and use infrastructure like Amazon Web Services and Azure, SAAS applications like Salesforce.com and mobile solutions like Dropbox.  These self-serve, rapidly available services easily accessed by business uses raise the expectations bar for central IT.

Corporate IT is now responding with new agility.  For example, new Agile software development, new automation and management structures such as “devops” and “operations intelligence” that improve response times are being embraced.  And, even a new outlook on their role – from central IT delivery to service broker – has emerged.  In 2013, the shift from resisting to embracing next generation IT became evident.  And, in 2014, the pace will only quicken.

The API economy emerges

Madrona Venture Group's Matt McIlwain. Photo via UW CSE

Madrona Venture Group’s Matt McIlwain. Photo via UW CSE

Last year in the course of a week we learned that three of our companies were using an early stage company, Zapier, to integrate APIs.  Since then we have seen a strong acceleration of these API focused services into the “API economy.”  And for good reason, as services move to the cloud and APIs become the core connective tissue to create data and automated workflows personalized to a company, or application, the importance of maintaining these API integrations increase.

Some companies have managed basic API-driven processes for years – think of an online travel booking service and the myriad systems they need to connect with to deliver a fast and satisfying experience for consumers.  The change now is that every company is recognizing they can automate and personalize workflow to meet the growing demand for web services from the infrastructure layer up through the smart, connected device, so these services need to be broader, easy to use and yes, available via subscription in the cloud.

Technology providers and technology consumers will embrace Pricing-as-a-Service, Agile Enterprise IT and the API economy in 2014.  And, as multiple CIOs and technology industry executives have shared with me, the pace of change is quickening.

AWS re:Invent highlighted rapid innovation with new offerings like Workspaces and Cloud Trails.  And, we fully expect AWS, Azure and many compelling startups to lead the way in 2014.

Matt McIlwain is a managing partner at Madrona Venture Group and invests in early-stage technology companies in the Pacific Northwest. He currently serves on the boards of 2nd Watch, Animoto, Apptio, ExtraHop, GraphLab, Mixpo, PayScale, Placed, Qumulo, Smartsheet and Skytap. You can follow him on Twitter @mattmcilwain.