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To Cloud or Not To Cloud-NICE Says Yes!

by Dick Bucci, Founder and Chief Analyst, Pelorus Associates - August 24, 2017

To Cloud or Not to Cloud-NICE Says Yes!

To cloud or not to cloud, that is the question being asked by contact centers and workforce optimization vendors. Hamlet’s thoughts notwithstanding, there is no question that the pace of cloud adoption in the WFO space is rapidly accelerating. Pelorus Associates has been tracking the WFO market for over 10 years. The first SaaS gambit that we are aware of was in 2002.  That’s when St. Louis based Pipkins, Inc. introduced WorkforceScheduling.com™ as a subscription alternative for users wanting the full complement of features and benefits of Vantage Point WFM software on a hosted platform.

For the next 10 years WFO players were relatively quiet on the cloud front.  There was a slow but steady stream of cloud-based point solutions, most commonly speech analytics and voice of the customer, but vendors were a little reticent to pivot their core product line to an untested distribution model.  However, what was recently a slow trot has now turned into a full-fledged stampede as virtually all the WFO players now offer at least one cloud solution for one or more of their core WFO applications.   Three factors are behind the change in strategy;
 
·         The success of contact center as a service (CCaaS) providers such as Five9, InContact, and 8 X 8 proved that the technology was secure and reliable and the enterprise market was ready to make the leap.
·         The emergence of dozens of Infrastructure-as-a-Service companies, most notably Amazon Web Services which controls 40% of the market, made it economical for smaller vendors to migrate their flagship products to the cloud.
·         Customer demand – Premise software contact center vendors were a little late with their cloud offers. This worked to their advantage as Microsoft, IBM, Oracle and others persuaded senior management and IT officials that cloud was the way of the future.
 
The most dramatic example of committing to the cloud model was the November 2016 acquisition of inContact by NICE Systems. The transaction valued InContact at approximately $940 million, making it one of the largest transactions ever in the contact center space.  NICE senior management elaborated on the reasoning during presentations on Analyst Day, May 8th.  CEO Barak Eilam explained that migration to the cloud was one of the “pillars” that was essential to achieving their corporate goal of achieving $2 billion in sales by the year 2020.  Some of the key advantages of acquiring inContact, which were voiced by Mr. Eilam and other senior executives were;
 
·         inContact already had a substantial business which included many small to midsize businesses, a segment which NICE had long coveted but did not have the product or distribution model to address.
·         Pure cloud solutions (SaaS based) require application development from the ground up based on pure cloud architecture.  In other words, it is very hard to reengineer premise-based application for cloud deployment.
·         Technology from Nexidia, a previously acquired provider of advanced cloud-based analytics solutions, could be embedded into NICE’s core interaction recording, workforce management, performance management, and related WFO applications.
·         Provided a complete omnichannel solution for customers, including call routing and interactive voice response plus email, chat, SMS text, social, work items in one cloud solution.
 
Finally, and according to NICE, “The new offering will enable organizations to create the “Experience Center,” adapting interactions routing in real time according to employee and customer personas, and understanding customer intent across the omni-channel journey. Such an approach allows organizations to understand the timely needs of each individual customer, anticipate them, and then best respond to them by utilizing the best channel that optimizes both customer preferences, as well as the nature of the specific situation.” 
 
This was not NICE’s first venture into the hosting model for WFO. Other cloud offers are Hosted Customer Engagement applications on NICE’s private cloud and the recently announced Evolve WFO Suite. The latter is a suite of cloud native applications built entirely from scratch and hosted on Amazon Web services. The first EVOLVE application, EVOLVE WFM was introduced in September 2016. 
 
Getting back to the question of whether to cloud or not to cloud, it’s useful to examine the pros and cons from both the contact center and vendor perspectives.
 
Advantages of cloud acquisition model – Contact Center
 
·         Modest front-end fees - conserves capital.
·         Investments are treated as expenses and therefore immediately tax deductible.
·         Software is automatically updated.
·         Fewer expenses for purchasing and maintaining hardware
·         Less need to retain IT specialists
·         Highly scalable
·         More flexible, easier for contact centers to change vendors
·         Usage-based pricing - ideal for seasonal businesses
 
Disadvantages of cloud acquisition model – Contact Center  
 
·         IT and operations staff resistance to change with loss of control and staff time to learn new systems
·         Need to integrate custom applications or functionality with new cloud applications
·         Difficult to integrate cloud applications with premise applications - WFO works best when all the components share databases and user interfaces.
·         Lingering concerns about security - recent experiences demonstrated that even highly protected enterprise and government databases can be penetrated.
 
On balance, deployment of the cloud model for enterprise software would seem to be the better choice. In our conversations with industry leaders we often hear that the entire organization is under a top-down directive to favor the cloud model over on premise. Cost savings is the big driver. In February of this year Gartner announced that the worldwide public cloud services market is projected to grow 18% in 2017 to a total of $246.8 billion up from $209.2 billion in 2016.
 
However, from the vendor’s perspective, moving to the cloud distribution model is by no means a slam dunk decision. There are obstacles, namely;
 
·         Hits to revenue and profitability
·         Accommodating channel partners
·         Customer retention risk
·         Harder to differentiate from competitors
·         R&D challenges moving from premise software development approach to cloud model
 
Of the above, the issues of revenue and profitability are the most significant.  The major problem with adding a cloud model is payback. The initial costs are substantial.  The vendor needs to build out or contract for extensive infrastructure required to host the product and modify the software to be cloud friendly. Sales must be recognized over time, typically 3 years, rather than immediately as with on-premise sales, while acquisition costs are recognized immediately.   The argument favoring cloud is that over time revenues from each customer will continue to flow much like an annuity and after startup costs are accounted for profits will roll in.   Unfortunately, this model hasn’t worked very well.   The most glaring example is Salesforce.com.  This CRM company has been growing at 20% per year and projects revenues more than $10 billion for FY 2018. Yet for virtually every year of the company’s existence it has piled up staggering losses and has just now turned profitable.   As a group, cloud companies spend a median of $1.18 to acquire $1.00 in revenue, and for some companies that ratio is as high as three to one.
 
The other key issue is the difficulty of fitting channel partners into the cloud distribution model.  Most WFO vendors rely on resellers to sell and support their products. In some cases, channel partners are the only distribution channel.  The reseller’s sales personnel are paid on commission and the commission on a cloud sale is only a fraction of what it would be on an on-premise sale. As well, there is less need for the ongoing maintenance and support services that are typically required with an on-premise sale.
 
NICE’s approach makes sense on many levels.  First, no customer is forced to adopt the cloud before they are ready.  NICE will continue to support its on-premise portfolio while rounding out the EVOLVE product line with WFO applications specifically designed for cloud deployment.  inContact brings over 12 years of cloud experience in both R&D, infrastructure and services. For greenfield customers, or organizations looking to transition to the cloud for all their contact center infrastructure needs the proven inContact platform is an ideal route.  Further, NICE is now positioned to provide powerful analytics-based WFO solutions via both ownership and subscription channels for contact centers of all sizes.  As a billion-dollar company with a solid balance sheet NICE can absorb any short-term hits to margins as the cloud channel, which now accounts for continues to grow.
 
Dick Bucci
Founder and Chief Analyst
Pelorus Associates
434-589-2131
dbucci@pelorusassoc.com
 
 
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