CloudStrat: Managing Migration to the Cloud

Introduction

CloudStrat places players in the role of the chief strategy officer of LegaSoft, a large global

software vendor. LegaSoft is a market leader in the enterprise resource planning $($ERP$)$ market.

ERP software is a suite of applications, including financials, manufacturing, human resources, and

other modules that together automate the back$-$office business administration functions of an

enterprise. LegaSoft has traditionally sold $$on$-$premise$$ ERP software, which is installed and run

on computers on the premises of the organization that buys it$,$ based on a perpetual license model.

However, a disruptive competitor has entered the market. This competitor, called NetWare, offers

similar products but uses the software as a service $($SaaS$)$ model to deliver its software. The SaaS

model, also known as the $$cloud computing$$ model, typically has a faster deployment time and a

lower cost of ownership than on$-$premise software. NetWare has been in the market for a few years,

and its offerings have been well received by customers. To compete with NetWare, LegaSoft

created its own cloud$-$based offerings. LegaSoft expects that a significant percentage of its legacy

customer base will migrate to these SaaS products. The migration will most likely proceed at

different rates for different modules, different markets, and different segments.

As LegaSoft transitions from the legacy software model to the SaaS model, its SaaS offerings

will potentially cannibalize its legacy offerings. This cannibalization will hurt revenues and cash

flows because customers pay smaller annual subscription fees in the SaaS model as opposed to

large up$-$front payments in the legacy model. On the other hand, if LegaSoft does not aggressively

compete in the SaaS space, its market position will gradually erode. LegaSoft$$s success ultimately

hinges on its ability to navigate this migration to the cloud, by transitioning its business model to

take advantage of the SaaS opportunity while protecting the profits of its legacy business for as

long as possible.

The Market for Enterprise Software

Enterprise software has traditionally been sold and deployed using an on$-$premise model, in

which firms purchase the software and, in a lengthy process, install and customize it$,$ deploy it

across their organization, and maintain and support it with their own dedicated staff of highly

specialized engineers and support personnel. The software requires a large up$-$front investment in

a software license, in addition to annual fees for access to upgrades and technical support. To