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Jun 30 2008 6:30PM EDT

Will Cloud Computing Upend The Consulting Business?

Blaise Zerega is counting the days. Cloud computing presents a day of reckoning for traditional software. Some like Salesforce.com will make the cut. Others, like SAP and Oracle... well, there's still time for them to change their ways. But what about consultants? The high-priced service arms of software and hardware firms? Will they be spared the grim reaper?

At last week's Structure '08 conference, Zach Nelson, CEO of NetSuite, let slip a sobering view on the future for systems integrators.

In a presentation about the impact of cloud computing on the mid-market, Nelson spoke of what it would mean to service firms. He said that typical mid-market customers are accustomed to paying 1-3x the price of a software license for consulting/systems integration work. So, for a $75,000 software license, the customer would pay between $75,000 and $225,000 in services. And while pricey, the numbers are so big that none of it is surprising.

For a customer paying $25,000 for a cloud computing license, the rule about service costs following the 1-3x license fee formula breaks down, however. When using smaller numbers the notion of paying $75,000 in services when paying only $25,000 for software will strike many customers as outrageous. A new cost formula is needed.

But finding it won't be easy. Because an application resides in the cloud, people often think that it will work magically with other cloud-based programs. Not true at all, says Nelson. In fact, tying together cloud-based applications can be more difficult than getting traditional server-based apps to work together.

Caught in the middle of this squeeze will be systems integrators who, if they cling to the 1-3x formula, may be asked to provide the equivalent of $225,000 worth of services for  $75,000 -- ouch. Hardware companies (think HP's purchase of EDS) and software makers with high-margin consulting arms, will also be pinched.

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