Cloud Marketplaces – The New Digital Way to Procure Software

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Cloud computing is now mainstream. First, it facilitated the rapid ascent from start-up to public company for the likes of Dropbox, Uber and Snap. Today, the Fortune 500 have adopted the cloud to operate their digital businesses.

Every industry vertical has used the cloud to launch digital products, and create immense stock price appreciation in the process. Starbucks, adidas, Allianz, Home Depot – just a few examples of companies that reinvented their business models with the cloud and created massive shareholder value.

The true driver behind “digital transformation” is the speed at which these companies can experiment and launch new digital services. When people talk about the “elasticity of the cloud” – it’s the ability to spin-up and spin-down new resources on-demand, to power these digital services. Elastic provisioning of new resources happens literally at the click of a button, in a cloud console.

The cloud success stories you read focus on the use cases. For some industries – elasticity is a game changer on peak-usage days. Black Friday in retail. Tax day in finance. Super Bowl for sports-betting. Containerized architectures, microservices, continued integration – you’ve heard it all.

But a much less talked about success factor of digital transformation and elasticity is procurement. Procurement had to adjust – from long to short buying cycles, from a pretty static world of on-prem IT to the dynamic world of the cloud.

Cloud procurement changed to support new use cases

A typical enterprise has hundreds of applications in the portfolio, about half of them developed in-house. Cloud spend on applications comprises roughly half of a company’s IT spend. And much of the use and buying of cloud services for those apps is decentralized.

It has to be.

Product and engineering teams are moving fast. When traffic goes through the roof, they can’t wait for some central purchasing department to give the “ok” to spin up another server. Whoever is on call goes into the console and adds more resources as needed. With container-based architectures and serverless technologies, scaling is entirely automatic.

In a decentralized, auto-scaling cloud context, the “old” procurement model with centralized accounting, budgeting and months of lead time just doesn’t work any more. When DevOps, CI/CD and containers mean that product and engineering think in hours and days for shipping software, finance and procurement can’t think in fiscal quarters and years for buying it.

But finance and procurement of course still need one version of the economic truth, to plan, budget, manage and finance operations. Rather than standing still – procurement adjusted to the needs of the business and changed the way they’re buying.

A common framework for enterprises to procure cloud services

On the platform side, the cloud vendors put infrastructure in place to support buying for a distributed environment. They built what procurement needed to follow the business. There are three fundamental classes of service.

  1. Identity and user access management (“IAM”) enables secure access to cloud services and resources. They include concepts for users and groups, with permissions to allow or deny access to a specific service, including granular parameters like time of day and IP address. The default option for any user is always “no access”, aka “least privilege”, to prevent any accidental misuse from the start. The corresponding products on each cloud are usually just called that – “IAM”.
  2. Deployment and management services specify and standardize the resources required to run an application, by using so-called “templates”. Templates are configuration files written in plain text or a programming language. Templates automate the process to spin-up the resources for an app, and can be repeated over and over with consistent, predictable results. Templates also standardize components across an organization, which means they enable compliance and represent the single source of truth for all resources. Products include “AWS Cloud Formation”, “Cloud Deployment Manager” (GCP) and “Azure Resource Manager”.
  3. Billing and cost management tools provide visibility into spend, intelligence on what services are driving cost, and of course payment options. Much of that data is consumed via dashboards, but the clouds also offer raw cost and usage reports for download. They are simple csv files – with granular consumption data. Towards the end of a month, these reports can contain billions of rows, and many enterprises are using those reports to run custom daily analytics on usage, and understand spend by product, department, etc.

All of this in a common security, compliance and legal framework that the cloud providers have developed for over a decade now.

Combined, these services mean procurement can track consumption at a granular application and user-level. They can abstract cost, usage and billing away from the actual products and users, and yet still be in control with a real-time pulse on consumption.

Successful cloud procurement strategies

And so in response, the “digital winners” overhauled their finance and procurement processes.

They created cloud procurement strategies that prioritize innovation, vs. dictating what services teams can use. They follow three principles:

  1. Align spend with business outcomes, not specific technologies.
  2. Track and re-allocate costs to business units and digital products based on usage
  3. Consolidate demand across business units and negotiate preferred pricing in exchange for longer-term commitments.

These longer-term agreements stretch over 3-5 years and are also known as “enterprise discount program” (AWS), “committed use discounts” (GCP) or simply “enterprise agreements” (Azure). They offer substantial discounts in the 40-70% range on the on-demand list prices.

With these three principles, everybody is happy. The business can do what they need to do, and procurement is still in control and delivers cost savings.

All good, right? Not so fast…

The old way of buying from ISVs

Now consider next that for each cloud service, there are additional 3rd party services attached. Applications require supporting software to run – for development, testing, security, analytics, monitoring, etc. Instana is an example for a company in the “monitoring bucket”.

Instana and other 3rd party software is as business-critical as the applications themselves. As 3rd party applications, we enrich the core cloud experience, and also run in the cloud ourselves. Most software is delivered in a SaaS model from smaller vendors (aka “ISV”). It’s not unusual for enterprises with more than 1,000 employees to have 200-400 SaaS applications from as many vendors running, and that number is only growing.

Each one of those vendors needs to go through a process to review and negotiate terms, pricing, licensing, security, vendor set-up, payments, etc. It’s a time-consuming process, and if oftens takes months to onboard a new vendor, or even just to renew an existing contract.

When we work with our customers during a trial, they usually don’t need more than two weeks to get to a “yes / no” decision. They are ready to start using the software – yet they’re waiting for the formal process of onboarding Instana – and that applies to other vendors as well. We’re all familiar with the back-and-forth of emails, calls and redlines. I’ve even seen account execs setting up WhatsApp groups with the user, legal and procurement.

Marketplaces to the rescue – a new way of buying software

This is where cloud marketplaces come in. They facilitate a buying experience for ISV products that’s identical to buying a native cloud service like a compute instance or storage via the cloud console. You can buy software quite literally at the click of a button.

The marketplace concept itself isn’t new – in the consumer world, Apples has an AppStore for apps, iTunes for music and movies. Google’s equivalent is Google Play. Microsoft has a Store for Windows Apps. In the enterprise world, Salesforce has the AppExchange.

What’s new is that in the past three years, the dominant cloud platforms – AWS, GCP and Azure have made major investments to make their cloud marketplaces first class citizens in their product portfolios.

Cloud marketplaces used to be a simple directory of third-party apps. They’ve now evolved to sophisticated distribution platforms with a ton of functionality for users to discover, procure and deploy relevant applications. Today, they offer flexibility around deployment options (e.g. SaaS, APis, containers), consumption models (e.g. by the hour, annual contracts, free trials), with integrated billing via the monthly cloud invoice.

Marketplaces also come with strict procedures for a listing, such as audits for security and privacy. The same guardrails that apply for cloud services – user management, deployment and billing – also apply to using software sold via the marketplaces. They also enforce additional certifications required for certain industries (e.g. finance) or government.

Benefits for buyers

With these new features, adoption of Marketplaces among buyers has soared. For example, AWS aloned processed over $1B in purchases in 2019 through the AWS Marketplace. Of course, that benefits their business. It drives up the transaction volume on their platform.which is why all the clouds are now actively promoting their marketplaces, and keep building out features.

But buyers also benefit, with three advantages.

  1. Faster purchase: Marketplaces compress the traditional buying cycle, from months literally down to minutes. As a customer, when dealing with a single vendor, you can buy software on terms already established with the cloud vendor, and bypass legal, procurement and vendor management. Payment is integrated with the existing cloud bill.
  2. Less overhead. If you ask any procurement department, they will tell you they want less vendors. But SaaS is clearly driving that trend into the opposite direction. Buying software via a marketplace reduces their workload to buying products from each individual vendor, one at a time.
  3. Draw down on committed spend. Purchases via a marketplace count towards a company’s cloud spend. Most enterprises today have long-term, 3-5 years enterprise agreements in place, with pre-committed spend in exchange for discounts in the 40-60% range. That spend is the “use it or lose it” type of spend. Buying software via a marketplace makes sure your spend ends up in the “use it” category.

At Instana, we see how a growing share of our new and existing customers take advantage of these benefits. Especially for larger enterprises, Marketplaces give our customers the flexibility to accelerate purchasing Instana, while staying compliant and cost-effective.

If you’ve never purchased software via a Marketplace before – shoot me a note on LinkedIn, and I’m happy to walk you through the process and the benefits for your particular situation. We work together with all the major clouds. Meanwhile – Instana is available for purchase on the AWS Marketplace, GCP Marketplace and the Red Hat Marketplace.

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As the leading provider of Automatic Application Performance Monitoring (APM) solutions for microservices, Instana has developed the automatic monitoring and AI-based analysis DevOps needs to manage the performance of modern applications. Instana is the only APM solution that automatically discovers, maps and visualizes microservice applications without continuous additional engineering. Customers using Instana achieve operational excellence and deliver better software faster. Visit https://www.instana.com to learn more.