When the downturn starts killing off your company’s SaaS providers

Over the last 10 years, we’ve seen a major shift as enterprises embrace cloud-based SaaS. It’s now customary for large enterprises to rely daily on dozens of outside services to function. While some of these services are provided by large behemoths like Salesforce and Oracle that can survive a popping bubble, others are from smaller companies, many of which are highly leveraged and/or still figuring out their long-term business model.

The Internet today is 100 percent dependent on the public cloud. The last time companies were so reliant on an external, generally available system was when electricity was invented. We have never seen such an interconnected network of dependencies between corporations to power their day-to-day processes. Consider what happens when AWS is down — even in just a single region. Major services including Netflix, news sites, and countless startups go down with it.

When setting up your infrastructure, you’re constantly balancing uptime and availability against infrastructure costs. If 100 percent uptime is critical, you’ll need to spend for it. If 99.99 percent is good enough, your budget will reap the benefits. Netflix going down can be frustrating, but it’s not as severe as a mission critical tool failing such as payroll, project tracking, or communications.

Each month you hear about another startup running out of funds and either shutting down or getting bought. But what if a startup can’t find a buyer? Sounds like their product will be shutting down. So what happens when a critical tool you’re relying on such as your support system, integration engine, or DevOps tool is suddenly shutting down in a week or two? At the very least, your team will stumble a bit. Even a fire-drill migration from one product to another will take at least a month to test and implement. This could cost you millions, and it can take your team months to get back to 100 percent productivity.

We have already seen the beginning of this consolidation phase at the infrastructure level. Last year, we saw major players including Nebula, HP, and Citrix shut down some of their infrastructure offerings. Although these products did not attain the success and customer base that AWS has seen, they still had customers that relied on their infrastructure to power day-to-day needs. While many of these customers were established and could find the budget for a migration, many could not.

We’ve all read about the Parse shutdown and have seen it reverberate across the tech industry, but another startup that just announced it is shutting down its product is Kimono Labs. After announcing that it was acquired by Palantir, Kimono Labs gave its current users just two weeks’ notice before discontinuing its SaaS solution. For companies that rely on Kimono Labs to assist with their operations, they will find there isn’t enough time to migrate to a new service.

Infrastructure consolidation is a key example of the risk of relying on outside technology and a reminder that an enterprise’s product is not necessarily a safe bet. Such failure can be cascading: If one critical service goes down, it can easily bring many others down with it. So what should you do to protect your business and ensure your company’s survival when the bubble pops? Here are three tips:

1. Control your dependencies and mitigate risk. Is the service mission critical? If your new lunch delivery service goes under, you can easily order two dozen pizzas to feed your team. But if you’re unable to manage payroll or your team can’t communicate properly, that’s a catastrophe for your business. Take inventory of all your IT services and systems and have a backup plan for all your mission-critical systems that is worked out and documented.

2. Interview your vendors. Find out how resilient your service providers, ISVs, and consultants are. If they’re running on VC funding and aren’t (yet) profitable, that could present a significant problem down the line. Companies that have a multi-year track record, significant cash reserves, or are customer funded will likely be able to survive a downturn.

3. Invest in your own IT. A complementary option to public cloud providers is to capitalize on in-house expertise and invest in private cloud infrastructure. Public SaaS solutions are enticing because you don’t have to do anything — you pay a monthly fee and they just work. But you also have zero control over availability. Even if you have a service-level agreement and get money back if the service is down, it would be much better if the service didn’t go down in the first place. If you can afford to run a system internally with a proper staff, backups and a guaranteed setup, it’s worth investigating.

No matter how many safety nets companies put in place, the tech bubble bursting will cause tremors across all industries. There’s a big difference, however, between a business that’s slowed down and one that comes to a grinding halt. Whether you believe the bubble is about to burst or slowly deflate, contingency planning is best done before you need it. With VC funds starting to dwindle, there’s no better time to get started.

Gal Oppenheimer is Senior Product Manager at Built.io.