Most cloud computing talk centers around whether users will make the switch — and rightfully so — but don’t think the whole paradigm begins and ends what end-users want. ISVs are interested, too, and the more they switch to SaaS delivery models, the more real the cloud becomes. Not only do some consider SaaS a cloud service (which is a more appropriate classification than just calling it cloud computing), but ISVs are prime customers for providers of cloud infrastructure.

Just ask Callidus.

A leader in the sales performance management (SPM) software market, Callidus has spent the past three years transitioning from a straight on-premise delivery model to also including an on-demand version of its products, and the results have been, well, “remarkable.” According to CTO Michael Graves, about one-third of the company’s customers are now leveraging the on-demand model, up from about 5 percent two years ago. He says the plan is to have half to two-thirds of Callidus’ customers using the model within a few years. And the great thing, he says, is that this switch isn’t just from existing customers changing their use, but rather from an opening up of the market due to lower prices. “In the on-demand model, the actual cost of the product itself and the solution delivery is dramatically lower,” says Graves.

Callidus built its shared, virtualized infrastructure on the Sun Grid (the foundation for Sun’s Network.com service), and the economies of scale that type of delivery architecture provides make a big difference. Callidus always offered a grid-enabled version of its on-premise product, but now, says Graves, “We’ve got this grid computing architecture that provides these computational services or commission calculation services, and basically what we’re doing is creating a scalable way of us porting more and more customers.”

The trick to making decisions as to the underlying architecture, he says, is to determine your company’s core IP. If building scalable, shared infrastructure is not part of your core IP, it’s time to leverage infrastructure providers. For example, Graves has a friend delivering his search product as a service via Amazon’s EC2 cloud. As long as you trust the provider and there is a level of credibility with the provider, Graves thinks pretty much any type of virtualized or cloud computing infrastructure will do. “You really want to make sure your infrastructure performs well, is secure, is reliable, because the real revenue opportunity isn’t going to be the first two or three customers — it’s going to be the hundreds of customers that follow them,” he explains.

He adds that taking this measured approach to ensure quality of service means happier and, hopefully, referenceable customers. Callidus spent the first couple of years emphasizing the operational model and just now is moving the emphasis on its go-to-market and product optimization strategies. In terms of security, he says, that, too, was an initial emphasis, and Graves says the security Callidus can offer on-demand customers is better than what they can do internally.

And although Graves describes the process as “by far the most fun things I’ve ever done,” that doesn’t mean there aren’t challenges. On the application side, he says “[y]ou have to challenge everything you do in terms of the fundamental design of your application.” For Callidus, that meant, for example, bringing in functional design and user interface experts who better understood the SaaS model. The company also changed its development methodology from a waterfall approach (six months for design, six months for building and six months for quality assurance) to an agile SCRUM approach, where updates are carried out on a monthly basis. “[We have] radically changed the way we operate internally,” says Graves.

After the initial work is done, the ISV sees two main benefits. First, says Graves, is a closer relationship with customers as a result of being more in tune with their day-to-day operations. Second, he says, is a tighter feedback loop. In the on-premise world, Callidus saw customers waiting 18 months to upgrade; the gaps between building, shipping and, ultimately, having customers roll out new features were immense. In the SaaS world, Graves says features are deployed much more quickly, which combines with the closer customer relationships to create fast, high-quality feedback.

Ultimately, Graves says the SaaS model means more responsibility for the ISV, in terms of having to manage operations and the application, but also the potential for greater profit margins. Once the on-demand operational process is optimized and OPEX is under control, ISVs see more revenue from a single transaction, and can then afford to lower the price of the product to take advantage of economies of scale. Really, Graves says, it’s a win-win situation.

“From an ISV perspective, I think the model makes complete sense,” he sums up. “It really boils down to: this model helps you develop a much closer relationship to your customer than you ever would have in an on-premise world. And that’s just goodness from a product delivery perspective and from a product development perspective.”

Oh, and users receive benefits, as well. Graves notes that aside from the tighter relationship with their vendors, customers also receive the advantage of having the application operated by someone who built it, thus creating far better operational efficiency. The move also allowed Callidus, specifically, to expand its product offerings to include more pervasive compensation areas. The company also teamed up with Saleforce.com so sales managers can see results for themselves or their teams right from the Salesforce portal.