Written by Andy Palmer
I believe that all software contracts should tie payments to end-user adoption and real outcomes in context of either saving money or driving growth (or both!). Limited term software subscription deals can be used to accomplish this relatively quickly: if users adopt and create value, you pay; if they don’t, you don’t renew.
For software industry old-timers this is heresy. But it’s time to leave this one in the rear-view mirror – or eventually suffer the consequences. The packaged, on-premise third-party software industry is due for a reckoning: it’s time for vendors to modernize their business models that depend on bilking customers for perpetual licenses and maintenance streams for software — much of which is never used. And customers should start buying software as a service, even if they are running it on premise, and in the process avoid overpaying for big perpetual licenses that their users may not ever use.
As someone who has worked on both the vendor and customer side of the equation, I believe that it’s time to embrace the new realities of enterprise technology. Here are the new realities, as I see them. (Most of these realities also apply to how software is sold to and purchased by federal and state governments.)
10 Realities That Vendors and Buyers Can Ignore – But at Their Peril
1. The pressure of the “consumerization of enterprise IT” is game-changing. This pressure is coming down on enterprise IT organizations, and is becoming acute as the gap continues to widen between what an employee experiences when they fire up their “standard” company laptop and what they experience when they go home at night and hop onto the modern Internet. This experience gap reveals just how wasteful and disconnected most enterprise technology organizations are from end-users’ real needs and what real business outcomes mean — driving top line growth or saving money.
2. Buyers purchase a ton of software that they don’t ever use, much less realize value from. The enterprise software emperor has no clothes. Buyers need to step away from the standard perpetual license agreement. Just put it down, and pick up a subscription/term agreement. It will be okay, really. Businesses haven’t imploded because they don’t use perpetual agreements. Short-term, subscription-based agreements are working great for all those Google Enterprise and Salesforce.com customers who have month-to-month agreements. Subscription/term agreements help ensure that buyers don’t waste bazillions of dollars buying software they don’t use.
Now, the finance folks will come in with their spreadsheets and models that show how you can finance perpetual agreements at a lower cost of capital. Don’t believe them. What these financial engineers don’t take into account is one important fact: that if you pay a vendor a bunch of money for a product that is supposed to do something and the vendor isn’t on the hook financially for this on an ongoing basis, then there is a significant risk the vendor isn’t aligned with what the customer will need down the road. There is little incentive for the vendor to ensure that the software is deployed, adopted and improved over time. The vendor (particularly if it’s one that’s oriented toward short-term goals) will likely take the money and run. Not necessarily because they are “bad people”, but because the business (like everyone else) is under pressure to deliver more, faster, better.
3. Vendors sell a ton of software that is never deployed (see #2). And many of the vendors don’t care. As their businesses have matured, many of these vendors have sacrificed their souls to short-term thinking and financials. They are no longer driven by missions to deliver value or great experiences for end-users. By comparison, the consumer Internet companies that have moved into the enterprise software market have used alternative models and behaviors and begun to disrupt the ecosystem. Those customers that have embraced new usage-oriented models have benefited significantly and lined up their interests with those of their users.
4. Traditional business models encourage vendors to extract as much money from their customers as quickly as possible – regardless of whether the software works or the customer actually needs the software. During the 1980’s and 1990’s, this “sell first, ask questions later” model became standard practice for technology companies, based on the success of proponents like Oracle. But now, we’ve evolved. Customers shouldn’t stand for it. There are better alternatives and vendors in just about every enterprise-software category should realize that it’s only a matter of time before someone comes along and provides better solutions that work for users quickly. Let the hangover of enterprise software purchases begin. User reviews from sites such as TrustRadius are the new primary source for evaluating new technologies as large companies realize that analysts such as Gartner and Forrester are being paid by the vendors.
5. The perpetual-license model creates perverse incentives for both buyers and sellers. With a perpetual license model, the seller gets too much value up front, misaligning their interests with those of the buyer. The subscription/term license model creates a much more rational incentive for the seller of technology to deliver both short-term value (through adoption) and long-term value (through improvement to the software) for customers’ end-users.
6. Traditional “maintenance” is just as dysfunctional as the perpetual license that it stems from. Fifteen percent (15%) maintenance is not enough money to innovate and improve a new system. Therefore, vendors’ business models put them in a position where they have to “upsell” their customers’ perpetual licenses for some additional usage or a new product.
7. Many customers should be happy to pay larger subscription fees over time in exchange for significant probability of greater success, user satisfaction and innovation. The biggest problem that most CIOs have is their overall success rate — too many of their projects fail. Using a subscription/limited term license model helps align vendors with the success of your projects.
8. Multi-tenant web services present a compelling alternative. The broad availability of commercial multi-tenant hosted web services (epitomized by Amazon Web Services) is creating a widening gap. On one side of the gap, there are buyers and sellers of software who are merely perpetuating outmoded models for consuming and selling software. On the other side of the gap are enterprise technology buyers that demand that their vendors deliver value through reliability and innovation every single day – and have the means to measure this.
9. FUD continues to rule – for now. Many of the procurement and sales establishments are using the FUD (Fear Uncertainty and Doubt) arguments to slow the adoption of new software-as-a-service models. I can understand why: the new business models including SaaS challenge their very existence. However, as a result, their customers are saddled with a sub-optimal state of productivity for their systems and infrastructure. This is not sustainable as technology organizations are under dramatic pressure to reduce costs significantly.
10. Enterprise technology organizations that embrace new licensing and deployment models are more productive/efficient and can recruit better people. They can focus more on high-leverage skills like networking and integration – and worry less about lower-value activities such as racking and stacking servers or building and releasing proprietary software.
In today’s era of big data and constant innovation, companies that don’t embrace these new realities of enterprise technology will quickly be left behind. To learn more about how we approach this at Tamr, please contact us or request a demo.