Enterprise Software : New Model Ahoy!

Larry Augustin writes,"The traditional enterprise software business model is broken. A rabid search for new customers and revenue growth has caused sales and marketing costs to spiral out of control. In fact, Rick Sherlund at Goldman Sachs estimates that in 2005 software companies will spend 82 percent of new license revenue on marketing and sales efforts. That's up from 66 percent in 2000. While tech continues to benefit from "mini-waves" of technology shifts (e.g.,wireless), there are not the rapid, landscape-changing shifts that drove feverish growth in the 90s. In addition, many of today's technology trends actually serve to reduce aggregate IT spending.

This quest for additional revenue has created an untenable cost structure for the industry - one that doesn't serve vendors or their customers. In essence, vendors spend a lot of money to convince customers to buy, and then charge them a lot of money for the license which covers the sales and marketing costs. We're charging the customer just to sell to them. The sales cycle of a traditional enterprise vendor is just too long – close to one and a half years to close a deal. All along, the software vendor is convincing the customer to buy. New license growth in enterprise software companies today is stagnating. By changing the revenue mix from primarily new licenses to primarily maintenance on already proven products, a typical enterprise software vendor's top line would drop by 25 to 30 percent. But the decrease in price and increase in market size will enable growth in those previously unreachable markets, creating a vibrant and growing company that will eventual pass its former revenue numbers.

Augustin is the creator of SourceForge.net and serves on the boards of directors of open source vendors JBoss, SugarCRM, Pentaho, Medsphere, and the Open Source Development Lab, which is the keeper of the keys for Linux. Given his backgorund, Augustin's prescription - [may be it is the case of(prescription being worse than the malady)] as the solution revolves around the much hyped open source model. Granted - Augustin certainly brings forth eloquently the issues centered around the problem.