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Tuesday, July 25, 2006

Enterprise Software Licensing & Pricing : Changing The Rules Of The Game

Jeff Nolan writes that in a scenario where, customers are already conditioned to expect a huge discount on the list price for the software, so going to zero, or close to it, synchronizes the actual price list to the official one may be more sensible. He points out two important things:
- License sales are simply a proxy for the future annuity that a maintenance base is. If the core application functionality that is competitive neutral as free, large installed bases can be built & consequently the complete sales cycle mechanism would change.
- Enterprise software selling favors the large vendors at the expense of the rest of the market & the sales processes don’t facilitate selling across the entire market spectrum and that’s where he sees partner’s fit in. ( I see a much bigger role for partners – from recommendations to making the value proposition real, they play a much more important role seen from a customer perspective – in fact when software gets commoditized, the differentiation and scope for value add remains entirely on services. Also the services revenue of the product vendors are not small money as reported).)
He argues that the cost of sales can be lowered while horizontally scaling the customer base & the objective of the sales could be the upselling of components and maximum penetration of existing accounts. Sales become monetizing the support part of the deal and moves away from the promise of upgrades. As he sees it the risk for product vendors here - newrange of competitors that could price cannibalize the entire business and that this approach could be in essence cannibalizing billions of license revenue for the prospect of rewards in the lower margin services business. Other obstacles include compensating sales team and reporting financial results. Challenges would include devising new rules for support pricing models, offering the “Core” software free and charging for the context – vertical solutions, technology add-ons like analytics components etc.
My Take : These are all sensible ideas, no doubt. Jeff ought to be complimented for thinking out of the box here. I think that the customers would benefit here only when true interoperability becomes possible, composites becoming more rampant and the ability of the vendor/vendor consortium to help and support customers in such scenario becomes crucial. The Obstacles look substantial – they could overrun any chances of such innovations/changes happening!! Megavendors should not make it look like they are creating a new operational model, when the traditional license growth for conventional product sales are seen to be showing limited growth. As I see it there are improvements that need to happen on multiple fronts for the existing customers and are more overwhelming. In general, it can be easily seen that all aspects of software spanning technology and markets to usage and licensing models, will undergo substantial change in the coming years. Vendor consolidation & instance consolidation are making things more and more tough for customers with the switching costs making exit almost a non existent option. Product vendors benefit when organizations over-customize their systems or become extremely reliant on the vendor without having thought through and bringing in contractual safeguards. Vendors need to dicuss and provide options for the different types of license audits that they can choose to make – the threat impact and the risk mitigation costs for the customer here are really huge. Vinnie points to a computerworld investigation involving 51 companies - including 14 that Microsoft contacted about the SAM program - showed that many U.S.-based IT managers were confused, distrustful or downright angry after their companies had been accused of potential licensing problems Some of the recommended protective measures include - protecting license costs for additional users and a provision to account for unused software or user base ought to be built in. Software companies ironically try to make money when users switch the hardware platform! – it is imperative that buyers make provisions during negotiations in contract to build in the ability to transfer rights in mergers and acquisitions or hardware updates. Buyers should be able to upgrade hardware / change site locations without the burden of additional costs. The whole notion of a perpetual license is that buyers own it and use it as they deem fit and the machine and location should simply not matter, except in legal restraints imposed by different nations. Customers ought to have the rights to exchange the license in case of version switches with same functionality for no additional license, maintenance, or support cost. Just as charity begins at home, changes ought to start from the current base - though it may be a tall order to expect mega vendors to change their ways overnight, particularly when the going looks better for them.

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