I get a lot of input into my research from speaking with software buyers and sellers, which I analyze and process to come up with firm conclusions and recommendations in my published research and forum speeches. I'm going to use this blog to air some work-in-process analysis, to solicit additional thoughts and information from you. Just recently, Ive been considering why people are talking about 'pay-per-use' a.k.a. 'utility pricing' for software, and to me, the disadvantages to buyers and sellers outweigh the benefits.
Software pricing should be simple but fair, value-based, future-proof and published (see The Five Qualities Of Good Software Pricing). Yes, a one-price-fits-all 'per user' fee isn't fair or value-based, but that doesnt justify the potentially horrendous complexity of tracking detailed usage. Role-based user pricing, such as SAP user categories, is a much better way to reflect diverse usage profiles.
Im not arguing against flexible, on-demand services, particularly for temporary needs, such as renting some CPU power for a few hours. I'm concerned about pay-per-use pricing models for regularly used applications. To me they would be:
Microsoft announced on Friday that it will stop selling new Select licenses from 1 July, 2011. Customers with existing agreements can renew them for another 36 months, as per their agreements, but the replacement Select Plus program is likely to be a better option. Microsoft launched Select Plus on 1 July 2008, and I wrote at the time that it was an improvement on the basic Select structure: Microsoft Simplifies Its Volume Licensing.
However, Microsoft's pricing team struggled to persuade its LARs to promote Select Plus over the more familiar Select agreement, and customer adoption was disappointing. So the decision to drop the older program makes sense for Microsoft, because it will force its channel partners to embrace the new model. And its no bad thing for buyers - you've one less choice to make, and there's little negative impact.
The biggest advantage of Select Plus for sourcing managers is that they no longer need to submit a three-year spending forecast - this is extremely difficult for central teams buying on behalf of autonomous business units that won't havent planned Microsoft technology adoption that far out. Instead, pricing works like an airline loyalty program, on the current and previous years' actual transactions, as the figure below from my report illustrates. My report explains some more advantages, such as the flexibility to opt tactically for software assurance on individual purchases.
Hopefully you’ve all read SAP’s co-CEO’s open letter to you (http://ceos.blogs-sap.com), and also some of the great responses such as this one: http://bit.ly/b5foPD . With all these open letters flying around, I thought I’d write a slightly different one. Unlike most of my fellow commentators, I’m not going to tell SAP how to run its business. Instead, I’m going to give you, its customers, a suggestion on how you can cut the cost of your SAP environment. You ready? The answer is “buy less stuff from them”.
Actually, it is not as facile as it sounds. Many companies that I speak with automatically favour their incumbent vendors for new projects, while their IT vendor managers complain to me about their negotiation impotence. You won’t be able to get the contractual protection you need, such as limits on CPI maintenance increases, unless you make them a condition of future purchases. Large software companies such as IBM, Oracle and SAP focus predominantly on license sales. It wasn’t customers’ unhappiness, resulting from the Enterprise Support blunder, that caused SAP to fire its CEO and rethink its approach. It was the fact that you showed that unhappiness by voting with your purchase orders, delaying projects, going to competing vendors, and causing SAP’s license revenue to plummet. When Jim and Bill promise to “accelerate the pace of the innovation we deliver to you”, the d word is a euphemism for ‘sell’.