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’.
As I live in UK, I tend to record major US sporting events and watch them the next day (the Superbowl doesnt start until nearly midnight). That means I have to avoid the internet, twitter, conversations with US colleagues, etc, for the whole of the following day so I can enjoy the game without knowing the score. One client nearly spoiled it for me by talking about the game in an inquiry, but I managed to shut him up. (I think he understood why).
January 26th, 2010 was a black day for the enterprise software business.Late yesterday, Oracle launched a lawsuit against independent support provider (ISP) Rimini Street, alleging 'massive theft' of its intellectual property. Industry analysts had been expecting something like this - Oracle is already suing Rimini Street's predecessor TomorrowNow and was clearly worried that a competitive market would force it to cut the price of its hugely profitable maintenance offering.
Along with its 2009 results, SAP today made another attempt to undo the damage of its clumsy attempt to hike its maintenance % up to Oracle-like levels, by announcing the reinstatement of Standard Support as an option for customers. “SAP’s new support model is a direct response to the many discussions we’ve had with our customer and user groups,” said Léo Apotheker, chief executive officer, SAP.
Software vendors like to claim that their sales proposals are highly confidential, For Your Eyes Only or even, if you prefer the Coen brothers to Bond, Burn After Reading. I help dozens of clients every year with software negotiations, but I cant do that unless they share with me the vendor’s proposal, including price details and contract terms. Many clients are reluctant to do this, worried that doing this might break confidentiality clauses in their agreement.
At yesterday's Influencer Summit, Dr. Uwe Hummel (EVP and Head of Active Global Support) explained to industry analysts why SAP believes so strongly in its Enterprise Support product. In fact, it is so convinced in proactive support and the positive impact on customers' SAP application management and operation costs that it decided to protect them from making the mistake of declining to buy it - by making it mandatory.
We all know how customers reacted to that idea, and how SAP has reconsidered its approach since the initial announcements. Yesterday's session focused on SAP's uniquely innovative program to track the actual benefits obtained by customers using Enterprise Support. SUGEN, the association of independent SAP user groups, agreed 11 application-management-related KPI that it would track at 56 member sites. The first results are now in, and though SAP isn't quite ready to publish them, from what we saw under NDA, there has been a clear and consistent improvement in measures such as 'failed system changes'.
However, even if these results enable SAP to make a convincing argument that enterprise support is beneficial for most customers, it hasn't yet answered the important questions that we've raised on behalf of sourcing and vendor managers:
Over the last few weeks, several Forrester IT sourcing clients have asked us to review and comment on special proposals from SAP that offer an attractive discount and contractual flexibility in return for a large, irrevocable, multi-year commitment. It appears that several SAP sales teams are trying to achieve their annual targets by enticing customers to place firm purchase orders (PO's) now for products and users that they won't need until 2011 or later. This could be a great opportunity for buyers to take advantage of SAP's tough year and get an exceptional deal on software they were going to buy anyway. However, there are risks from over-committing ahead of your roll-out plans, as I explained a couple of years ago in my report, Avoid The Hidden Costs Of Shelfware, which is still as valid today as it was when I wrote it.
The most obvious risk is that delays in the implementation process will mean the licenses you're forced to buy in years 2 and 3 will sit on the shelf for a while until you are ready to deploy them. Worse, you'll be paying maintenance on that shelfware, which could soon cost you more than the extra discount you got on the initial deal.
I get this question all the time because, let’s face it, it’s a significant decision. For example, an Enterprise Agreement (EA) renewal for an enterprise with the main desktop suite on, say, 10,000 PCs could cost around $1,500,000 per year. So what do you get for this outlay? You’ve already purchased a perpetual license for the relevant Microsoft products via your original EA, so the renewal is merely an extension of the maintenance element, which Microsoft calls Software Assurance (SA). Like most terms in Microsoft licensing, SA looks like an industry standard concept, but has sufficient Microsoft-specific nuances that confuses customers. The key differences from most vendors’ software maintenance offerings are that SA:
Is not tied to product support. Customers that aren’t paying SA still get access to patches, and can purchase additional support services from Microsoft or its partners on a time & materials basis.
Delivers upgrade rights that live on after the agreement expires. Customers earn rights to any version that Microsoft releases while they are on SA. So, for example, a customer paying SA on Microsoft Office for the next 12 months will earn the right to the next version, Office 14, due out at the end of 2009, even if it doesn’t intend to actually upgrade to that version for another 3 or 4 years
Includes many additional benefits that, though hard to value, are far from worthless. For example, the extra training, online e-learning and rights to use the same version on a home PC will certainly translate to more effective use of the software and enhanced user productivity, but it's very hard to give that a dollar value.