Enterprise Software Sales and Procurement Need a Makeover

Time to Tie Payment to the True Measure of ROI:  User Adoption

Today, I believe that the only way for IT organizations to truly measure their effectiveness is by analyzing the usage patterns, satisfaction and productivity of theircustomers: end-users.  Period.  Any IT organization that doesn’t use this kind of measurement won’t be successful over the next 10 years.  As David Sacks, the founder/CEO of Yammer, has said: “Voluntary adoption is the new ROI.”

One of the things that bugs me the most about the software industry is the sub-optimal behavior that exists between vendors and buyers.   Software buyers and vendors are engaged in a dysfunctional dance that wastes money and stifles innovation – on both sides. This dysfunction is driven by outdated software business models, and further complicated by non-technical sales and procurement people whose identity is tied to controlling the buying process instead of optimizing value created for end users.

Simply put, times have changed dramatically; enterprise software sales and procurement haven’t.  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.)

12 Realities That Vendors and Buyers Can Ignore – But at Their Peril

1.       The pressure of the “consumerization of IT” is game-changing. This pressure is coming down on enterprise IT organizations, although most still have their heads in the sand.  This pressure is going to get acute over the next few years as the gap widens between what is available to the average consumer on the Internet and what an employee’s IT ecosystem provides at work. This gap will reveal just how wasteful and disconnected most IT organizations are from end-users’ real needs. 

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 dudes 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 models 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, then the vendor probably won’t do it.  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 them 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. Those customers that haven’t are just wasting money and causing their end-users to continue to suffer with outdated and expensive technology that preserves the short term job security of narrow minded IT staff members.  

4.      Software vendor sales people and customers’ procurement staffs are disconnected from how software is used and developed in the enterprise.  Generally, neither procurement folks nor salespeople understand the technology or how it’s used. They are managed to objectives that have nothing to do with successful deployment, much less adoption of the software or technology.  Procurement people generally care about discounts and sales people care about commissions.  It’s time to get these folks out of the way or give them incentives that align with effective adoption and value created for end-users.  One of the powerful benefits of SaaS is that end users can buy their own capabilities and just expense the cost.  This is how many customers start with Salesforce.com, and I’ve seen this same adoption pattern occuring in infrastructure at companies such as Cloudant

5.      Software that sucks.  There’s a disconnect between the amount of money that big companies spend on software and the value they get from it. Many big companies only resolve this disconnect over long intervals, after tons of money has been wasted on useless technology projects that aren’t aligned with users’ requirements.  Moving toward shorter-term subscription models helps reinforce the need for software companies to create value within reasonable periods of time.  In other works, deliver software that doesn’t suck.

Part of the reason corporate IT projects take so long is that businesses don’t push their vendors to deploy quickly or drive adoption. Here’s an example, from the Front Office/Customer Relationship Management sector of the software industry.  Siebel Systems launched its system in the early to mid-1990s using the traditional third-party installed and heavily configured model. (I suspect that the rationale was: “It worked for ERP, so let’s do the front office the same way.”)  Unfortunately for Siebel, things didn’t play out this way. As Salesforce.com launched, customers realized that they could get immediate adoption, usage and value by just signing up for the Salesforce.com service. These customers perhaps didn’t get all the customization that usually came with traditional enterprise software, but most of that customization was being sold to big companies by consultants who wanted to make money as part of the enterprise IT ecosystem.  A lot of smaller customers didn’t need the customization, and ending up paying for overhead that they didn’t need.

A general rule of thumb for IT organizations was that you had to spend an additional 2X-5X in services to get a third-party enterprise software application deployed and working.  This never made sense to me, but I participated in the dysfunction along with everyone else for many years, on both the buyer side and the sales side.  As this thinking became more broadly accepted, it became a self-fulfilling prophecy: vendors could make money customizing the solutions for customers (regardless of their actual need for the customization), so it was in their best interests to create software that required a bunch of consulting to get it working for customers. (Software that sucks, in the classic sense of “suck”: time, money, corporate IT resources.) 

With the evolution of SaaS, all vendors now face more accountability, like it or not. Salesforce.com knocked it out of the park as an independent business while Siebel sold out to Oracle and has bounced along the proverbial third-party software bottom, collecting maintenance on software that they sold 10 years ago to big companies who are not capable of switching to Salesforce.com.

6.      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. 

7.      The perpetual-license model creates perverse incentives for both buyers and sellers.  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.  With a perpetual license model, the seller gets too much value up front, misaligning his interests with those of the buyer.

8.      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. 

9.      Many customers should be happy to pay larger subscription fees over time in exchange for significant probability of greater success, user satisfaction and innovation.  They just don’t realize this, because business owners, end-users and engineers aren’t involved in procurement processes.  This perpetuates a lack of accountability for vendors and feelings of helplessness among users and consumers of these software systems. 

10.   Multi-tenant Web services present a compelling alternative. The broad availability of commercial multi-tenant hosted web services (epitomized by Amazon Web Services and GoogleApps) 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 software buyers that demand that their vendors deliver value through reliability and innovation every single day – and have the means to measure this. 

11.    FUD continues to rule – for now.  Many of the procurement and sales establishment 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 IT systems and infrastructure.  This is not sustainable as IT organizations are under dramatic pressure to reduce costs significantly.

12.   IT organizations that embrace new software models are more productive and efficient.  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 software. These benefits have been documented among the likes of Google Apps enterprise customers (Genentech for example) as well as large companies that have embraced Amazon Web Services (Netflix for example).  

I believe that all software contracts should tie payments to end-user adoption.  Monthly software subscription deals can be used to accomplish this relatively quickly: if users adopt. you pay; if they don’t, you don’t pay.  

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 third-party software industry is due for a reckoning – it’s time for vendors to modernize their business models which depend on bilking customers for perpetual licenses and maintenance streams on software that is never used.  And customers should start buying software as a service and not overpaying for big perpetual licenses that they may or may not ever use.  

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7 Responses to Enterprise Software Sales and Procurement Need a Makeover

  1. just.a.guy says:

    This all rings true, though I believe the key concept is "time to value" versus the particular structure of cash flows (license+maint vs. subscription).SolarWinds, for instance, has made an excellent business of selling licenses and maintenance for software that:1) is easy to try (download, install, and see value quickly)2) is easy to buy (credit card, PO, etc)3) is easy to maintain4) is easy to upgrade 5) is enterprise-class6) just plain worksand they are able to do this all [very] profitably at a price point that flies under the red tape radar of most procurement departments, even at the largest of customers. They've achieved a remarkable level of alignment with their customers and have somehow managed to do it profitably as well.Solarwinds are not alone in this model. I've had the pleasure of buying and using Tableau's analytics products as well and they also fit all of the above criteria, despite being sold in a license+maintenance model as installable endpoint software.So while I agree with all the above points of contention that enterprise customers can rightly have with enterprise software vendors historically, I think the vendors' shortcomings have to do with time to value and pricepoint more directly than with their revenue models.Also if you know of other folks disrupting the enterprise software landscape like Solarwinds (network and systems management) and Tableau (desktop analytics software) — I'm all ears!

  2. kyle garman says:

    While you make some good points, I take issue with the “one size fits all” premise that underlies your argument. You seem to suggest that term licensing/subscriptions are the best solution for all enterprise software investments. This simply is not true in all cases. Let’s start with where we agree:1) Subscription pricing clearly makes sense for multi-tenant SaaS offerings – this is true for both new entrants and established players. SAP, for example, has the world’s largest installed base of SaaS application users and has very aggressive growth plans to expand this business model (even at the expense of cannibalizing perpetual license agreements).2) Subscription pricing or term licensing can also make sense for on premise software (or software hosted in a private cloud) in certain cases, particularly with new customers that don’t have pre-existing perpetual license assets. This is true for both new entrants and established players where a customer wishes to start from scratch with this type of business model.Now, here’s where we disagree:1) In cases where established players have long-standing perpetual license contracts with a customer and the customer wishes to expand usage of a product they already own for on premise or private cloud usage, a perpetual license is almost always the best solution. Moving these products to a subscription either forces the customer to give up a perpetual asset (kind of like an apartment owner who has paid cash giving ownership back to a landlord and asking to be charged rent)…or it creates an awkward hybrid environment where some units of the same product are owned and some are rented.2) Regarding your comment that “all software contracts should tie payments to end-user adoption”, this again is a “one size fits all” argument. There are some products that create real business value that are designed to potentially drive less users and usage of the software itself. The value of SAP HANA, for example, should not be tied to its number of users (as one analyst can now do the work of many analysts) nor the amount of time it is used (dramatically faster analytics allows value to be created in less time). Moreover, SAP HANA eliminates multiple layers of the technology stack by storing data in memory – this drives business value through reducing TCO which is independent from measuring user adoption.In summary, some of your points are right on target, but I would have expected a more comprehensive assessment from someone who has had such success advocating that “one size does NOT fit all”:)Kyle Garman

  3. Andy Palmer says:

    Kyle – excellent thoughts. I guess that in general I just believe that software companies who have a biz model that is tied to packaged, installed, configured 3rd party software are going to have to radically change to keep up with the pace and effectiveness of technology providers who are both building the software and operating the software. As a consumer of enterprise tech products – it's radically easier and radically more effective. I think that the emerging Data As A Service Layer is a great example. HANA is great – but SAP should be offering as a service – either bundled with hosted apps or just as a service that is competitive with Amazon Dynamo or Cloudant. Don't get me wrong – I think there will always be a place for traditional installed on prem software – I just think the current vendors are WAY off – and current sales and procurement people need to wake up and embrace the new ways.

  4. In many cases, the pricing model is constrained by by preexisting management and decision making policies, workflows, and practices.For example, many large corporations have "preferred vendor" lists, "best practices" documents on every occasion, as well as long-standing vendor company and product vetting practices. Besides the obvious fact that these mechanisms favor established big vendors, they also impose dated technology adoption models, slow down the process, etc. Data As A Service layer is also affected by all sorts of compliance consideration, various data security certification standards, such as PCI Compliance. Perpetual licenses allow for controlling vendor product and service versions and releases, thus they provide better risk management and compliance management controls.I agree that subscription based pricing model adoption will expand rapidly, and you provide the most comprehensive set of reasons why this will happen. Nevertheless, the old license model will survive in places and situations where subscription based pricing model may not be easily aligned with existing vendor management, risk management, and compliance mechanisms.

  5. Andy Palmer says:

    great thoughts Alex – I really think that it's the perpetual license center of gravity that will have to change – reality is that these models are – just as you say – just artifacts of the earliest days of our industry and are just constraints now – don't really reflect what users need/want – can't wait until enterprises view not only system infrastructure as a utility – but also data management and application services as utilities – I'm probably too far out ahead – but hey – that's the fun stuff imho 🙂

  6. The problems you outline Andy are a function of free market capitalism and the changes you propose can only be a function of free market capitalism.I've said multiple times that the major shift to cloud and SaaS models will occur through a push from the insurance world. The insurance industry has a gold mine waiting for it in the form of new products and services, and when the data is insured properly, the shifts away from data centers will occur. But right now, the data center guys have too much political capital within any organization to just give away their budgets. It's not going to happen. These fundamental and philosophical changes are coming as the decision makers turn over from the baby boomers to the Gen Xer's. It is inevitable, because Gen Y and Millennials simply won't work in the environment as it currently stands. That gap between demand and supply of talented technology labor will eventually force a change. Let me explain.One of the side effects of the "Apple Products" phenomenon is that while technology is being adopted at a rapid pace, the "curiosity" around how the technology works is declining at that same pace. Gen Y and Millennials don't have the same level of curiosity around how to create technology that Gen X had. Thus, Gen X lead to the wonderful world of open source, and Gen Y and Millennials lead to the fast pace of technology adoption and explosion of social media. Any rudimentary analysis of our economy will show that we have to reverse that trend. We need to raise that curiosity around technology again, and stratify labor to work at different layers of abstraction within technology. Otherwise, the SAPs and IBMs will own the enterprise world and dictate how change occurs, because at the end of the day, they simply work with minimal knowledge needed within the user base. For companies to diversify their technology portfolios and leverage what's out there with any kind of meaningful financial impact, there has to be a general curiosity restored around technology by the general pool of labor.Blame Apple. It's their fault.

  7. Pingback: Five Rules for Enterprise Software Buyers |

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