Thursday, February 23, 2006

Contrary Evidence

Sam Ramji of the Microsoft Emerging Business Team writes "At last week's IDC Software Leadership Council, opinions on Open Source were not the only surprise. The IT Execs from 4 companies (Manufacturing, Healthcare, Heavy Equipment, and Financial Services) were generally against subscription models for software. As the conversation progressed, two key statements came out:

1. The CIOs did not want to go with subscriptions because if their business grew beyond expectations, they didn't want to pay the software provider more ("Why should we share the upside"?)
2. The CIOs did want providers to reduce pricing if their business failed to grow to expectations

I think this was a case of two things - first, the natural expression of greed (wanting vendors to share the downside but not the upside) - but more importantly, a need for the industry to provide clearer guidance on standard pricing models. There was a clear conflation between value-based pricing and usage-based pricing in the mind of the customers. Additionally, they were concerned that in the long run it would be cheaper to go with perpetual licenses and pay maintenance, dealing with amortization internally, rather than pay a subscription cost which would never go down.

So where do we go from here to advance the understanding of the SaaS industry's offer to CIOs of mainstream companies? Are the doubters right, and will SaaS fail to penetrate large enterprises because of these issues?"

"In his post Contrary Evidence at the SLC, Sam Ramji of the Microsoft Emerging Business Team is surprised by big CIO resistance to SaaS pricing models. No surprise, really, that CIOs want the best of all possible worlds (a ceiling on price with lowering price as appropriate and lowest overall cost).

He makes some good points about confusion surrounding standard (or lack of standard) pricing models and conflation between value-based and usage-based pricing. I certainly agree that pricing models are getting more complex. There is a real need for simplified / standardized pricing as well as licensing agreements. This would be a real help to all types of software vendors.

Back in the Web 1.0 days, my former company Energy Interactive sold SaaS to large energy providers (both vertically-integrated electric utilities and deregulated energy suppliers). Of course, we called ourselves an Application Service Provider (though SaaS is a better term).

At the time we sold the hosted product as a one-time setup fee plus annual bundle of license, maintenance and support. We also sold the product as installed software with a perpetual license + maintenance and support. There was a direct correlation between the size of the customer and their level of comfort with the SaaS model: the bigger they were the more they wanted to just buy it and install it themselves. Truthfully, we didn’t want to sell it as an installed product for the typical reasons (i.e., it was much easier for us to maintain and support it if we had direct access to it, etc.).

Again and again we had to convince the large prospective customers that it made sense for them to go with the SaaS model then for them to host it themselves.
Of course, times have changed: SaaS is more accepted. Small customers (both individual users and small to midsize companies) certainly benefit from it; however, Mr. Ramji has detected that this is still the case for large enterprises. Certainly there are the financial and licensing issues to be resolved, but this will continue to be a hard sell for the large enterprise that is used to having absolute control over their brand, operations, IT environment, security, etc.

I don’t have the answer to question, “will SaaS fail to penetrate large enterprises”, but I do think it will continue to be a hard road."

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