Caught in the Middle: Subscription Software

pay-button-on-keyboard-630x300Software Subscriptions can feel like a vampire. They lurk on your OpEx ledger, claiming a value proposition for each month, hour or mile you use them. Gone are the opportunities to squeeze extra value beyond the design intent of the software. You can’t stop paying for them in a slow cash-flow month if you still need to use them. That feeling that you “don’t own” anything starts to sink in. The fear that if you leave it will cost more to find something new starts to materialize. Hiding under your desk sounds like a good idea.

Welcome to the new age of Subscription software. It’s everywhere now. It’s not going away either. Here’s why:

Customer loyalty is only skin deep

In hopes we would spend lots of money with them, software companies often gave deep discounts to get us in. In many cases, these investments would be the last time the customer spent money with the software company for years. It took a lot of customers paying a negotiated rate for software to make a profit. Remember that the people that code these solutions routinely capture $100k/year+ salaries and executives many more times as much. Add on to that the need to have a sales force in the first place (which isn’t cheap either) and you have a steep mountain to climb to profitability as a software company.

Pirating

It’s easy to pirate software that’s perpetual and use it for as long as you please. Just ask Adobe, AutoDesk and Microsoft. It was so bad, that to combat it, they created the Business Software Alliance to go around and threaten to sue companies in high risk verticals if they didn’t submit to an audit. Many Mid-Sized and Small companies were audited and most were found to be out of compliance to some degree, though it’s unclear as to how bad it really was.

Upgrades aren’t always enticing

Many software companies would charge about 2/3 the original cost of the software to ‘upgrade’ to the latest version. Some could justify the cost if the value proposition (new features, typically) meshed with their business. Smaller businesses learned that they could skip versions or never upgrade and be fine. This meant that a new release might only capture a small percentage of existing customers. If it didn’t entice new customers, the new release could be a complete flop. Software companies learned that this was not working consistently. After investing sometimes millions in a new release, new revenues from it might only be a fraction of that.

Support costs are high

All software depends on other software for it’s reliability (Operating Systems, Drivers, Databases, etc.) When there are at least as many deployments of your software as you have customers, the cost of support goes up. One of the primary reasons is because each deployment has it’s own set of risks and potential for supporting software to have issues. In most cases, you’re left holding the bag as a software company to prove to the customer that the issue isn’t your software. In major cases where a supporting piece of software takes your software down, you as a software company typically have to release a fix at your own cost. It can get expensive fast.

Agile Emerged

Some very smart folks came up with a manifesto for developing software better. Known as the Agile Manifesto, it dictated, among other things, that software companies release new versions all the time with minimal bug fixes, features and little to no upgrade labor on part of the customer. Software companies who started into Agile quickly realized they produced a higher quality product as a result. Since no customer is going to pay for an upgrade that includes only minor new features or bug fixes, it didn’t take long for early Agile adopters to completely abandon perpetual licensing.

What can be done?

Software companies are trying to improve their businesses just like everyone else to be relevant into the future. Your job now as a Business Manager, CIO, CTO or CEO is to evaluate how you will manage this transition to “Pay as you Go”.

Communicate with software vendors

Find out what your software vendors intend to do in the future. Are they moving to a subscription model? What’s their roadmap? What will it cost? What’s their emerging value proposition? The worst thing you can do is sit idle and wait for things to happen.

Plan on a hybrid environment for a long time

Some of the perpetual software you have in your datacenter now probably has no subscription based replacement yet. Plan on maintaining these applications using as much virtualization as possible – even cloud based virtualization if it pencils out (note: it doesn’t always make sense to virtualize in the cloud).

Hire a Business Technology Consultant

Since your IT consultant isn’t going to be doing much for you anymore, it’s time to find a good Business Technology consultant to help out. A Business Technology consultant is going to help bring new systems in and manage them with you under this new model. A good Business Technology consultant should specialize in your particular line of business. Most of what they are going to be doing is matching technology, workflows and process to your business – not adding equipment to your server room.

Shift your technology spending

Take a look at your budgets and accounting classifications of technology spending. Most of what you will spend on technology in the future is pure OpEx – very little will still qualify as CapEx. Check with your Business Technology and Accounting professionals to adjust you’ve got your books and budgets to correctly accommodate this shift.

 

 

Greg

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