22 June 2009
With more companies moving away from buying licences, Duncan Jones examines the pros and cons of renting software
A revolution in the way enterprises acquire software has meant more companies are now looking to rent technology instead of buying it.
Market analysis by Forrester Research shows subscriptions for e-purchasing software continue to grow while licence revenues are shrinking. Customers want either SaaS ('software as a service', in which the vendor hosts a system shared by multiple clients), or a limited-term licence, where firms have their own system on-site. Only suite vendors SAP and Oracle prefer to sell perpetual licences, and even they are expanding their SaaS offerings.
There are a number of reasons why CPOs may no longer want to own their e-purchasing software:
Urgent cost-reduction There are instances where CPOs need to begin urgent cost reduction projects without waiting for capital approval. E-purchasing helps companies negotiate better deals and make savings by reducing rogue spend and invoice errors. The systems pay for themselves within the first three months if there is no upfront licence cost.
Cost flexibility Whether their e-purchasing tool is priced by user numbers or the value of spend going through it, purchasers want to be able to adjust capacity up or down in line with business circumstances. SaaS companies may insist on a long-term commitment by the customer, but they usually include some quantity flexibility. In contrast, licence owners can't reduce maintenance commitments without scrapping capacity, which they may later have to replace at high cost when business recovers.
Outsourcing Buyers may need to outsource technology management to the experts. They know they can benefit from SaaS providers' economies of scale and core competence in tasks such as hardware maintenance, security management and software patching. Some want to control sensitive data such as contracts on their own site, but even for them there are hybrid models that combine on-demand applications with on-premise data.
The SaaS commercial model is still immature, however, and IT sourcing managers are only just learning how to mitigate the risks. Consider what would happen if the software provider did any of the following:
Tries to hike prices at contract renewal time Customers can threaten to switch to a competitor without having to buy another set of licences, but this may be harder than they think. To the usual challenges of implementing new software such as configuration, integration and user training, SaaS adds new ones such as how to get your data back from the incumbent.
Fails to deliver continuous improvement The software publishers' vision and commitment to innovation are almost as important selection criteria as their current functionality. Companies may want to switch providers if their first choice isn't delivering the stream of enhancements it promised in the sales process.
Sells out to a new owner Struggling SaaS providers are unlikely to just switch off their servers and close down, because there will usually be someone willing to buy the intellectual property and the revenue stream. Indeed, a small company's customers may well gain if a larger one acquires it and increases investment in its product.
However, many acquirers want to milk the target's installed base and/or kill off a competitor, so whether your provider is headed for a stud farm, dairy farm or abattoir, you want an exit strategy.
☛ Duncan Jones is senior analyst, sourcing and vendor management, at Forrester ResearchSMjun2009
