deal architect

Flex should also include down, not just up

I listened to Jim Schaper introduce the concept of Infor Flex today. Includes plans to upgrade to their SOA solutions, or exchange licenses towards another Infor solution. That is goodness, though the listed discounts and transaction fees will need customer analysis and haggling.

But there is no downgrade path. If customers only want a low-touch plan – some bug fixes, minimal number of support calls, regulatory updates – you have to keep paying at full rates. As I have written before, customer needs and vendor delivery speeds (and their support costs) vary considerably making it very hard to justify a single maintenance rate across the product lifecycle – so my suggestion about letting maintenance rates float

To a question I asked, Jim responded “Unlike what we are reading about our competitors, we are not seeing as much defection in our customer base to SaaS or third party maintenance. Besides we will offer SaaS in several components of our offering”.

In other words, our customers are peachy and not really asking about flex down. Interestingly enough, we hear the same thing from from Lawson, Oracle and SAP with a similar qualifier - “We read their customers (those of our competitors) are asking for it, but not ours”.  A whole lot of reading going on.

With that definition of flex, remind me to not buy any bungee cord from any of them :)

Update: Frank Scavo and Ray Wang are more positive about Infor's announcement. Dennis Howlett less so.

“The secondary software market”

Add to third party maintenance, SaaS, open source – another disruption to the traditional enterprise software market – shelfware reduction in the form of sale of unused licenses as Ray Wang at Forrester points out.

As Ray points out “This post provides an alternative that must be vetted by proper legal professionals. “ Indeed, don’t expect software vendors to give up without a significant fight. Even if they don’t let you resell licenses, if you can get them to not charge maintenance on your shelfware that would be a huge victory for most organizations. Parking should not only be for cars.

“We won it fair and square”

No, not talking about Iran. Talking about this article in Managing Automation where ERP vendors basically take the position of “Not sure about SAP, but we sure deliver value from maintenance”.

The only way to say if you are delivering value is to let your customers vote. As I wrote here - “Let it float”. Your customers may go to third party options, or may ask you for a low-touch maintenance plan at 5% a year or may tell you you need KPIs or tell you they are happy cutting you annual checks at current prices.

Let your customers speak. And let unbiased observers certify the results of the poll.

Otherwise expect rioting in the streets, even as you repeat on official TV that you won and are delivering value.

More Signs Your Software Vendor Can’t Innovate Fast Enough

Let me add to Ray Wang’s list of 7

1) Customers paid extra for vertical modules like utility billing or retail merchandising (using vertical licensing metrics and price points far higher per function point than in the core) and continue to pay maintenance on that but little in the way of new functionality is being delivered

2) Analytics continue to be focused on internal, historical, structured data. Little in the way of predictive or web or unstructured analytics.

3) User interfaces continue to evolve at snail’s pace. Many vendors finally support Excel integration and that look and feel. Don’t hold your breadth about Surface computing anytime soon.

4) Customers report upgrades continue to be too cumbersome. Indeed they are forced marches. You would think by the 12th release of something, an upgrade would be a piece of cake?

5) Compared to application support. hosting  and storage cost benchmarks coming out of SaaS and cloud world, your vendor’s ecosystem seems frozen in the annals of time

6) Compared to SLAs coming out of offshore and SaaS vendors, your software vendor’s support KPIs and SLAs quit evolving a decade ago. And there are toothless penalties for breach.

7) Compared to training and documentation materials coming out of Apple and Google, your vendor’s classroom training and documentation is antiquarian.

Update Dennis Howlett adds 7 more

Deal Architect announces new partner

Well, I have not discussed it with him yet and he does not even know I am even thinking about it…but I talking about David Dobrin, the “Applicator”.

Years of coaching clients on negotiating hard of maintenance has earned me the moniker of “Vinnie Maintenance.”

But I never had the cajones to propose a real simple solution David does. Not 30% off. Not 50% off via third party maintenance.

David says don’t pay at all

I better bring him in as partner before he drives me out of business :)

Seriously, David is one of the smartest people in the industry. And unlike so many market watchers unafraid to say it as he sees it. He also plays a mean game of bridge. Partner or not, I am not playing on the same table as him…

CedarCrestone HR Systems Survey

Lexy Martin at CedarCrestone invites participation in their annual survey. Participants will get a free copy of the report and an invitation to a webinar covering the results.

The survey questionnaire is available online at www.cedarcrestone.com/hrssv70

Let it float!

They come in threes.

We have all heard about the software “iron triangle” – you can manage 2 out of 3 – cost, quality or speed of development.

Then there is the Mundell-Fleming model, which argues that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. It can choose any two for control, and leave third to the market forces.

Vinnie “Maintenance” Mirchandani has another iron triangle – this around software maintenance.

“A software vendor cannot simultaneously keep a “one price fits all” maintenance plan, a diverse customer base, and a diverse product base. It can choose any two, and leave the third to market forces.”

Customer needs ebb and flow. During implementation before they go live on software, few customers tax support lines. Often their systems integrator is the on-site “support”. Similarly after year 4-5, the support demands of most customers drop off as they stabilize their production environment.

Product support ebbs and flows. Enhancements are influenced by architectural changes, regulatory updates, bug fixes. And as products mature, support databases are automated, support moved to cheaper locations, customer calls drop off etc etc.

Now think of the ripples, waves and currents across thousands of customers and hundreds of products.

And for that software vendors expect one single rate (or a second in some cases typically even less affordable) to work across all customers and all products?

The stubborn “maintenance is untouchable” posture of software vendors causes bad will and growing hostility in customer bases, and is leading to many being lost forever to third party maintenance, SaaS, open source, BPO.

The stubbornness is similar to what many countries will do as they “manage” their currencies. When they eventually have to revalue – up or down – the effect is dramatic. They could have done it gradually, but often they are forced to do it in one fell swoop causing huge disruptions to their economies.

So, enjoy your assets – your customer bases and your products. Let the maintenance rate float. Offer a single digit rate to customers with very basic needs – bug fixes, regulatory updates and a few hours of support a year. A bit more to the mainstream customer. And more  to those that want to the latest innovations and have continuous rollouts and special support needs. May be slice the customer base and offer couple more tiers – but make sure they start low.

Enjoy your assets – your customers and your products. Let the third side of the iron triangle, the maintenance rate - float. 

SOS to Red Cross. We have a software industry disaster

In 2005, Optimize Magazine asked me to "square off" on the topic of enterprise software innovation against David Thomas of the Software and Information Industry Association. I wrote that if the Red Cross only contributed 10-15% to charity we would freak out.  We would be demanding to understand where the rest was going. But we have accepted the fact that software companies only spend 10-15% in R&D and product development.

Jason Carter has spent some time analyzing the share of maintenance revenues that is going towards R&D. And the R&D investment has declined further in many software companies since my lament in 2005.

And let's not forget very little of that goes towards new product development. Much goes into bug fixes, regulatory updates,  re-platforming of releases, translation to multiple languages. Little net new functionality. 

Hold on, you may say - the investment is in the 20s, not 10 to 15%. Note that he leaves out license revenues in the denominator.

He also points out that SaaS vendors are just as bad as on-premise vendors. To which my response is if you added hosting, upgrade, database costs, application tuning and support costs to the denominator for on-premise costs (since those elements are included in SaaS pricing) we would need a microscope to see how little is going into their R&D.

“Defending” Maintenance Pricing

Paul Willis comments on Frank Scavo’s blog

“To take up your point about maintenance, I’m surprised that yet again a representative of a large enterprise software vendor doesn’t take the opportunity to more forcefully defend the company.”

Then he blogs more extensively about it here – it is a bit SAP centric but he could be speaking for most legacy, on-premise software vendors

First let me me say it is ironic that Paul and Frank and I and others on our free blogs are debating the value of maintenance when software vendors spend 20, 30, 40% of their revenues in high-powered sales and marketing and corporations spend enough (though somewhat less than vendors) on IT, procurement and attorneys to manage that budget line item.

We are the dumb ones for charging nothing for analyzing those tens of billions in annual maintenance. While Paul and I ponder how to twist our business models, though, let me disagree with some of the points he makes on his blog:

a) SAP’s move to 22% is justified

It is opportunistic for SAP to say “we are getting on par with Oracle’s 22%”. SAP’s maintenance is typically calculated on a much higher application license cost base than Oracle’s  - its 17% in many cases, normalized for comparable functionality is in dollar terms already higher than the 20% customers pay Lawson or 22% they pay Oracle.  The belly aching about SAP costs we have heard for two decades is not just about project overruns. The base cost and shelfware is itself pretty pricey. So maintenance increase from 17 to 22% on that base just adds straw on the camel’s back.

b) Accept the vendor’s development plans – slow as they may seem

Hmmm. Let’s pick on one area - vertical applications. Remember all the exotic licensing metrics SAP and other software vendors dreamed up for vertical modules – number of students for higher education, number of meters read etc.  Remember the “wall-to-wall” coverage promises? There are still huge chunks missing. So if software vendors want to get miserly on spending those maintenance dollars they collected on the incremental licenses let’s reset the clocks. Let’s refund the vertical licenses.

c) Support is insurance policy

I can see this argument. But then software vendors should be prepared to pay out for claims when their software does not work as promised. Even if it costs tens of millions. Game?

d) Don’t expect pricing based on components of support

All I can say is be glad you are not a major supplier to Walmart. They would tear down components and hand it back in a heap and tell you what you can expect to get for it. Oh, and btw tell you to share hotel rooms when you go to Bentonville. Since when did suppliers expect to keep savings from efficiencies and not pass them along? 

I could go on and on. Somehow doing it for free when discussing 90% + margin maintenance just gnaws at me :)  

SaaS and outsourcers

I was talking to Zach Nelson, CEO of NetSuite recently and he commented "People think of SaaS as changing the software industry. Our impact will be even more profound on the outsourcing industry".

I agree.

Outsourcers have to get used to smaller, more iterative projects around his products and those from salesforce, Workday and others - a big adjustment from their SAP and Oracle practices. But even more dramatically they will have to adjust to up-time, responsiveness, ease of upgrade, price and other benchmarks emerging from cloud world.

Then I read Phil Fersht of AMR Research and he disagrees:

"What concerns me with SaaS delivery is the lack of provisions for compliance, business continuity, security and privacy of data.  Moreover, there is often a far-reduced level of control over data and processing, for which a well-crafted outsourcing contract caters.  Outsourcing goes to great lengths to stipulate where data resides, how it is protected, who has access, which measures are in place to accommodate political or natural disasters, and how data management complies with regulations.  In addition, outsourcing providers are SAS 70 compliant, but are all SaaS providers?" 

"With SaaS, companies can sign up, flip a switch, and they’re up and running with zero upfront investment.  Does this mean they are going to invest nearly as much attention on governing these processes?  My experience so far is no.  Companies move into SaaS because it is cheap and easy, and often overlook the internal business transformation then need to go through to manage these processes effectively in an outsourced environment. "

So where's the reality? Somewhere between Zach's optimism and Phil's cynicism.

Yes, SaaS vendors will increasingly go through more tire-kicking from customer due diligence teams. Actually it's already happening. If you ask Marc Benioff he will tell you what some of the largest companies in the world have done to crawl through nooks and crannies of his data centers. In SaaS deals I have been involved in, attorneys are already fighting over SAS70, data portability, privacy, IP issues.

And Phil has an overly rosy view of what outsourcers sign up for. Their standard force majeure (for disasters) language is typically weak. In many cases, all they have to do is declare it, and that basically buys them a few weeks of service degradation. You have to amend their language to say they will do x and y and z in a disaster. The credits for not meeting SLAs in many outsourcing contracts would barely buy you a cup of coffee at Starbucks. The termination fees in many outsourcing contracts would by themselves pay for several years of NetSuite, salesforce, Workday contracts.

The good news in all this is buyers should use clouds to benchmark outsourcing arrangements. And what we have learned from outsourcing due diligence and failures (and there are plenty of those) to benchmark clouds. And get the best of both worlds in economics, performance, security, scalability and many other dimensions.