If you haven’t been closely following the software market, you may have missed the sudden shift in messaging from traditional on-premise software vendors like SAP and Oracle. It was not that long ago when these providers were mocking the practicality of cloud applications for the large enterprise. These providers are now pushing a new message: the cloud is here to stay and you will all eventually move to our cloud solutions.
Not only are vendors embracing the cloud, they’re salivating over it to the extent they have even changed how they report on it to Wall Street. For tips regarding your upcoming dealings with your cloud provider, please be sure to check out our blog post “3 Keys to Negotiating Cloud Agreements”. Below are some of the key reasons explaining this behavior change and the potential impact to customers.
1. Consistent and predictable revenue streams
If there is one thing software vendors love most, it is predictable revenue streams. With the cloud, customers do not receive a perpetual software license in exchange for a one-time fee. Rather, software is licensed or “rented” along with maintenance and support services for a period of time or subscription term. Once the term expires, the software licenses and associated maintenance and support services expire unless the subscription is renewed.
Software vendors now see the benefits of this model as every time a subscription term expires this presents another opportunity to negotiate a new fee at a higher rate. For financial modeling purposes, software vendors are able to obtain a predictable annual revenue stream for the term of the subscription, plus inflation adjusted (and additional profit mark-up) subscription renewal fees after the term expires.
Software vendors can be reasonably confident in these renewal fee price increases due to added leverage. Once a business software application has been incorporated into an organization’s business processes it becomes extremely difficult to terminate, as this will require a replacement product to be already licensed, deployed, and users to have undergone sufficient training. This migration process can take months up to years depending on the software application and the complexity of a customer’s organization. Plus most organizations do not even consider subscription renewals until a few months to a few weeks prior to their expiration, and the vendors are well aware of this. Also remember, under the subscription model a customer cannot just terminate maintenance or refuse an upgrade and still utilize their old application licenses until they find an alternative. The license right to use the application terminates if the subscription is not renewed. Therefore, software vendors can be confident in knowing that even if customers do not agree with any increased fees, in a vast majority of situations customer’s will have to grumbly accept them as they begin to realize it is the least intrusive and least expensive option available.
As an added benefit, software vendors will have the flexibility to not only increase fees, but to also modify licensing rules, metrics, definitions, structures, etc. after each term. This allows vendors to close any license and subscription loopholes that may be identified, terminate license and subscription policies that no longer prove useful, and further monetize software revenue.
2. Elimination of defending maintenance and support value
As stated above, maintenance and support are no longer separate from the software licenses. Under the perpetual license model, vendors could not tie or attach maintenance and support to the license fees as this would violate revenue recognition rules. Vendors had to defend the value of their maintenance and support service offerings to secure those revenue streams and their annual fee increases. In recent years customers have been more willing to utilize alternatives to vendor provided maintenance and support – either through third party providers or moving to a self-support model for more mature applications. Now vendors will no longer have to separately defend maintenance and support as the subscription fee bundles access to the software and maintenance and support as part of the subscription service.
As an added benefit, software vendors can stem the tide of third party support providers stealing maintenance and support revenue as the subscription model eliminates this possibility. Learn whether or not third party maintenance and support is a good fit for your organization.
3. Built-in version adoption
One of the biggest challenges software vendors face is customer adoption of new releases of previously licensed software. As technology is rapidly changing, vendors are continually updating their software and developing new applications, sometimes on new platforms. Since the new applications are developed on the latest technology or platform, some older applications may be incompatible with the new application. This means that customers who may benefit from a new application often have to upgrade their older applications to newer versions in order to integrate and receive the full benefits – resulting in a larger and more complex process with greater costs and a longer timeline. Many organizations are faced with a cost/benefit equation that is difficult to justify until there is enough pent up demand and potential value that accrues over years.
In the cloud, the software vendors host the environments running their software applications as part of the subscription service they provide to customers. The vendors have full control of the environments and can determine when to release and deploy new application versions as well as integrate new products. Gone are the days of software vendors spending countless hours and money trying to build a business case for their customers to adopt the latest product release. Customers can now receive the immediate benefits of being on the latest product release without the added implementation costs associated with on-premise software.
4. Self-help remedy for compliance or payment disputes
Another added benefit for the software vendors is eliminating ambiguity and confusion in the audit process and enforcement of audit results. By maintaining control and hosting their software applications, software vendors can easily track actual usage of their software by their customers, allowing them to quickly identify any unauthorized or excessive use scenarios and issuing an invoice for such additional license fees. Also, if a customer objects or unreasonably challenges the audit findings, the vendor has the ultimate leverage in being able to simply shut off a customer’s access to their software, which includes stored customer data. This provides the necessary incentive for customers to settle audit finding fees quickly and without dispute, or at the very least the vendors will be paid the fees while the dispute process proceeds. The result is a tremendously enhanced ability to enforce license compliance, extract license fees, and reduce large amounts of overhead costs currently required to enforce license compliance.
There are likely many other benefits for software vendors under the cloud model, but these 4 are some of the most compelling. We welcome your input, feedback and the opportunity to discuss other vendor benefits as well as the risks and implications to customers. Please do not hesitate to contact me at [email protected] with any feedback or inquiries. To learn how you can ensure your organization navigates the cloud landscape successfully, be sure to check out our SaaS Matters blog series.