There is a growing concern related to the impact the coronavirus is having on the economy. Businesses are being forced to shut down, many of which will either not re-open or will be much smaller while facing a long road ahead to getting back to where they once were before the coronavirus. This means many businesses will have significant reductions in sales revenue and profitability, which will necessitate corresponding cuts in operating expenses and workforce.
One of the original promises of the cloud was that businesses could scale up and down based on their requirements and usage. In the SaaS world of business applications, this promise wasn’t kept. Since software vendors are valued by Wall Street analysts based on predictable revenues and forecasted growth rates, in the original perpetual license model, they created very one-sided rules with respect to maintenance and support.
When the market shifted to SaaS, software vendors needed to come up with pricing that accounted for these revenue and growth expectations or else shareholder value could plummet. Therefore, the SaaS pricing model that developed provided for a minimum fee commitment for a fixed duration of time; typically a 3 or 5-year initial term. Fees are based on the solution subscriptions and their associated business metrics, with no reductions or cancellations allowed for the duration of the term. Pricing can only increase to reflect business metric growth or added solutions.
But with the impact the pandemic is having on businesses, SaaS providers like Workday, Oracle, Microsoft, SAP, Salesforce, ServiceNow, and many others have a unique opportunity to demonstrate the partnership commitment that they so like to pontificate about during sales cycles and in public forums.
The question is, will these vendors do the right thing and allow their customers to reduce their SaaS commitments to reflect their actual post-coronavirus usage requirements and business metrics?
The market will be watching closely for announcements that demonstrate the ability and willingness of vendors to be true partners in a time of need. This is when you find out who your true friends and partners are. Actions speak much louder than the plethora of CEO emails that have been issued stating how much they care about their employees’ and customers’ health and describing the policies they have effectuated to combat the spread of the coronavirus. Now is the time to walk the walk and see who steps up with their checkbook.
Workday Has Set an Initial Tone… So Far
In mid-March, Workday announced that they would be paying employees a cash bonus worth two weeks of pay to help them and their families during the coronavirus. The expected payout equates to roughly $80M, which is a substantial expense for a company of Workday’s size, especially since Workday is in a hyper-growth phase of their company lifecycle, competing against much wealthier and established incumbents like Oracle, SAP, and Microsoft.
Salesforce CEO Marc Benioff just announced that they will not conduct any “significant” layoffs for the next 90 days and he is encouraging other CEOs to take the 90-day no-layoff pledge.
We have not seen any announcements from the other vendors with respect to employee compensation packages to assist with the impact of the coronavirus.
Who Will Set the Tone for Aiding Their Customers?
This is a critical area that we are monitoring. We have read about Microsoft focusing on new demand as a result of the coronavirus and employees working from home. But this is more about generating new revenue for Microsoft and investing in infrastructure to meet the spike in demand for their Teams and Office applications. Certainly, there is no shame in Microsoft’s efforts to capitalize on this new demand. But what about those customers in industries whose employee base is being reduced? Will Microsoft provide them with a corresponding reduction in their current contractual fees? And will Microsoft allow these reductions without re-pricing the unit costs to account for the reduction in employee and business metric quantities?
What’s at Stake?
Market and vendor perception! The software market has created licensing rules and policies that immunize themselves from business downturns and they have been very inflexible in allowing any exceptions. Think of the scene in Goodfellas when Paulie takes an ownership interest in the Bamboo Lounge restaurant. Paulie gets his cut no matter what. If the business has a bad month or a few bad months, too bad, pay me! That is how the software vendors have treated their customers to date. Customers have had to approach these vendors with hat in hand requesting some financial relief, only to be told too bad, we don’t do that.
But this pandemic is a unique situation as it presents a complete paradigm change, like that after 9/11. The world is closely watching to see who is using predatory tactics to profit at the expense of others, and also taking equal note of those who are showing compassion and doing right by their customers and employees.
Software vendors have a unique opportunity to prove their partnership commitment to the success of their customers, and in turn, distinguish themselves from their competition. This type of action would provide very compelling evidence of being a true strategic partner and should result in a business boom as the economy improves. After all, isn’t it human nature to want to work with those who have your back and who are with you not only in thick but also in thin?
Possible Domino Effect – A New Me-Too Movement
There is the potential for one vendor to be a leader here and then have the rest follow to avoid looking bad. But the first one willing to do the right thing will be forever viewed as the leader who acted based on their character and not in response to market perception.
This is a business scenario with a global economic impact that none of these vendors have faced before; even greater than 9/11 from a long-term economic impact perspective. Who has the character, leadership, and risk tolerance to take appropriate action to meet the needs of their customers by agreeing to restructure contracts downward? Who is willing to eat a little less today with the potential to receive a more fruitful bounty tomorrow? The market and customers await in eager anticipation.