When Aegent Energy Advisors opened its doors for business in Jan. 2002, the Toronto-based consultancy had some bright ideas about how to make a name for itself. For example, the seven-person operation knew it would need to tap into some powerful software if it was going to compete with the big boys.
Like many start-ups, however, Aegent had little capital to invest in technology.
Fortunately it found a good fit with Computer Associates International Inc., a global software vendor that did not snub its nose at Aegent Energy just because it was a minnow wanting to swim with sharks. Instead CA took the time to sit down with Aegent Energy, a company that specializes in monitoring the energy consumption of large enterprises, including universities and municipalities, to discuss payment terms for an e-business application it wanted.
“”We did not want to tie up capital with licensing fees,”” says John Voss, managing director of Aegent Energy. “”And secondly we wanted to test-drive the technology to make sure it was what we needed.””
The agreement that emerged was simple and straightforward. Instead of having to commit to an up-front, perpetual licensing fee that would last from here to eternity — the software industry’s long-standing equivalent of a shot-gun wedding — Aegent Energy was only obligated to pay a monthly subscription fee, which could be cancelled if the technology proved not be what it was looking for.
Why did a giant software vendor like CA bend over backwards to make a tiny client like Aegent Energy happy? The short answer is that CA, a multinational provider of IT solutions and services, finally got the message.
Like all software vendors in the post-Y2K, post-dot-com-bust universe of 2001, CA was under attack from disillusioned clients who had bought into a vision of the world that never materialized. Huge amounts of money had been invested in a combination of Y2K upgrades and ERP and e-business installations, but the promise of productivity improvements and cost reductions was not being fulfilled.
“”IT was getting a bad name,”” says Joanne Moretti, general manager of Toronto-based CA Canada. “”We were guilty of pushing for big transactions that felt good in the moment, but not the morning after.””
As a result, CA made two dramatic changes in 2001. First, it adopted a flexible approach to software licensing, known internally as FlexSelect, that puts the client first. If you want to pay for an enterprise application like you do a magazine subscription — something known in the industry as software-as-a-service — CA can do that. If you want to match business value with price by paying out of new revenue over a fixed term, CA can do that too.
“”It’s licensing that makes sense,”” says Moretti. “”Not one size fits all.””
Second, CA vowed never again to sell software without adequate services and education. “”If you sell and expect the client to implement, it won’t happen,”” says Moretti.
Does CA’s change of heart — or, perhaps more accurately, new clarity — signal a quiet revolution in the ranks of the world’s leading application vendors, including Oracle, SAP, Novell and Hewlett-Packard? Yes and no.
“”Software vendors are under pressure to change, in part because companies still have a lot technology left over from the Y2K round of upgrades that is not doing what it was supposed to,”” says Amy Konary, director of software pricing and licensing research at Farmingham, Mass.-based IDC. Konary applauds CA’s radical makeover, but does not expect it will be replicated any time soon in an industry that prefers incremental movements. “”For Oracle to do the same thing would be like turning a battleship,”” says Konary. “”It could have a dramatic impact on shareholder value, and people’s jobs.””
Also, Konary warns that the subscription model of software licensing is not necessarily the best option over the long term, especially for large enterprises. Over a period of three to four years, the total of subscription fees will usually equal the cost of an up-front perpetual licence. Plus, there is nothing to stop vendors from raising subscription fees from one year to the next.
“”I can’t see someone subscribing to a $40-million CRM application over the long run,”” says Konary. “”The subscription model is most appropriate in situations where you are not ready to commit, but want to try a product out.””
Voss could not agree more. After a 12 months of using CA’s CleverPath, an e-business suite that allows Aegent’s clients to access detailed monthly reports over the Web as if they were using an internal system, Voss decided to acquire a perpetual licence.
“”It’s like renting versus owning,”” says Voss. “”If you like the neighbourhood, you buy, because there is a cost associated with renting month by month.””
Moretti says about half the customers who initially opt for the flexibility of subscription fees end up buying a perpetual license. She expects the crossover rate to increase to 75 per cent over time.
“”Flexible pricing gives us a huge competitive advantage,”” says Moretti. “”It allows us to get a foot in the door, and build a relationship by giving our technology a chance to prove its value. Then, when a customer is ready, they can commit to a full licence.””
Montreal-based Madacy Entertain-ment Group, a distributor of CDs and DVDs, already owned the software it needed when it was spun off from its parent company in January 2003. But it suddenly found itself without hardware to run those applications, and an IT department to support them.
“”We did not have the technical expertise to go forward,”” says Philip Chung, Madacy’s IT manager. Because it was already running Oracle, Madacy decided to outsource the hosting and management of its applications to Oracle Corp. on demand.
This service has worked out well for Madacy, in part because the subscription fees it pays include automatic software upgrades that used to eat up significant amounts of time and money. In the best of all possible worlds, however, Chung would like to see Oracle take its on-demand service one step further by bundling software into the mix. “”Give me a complete subscription model where there are no up-front costs and I don’t own the software,”” says Chung. “”That keeps the vendor on his toes, and money in my pocket.””
Redwood Shores, Calif.-based Oracle, the world’s biggest enterprise software company, argues that what amounts to a software-as-a-service option is already available through its financing division.
“”We have a program that allows customers to include the software licence, support and on-demand services bundled into one monthly fee,”” says Jacqueline Woods, vice-president of pricing and licensing at Oracle.
Richard Daukant, vice-president of major accounts at Toronto-based SAP Canada Inc., makes a similar argument. “”Our customers have financing options that allow them to tie payments to the future benefits stream,”” says Daukant.
He says in the last 12 months, SAP Canada has been pushing what it calls a value engineering approach to implementation that gives a timetable for the expected return on investment. “”The end game for us is to make sure customers realize the benefits they expect,”” says Daukant.
Analyst Mary Turner with Boston-based Summit Strategies, an IT market research firm specializing in on-demand computing, says many companies are not convinced subscribing to software is the most cost-effective approach.
“”Small and medium-sized companies like the idea of one price taking care of everything,”” says Mary Turner. “”But it does not make sense for everyone.””
The verdict on software as a service is still out. But if vendors gave customers the same test-drive options as CA, the world of enterprise computing would be a happier place.