Time
to Tie Payment to the True Measure of ROI:
User Adoption
Today, I believe
that the only way for IT organizations to truly measure their effectiveness is
by analyzing the usage patterns, satisfaction and productivity of their
customers: end-users. Period. Any IT organization that doesn’t use this
kind of measurement won’t be successful over the next 10 years. As David Sacks, the founder/CEO of Yammer,
has said: “Voluntary adoption is the new ROI.”
One of the things
that bugs me the most about the software industry is the sub-optimal behavior that exists between vendors
and buyers. Software buyers and vendors
are engaged in a dysfunctional dance that wastes money and stifles innovation –
on both sides. This dysfunction is driven by outdated software business models, and further complicated by non-technical sales and procurement people whose
identity is tied to controlling the buying process instead of optimizing value
created for end users.
Simply put, times
have changed dramatically; enterprise software sales and procurement
haven’t. Here are the new realities, as
I see them. (Most of these realities
also apply to how software is sold to and purchased by federal and state
governments.)
12 Realities That Vendors and Buyers Can Ignore – But at Their Peril
1. The pressure of the “consumerization of IT” is
game-changing. This pressure is coming down on
enterprise IT organizations, although most still have their heads in the
sand. This pressure is going to get
acute over the next few years as the gap widens between what is available to
the average consumer on the Internet and what an employee’s IT ecosystem
provides at work. This gap will reveal just how wasteful and disconnected most
IT organizations are from end-users’ real needs.
2. Buyers purchase a ton of software that they
don’t ever use, much less realize value from. The enterprise software emperor has no
clothes.
Buyers need to
step away from the standard perpetual license agreement. Just put it down... and pick up a
subscription/term agreement: it will be okay, really. Businesses haven’t
imploded because they don’t use perpetual agreements. Short-term, subscription-based agreements are
working great for all those Google Enterprise and Salesforce.com customers who
have month-to-month agreements.
Subscription/term agreements help ensure that buyers don’t waste
bazillions of dollars buying software they don’t use.
Now, the finance
dudes will come in with their spreadsheets and models that show how you can
finance perpetual agreements at a lower cost of capital. Don’t believe them. What these models don’t take into
account is one important fact: that if you pay a vendor a bunch of money for a
product that is supposed to do something and the vendor isn’t on the hook
financially for this, then the vendor probably won’t do it. There is little incentive for the vendor to
ensure that the software is deployed, adopted and improved over time. The
vendor (particularly if it’s one that’s oriented toward short-term goals) will
likely take the money and run. Not necessarily because they are “bad people”
but because the business (like everyone else) is under pressure to deliver
more, faster, better.
3. Vendors sell a ton of software that is never
deployed (see#2). And many of them
don’t care. As their businesses have
matured, many of these vendors have sacrificed their souls to short-term
thinking and financials. They are no longer driven by missions to deliver value
or great experiences for end-users. By
comparison, the consumer Internet companies that have moved into the enterprise
software market have used alternative models and behaviors and begun to disrupt
the ecosystem. Those customers that have
embraced new usage-oriented models have benefited significantly. Those customers
that haven’t are just wasting money and causing their end-users to continue to
suffer with outdated and expensive technology that preserves the short term job
security of narrow minded IT staff members.
4. Software vendor sales people and customers’
procurement staffs are disconnected from how software is used and developed in
the enterprise. Generally, neither procurement folks nor
salespeople understand the technology or how it’s used. They are managed to
objectives that have nothing to do with successful deployment, much less
adoption of the software or technology.
Procurement people generally care about discounts and sales people care
about commissions. It’s time to get
these folks out of the way or give them incentives that align with effective
adoption and value created for end-users.
One of the powerful benefits of SaaS is that end users can buy their own
capabilities and just expense the cost. This is how many customers start with
Salesforce.com, and I’ve seen this same adoption pattern occuring in
infrastructure at companies such as Cloudant.
5. Software that sucks. There’s a
disconnect between the amount of money that big companies spend on software and
the value they get from it. Many big companies only resolve this
disconnect over long intervals, after tons of money has been wasted on useless
technology projects that aren’t aligned with users’ requirements. Moving toward shorter-term subscription
models helps reinforce the need for software companies to create value within
reasonable periods of time. In other
works, deliver software that doesn’t suck.
Part of the
reason corporate IT projects take so long is that businesses don’t push their
vendors to deploy quickly or drive adoption. Here’s an example, from the Front
Office/Customer Relationship Management sector of the software industry. Siebel Systems launched its system in the
early to mid-1990s using the traditional third-party installed and heavily
configured model. (I suspect that the rationale was: “It worked for ERP, so
let’s do the front office the same way.”)
Unfortunately for Siebel, things didn’t play out this way. As
Salesforce.com launched, customers realized that they could get immediate
adoption, usage and value by just signing up for the Salesforce.com service.
These customers perhaps didn’t get all the customization that usually came with
traditional enterprise software, but most of that customization was being sold
to big companies by consultants who wanted to make money as part of the
enterprise IT ecosystem. A lot of
smaller customers didn’t need the customization, and ending up paying for
overhead that they didn’t need.
A general rule of
thumb for IT organizations was that you had to spend an additional 2X-5X in
services to get a third-party enterprise software application deployed and
working. This never made sense to me,
but I participated in the dysfunction along with everyone else for many years,
on both the buyer side and the sales side.
As this thinking became more broadly accepted, it became a self-fulfilling
prophecy: vendors could make money customizing the solutions for customers
(regardless of their actual need for the customization), so it was in their
best interests to create software that required a bunch of consulting to get it
working for customers. (Software that sucks, in the classic sense of “suck”:
time, money, corporate IT resources.)
With the
evolution of SaaS, all vendors now face more accountability, like it or not.
Salesforce.com knocked it out of the park as an independent business while
Siebel sold out to Oracle and has bounced along the proverbial third-party
software bottom, collecting maintenance on software that they sold 10 years ago
to big companies who are not capable of switching to Salesforce.com.
6. Traditional business models encourage vendors to
extract as much money from their customers as quickly as possible – regardless
of whether the software works or the customer actually needs the software. During the 1980’s and 1990’s, this “sell first,
ask questions later” model became standard practice for technology companies,
based on the success of proponents like Oracle.
But now, we’ve evolved. Customers
shouldn’t stand for it. There are better alternatives. And vendors in just about every
enterprise-software category should realize that it’s only a matter of time
before someone comes along and provides better solutions that work for users
quickly. Let the hangover of enterprise
software purchases begin.
7. The perpetual-license model creates perverse
incentives for both buyers and sellers. The subscription/term license model creates a
much more rational incentive for the seller of technology to deliver both
short-term value (through adoption) and long-term value (through improvement to
the software) for customers’ end-users.
With a perpetual license model, the seller gets too much value up front,
misaligning his interests with those of the buyer.
8. Traditional “maintenance” is just as
dysfunctional as the perpetual license that it stems from. Fifteen
percent (15%) maintenance is not enough money to innovate and improve a new
system. Therefore, vendors’ business models put them in a position where they
have to “upsell” their customers’ perpetual licenses for some additional usage
or a new product.
9. Many customers should be happy to pay larger
subscription fees over time in exchange for significant probability of greater
success, user satisfaction and innovation. They just don’t realize this, because business
owners, end-users and engineers aren’t involved in procurement processes. This perpetuates a lack of accountability for
vendors and feelings of helplessness among users and consumers of these
software systems.
10. Multi-tenant Web services present a compelling
alternative. The broad availability of commercial
multi-tenant hosted web services (epitomized by Amazon Web Services and GoogleApps) is creating a widening gap. On one
side of the gap, there are buyers and sellers of software who are merely
perpetuating outmoded models for consuming and selling software. On the other side of the gap, are software
buyers that demand that their vendors deliver value through reliability and
innovation every single day – and have the means to measure this.
11. FUD continues to rule – for now. Many of
the procurement and sales establishment are using the FUD (Fear Uncertainty and
Doubt) arguments to slow the adoption of new software-as-a-service models. I can understand why: the new business models including SaaS challenge their very existence. However, as a result, their customers are saddled with a sub-optimal state of productivity for their
IT systems and infrastructure. This
is not sustainable as IT organizations are under dramatic pressure to reduce costs significantly.
12. IT organizations that embrace new software models
are more productive and efficient. They can focus more on high-leverage skills like
networking and integration – and worry less about lower-value activities such
as racking and stacking servers or building and releasing software. These benefits have been documented among the likes of Google Apps enterprise customers (Genentech for example) as well as large companies that have embraced Amazon Web Services (Netflix for example).
I believe that all software contracts should tie
payments to end-user adoption. Monthly
software subscription deals can be used to accomplish this relatively quickly: if
users adopt. you pay; if they don’t, you
don’t pay.
For software industry old-timers this is
heresy. But it’s time to leave this one
in the rear-view mirror – or eventually suffer the consequences. The packaged third-party software
industry is due for a reckoning - it's time for vendors to modernize their business models which depend on bilking customers for perpetual licenses and maintenance streams on software
that is never used. And customers should start buying software as a service and not overpaying for big perpetual licenses that they may or may not ever use.
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