Your next software buying decision: zero cost?

Your next software buying decision: zero cost?

Summary: My piece about SugarCRM contains a line from Vinnie Mirchandani that's been ringing in my ears: "They're tiny." What's tiny about:Free edition400,000 users50,000 systemsCommercial customers100,000 users5,000 systemsI'd have thought most application software vendors would carve off their right arm with a broken hacksaw to get those sort of adoption numbers.

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My piece about SugarCRM contains a line from Vinnie Mirchandani that's been ringing in my ears: "They're tiny." What's tiny about:

Free edition

400,000 users

50,000 systems

Commercial customers

100,000 users

5,000 systems

I'd have thought most application software vendors would carve off their right arm with a broken hacksaw to get those sort of adoption numbers. But then I'm not following the money. It seems to me that we're at some sort of inflection point where the value software delivers is finally coming under scrutiny. This should have happened years ago albeit Phil Wainewright asked that question nearly four years ago.

But when you have sales people addicted to six, seven and eight figure deals, when software companies can put on huge events, pour money into a compliant analyst community and still declare close to 30% net profit, there's little incentive to change. Until someone comes along and does it for you in economic conditions that demand change.

I'm convinced the days of mega margins are over but it's up to buyers to force the pace and especially to force the software industry into some semblance of SG&A discipline. Commercial open source and cloud computing offer that prospect. I'm not alone in that thinking and it makes for great knock about conversation. Over the last few days, the Irregulars have been pounding on one another around this topic.

Our resident investment guru Jason Wood correctly points out that:

The problem with OSS models is that, if the companies can't effectively monetize them over time, how do they survive? Investors aren't going to perpetually fund low profit model businesses, they rightfully demand a certain return on their capital.

My answer is simple: get better at investing governance so that you're not always dependent upon the next Google. Jason sagely adds:

Just as we saw semiconductor margins peak [and then people argued against having seen that peak for a decade before they came around to the evidence], I believe we've seen the best margins will ever be for the enterprise software/hardware computing paradigm.

Does that mean margins won't go up, sometimes dramatically? Of course not, there is too much cyclicality in the industry these days to say that. But we're now in a situation where CYCLICAL margins can rise, but in the backdrop of SECULAR decline.

No-one wants to punish innovation but the rewards we see Oracle, SAP and others currently earning seem way out of proportion to the value they claim to be delivering. You only have to consider the implications of Jason Carter's findings against net earnings to see the mismatch.

My kick off argument was against the backdrop of open source but that drew short shrift from Bob Warfield:

OSS as a business is an abject lesson that when you offer the component parts of value (e.g. separate support from the software in the traditional OSS Model), you destroy value.  The whole is greater than the sum of its parts.  That's why SaaS is so great--you're adding a service component that can't be unpicked.  At the very least, OSS is going to need to add more value somewhere else if they give away the source.

OK but then I didn't say that commercial open source is a particularly mature model or one that anyone has  cracked as sufficiently viable for a long game. Jeff Nolan weighs in with:

The larger theme is the overall trend to commodization in tech, it's the defining attribute of technology for the last 40 years. Irrespective of current economic conditions, the enterprise technology sector (hardware and software) should be getting used to an environment that rewards being lean because it's hard to imagine margins ever recovering, especially in light of the observation that many of the productivity gains that were attributed to technology are proving to be less impressive than originally projected.

OSS has a place but it's not the game changer that it was originally expected to be.

There we have it. On the one side, vendors who remain dumb, fat and happy and a lean OSS model on the other side that hasn't figured out where it wants to be. Perhaps. Which brings us back to SG&A with Jason firing back:

I always said that if SG&A costs were going to come down, it had to be because the buyers started EN MASSE changing their OWN behavior, including just blindly signing up for premium annual maintenance on software they would have trouble justifying ROI on in the first place.

Most of us agree there is a race to the bottom and that it is happening at a frightening pace. Do SAP's recent numbers portend that trend? Of one thing you can be sure, the big players will fight tooth and nail to defend their margins, regardless of what the wider customer community might wish. But it was Michael Cote who asked the right question:

I feel like open source has unmasked the "scam" of software licensing to the buyers and users: software doesn't actually have to cost a lot. But as an industry - creators and consumers - we haven't moved past that unmasking moment and asked, "so, how much should I be paying?"

If you think that open source is the answer, then the minimum is nil, zero, nada. If you're a proprietary software vendor a la Microsoft, IBM, SAP or Oracle then the answer is as much as they can wring out of you to justify SG&A plus the inevitable 17-22% maintanance tax. Neither model is right. Maybe saas/cloud/on-demand whatever you want to call it IS the answer, albeit immature in its current iteration.

Whichever way you want to slice and dice this argument I believe we're close to a significant watershed but what do readers think? Has the time come for the software business to be a more mature, lower margin industry? Is it time for a meaningful emphasis on innovation that proves Jeff Nolan wrong? Is the race to zero a reality? Or has Phil been right all along: it's not the software, it's what you do with it that matters? In other words, it's the services around software that truly transform business and that, to use Michael's thoughts - we're really looking at buying more screws and nails rather than something that offers us value at an as yet to be defined value?

Topics: IT Employment, CXO, Open Source, Software

Dennis Howlett

About Dennis Howlett

Dennis Howlett is a 40 year veteran in enterprise IT, working with companies large and small across many industries. He endeavors to inform buyers in a no-nonsense manner and spares no vendor that comes under his microscope.

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14 comments
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  • Open Source it!

    The beauty of open source technologies and hiring skilled talent not people who want to haul in a bunch of proprietary software the extorts tens of thousands of dollars for nothing on return.


    Having skills to develop and maintain your own infrastructure is the future, not getting locked into insecure software from big Mega Corps like MS that are plagued with worms and viruses.

    What good is paying for software from MS when they can't even fix it??? Can someone tell me why this is a good route to go when it has racked up $9 BILLION in damages?
    Christian_<><
  • Software industry continues to consolidate

    One of the reasons industries consolidate is that competition reduces profit margins. When there's a substantial research component, having the most money means accomplishing the most. As shown by pharmaceuticals and software, buying promising products both yields future profits and eliminates competitors in the various markets.

    Software markets are no longer as small as a single application. Product lists allow flexibility in pricing and differentiate based on how well one product works with another. And another. And another. Call it a stack if you like, but the surviving companies know that packages of software sell.

    So if open source were to have commercial significance (except as a cheap way to add to a package), the directors of the project would have to manage not only their own product, but also linkage to other products.

    Of course, as the directors of many open source projects are the companies which gain from packages available from a single source, this is unlikely to happen.

    Predicting a significant commercial future for open source as product seems myopic.

    Anton Philidor
    • Flat out wrong

      @anton - read the 10-Q's and 10-K's, participate in open source development and THEN tell me your development argument holds water. As framed, it is flat out wrong.

      That's one of the big reasons you see OSS and cloud enthusiasts promoting open standards. Or in the case of Salesforce.com, providing an easy platform against which to develop. Proprietary s/w makers don't want you going there - it helps maintain their ridiculously high margins.
      dahowlett
      • The interesting line in the article

        [i]but the rewards we see Oracle, SAP and others currently earning seem way out of proportion to the value they claim to be delivering[/i]

        So part of the problem is that the author already has determined a value he feels that Oracle should earn.

        No Phil's been right all along: it?s what you do with it that matters. If a 10,000 dollar piece of software saves me 30,000 dollars a year, it is a good thing.

        GuidingLight
        • But if a $100 piece of software saves you $25,000/year...

          That is even a better thing.
          Bruizer
    • Nonsense

      You don't see Pepsi and Coke pouring money into R&D.
      Anhauser Busch has been taken over by Inbev, the largest consolidating force in the Brewing market, making Inbev AB 51%+ of the world brewing market.

      Their first action: cut all R&D labs. Across the world, Inbev have slashed R&D.

      Why? No return for massive R&D investment.
      Once the low hanging fruit has been nailed, the law of diminishing returns comes into play.

      Where are the fruits of Microsoft's continuing massive R&D budget?
      Windows 7 is a total ripoff off OSX again, minus Apple's cool feature where you tag a person in one picture, and you can search for them in other pictures.

      .Net is a train crash, OpenOffice is smashing office 2007. To try to interpret falling sales and profit as a harbinger of future sales and profits without any compelling mould-breaking products (eg: iphone) is plain wishful thinking.

      Outlook/Exchange/WindowsMobile is being smashed by GoogleApps on anything including regular cellphones.

      The future is open formats, open source software, the cloud. I have all my mail in GMail, but I've also got it backed up on my Mac in Apple Mail.
      My work Gmail I have backed up on my PC through GmailBackup which is a relatively simple Python program (appears just like any Windows program to the user). I've used Gmail with a succession of mobile phones, usually though the browser.

      There is no risk of data loss, I've got 24/7 access without the need for a risky VPN, and it's compatible with everything I've ever tried it on including the Nintendo Wii.

      Go on, tell me the R&D $$$ that microsoft have spent on Outlook/Exchange has made a better product....

      pffff.
      stevey_d
  • RE: Your next software buying decision: zero cost?

    The prime directive is Vendor Lock-in. You get an initial amount of money and because you don't interoperate, you get a continual revenue stream as that is cheaper for the customer than migrating to another vendor who has the exact same business model.

    Open standards.. you export your data and import it onto the new vendors hardware or support and you are up and running in a day. When all things are equal, the software vendors then have to base their revenue model on customer satisfaction. That is determined by price, quality of service, and a few other things. Quite frankly, it is easier to keep an unhappy customer if the process to leave is painful. When someone else offers the same apps, you are only going ton get them by competing on price and quality of service. That will force the prices down.

    Not sure I would say OSS is going to be the future, but it will certainly drive Open Standards.
    rijrunner
    • Depends on the application

      I see this "vendor lock-in" argument a lot in the OSS crowd, and I think this really relates more to Office software than enterprise software.

      In an ERP system, for example, there are 101 ways to handle job-costing, slice-and-dice financial statements, and there might be very industry specific information that must be tracked and controlled. What kind of "open standard" would the open source community provide to handle this?

      More to your point, if a company were to go Open-source, how would this provide any less lock-in to the product than would implementing a commercial package with standard data import/export capabilities (which exist in almost every proprietary enterprise system on the market today)?

      The pain of switching systems comes from process changes, training, and software implementation itself, none of which disappear or become any easier in an open-source environment.
      daftkey
  • RE: Your next software buying decision: zero cost?

    Fine Stevey, explain to me wha CIOs should not cut out maintenance and spend that on innovation dollars on their own. With 70% going towards keep the lights on, another 10-15% on more recent compliance and risk management initiatives, if sw and hw and telcos adopt the slash R&D mentality. where will innovation techcome from?

    some of the most productive IT shops - BP, UPS. Amex have taken core tech components and innovated on their own in many areas rather than wait for mainstream vendors
    vmirchan
  • Software business is mature now.

    Software business is mature from the following signs.

    1. Outsourcing - More and more US companies move software development jobs to offshore, usually China or India.

    2. Software companies looking other ways to monetize freeware or open source. See this - http://bionicoder.wordpress.com/2009/03/04/three-ways-to-monetize-freeware/

    Although it is mature, but does not mean low margin. Software companies can still earn from other source, like SaaS, ad-supported etc.

    donbaker
  • Do the math

    As to why this is "tiny", at SugarCRM's most optimistic pricing, 100K users is only about $8 million USD in revenue (odds are that the true number is much less). Hardly a "big" software entity. That would sustain roughly $1.5 million in annual R&D - rounding error when compared to the big guys or medium guys.
    IndustryWatcher
  • RE: Your next software buying decision: zero cost?

    This is a very interesting thread with multi-faceted arguments. I don't think that software development either tradition, SaaS or OSS should be a religious argument. There are pros and cons depending on business needs.

    The key is to really engage the business in what it needs

    I don't think the software business is mature yet. Some of the technology we have developed is maturing - but we are far from mature in how we apply it

    The value of software isn't measured effectively by just looking at cost savings.. a solution may be reduce latency of a decision or process, or increase productivity in a business process for specific competitive advantage

    To minimise the cost of commercial software we need to reduce the cost of maintaining it - so that we can invest more dollars in innovation with the same expense envelope

    I do agree that we can reduce the cost of supporting deployed solutions. Much of this may come from less customization and more working with the vendor as a partner to provide commercial enhancements that meet business needs

    In short - it's all about the business not technology

    The value of a deployed solution is far from commoditised, and to maximize that value we must align with business needs, branding, competition, market changes, channel strategies etc.
    sjking2000
  • Age old answer...

    It all comes down to a trade off between sweat and cash. Today you can get free hardware (usually older), free software including the operating system (usually older), but you will have to spend your time getting it all to work.

    On the other hand you can get bleeding edge, mega-computers, with the latest software and support for a ton of cash.

    Nothing is free, even now Microsoft and the OEM computer makers are screwing users with their basic systems. Just listen to users laments over Vista on bargain basement systems. I hope the current economy will squeeze them to offer more value, but I am not holding my breath.

    You pick.

    I was lucky, I had to get by on stavation wages and had to go the sweat investment route in the beginning (making cow crap fly). Then some where along the journey I ended up being the go to guy and I ended up working at Microsoft and then consulting, so to mangle an old quote from some ancient celeb: computer been bery bery good to me.

    I run Linux off of a memory stick, for free, but I had to make it all work.
    mikifinaz1
  • RE: Your next software buying decision: zero cost?

    Just like we pay large margins for processed food, brand name cosmetics, legal services, often unnecessary surgical procedures, and even drinking water, we will continue to pay for bloated software for years to come, regardless of how many, often better, OS alternatives are available.
    ganeshan17