Chewing on software and service pricing

One of the perennial discussion points among my colleagues is business software pricing and its relationship to services. This topic is problematic at all sorts of levels. We're seeing on-demand/saas putting pressure on both incumbent on-premise vendor pricing and within the on-demand world. Deep discounting is rife among enterprise vendors like SAP and Oracle as they face aggressive price points from the on-demand world and a growing recognition among buyers that they're investing in 'old' technology at premium prices. It doesn't stop there. Most recently, Josh Greenbaum asserted:

I think 2008 promises to be the real year of on-demand CRM: It’s Salesforce.com’s market to lose, and, unless something changes dramatically in their favor, lose it they will.

Phil Wainewright is dismissive of Microsoft's CRM Live offering to partners:

Its 10% cut for partners is derisory, and out of kilter with what partners look for in the SaaS marketplace (NetSuite for example offers a generous 30% lifetime margin to its partners). It’s also a far cry from the margins partners are used to on Microsoft’s licensed products.

From what Henning Kagermann recently said, A1S looks likely to come in at around $2,000 a user per annum for a configurable, all-you-can-eat 50-person license. OK, so on-demand/saas is unquestionably flavor of the month. In a Google Group discussion, Josh Greenbaum suggested this fact might drive buyers to make irrational decisions. Ever that remains true in an industry characterized by fashion trends. But in a related Google Group discussion Zoli Erdos said:

When you expand your horizon to include small businesses (the Very S in SMB) you'll see a completely different picture: they most often have no IT support in-house, running, maintaining systems would be a burden they don't want to take on - SaaS is the only choice, provided there are vendors with "good enough" functionality. It was really hard for me 3 years ago to get used to this "no IT" approach when for the first time in my life I became the "customer" at a $5M 30-person business, but understanding our realities we through out all packaged software from our selection process, and only compared Salesforce and NetSuite.

The success of the on-demand/saas model seems to be born out by the spectacular growth of registered users at places like Freshbooks. Late August 2006 it had 80,000 registered users, today it records 190,000. More important however, what do the 'new' price points mean for implementation costs and services?

At Microsoft's recent Worldwide Partner Conference, Tami Reller, corporate vice president for Microsoft Business Solutions said the predicted 2008 market opportunity for services is $93 billion. Set that against the software and enhancements prediction of $51.7 billion and you come up with a services to software ratio of 1.8:1. That's interesting. A number of my colleagues believe the range runs 2-5:1 in most enterprise implementations although it is widely acknowledged there are numerous variables that can swing costs in any number of directions. Michael Krigsman points to innumerable non-technical complexity issues but also argues that much can be done to at least alleviate the technical implementation process.

Regardless of whether software is on-premise or on-demand, implementation costs don't magically evaporate. But... the industry does little to drive down those costs or make the rest of us aware of the many traps and potholes that impact cost. Vinnie Mirchandani notes that when he's looking at project costings, he's looking for effective labor but that:

I can tell you I have seen many, many projects where just the consultant travel expenses exceeded the license cost...it is not in the interest of a software vendor to be transparent about integration costs

This is a terrible indictment for an industry that struggles for credibility and which is effectively starving its customers of innovation oxygen. But the implementation issue is not one dimensional. I'm with Michael Krigsman when he argues that:

The difficulty in measuring qualitative, organizational and political risk factors is one reason that so many project reviews produce virtually useless results.

In other words, no-one is to blame but everyone is responsible. In my opinion it's about time we woke up to that fact.

Is Tami therefore suggesting the services ratio - at least in the SMB sector - will be pegged? In the short term at least, I doubt it. There's just way too much money to be made and way too many people who don't want you to know the real costs. But if you want a rule of thumb then maybe Thomas Otter is correct when he draws on his 12+ years of SAP experience and says (I paraphrase):

When a company asks me how long it takes to implement SAP (and by implication cost) I usually say: Slightly longer than it took you to make the buy decision.

Now you know.