Software as service

In a new opinion piece, Ray Lane,former president of Oracle and now a venture capitalist, offers a compelling vision of software as service.He defines thisconcept in terms of "tying supplier revenue to a business outcome: the supplier sees the client's end result, measures its success, and receives revenue based on the results achieved."

He also hastens to point out that there are multiple pricing and licensing models to which the concept might apply. "You can find a lot of examples of companies that are offering a service with very complex software behind it (Amazon, EBay, iTunes, SalesForce) - even if the customer owns a license (Elance, Oracle Online, Siebel On-Demand)," he explains. "These suppliers focus on selling knowledge not bits."

Lane acknowledges that the shift won't happen overnight -- and notes that it will be particularly difficult for large, entrenched vendors. Nevertheless, he is convinced the move is inevitable -- and truly desirable. "A move to a service model means the reputation of the software industry improves," Lane states. "If the transition occurs gracefully, customer satisfaction will grow, profits will grow and become more predictable and, ultimately, the industry will grow from real demand by customers when the technology is actually needed and consumed. Although the industry's past youth and cowboy culture was fun, the products of our industry are far too important to deliver over the transom with an 800 number for service. Ask yourself the question about the relative reputations of software service companies vs. software products companies (amongst their respective customers). It's not even close, and thats because service companies are in the business of pleasing their customers every day, not just when they need the next deal."
So who will make the leap first? "Small private companies starting up have an advantage," contends Lane. "They can develop a service model from scratch and use it as a competitive advantage. Salesforce.com doesnt offer more, they offer more service. Elance delivers a result through its intellectual capital, not bits. It boils down to simple economics. With a large customer, you can discount very large product sales up front and erode the value of a relationship or develop a long term relationship that is a win-win in terms of price/value that builds a more sustainable and predictable business. Any economic analysis will show that the service model will offer a better opportunity long-term for profits and cash flow, despite more required investment in the short term."