In my tech market forecasts, I am starting to see the intersection of two worrisome trends:
- Software subscription fees for multitenant SaaS or for single-instance hosted software are rising rapidly, with a growing percentage related to existing software as opposed to new and with a high percentage having fixed annual fees or fees tied to metrics with little relationship with company revenues.
- A small but rising risk of recessions is apparent, which could reduce company revenues by 5% or more.
The combination of these two factors could place CIOs in a bind where a significant portion of their tech budget is rising inexorably, but the potential for their CEOs to ask them to cut tech budgets is also rising. To see whether CIOs will face this situation, I would recommend that they ask and answer the following questions:
1. What percentage of your overall tech budget will software cloud subscriptions represent in 2019? What was that percentage in 2018?
2. What percentage of your total software cloud subscriptions comes from new software contracts that you plan to buy in 2019, and what percentage comes from software contracts signed in 2018 or earlier?
3. What is the average contract length for your cloud software contracts?
- What percentage of your cloud software contracts are for one year or less (with renewal)?
- What percentage of your cloud software contracts are for 2 to 3 years?
- What percentage of your cloud software contracts are for four years or more?
4. What is the average contract tenure for your cloud software subscription spending?
- What percentage of your total cloud software subscription spending is governed by contracts for one year or less?
- What percentage of your total cloud software subscription spending is governed by contracts for two or three years?
- What percentage of your total cloud software subscription spending is governed by contracts for four years or more?
5. What percentage of your cloud software contracts with two-year or longer terms have fixed annual fees or subscription fees tied to metrics that have no relationship to your company revenues?
6. What percentage of your total cloud subscription spending is governed by these contracts?
7. How would your cloud subscription cost profile impact your ability to react if your firm's revenues drop by 5% or 10% and your CEO asks you to cut your tech budget by the same amount?
- No problem -- we have never had revenues drop by 5% or more.
- No problem -- most of our cloud contracts are one year or less or have provisions to lower subscription fees if business metrics decline.
- "Houston, we have a problem."
Here are my hypotheses for what the answers to these questions will be:
- On average in the US, cloud subscriptions will represent 7% of total tech budgets in 2019, up from 6% in 2018 and 4% in 2016. Specifically for software spending, cloud software subscriptions will rise from 20% of all external software spending in 2016 to 33% by 2020.
- On average in the US, 16% of all cloud subscription spending will go for new contracts in 2019, down from 18% in 2018. Eighty-four percent of cloud subscription spending will be for preexisting contracts.
- The average cloud software contract will be two years, with 30% of contracts for one year or less; 50% of contracts for 2 to 3 years; and 20% of contracts for four years or longer.
- The average contract life of all cloud software contract spending will be three years, with 10% of total cloud software subscription spending having a contract life of one year or less; 60% of all cloud software subscription spending having contract lives of 2 to 3 years; and 30% having lives of four years or longer.
- On average, 70% of cloud software contracts will have fixed fees or pricing models with no relationship to company revenues.
- On average, 90% of total cloud software subscription spending will be under contracts with fixed fees or pricing models with no relationship to company revenues.
- Twenty percent of firms will provide the first answer, 30% of firms will provide the second answer, and 50% of firms will provide the third answer.
I expect that most CIOs will want to keep the answers to these questions to themselves. However, if you are interested in finding out how your firm compares with others, please send your answers in confidence to my email (email@example.com). I will aggregate and keep anonymous the individual results and then publish the full results at a later date.
By Andrew Bartels, Vice President, Principal Analyst
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This post originally appeared here.