The battle waged by Oracle to acquire PeopleSoft highlighted a number of aspects of the application software business that had received little attention in the past. In particular, much attention was focused on the value of software maintenance, and the question of what obligations Oracle would have to support the customers of the PeopleSoft. There have been questions about whether products would continue to be supported, and what the future of acquired product lines would be. There have been questions about increases in the fees for annual support. There have been questions about the availability of competent technical support. In fact, 64% of PeopleSoft customers polled by AMR Research have low expectations for how well Oracle will support them, and more than 60% said they would drop their maintenance contracts if Oracle stopped enhancing PeopleSoft applications. These questions do not arise from concerns about whether Oracle or PeopleSoft products have appropriate features – they are not really product questions at all. These questions reflect a growing recognition by software customers that traditional software licenses give the software vendor extraordinary control over the relationship.
The problem is not Oracle’s problem – the software industry has enjoyed almost three decades of selling ‘killer apps’ that customers eagerly bought on the vendor’s terms. But the software industry now faces a new dilemma. With first generation ERP products implemented poorly throughout most of the mid-market, mid-market manufacturers and distributors stand to reap significant productivity gains with more successful implementations of modern ERP solutions. Almost every major application provider has attempted to create the perfect bundle of features to attack the mid-market and unlock the billions in potential revenue. What they fail to see is that the problem lies less with the features than with the vendors themselves.
The administration of traditional software licenses leaves customers feeling frustrated and disadvantaged. Finally, some software customers appear to be fighting back. A recent article in The Wall Street Journal identifies this frustration, coupled with downward price pressures, as the two trends that have customers “demanding – and getting – more and better software for their money.” Large customers have recently been able to ask for and get discounts of 70% on the initial license fees with some vendors. Success is dependent on the negotiating skill of the customer in this battle for control over the relationship. Knowledge is power, and software vendors more about the details of software licensing than most mid-market customers. Even larger customers face significant hurdles in negotiating license terms such as the rate for annual maintenance. “If you are a good negotiator, you get 15%. If you are a bad negotiator, you have to pay 25%,” testified Michael Gorriz, vice president of information technology business systems at Daimler-Chrysler AG, in the antitrust trial over Oracle’s acquisition of PeopleSoft. Mid-market companies lack the time or resources to be “good negotiators,” haggling with software giants over the complex terms of traditional licenses.
However, with this shift in power from the vendor to the customer already changing software negotiations throughout the marketplace, a new breed of software vendor will emerge whose sole purpose is to delight the customer by accommodating administrative business needs and requirements. This new breed of software vendor will understand that delighting customers is the business strategy that has the potential to unlock mid-market tech spending.
How will a software vendor focused on delighting customers approach the licensing issue? The vendor will start by designing and implementing a license agreement that incorporates the customer’s priorities first – a kind of “omni-license” that captures all of the customer’s needs, rather than a vendor-centric license that can be amended through negotiation. The first step towards creating an “omni-license” for software customers is to identify their key priorities. The Software Customer’s Bill of Rights, put forth by HarrisData, identifies nine key relationship issues for mid-market companies to review before signing a software license.
1. Right to Affordable Quality Software
With software customers such as AT&T spending “roughly $1 million a month just to patch its existing software,” the cost of poor quality is becoming more apparent to software customers. Software vendors typically provide a short period of time – from 90 days to a year – as a ‘warranty period’ where fixes to the software are available for free. After that initial period, software customers must pay for “maintenance” either on a subscription or per incident basis. Improvements in software quality should allow vendors to extend the “free” period significantly to more closely approach the expected life of the software. For enterprise applications, software customers have a right to expect their vendors to stand behind their products for five years or more. A five year “free” period provides software customers with the vendor backing the software products need, but makes certain the cost of the software product will remain fixed during that time. Under this approach, software vendors can not pass on the expense of producing poor quality software to their customers through arbitrary rate increases for software maintenance. Software vendors must produce better quality software to reduce their support costs in order to remain profitable.
2. Right to a Well-defined Implementation
Software only delivers value if it is implemented effectively. Most software customers have read or heard about the implementation mistakes made in the enterprise software market – and understand the resulting bottom-line impact of failure. Software vendors must bring a “failure is not an option” approach to the implementation project, but software customers have the right to expect that project to be well-defined, and clearly delineated. Software customers have the right (and the obligation) to control their own implementation project. The software customer is the one who needs to make informed decisions about priorities, deadlines, and budgets. The software vendor’s role should be advisory: helping the software customer gain access to sufficient information to make effective decisions about the project. With this approach, experience has shown that the overall project expense can be reduced by 50% or more.
3. Right to Unlimited Quality Support
Issues inevitably arise from the use of software within a business environment. The issues may result from flaws in the software, a misunderstanding about how the software works, or both. In any case, software customers want to be able to contact a qualified expert to discuss the issue and resolve it in a timely fashion. Ultimately, the software customer doesn’t care whether the issue arises from a design flaw or a user error. The software customer wants the issue resolved as quickly as possible, with minimal impact on their business. Software vendors need to provide unlimited access to support services that include experts trained not only in the detection and fixing of design flaws in the software, but able to explain - in plain English - how to get the software to perform the functions required by the customer.
4. Right to be Free of Vendor Control
Software customers need to be able to make the software product work for them. They may need to extend the system to meet the unique needs of their business. They may believe they can find better, more cost effective support from an alternate vendor. They may simply need a means to help direct the software vendor in the enhancement of the product. Access to source code, to published programming interfaces, and to the product management team (even through an active User Group), all help the software customer control their own destiny.
5. Right to Business Growth
Mergers and acquisitions are a fact of life in the mid-sized market. Business owners struggle with software licenses whenever acquisitions occur for two key reasons: the software must likely be re-implemented to reflect new business processes, and most software licenses are non-transferable.
Rapid, low cost re-implementation of enterprise software is critical to gaining the value expected out of an acquisition. Software vendors that consume one, two, even four times the original value of the software in implementation projects are not well positioned for rapid re-implementation. Look for vendors that can implement the software at a fraction of the list price. These vendors will be able to help you rapidly re-implement new divisions or operating companies.
On the other hand, if your company is acquired, the acquirer likely expects the computer systems that manage the critical business processes of the company – including the software – to be included in the acquisition. Most software licenses are non-transferable. The software vendor may grant permission to transfer the license for a fee, but the fee may not be determined until the software customer makes a formal request. This process puts the software vendor’s permission to transfer the license, and the undetermined fee, in the way of selling the business. Software customers deserve a license that allows them to negotiate a sale of the business with known costs for the transfer of the software.
6. Right to Prevent Software Obsolescence
Business processes undergo constant change. Changes in business strategy, such as s shift to lean manufacturing, can mandate changes to business processes. Regulatory changes, such as those mandated by HIPAA and Sarbanes-Oxley, can mandate changes to business processes. Changes in the market, driven by customer demands for real-time, 24x7 access to information, can mandate changes to business processes. Software vendors have an obligation to keep their software products from becoming obsolete due to these changes.
Software customers have the right to expect to be able to utilize updated products to address these issues, including easy and cost-effective upgrade processes.
7. Right to Deploy Software without Restrictions
Software deployment is the process of making the software available to the people who need it. Software vendors have offered a variety of pricing models that restrict who can use the software and for what purpose. Licenses are written incorporating rights for named users, concurrent users, power users, servers, and other “units,” in an attempt to balance the cost of the software with some measure of the value it provides. Software vendors spend millions to insure compliance with these terms, from incorporating software that counts users and prevents extra users from using the system, to on site inspection and license audits to determine additional charges.
Software customers in the mid-market do not have the time or inclination to count users, power users, concurrent users, or to spend additional money on software license compliance. These software customers want software they can use to help them make money, not software that is going to cost them money every time they try to do something new. They don’t want to pay a license fee for every customer or supplier that uses the software to access information through the web. They don’t want to pay a license fee for every employee that uses self-service through a corporate intranet. They don’t want the president of their company to get the message “too many users – try again later” when attempting to view the company financials Monday morning. They just want the people that need the software to be able to get access to it – with no strings attached.
8. Right to Improve Technology Infrastructure
Rapid technological change affects every software investment. The pace of change in the computer industry has been furious for over four decades. In 1965, Gordon Moore observed that the number of transistors per integrated circuit had grown exponentially every year since their invention. He boldly predicted that the trend would continue through at least 1975. The press gave this prediction the name “Moore’s Law.” Today, Moore’s Law continues to accurately predict the doubling of data density every 18 months.
Software change has been just as dramatic. The 1970s were dominated by start-up software companies selling programming aids to mainframe shops. The early 1980s saw the introduction of new database technology based on a Structured Query Language (SQL). The late 1980s was dominated by the growth in PC-based software such as word processing and spreadsheets. The early 1990s saw the introduction of a new PC operating system offering a Graphical User Interface (GUI) that revolutionized they way we see information. The late 1990s saw software applications designed for this new environment and deployed using a new “client-server” architecture. The last five years have seen an explosion of software (especially application software) written for deployment through a web infrastructure. Each of these changes represented a dramatic and important technological change potentially affecting a software customer’s investment.
Software customers do not see these technological changes as changing the business value of their software. Software customers do not see technological change as a justification to pay more money to their software vendor. They are unwilling to pay their vendor to transfer the software onto a new PC operating system or a new server if the value the software provides hasn’t changed. They will pay their vendor for more functionality that drives additional business value – but they shouldn’t pay their software vendor for responding to technological change if the vendor hasn’t provided any value.
9. Right to Quality Documentation
Documentation is critical to a successful implementation. Some vendors will claim that their software is so easy to use that documentation really isn’t necessary. Others will develop profit centers out of in-house publishers of the documentation. What software customers want is to have easy-to-read documentation available to them (including all of their users), whenever and wherever they are. Software customers understand that there are costs associated with publishing books, but want no restrictions on duplication rights for valid purposes.
With these concepts in mind, mid-market software customers can better assess the likely relationship with their software vendors. The software vendors that will survive in the mid-market are the ones who address these customer requirements as an integral part of the administration and deployment of their applications. They will be the ones that delight their customers, and make the customer’s long term success the priority of the relationship.
Article contributed by Harris Data HRIS