Ailing Economy Affecting ISV Sales Practices

Analysis of News Events
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With money scarce and credit crunched, ISVs are looking for new ways to help companies that want to buy their wares but can't easily afford them.

 

Although the current dreary economic climate is well-known, what's not as apparent are reactive changes taking place in the sales practices of some independent software vendors (ISVs) and software-service providers. The need for computer-related solutions hasn't diminished, but cash-flow problems and limited credit availability are keeping many potential-customer companies from making needed technology purchases. Some vendors are responding to this situation as an opportunity rather than a problem by changing their sales practices. Other consequences are changes to the outlook and business models for such industry stalwarts as Software as a Service (SaaS) providers.

Play It Again, Sam

One ISV response is to turn to time-tested tactics such as providing discounts for volume and cash purchases, offering new software and service bundling combinations, and helping customers with financing their purchases. For example, BCD Software is making available 40 percent discounts for customers purchasing its entire suite of bundled modernization tools, a free copy of its E-Z Pickin's data extractor with a buy of its Catapult spooled-file control product, and discounts on the PHP version of its WebSmart Web application generator to those owning the ILE version of the product, among other offers. BCD is also providing a 10 percent increase in the number of consulting hours it includes with the purchase of either WebSmart solution, according to Eric Figura, BCD's director of sales and marketing.

 

Centerfield Technology, for a limited time, is shifting sales of its HomeRun suite of system performance tools from availability on a single-partition basis to a whole-server basis at the same price.

 

On the hardware front, as long ago as last September, IBM Global Financing unveiled new financing options to help potential customers invest in storage systems.

 

One can only speculate on how many ISVs may be offering potential customers other payment and financing options that haven't been publicly announced.

A Cue from Magazines

Although the publishing industry is struggling as much as anyone these days, another approach is to follow a longstanding practice of periodicals and to begin offering software on a subscription basis rather than as an up-front purchase. This idea minimizes cash-flow effects for customers by letting them obtain software today while avoiding the high cost of buying a standard software license and maintenance all at once. Australian high-availability (HA) tool vendor Maximum Availability, for instance, recently launched its *noMAX Subscription Edition. Under this program, customers can choose to pay a quarterly or annual subscription fee for the *noMAX HA product.

 

Patrick Townsend Security Solutions is providing the option of a monthly subscription fee for all of its data-security and key-management solutions, as well as adding implementation services to its roster for customers who "find themselves without the human resources to complete their projects."

 

Quatred LLC is combining its mobile computing/bar coding solution into a bundle (which includes hardware, software, onsite services, maintenance, travel, freight, and Sungard Public Sector applications) with a 36-month lease package for which customers can pay on a 30-day basis.

 

IBM is also getting into the software action, though a bit off the beaten path for some System i users, in its recent agreement with Amazon Web Services to provide DB2, WebSphere Portal, Lotus Web Content Management, WebSphere sMash, and Novell's SUSE Linux OS in Amazon's Elastic Compute Cloud environment under a "pay-as-you-go" fee model.

Sweeter Than SaaSparilla

Of course, the subscription model for software isn't new; it's been the basis for SaaS since that idea's inception. ISVs are simply borrowing the concept but, ironically, just as the economy is casting some distorted shadows over the SaaS business model.

 

Downsiders can point to the February 6 resignation of John Cakebread, president of Salesforce, a major SaaS player, along with two other major execs, despite the fact that Salesforce.com announced it passed the $1 billion mark in gross revenue in its last quarter. Upsiders are quick to quote a January IDC research report that predicts 42 percent growth for the SaaS market over 2008 and claims that by the end of 2009, 76 percent of U.S. organizations will use at least one SaaS-delivered application in their businesses.

 

On February 19, Gartner published a new study checking the five most common SaaS assumptions. The results seem to explode several myths about the SaaS model. Gartner's research led it to conclude that, while total cost of ownership may be lower for SaaS than outright software purchase in the first two years, benefits decline in subsequent years from an accounting perspective because companies can start to depreciate the capital assets used for on-premises software deployment. Another challenge is that while SaaS vendors can point to some implementation times of less than 30 days, most of those examples are simple-requirement sites. More complicated implementations, Gartner points out, can take seven months or longer. In addition, Gartner found that the common claim of SaaS providers that they are best thought of as utilities similar to electric companies is often false because customers have to "commit to a predetermined contract independent of actual use."

 

On the plus side, Gartner says fears that SaaS applications are difficult to integrate with on-premises apps and data sources are usually unfounded. The study also found that SaaS can work for more than just simple-requirement situations, as long as one is mindful that complex workflows or business-process management implementations can take time.

A B2B Subscription Model for SMBs

But one stumbling block the Gartner study doesn't tackle is that the cost of SaaS puts it out of reach of most SMBs. "SaaS is best for companies with distributed applications and hundreds of users," points out This email address is being protected from spambots. You need JavaScript enabled to view it., managing director of Focus Development Group LLC, a marketing company. "Also, the customer must do the integration work [with in-house systems] and despite high monthly costs, [once they're committed] SaaS customers can't walk away from their investment in integration, training, and so forth."

 

So ISVs thinking about following a SaaS-like path of offering subscriptions for software to an SMB-laden market like that of the System i need to find a middle ground. And perhaps there is one in an idea growing out of the conflation of ISV sales strategies and SaaS at D&B Global Services, a new venture that's developing a model for delivering B2B software and services (such as EDI) to SMBs and wants to include System i users in its clientele. D&B is looking to offer the software and services on a subscription basis that SMBs can realistically afford.

 

"Hosted, managed B2B services" is how D&B President Dennis Bonagura refers to this concept. The idea is to offer a compete B2B infrastructure as a service, for a monthly subscription fee that's lower than the customer's cost of  maintaining such a system in-house, with a mandatory subscription term of two years or less. "A major issue with B2B systems is the costs for integrating with back-end systems, and often there have to be custom programs for each business partner or even each transaction," Bonagura notes. D&B offers an integration component and runtime model that works with a customer's back-end systems and can run either on premises or on D&B's servers. The company hopes to launch its services within the next few weeks.

A Shift in the Business Model

What seems definite is that the troubled economy is forcing ISVs and other companies to start considering new ways of doing business. And whether it be discounts, bundling, software by subscription, financing, or some new services model, these and other new methods that haven't yet been rolled out are likely to affect how software sales are carried out long after the current recession is over.

 

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