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The slow death of traditional software

July 27, 2005

Chris Koch reports on a new study that reveals just how disillusioned CIOs have become with the traditional model of buying and maintaining business software. The research house IDC surveyed 250 IT execs and found, according to Koch, "that they are so frustrated with software licensing that deep discounts on the software - as much as 100 percent! - don’t lift their moods. They are convinced that the software companies will rip them off somehow. That somehow is usually via maintenance or subscription fees." The survey reveals, moreover, that "companies believe they use just 16 percent of the software they buy. The rest is just there to pump up the vendors’ fees." The study backs up earlier research by AMR that found software buyers are "furious" about vendors' maintenance and upgrade practices.

Koch concludes, rightly I think, that the breakdown in trust between enterprise software companies and their customers signals the death of the traditional model. He writes: "When you’re paying for software endlessly without knowing whether you can afford to upgrade the software when a new version comes out, or how much you will be charged for new software that the vendor develops, or how much of a say you will have in that development, you are tempted to simply reject the entire model out of hand. I think we’re there."

Not coincidentally, the IDC research reveals an increasing appetite for "software as a service" (SaaS) - applications hosted by outside companies and served up as utility services for a simple fee. "For every major category of enterprise software," Koch writes, "IT executives in small and large companies (we used to think only small companies wanted software as a service, right?) said they wanted software delivered as a service. Twice as many wanted to buy by the drink rather than owning it outright." The way that demand for SaaS is moving up the market, from small companies to big ones, follows the classic pattern of a bottom-up disruptive innovation - and reveals where the enterprise application industry is heading.

But the research also points to one of the roadblocks to the adoption of SaaS: resistance from the CIOs themselves. Koch reports that "when the IT executives were asked whether they wanted CRM as a service or wanted to own it, the numbers [supporting SaaS] reversed. Twice as many wanted to own. That seems to be a direct reaction to Salesforce’s success in the market. Business users can go around IT and set up their own Salesforce.com accounts. IT can’t justify the investments it has already made in CRM any longer." CIOs are fed up with the traditional model of software supply, in other words, but they still resist the changes necessary in shifting to a new model. Because SaaS calls into question their past investments, they have a natural tendency to see it as a threat. Once again, that follows the disruptive-innovation pattern.

But the resistance will fade as SaaS matures and, in particular, becomes more flexible. Koch notes that difficulties in integrating hosted applications with in-house systems is holding up the shift to SaaS, but companies like Salesforce.com are tearing down that barrier, and it will disappear as new web-services platforms emerge. The death of the old software model will be slow, and it will be painful for many vendors and users, but it will happen.

Comments

As an enterprise IT staff person, we see decreasing value from the traditional models of buying software licenses, purchasing hardware to run the software on, then training to learn how to maintain the software, and then the excessive time wasted to operate and maintain the software. Of course we want the service (the end product that the software produces) because we feel that we are spending too much time and money becoming experts trying to wring the promises out of the product.

We used to think that it was cheaper to buy a firewall and run it ourselves. Now we want someone else to provide the firewall as a service, keep it running, keep the software current and safe with any new functionality and monitor its performance and output. We want to provide true business value by interpreting corporate policies into system design and configuration and change management.

Years ago, I suggested that Cisco should stop trying to sell us network hardware and begin to sell us a network service. They provide the hardware, install, configure and maintain as well as provide ports as needed. We would pay for ports used per month based on the type of port. The chief advatntage would be that the focus Cisco would provide would be on stability and reduced hardware churn (in both of our interests) and features driven by business requirements rather than marketing cycles. The account manager liked the idea - but I imagine that they were making money just fine, as is, thank you.

Posted by: Stuart Berman at August 16, 2005 11:02 PM

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