A great discussion at the Enterprise Software Summit on business models. Particular emphasis on: perpetual license vs. subscription; and hosted vs. premises. Which is natural for a conference with mostly CRM attendees these days. Salesforce's IPO is shaking things up.
Peoplesoft GM of CRM Joe Davis shared his experience in taking Clarify private when it was part of Nortel. Gartner has trained every enterprise buyer to take advantage of deal making to be done just before 7pm EST at the end of the quarter. The perpetual license model has drawbacks including end of quarter pricing pressure. He developed a model where not everything is paid up front, but instead having most of it be milestone-based. The result allows you to enter into the quarter knowing where 70% of your revenue is going to come from. But more importantly, it shares risk. They used a period of being private to make this switch as it would create a significant hit to earnings for about two quarters.
Suggests that subscription models are best for new companies -- they are sellable and don't require the burden of maintainence.
At Socialtext, to toot my own horn for a moment, we have the benefit of beginning with a similar model. Socialtext Workspace pricing is largely subscription based. This shares risk with customers, allows business cases to be built and costs to be incremental. For customers that don't want to pay us a dime, we even offer an open source version (Kwikspace) with an easy upgrade path to the commercial version meant for business use. We also offer fair exits from the service with a low switching cost, such as transitioning use to our open source product.. We do this because we don't believe in false lock-in and believe in the value of our products today and tomorrow.
We offer both a hosted service and an Appliance offering. The hosted offering allows immeadiate and incremental use that scales as well as the web. For some customers, we offer the Appliance as an option for on premesis deployment. The Appliance has a lower total cost of production for us and a lower cost of ownership for the customer compared to other models of on-site deployment. But enough about me and my horn...
Siebel CIO Mark Sunday described the virtues of a hybrid approach that leverages the same architecture. They found from a customer survey that all believe there is some area where a hosted service could be applicable. 85% of their employees are also Seibel users so they have additional insight into applicability for other processes. They offer annuity as well as perpetual licensing options for prem customers. Some buyers choose perpetual to buy forward. Having "every month be a close is a mind-shift." Hosted offerings can work with the channel (IBM; BT bundle with hosted VoIP, Big 5 interest in SMBs). The hybrid approach is essential for large organizations
Phil Windley, former CIO (blogger and Scout) of the State of Utah, comments that in the public sector making mistakes hits the papers which can lock a vendor out of future work. The subscription model makes it easier to succeed. Phil recalls when he had to write about Grand Central for Infoworld. He was able to access the web services platform immediately, tinker around, and get a good enough sense to almost write about it before talking with CTO John McDowall.
Interesting discussion of switching costs. Someone suggests that Salesforce has a high level of churn which is represented as a risk factor in their S-1, but not heavily reported.
Citrix Biz Dev Director Bob Gardner was one of the first to deploy the ASP model. As a veteran of the ASP wars, he asks himself if its hard to define applications without integration. Mark replies that its less of an issue for many substantive companies than you would expect. Especially with XML and SOAP. Someone asks if any company has a fully integrated system that flows to dashboards. The most fully integrated is Peoplesoft, Oracle and SAP...although there are other examples like Forester and Akamai...but is for the most part rare.
Some good discussion about how often you don't have to involve IT with the subscription model.
Mark Sunday: Every organization has the IT they deserve.
Overall, a great session. As I alluded above, the key is recognizing the intelligence of today's buyers. If you don't offer an incremental path of risk and flexible options they won't buy. They might just do it themselves. The most suprising thing about this session and the conference overall is it was the first I have been to for a long long time that didn't consider open source as a key part of the mix.