March 3, 2004 5:15 PM PST

Software execs bash their industry's approach

SAN FRANCISCO--No longer entranced by Internet-bubble hype and Year 2000 bug-driven fear, businesses remain skeptical of their software suppliers, and that's causing some suppliers to change their ways.

That was the message, at least, from top executives of four software companies, including Mercury Interactive and Agile Software, who sounded off this week at a panel discussion on the topic of enterprise software sales and marketing at Sand Hill Group's Software 2004 conference.

The most outspoken of the bunch was Christopher Lochhead, chief marketing officer of Mercury, who criticized his industry for pricing models that give software companies little incentive for ensuring customer satisfaction and for a pervasive cluelessness with regard to marketing.

"I believe the traditional enterprise software model is dying," Lochhead said. "The industry is not scaling."

In Lochhead's opinion, the problem with the industry is that it's dominated by a few, very powerful software companies that dictate terms to customers. One of those terms is the perpetual license model, which Lochhead thinks should go the way of the punch card computer. In the perpetual license model, software makers collect big upfront fees, plus smaller, ongoing payments for maintenance, which entitle customers to technical support and upgrades.

Stock analysts tend to obsess over the upfront fees, also known as new license revenue, because Wall Street views them as a growth barometer. The upshot is that many public software companies focus on landing big deals while taking maintenance fees and customer satisfaction for granted, according to Lochhead.

Subscription-based licensing, in which customers make repeat payments to renew their right to use software monthly or annually, is a better model, Lochhead said. That model, which was a big theme at the conference, provides a "carrot and stick" mechanism that keeps suppliers focused on keeping customers content at renewal time, he said. Information technology buyers have long lamented the hit-and-run sales mentality of big software companies. Oracle, in particular, has a reputation in that department.

Lochhead also gave a blunt and dismal review of the industry's marketing prowess. "Our industry sucks at marketing," he said. "It's one cut above human resources" in the corporate food chain.

The rise of software start-up Salesforce.com has done much to validate the so-called software-as-service, or subscription, model. The company, whose chief executive, Marc Benioff, is a practiced marketeer, is getting ready to offer the company's shares for public trading, an event that's expected to refuel investor interest in high-technology initial public offerings.

Salesforce is also making waves with competitors. Rival Siebel Systems recently launched a subscription service, a move many view as a reaction to Salesforce's increasing brand cache.


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Hewlett-Packard, IBM, Oracle, Sun Microsystems and others are touting their version of the concept, called utility computing.

At least one software giant is reluctant to hop on the bandwagon: SAP. The German software maker, founded more than 30 years ago, is content to stay on the sidelines of the subscription software market--at least for now. "It's been more hype than reality," said SAP Executive Board Member Shai Agassi, who also presented at the conference.

However, SAP has the unique luxury of being the gorilla of the business applications market and can probably afford to watch and wait.

Other novel sales strategies that younger software companies are using include linking payments terms to certain project milestones. Agile Software is using a pricing technique it calls Guaranteed Business Results, said Chris Wong, executive vice president of corporate strategy and development at the company. Under its contracts, customers pay Agile at various points along the way, including the delivery of the programs, the point at which customers switch on the systems and once again when certain promised results are realized.

Optum, a privately held supplier of supply chain software, uses pilot projects as a sales tool as well as a focus on quick-payback projects, said Dave Simbari, chief executive and president of Optum and another panel participant.

Yet, software buyers also have themselves to blame for dysfunctional relationships with their suppliers, said Toby Redshaw, vice president of information technology at Motorola. In a separate speech at the conference, Redshaw said buyers focus too much on frivolous software features as the basis for their buying decisions and not enough on contract terms. But that's changing, he said. Big companies are becoming "unstupid" and are no longer blowing big bucks on "margarita blenders with frappe buttons."

 

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