Managing Your Enterprise-Software-Vendor Stockholm Syndrome

Dennis Byron

A blog post yesterday by Wayne Eckerson at Enterprise Systems entitled The End of Enterprise Software builds its theory around the following observation:

" the business model for enterprise software vendors has switched from selling licenses to selling maintenance and support. He said maintenance fees now comprise 45 percent of revenues and a lion's share of profitability. This is largely because the software market has matured and consolidated, leaving customers hostage to a few big companies"

I agree, as I wrote in EMC/VMWare/Springsource Wants to Be Your Strategic Enterprise Software Partner, that
"This is largely because the software market has matured and consolidated," and that it leaves customers hostage to a few big companies. That's why it's important to understand the facts behind your captivity. As with the real Stockholm Syndrome, the conventional wisdom in the media might not agree with reality.

 

Based on my research, Wayne's observation (quoting a third party by the way) unfortunately veers away from reality in its first two sentences. And it might steer you in the wrong direction, too. The post concludes that this switch in enterprise-software "business model" is good news for open source. That is a mixed-up correlation in at least two dimensions. A lot of enterprise software is distributed under open source terms and conditions. And the way people make money on open source software is by "selling maintenance and support." (There is an argument in this strain of logic for third-party maintenance providers such as Rimini Street, however.)

 

I could probably find more issues relative to the open source tie-in but that's not why I'm writing this post. It's more important to understand that the basic fact is wrong. There has been no recent switch to "selling maintenance and support." That's the way enterprise software suppliers have always realized the "lion's share of profitability."

 

For the last 30 years - but this does not include IBM or Microsoft, the two leading enterprise software providers - software companies have tried to build a balanced revenue flow of 33 percent license, 33 percent subscription maintenance and 33 percent professional services. The license revenue stream is mostly easy -- sell upgrades and add-ons -- but still licenses are loss leaders because of the costs of making the initial sale to you. Professional services are simply a have-to-have like the Maytag repair man; Microsoft has avoided most of this by depending on its channel. IBM has made professional and managerial services its primary business.

 


The profits for most software suppliers are and always have been in the maintenance stream. This is not unique to software marketing or coincidental; add in bundling and substitute punched cards for subscription maintenance and this is how IBM made its money from way back when it was called Computer Tabluating and Recording, or some such name.

 

In bad economic times such as 2009, the mix for classic enterprise software providers changes to a heavier dependence on maintenance revenue stream because you delay license purchases and professional services contracts. But most of you keep up your subscription maintenance contracts because you need the tax-law changes, the bug fixes, support for new devices, and so forth.

 

So it's your fault that Oracle has such a high percentage of maintenance revenue, not Oracle's. (That's a joke.)

 

More seriously, do all you can to control who your captors are.



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