Big Software has duped us for decades – Part I
How enterprise software giants separate you from more of your company’s money
By Roger Burkhardt, CEO, Ingres
Burkhardt reveals Big Software's secrets. Photo: Ingres
Here’s how the software business really works: A software company charges your firm an enormous upfront licensing fee and locks you into escalating costs for decades to come, often using a set of hardball tactics.
But with the growing popularity of pay-as-you-go and subscription-based software and services, the old way is being exposed for the unfair financial model that it actually is. And the new open, more flexible models are starting to make the old ones look downright deceitful, especially when you show them against the backdrop of a deep recession.
Many companies have been forced to downsize to make it through these tough economic times. And as information technology and C-level executives examine the financial books together, many are discovering the unfortunate news that their Big Software contracts are harming their business’ bottom line and cannot be downsized – at least now without a fundamental change of approach.
Perhaps it’s not always intentional, but if you’re an IT decision maker with several of these licensed-based software contracts on the books, it’s very likely you’re getting duped.
How the duping works
Big Software Goliaths like Oracle (ORCL), Microsoft (MSFT), Sybase (SY) and SAP (SAP) use multi-year enterprise license agreements that lock you into annual fees that go up, but can almost never be reduced. They encourage you to make large upfront purchases of software licenses by providing significant volume discounts. Volume discounts are common in the software industry and help you achieve a lower price-point on your software licenses and annual support fees. However, encouraging you to purchase larger quantities than you need often leads to “shelfware”, i.e., owning a whole lot of software you don’t use.
What if you want to downsize? Because annual support fees are tied to the net license price, the discount is tied to the original volume of license purchased. Therefore, the Big Software companies argue that you lose the discount originally granted on the contract. Their typical tactic is to re-price right back to list price, not a reduced discount, and with typical discounts in the 25 to 85 percent range it is financially infeasible to downsize. It’s this kind of aggressive tactic that ensures that Big Software’s revenue streams never go down, and in fact continue to go up as annual escalators are applied.
Duped and trapped
If you don’t need to downsize your usage but want to just hold steady and pay maintenance you’ll be caught in the renewal trap. When your multi-year contract comes up for renewal, you’ll find that your contract has no cap on subsequent increases to the annual support contract. The high-paid sales person will then warn that your original discount will evaporate if you don’t buy more licenses. It will be cheaper to buy more “shelfware” than to pay list price for your maintenance.
In addition, if you ever want to reinstate support on the unused portion of your licenses, you would be required to pay all the back-support fees for the period you cancelled. It would be like getting a large service bill for services never rendered from your former auto mechanic – the guy whom you haven’t taken your car to in two years because you found a better shop. No wonder Oracle’s margins on maintenance are over 90 percent!
More deeply duped
The enormous consolidation of the software market has created a few behemoths that have enormous pricing power over their customers because of their large market shares and a strategy of vertical integration, which raises customer-switching costs. If you try and get out of being locked-in, you’re likely to pay a big price.
Big Software players have demonstrated their power by raising prices during the worst economic period since the Great Depression – not exactly a tactic that supports the customers through tough times. In the last year and half, for example, Oracle has seen fit to raise overall software and maintenance fees by 15-18% and to raise prices on acquired technologies by 45%. Many companies locked in to an Oracle contract, for instance, have signed a contract where they agree to pay these unexpected price hikes, often without reading the fine print and realizing the true cost of what they have signed up for.
Many price increases are hidden behind additional fees that penalize customers for taking advantage of industry advances such as modern multi-core chips which reduce hardware costs or even just external access to your own data over the Internet. Yes indeed, even in the 21st century Internet access is often excluded from Big Software’s standard licensing terms.
Meanwhile, contract consolidation and the co-termination of contracts further reduce options, as more software is covered under a single contract. You may ask for a consolidation, but more likely than not, the vendor will argue that the entirety of the new contract is open for re-pricing, if you attempt to modify one component of that contract. This is happening with increased regularity for product lines that have been acquired, as vendors consolidate the newly acquired product lines in single corporate purchasing agreements and use their increased leverage to extract more revenue and lock the customers in even more firmly in the future.
To learn more about how to get out of Big Software contracts and/or negotiate current ones to your advantage, stay tuned for my next article.
Burkhardt is president and CEO of Ingres. He previously spent six years as CTO and executive vice president of the New York Stock Exchange, where he and his team transformed the NYSE to a fully electronic model.
It never fails to amaze me that intelligent business people continue to allow themselves to be at the mercy of greedy and unethical practices. Having been involved in training and pre/post sales support for over three decades, I have been constantly exposed to the before and after impacts of what basically amounts to poor and sloppy decision making, laziness, a lack of understanding of the importance of the correct mapping of business processes, as well as a resistance to commit to appropriate training.
It is the responsibility of the software companies that sell the software, AND of the business decision makers who buy the software, to ensure that the software solution they are considering actually IS a solution. This means across the full implementation, and for all the business units it impacts.
To large extent, software companies need to lift their game as the advisors to the business community that they serve and move with the times otherwise someone else will take their lunch. In turn, business people need to look at the impacts of those processes that are not addressed by proposed software AND figure out how they are going to address them BEFORE deciding to go ahead with a particular solution – after all, it is the lifeblood of the business that they risk if they don't – and sheer incompetency if overlooked.
Software companies who employ incompetent, commission driven sales consultants need to review their commission structures – and pay on successful implementations and satisfied users; business people need to swallow their ego's and get a thorough understand of how to successfully manage the automation of their business processes, the integration issues, and any impacts across the entire business – and compensated according to successful outcomes.
Quality should never be comprosmised – user satifaction should aim to be assured; and Training should never be an afterthought.
We pay for the software when we purchase it. Then we pay:
- for installing it
- for training on how to use it
- for customizing so that it solves our problem
- for consulting to find out other problems that can be solved by it
- for integration so that it works with other enterprise software
- for maintenance to get upgrades and fixes
- for migration of data and applications when the version changes
Over the years my biggest IT capital expense has become software. Back in the day, software was maybe 30 percent. Now it is closer to 60-75 percent of the budget, offsetting the benefits of ever-cheaper hardware. My clients and employers got sticker shock when the bill was presented, because they "Had to Have it". Worse are the 24-36 months upgrade cycles they now try to hook us into. Adobe is a master of this with their pricing and licensing. Apple also plays this game with both hardware and software, quietly dropping support for hardware AND software more than 3 years old.
Myself, on the personal side – I still use Windows 2000 and Office 2000 on my personal machine, with no ill effects (save being unable to install Google Chrome). I would love to tell my clients to do the same.
Humm… could the rising fees have anything to do with less people buying during the down economy and the fact that they (software companies) still have a very demanding customer base? A computer can go down and it will get fixed… watch happens if your enterprise goes down for a day? Perhaps there is still high R&D needs? Software developers and project management staff that KNOW BUSINESS and can make software work within that realm don't grow on trees and don't make $7.25 and hour. So if you have the same margin, less sales and same or more operating costs… what do you do? …close shop and let all your customers suffer? Perhaps the clients should use open source, hire their own staff, develop their own software to save money. I think that most of the "open source" advocates are looking at job security… create a software (free) that is cheap and keep your employer at their mercy with software that is not standardized or supported. I have had to manage these guys… they love you go on vacation for 3 weeks and show you "how valuable they are". I am a huge advocate of working with a firm… my business is too important to risk paying someone for 1,2,3 years to develop something that handles 75% of my business needs.
I like the comment by the gentleman from GA… "companies will pay 4 Million for a machine, but won't pay $150 for software…" Most of the are operations guys, software is not a tool to them… it is overhead. What about the 4 million dollar machine that only produces at 50% capacity because their software does not allow them to increase sales volume? I love it.
I have worked in manufacturing for years in a very specific automated industry. I think it is amusing that a company will buy a 4 Million dollar machine. YET $150K for software that runs the entire business (including the Bill of Materials, automation files, touches all their internal and external clients, accounting data, etc) is out of the question. They will pay 10 technicians to maintain the machine and have 1 IT person.
The fact that a successful software company has to generate an idea and develop it at considerable expense (and risk) then have continued R&D by developing internally to keep their customers happy doe not turn me off that companies pay for the annual licensing. We are talking about a tool that runs business. We are talking demand for innovation. We are talking about capitalism. A company that is not satisfied with software can go back to doing everything the easy, "cheap way" – taking orders by phone, faxes, double, triple and quadruple entry… I don't blame the software company's one bit for charging what their tools are worth.
Agree with the article completely. The advent of open source and SaaS is providing more options to the enterprises which helps create competition for the large software vendors and better terms & flexibility for end users. But enterprises should be careful to design their apps for open standards and not get locked in into propreitary technology standards otherwise cost savings through open source can be not so easy to get. It defintely needs a concious open standards design policy at the corporate level. We have been slowly moving some of our own apps to open source as part of the corporate policy and have found that most of the apps work as well with open source as they did with propreitary technology and the TCO reduction was very signficant.
I find it interesting that the CEO of a company that markets database software (Ingres) was allowed to use this platform to target and accuse his direct competitors (Oracle, MS, Sybase and SAP) of "duping" their clients.
It's a Conflict of Interest and disingenuous.
I do not think open standards has matured to the level of providing structure for standard business documents, such as, sales order, purchase order, invoice, payments, service requests, tasks, etc…. Managing a word document or spreadsheet through multiple open source software as noted below is different from actual business documents. Former is a container. The latter is the data itself.
"I do not understand how open source solves the problem of lock-in. For example, can I create an invoice in open source software 'x' and view and update it in open source software 'y'? Why should the data structures be proprietary to software?"
Well, it's actually open standards which prevent lock-in. Using your example, if I write a document in ODT format using OpenOffice, you can open it up in KOffice, Symphony, or even Abiword. If I create a website using W3C standards then the website has [at least] a 95% probability of looking exactly the same in Firefox, Opera, Konqueror, or even Apple's Safari; no need for the developer to run fifteen different browsers on his machine to check for consistency.
The notion that "open source software" prevents (or, at least, curtails) vendor lock-in comes from the fact that the bast majority of open-sourced applications use the very same standards.
Simple. If the file format is a true open standard (e. g. OpenDocument Format, but not the patent-encumbered MSOOXML), then *anybody* can implement it. Here's an example: Web browsers. Konqueror, Firefox, even Lynx can all read standard HTML. Here's another, relating to ODF. Both KOffice and OpenOffice.org read and write ODF.
Say a MySQL shop wanted to be able to read PostgreSQL databases. No problem, the formats and even the source code are WIDE OPEN for all to see and use. An import filter for PostgreSQL databases could be written for MySQL (and vice-versa).
You can't do that with Oracle, Windows Media, QuickTime, etc. That's why both open *source* and open *standards* are so important.
Hopefully that answers your question.
–SYG
It looks like the usual assortment of company agents, Technical Evangleists and fanbois are astroturfing this article with company PR, smoke and mirrors.
An Oracle admin I know told me:
"Yes, one of the biggest aggravations my boss and I had with the Oracle license is how it fails to keep up with hardware technology. Although all our other database servers are in VMs running on the shared processors of our blade servers, we couldn’t do the same with our Data Warehouse server because its database is the premium Enterprise edition which we have on a “per processor” license. Oracle still hasn’t updated its “per processor” license so that customers can put the Enterprise edition of its database on a blade server environment without getting fleeced for paying for all the processors that it might use. So putting our Data Warehouse on the blade servers with all their processors would have exploded the cost of the license to where we couldn’t afford it. So, it’s still on its own server.
With the ever tightening state budgets, the licenses we pay for M$ and Oracle are really going to put us in a squeeze in the future. With the rest of their revenue stream drying up because of the recession, their only cash-cow will be the chumps like us who were stupid enough to lock ourselves into their proprietary platform. The time, chaos, and expense of migrating to open source alternatives with our current staff level and workload just places us at their mercy. So, every year we just pay up.
Maddening."
And to think, PostgreSQL 8.x could do 95% of what his Oracle db does and is free for the download and a drop-in replacement for 95% of the medium size and SOHO businesses, and a large percentage of the big boys.
Open Source is one help in combating lock-in. Another is Open Standards. Still another that needs to be considered is functionality.
Some applications do not do all that they claim. This is true both in Propitiatory applications and in open source.
Open Standards mean that you can know how your data is stored.
Open source means that you can know what the program does. You can also change the program (or hire someone else to do so).
Functionality review means that you can know if the program will do what you need before you try to implement it.
Corporate America is littered with the manuals and disks of expensive software that didn't do the job that was promised. You really need all three.
There, now I've said what all of you already know. Now we just all need to do it.
I do not understand how open source solves the problem of lock-in. For example, can I create an invoice in open source software 'x' and view and update it in open source software 'y'? Why should the data structures be proprietary to software?
This article is right on. This happens a LOT where software vendors use tactics of vendor lock-in to squeeze everything they can out of their customers, leaving them helpless and scared to migrate away to some other product.
This is why open source and the GNU General Public License have combatted this for years. Open source is completely immune to this type of activity, so that companies can use the software and have the freedom to continue using it without having to go back and pay somebody year after year.
We destroyed this model in the hardware business by demanding open architectures, only to have Microsoft lock us into Intel and AMD.
The opportunity exists with the Open Source model to be truly hardware independent and totally free from big software.
Linux runs on processors from ARM, Sparc, MIPS, Intel and AMD.
You want price competition in the software and hardware markets? Support Open Source. Support hardware from a range of suppliers. Keep them all a little hungry.
You remember being HUNGRY don't you?
I have several problems with this viewpoint:
1. As CEO of Ingres, he obviously doesn't consider his company "Big Software", so comes off sounding like Little Brother wanting what Big Brother has (sour grapes?).
2. He makes buying extras to get an overall price break sound like a bad thing, despite the positive effect on the bottom line. Also, "shelfware" insulates a company against licence violations in the future, and keeps those of us charged with managing licences from performing excessive time-consuming and invasive audits.
3. His comments about penalizing customers re: multi-core chips and co-termination of contracts is totally unfounded, from my own experiences with Oracle, Microsoft and IBM account reps. These reps have always bent over backwards to help me out. (Maybe he has a way of antagonizing his reps?)
The problem is an even more nefarious picture than Mr. Burkhardt paints. Some large enterprise software companies such as Infor have contract 'compliance' teams that have the sole task of finding minor contract infractions by customers. They then threaten with lawsuits if companies don't pay to get back in compliance, sometimes with having to re-license an entire suite of software simply because a company has changed ownership, thus 'invalidating' an original contract. At least thats one thing the used car salesman can't do when I re-sell the car I bought from him.
The article has some truths but is disingenous.
Do not lump all vendors in the same discussion. I am a reseller of Sage Products and my experience over that past 10 years has been completely the opposite.
Maintenance rates have been the same for customers over my ten years. The ability to surrender licenses to reflect changes in business circumstances is stated / published policy.
Moreover, I am being contacted by SaaS customers because they cannot reduce their license count until contract expiration, hidden fees are exploding their costs and these models lack the support, service and flexibility needed. They are finding 20% Support and Maintenance plus licensing be to less than SaaS after only two years.
Maybe the difference is that as a reseller I help my customers understand their options and make recommendations on how minimize their cost while maximizing their ROI on their investment.
Oh and my interactions with your "outsourced" consultants at the NYSE explains why your projects were riddled with issues. You and your team are not in a position to make recommendations on successfully managing technology projects. Come clean and be honest.
As an auditor I have noticed that all the rising technology based organizations I visit are using Open Source and paying very little in licensing fees. About the only thing they pay for is accounting software.
The article is generalisation of software licensing practices. To each giant company, there are special areas you need to watch out for and this is NOT mentioned.
Also there is always a choice not paying maintenance. This is true in many cases in Asia. Just curious why that scenario was not covered.
Also paying maintenance has its reasons for the enterprise apps business. Selected apps need to be kept up-to-date to legal requirements. This important point was not covered.
Bottom line this a good introduction to enterprise apps pricing.
Thank You.
Readers of this article should keep in mind that Mr. Burkhardt is CEO of Ingres, which once went head-to-head with Oracle back when their core franchise, relational databases, were a new thing. As with any foundation technology where the goal is to become the "defacto standard", the spoils of winning those early, seminal battles at IT shops and ISV's is not only license revenue, but the residual maintenance stream. As these technologies mature, it is fairly common to see these old competitors try to get back in the game by giving their stuff away. After all, their development dollars are a sunk cost with R&D headcount long-gone. They are just trying to monetize the remains at a lower price-point. SQL-for-less basically. Trouble is, the numerous applications built on Oracle cannot swap-out to Ingres without incurring costs that are often much higher than licensing and maintenance. That aspect is the "moat" of any successful enterprise software company.
The problem with enterprise software is same as any other software that generates and manipulates data in highly proprietary data structures. Therefore, once you use a software, moving into another software becomes increasingly painful, as migrating the increasing data volume to the new software becomes almost impossible beyond a certain period of time.
The only solution to the problem is that all software companies must build their enterprise software always on the same data model that should be owned by a standards organization, similar to the existing mechanical engineering standards. Only this will ensure true competition. The standards will not kill innovation in software industry, as they did not in other mature industries. It is time that the enterprise software leaves its teenage years and move to adulthood.
Great article and from my experience, right on the money. IBM, Oracle and Microsoft locking companies into not expensive contracts, but bad software (IBM Websphere practically given way up front is a case in point.) Maintenance cost of 15-25% are not uncommon, with very little value add after the first few covered licenses.
Many companies would be better off exploring open source software and maintaining some expertise in house. I worked with a CTO several years ago who said "I want one throat to choke." Or more accurately, one company to threaten. As your article points out, once you are locked in, most threats are pretty hollow.
Fair disclosure, I worked for an enterprise software company; however, it is disappointing how often people leave out that the big software companies spent billions of dollars figuring out what customers really needed in order to automate their business and then develop software that enabled this. Yes, new delivery paradigms exist but they are often copying what others had to figure out…the hard way.
Interesting article. However, I am not sure how you have this type of "evaluation" without any consideration of benefits/ROI. Clearly the reason that software is purchased is to reach efficiencies in our businesses. Everyone needs to negotiate with their eyes open. However, perhaps the better analysis is one of cost AND benefit.
Dear Mr.Burkhardt good article, just curious how you left out IBM from the scheme of things after they started the whole trend of Net present value.
The author could have outlined the proposed solution for this problem. I think it is high time all of us start embracing the freeware solutions, ensure that the community evolves with require 'support', the one reason for which the Corporate Firms dare not to venture into embracing freeware. This way we should be able to break the shackles of getting struck with big vendors.