Are you still paying up-front for software licences? STOP IT!

 
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I am continuously amazed at just how many organisations are still buying software licences in the out-dated, pay up-front for a perpetual-use licence model.  I know many software providers are still only providing their product this way, but that’s because it suits them, not because it’s the best model for you, their customer.  While customers are still prepared to write cheques for perpetual licences, as certain as night follows day, I can assure you the software vendors won’t change.  

Here’s why I believe consumers of software should never pay up front for perpetual licences but rather opt for “as-a-service” subscriptions... 

The upfront perpetual licence model fundamentally causes on-going mis-alignment between the buyer’s and the vendor’s commercial interests.  This misalignment of commercial interests is caused by the perpetual licence model:

  1. tending to focus the vendor on sales to new customers over servicing existing customers;

  2. leading to premature dead-ending of software R&D investment once sales to new customers start to decline;

  3. creating a financially unhealthy timing gap between when the software is purchased and when the targeted business benefits start flowing for the buyer; and

  4. in the scenario where the deployment project is either cancelled or scaled back, causing unneeded legal issues and write-downs for the buyer.

Don’t just take my word for it.  Customers around the world are voting with their feet and moving towards "as-a-service" subscription models.  You can see it particularly well in the financial results of the large-scale software providers that offer both subscription and perpetual licence models for their customers.  

The most recent results from Oracle in June 2018 are a good example.  Oracle reported cloud subscription revenues growing 10% year on year, whereas licence-based revenues reduced 4% year on year.  

This trend is even more obvious with Microsoft who are, in my opinion, further down the track with their “as-a-service” transformation.  In Microsoft’s April earnings announcement they reported 16% revenue growth overall with the four largest areas of growth all cloud based “as-a-service” offerings: Azure (94% YOY growth), Dynamics 365 (65% YOY growth), Office 365 Commercial (42% YOY growth) and LinkedIn (37% YOY growth).          

My message is simple.  Don’t buy perpetual software licences!  If your vendor(s) isn’t offering an “as-a-service” subscription option, then demand they change and be prepared to be patient.  They’ll either transform themselves into an “as-a-service” player as you, their customers, are demanding, or they’ll be displaced by competitors who will step in to give you what you need.  Either way in the long run you’ll be better off because your commercial interests will be better aligned with your vendor over time.

If you need help with your operating model for agile change feel free to reach out to me on david.boyle@cap2its.com.

 


About the author: David Boyle’s IT career over 30 years spans both the buy side and sell side of technology services. He’s worked with Accenture, EY, Commonwealth Bank of Australia and until recently was the Group CIO at NAB. David is now the Managing Director of CAP2ITS, a technology advisory firm focusing on technology strategy, performance and risk.