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The Enterprise System Spectator

Wednesday, March 03, 2010

A game-changing play in enterprise software

Finally, someone is showing some innovation in how enterprise software is sold and contracted. No, it's not the two big guys of traditional on-premise software, SAP or Oracle. And it's not the market leader in cloud-based systems, Salesforce.com. Rather it's a smaller player, farther down the list: RightNow.com, a SaaS provider of customer service applications.

According to RightNow's press release, the firm is introducing something called the RightNow "Cloud Services Agreement (CSA)." If this catches on, it is very good news for software buyers.

What it is
RightNow points out that although cloud computing promised to fundamentally change how software was purchased and delivered, the benefits have not yet been fully delivered on the "business engagement side of the promise." RightNow’s CSA addresses this problem by providing the "guaranteed-pricing benefits of a traditional Master Services Agreement (MSA) without the pain – hidden costs, escalating maintenance bills, lock-in, and shelfware."

Here's how it works (as paraphrased from the press release):
  • Annual Usage Alignment Up or Down. Traditional software contracts force clients to anticipate their future needs, in terms of the number of seats. RightNow's CSA allows clients to re-balance usage up or down based on what they actually need from year to year.

  • Three Year Price Commitment Plus Three Year Renewal Price Cap. Traditional agreements are often written with hidden fees and escalation clauses, which are difficult to understand from the customer's perspective. For example, SAP now says it is going to start enforcing cost-of-living escalation clauses, which many SAP customers are not even aware of. RightNow's CSA, in contrast, essentially gives customers a simple fixed price for six years while only requiring them to commit to the first year.

  • Annual Termination for Convenience. With traditional software agreements, once the contract is signed, the client is locked in, putting the client in a position of weakness relative to the vendor. Allowing customers to walk away each year restores the balance of power in the relationship, motivating RightNow to continually deliver on client expectations.

  • Annual Pools of Capacity. Traditional agreements force clients to buy enough seats or capacity to cover their peak usage, even if most of that capacity is unused most of the time. RightNow's CSA provides clients with an annual "pool of usage" over a 12-month period. This allows clients to accommodate seasonality and fluctuations in their businesses without having to pay extra for spikes.

  • Cash Service Level Credits. I especially like this point. Many Saas provider contracts are weak in terms of penalties for failing to meet service level agreements. With many providers, SLAs are weakly written or only offer token concessions to customers. But RightNow’s CSA looks like it has real teeth. If RightNow falls short of the service levels guaranteed in the client’s customer care package, it will refund a percentage of the client’s subscription fees.

  • Unlimited Capacity for 90-Day Pilots. Here's another good point relative to other SaaS providers. RightNow is allowing clients, under its standard engagement process, to try out the product for up to 90 days before they have to commit to a contract. This is far better than signing a long-term contract, then getting into the implementation and finding out that, for whatever reason, there is not a fit. This is far more than allowing the customer to do a pre-sales "proof-of-concept." This means the customer could essentially attempt implementation and then back out if it doesn't go well.
As a bonus, it appears that the CSA is not just for new customers. RightNow will allow existing customers to convert to the CSA when their existing contracts are up for renewal.

In summary, as the press release points out, the CSA simplifies the contracting process. This reduces the amount of negotiation that is typical of enterprise software deals. Bottom line: "the company and its clients can spend less time negotiating contracts and more time achieving faster results."

What it means
Enterprise system initiatives for customers are notoriously risky. Our most recent Computer Economics study on technology trends, for example, shows that over half (51%) experience ERP TCO that is greater than budget. Even worse, 20% of organizations experience negative ROI--i.e. from a financial perspective, they would have been better off not doing the project. The results for CRM are somewhat better but still poor. RightNow's move addresses the risk problem in two ways: increased flexibility and lowering costs for customers.

It's good to finally see a vendor stepping up to the plate to compete on cost, and not just the up-front costs. On-premise vendors have been discounting their up-front license fees for years to win specific deals. RightNow is moving price competition to long-term costs, where the real money is. We’ve already started to see it some on-premise vendors, such as Infor and Microsoft Dynamics, emphasizing their maintenance and support programs as a way of differentiating themselves from SAP and Oracle. Now we’re starting to see it in the cloud.

RightNow's announcement not only differentiates itself from SAP and Oracle but also from some of the cloud providers. Cloud-based vendors, such as Salesforce.com and NetSuite may be up-to-date in terms of technology (SaaS, PaaS, muli-tenant, etc.) but in many respects the way they sell, negotiate, and contract with customers is not much different from how SAP and Oracle deal with customers. Perhaps it's because most of their executives grew up in the traditional on-premise world, where customer lock-in is considered a positive thing.

If you have a minute, check out this video, where RightNow ridicules Oracle, SAP, and even Salesforce.com for their approach to software agreements. I'm usually not fond of these sorts of PR efforts, but I think this one could touch a genuine nerve with software customers these days.

Moving to a true form of utility computing
Rightnow's move brings it closer to a model of pure utility computing, where the customer pays only for what he uses, as is the case with electrical utilities. Sure, your electrical utility levies some base charge to cover the cost of provisioning and maintaining the customer's connection. But most of the cost of electrical service to the customer is usage-based. You use more, you pay more. You use less, you pay less.

If software is truly being delivered as a service, then, it is logical that the industry would move in the direction of usage-based pricing. In the case of SaaS providers, the only reason they haven't moved in this direction is their desire to lock in customers to maximize revenue--a legacy from the on-premise world.

Pushback from the usual suspects
Is RightNow risking some loss of revenue short-run with this? Yes, but it's such a game-changer that I don't think that matters in the long run.

Some of my associates are asking whether Wall Street analysts will push back on RightNow.com. After all, if customers can flex their usage up or down, won't that introduce revenue uncertainty into RightNow's business model and thus lower the firm's valuation?

My take is that this question is extremely short-sighted. These are the same financial analysts that cheer for Oracle's 90+% margins on its maintenance business, all the while Oracle customers are plotting to set up "Oracle-free zones" within their organizations. If RightNow is successful--as I hope it will be--any uncertainty in future revenues from existing customers will be more than made up for by increased revenues from new customers. The new contracting model is simply that much more attractive.

In the meantime, the next time my firm does a consulting project for a customer to select a customer service system, guess who's moving to the top of the list?

Other voices
Two of my fellow Enterprise Advocates have already weighed in on the significance of RightNow's new deal for software buyers. Dennis Howlett agrees that RightNow is shifting the needle on enterprise value, while Vinnie Mirchandani says it as a step in the right direction. Read both posts as they provide additional perspectives on this important development.

There is also good analysis in Phil Wainewright's post, RightNow promises and end to SaaS shelfware.

Update: Two more very good posts: Barney Beal's Software buyers are the big winners in RightNow’s cloud services pact and Paul Greenberg's RightNow's New Customer Service Agreement Genuinely Important.

Update: Fellow Advocate Dennis Howlett has a longish piece including a narrated slide presentation of his analysis on RightNow's CSA. Worth listening too.

Disclosure: In case you're wondering, I do not have and have never had any relationship whatsoever with RightNow.com, they haven't paid me a penny, and in fact, I've never even spoken or corresponded with them. I just like what they're doing this week.

Related posts
Oracle confirms: maintenance fees are virtually all profit
Oracle profits strong, thanks to your maintenance payments
Flash: SAP backs down on 22% maintenance fees
Mad as hell: backlash brewing against SAP maintenance fee hike
SaaS contingency plans need more than software escrow

by Frank Scavo, 3/03/2010 02:01:00 PM | permalink | e-mail this!

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 Reader Comments:

Back in October my company, New Relic (www.newrelic.com) introduced On-Demand billing to go along with our regular monthly or annual options. Under this plan, users of our application performance management tools for Java and Rails apps can pay for what they use by the hour instead of long term commitments. We believe that since many of our customers applications are hosted in the Cloud, that they would want their application management tools to match the way they pay for infrastructure capacity. We were right. Since we introduced it we have seen a almost 20 percent of our new customers choose the On-Demand option when they sign up. We think its the way most software, infrastructure and bandwidth will be licensed in the future.
 
Mike, thanks for the confirmation. Of course, the farther you go down the technology stack, the more common it is to see usage based pricing. For example, I believe you can get Amazon EC2 services for just about any length of time you want, with the cost declining when you make a longer commitment.

As you move up the stack, however, usage-based pricing seems less prevalent. Your application (correct me if I'm wrong) looks to be an apps management tool, which I would put somewhere above Amazon IaaS and somewhere below a business application, like RightNow.

Still, the fact that you see good uptake of your "on-demand billing" option confirms that this does meet the needs of a certain segment of buyers.
 
Meh. I don't think it's a gamechanger. I think its a smart marketing ploy by a low-end player. The thing people better keep in mind is if you're putting all of your eggs in one basket, you'd better be darn sure it's a good basket!

What do you do when you've bet your business on a solution like this and one day the IRS shows up and takes everything because someone forgot to pay their taxes?

Beware of vendors bearing panicea!
 
In response to the preceding post, I don't agree this is merely a marketing ploy by RightNow.com.

But I do agree that organizations considering SaaS providers should take the vendor's financial viability (and all forms of risk) into consideration.

I addressed this issue in the post at the following link (also linked in the Related Posts section above).

http://fscavo.blogspot.com/2009/09/saas-contingency-plans-need-more-than.html
 
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Independent analysis of issues and trends in enterprise applications software and the strengths, weaknesses, advantages, and disadvantages of the vendors that provide them.

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