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Perpetual is a word that makes CFOs uncomfortable. In a changing world, who wants something that lasts forever? But there are business advantages to owning your software rather than renting it.
David Rosenbaum, CFO.com | US
November 18, 2011
ERP giant SAP announced this month the completion of its acquisition of Crossgate, a provider of cloud integration services. Last month, Oracle bought RightNow Technologies, a customer experience cloud company, and IBM purchased Platform Computing, a software company specializing in managing cloud systems. And not only are the big software vendors loading up on cloud companies, they're all working to offer their on-premise software suites as hosted cloud services.
The enormous growth and relatively rapid adoption of cloud computing (Forrester Research estimates 31% of companies are now running some software-as-a-service, or SaaS, applications) can be explained by a host of factors. Butenterprise fatigue with the hamster wheel of buying expensive perpetual licenses for on-premise software, paying for annual maintenance (which can run as high as 18% to 20% of the initial purchase price), and then paying again for new releases and upgrades (which also eat up time and resources) cannot be overstated. CFO preference for the cloud's subscription model, in which payments can be accounted for as operating expense and upgrades to the software are rolled out automatically with no muss, fuss, or maintenance fees, has been well documented.
However, owning software has certain advantages over renting it. "When you've got a perpetual license and you're dissatisfied with the service or it's not meeting your business requirements, you can hunt down another vendor for a replacement product," points out Kerry Kane, principal at Software Contract Solutions, which helps companies negotiate software contracts. Meanwhile, as you conduct a careful search for a better vendor or a better product, you can continue using the software to operate your business. It lives on your servers and, under the perpetual license, you've purchased the right to the intellectual property the software represents even after you opt out of the contract. You'll lose support, and future upgrades, but you probably won't need either for some time, especially if you're running the most recent release.
But if the software you're depending on is hosted in the cloud, on someone else's servers, then once you decide to switch vendors, your application is turned off, and you're left with . . . nothing.
Turning Off the Application Spigot
Cloud providers emphasize how easily customers can switch vendors in the cloud, but Kane points out that it's not always so simple.
For example, a company Kane worked for before joining Software Contract Solutions was using Salesforce for its front-end sales activities and running its back-office financials on Oracle. The Salesforce data was integrated with the Oracle financials. "We were approached by Oracle," recalls Kane, "to displace Salesforce for minimal cost. It seemed appealing, but then we asked Salesforce how we'd get our data." Salesforce could easily provide Kane's company with all the customer and prospect data it was hosting, but the integration with Oracle would be lost and would have to be re-created. "Our sales team would have had to manually input all our contacts into Oracle," says Kane. "It would have been very labor intensive. Meanwhile, we have to drive revenue, you know? I mean, it was doable — anything is doable — but at what cost?
"Companies underestimate switching costs in the subscription model," he says. "They'll pay a premium for the perceived ability to drop the subscription if they're not happy, but in reality, once they've developed data, process, and infrastructure tied to the product, they can't switch in practice as easily as they can in principle."
This leads to the dreaded specter of vendor lock-in — precisely what many think the cloud is designed to prevent, and perhaps the reason why traditional software vendors increasingly are offering subscription services instead of perpetual licenses.
Avoiding Cloud Vendor Lock-In
The benefits of cloud computing are real and achievable, but CFOs have to look beyond the immediate cost savings of a cloud subscription to the future use of the cloud application and its role in the business. The greater the number of applications that depend on or are integrated with the rented application, the more difficult it becomes to migrate from one service to another.
Before signing on with a cloud service, Kane suggests CFOs determine how critical the application is to the organization's business processes, and what would happen if it proves unsatisfactory. If the application must be integrated with other applications and needs to be customized to your business processes, the cloud subscription model might not be your best choice. In that situation, that perpetual license can be a business-continuity security blanket.
"If you can take the application the way the provider gives it to you, that's a great cloud application. If it's something you'll want to build on, you really have to think hard about what happens if the honeymoon with your vendor ends," concludes Kane.