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A few years ago, Software as a Service (SaaS) became synonymous with subscription pricing. Initially, it sounded good; you only pay for what you need when you need it. Many of my peers were big proponents of it, operating expense, not capital, power when you need it, not overbuying capacity because you need it once per year, etc.
It promised great scalability and low hardware overhead.
What is the downside?
Well, for many of us, the downside has been an exponential increase in our software operating expenses. For me, this means my software costs have more than quadrupled in the ten years I have been at Seattle Housing Authority. Yes, we have added some functionality, but we have also consolidated a lot of various applications into far fewer apps. In several instances, we were required to move to a subscription model if we needed to modify the contract in any way.
In one instance, a vendor simply said the next version was new software, and the old version was being retired.
The new version would only be available with subscription pricing.
I have been in IT for quite a while and have seen several changes to software pricing over the years. The one thing I always heard from/about software companies was that they made up their costs plus profit on the licenses and that maintenance was mostly profit. With these changes, they must be more profitable than ever now.
Back in the dark ages, as my career was just beginning, most companies had a mainframe environment and wrote their own software.
In general, the software they created was functional and specific to their environment. There were no licensing or maintenance fees; you just had to have a staff of developers to maintain it. Sure, there were always issues when a developer had to make changes to a program written by a different developer (I have never met a developer who didn’t think an application needed to be rewritten because the previous developer didn’t do it right!). Changes were often fraught with issues and could be disruptive to the business.
“Unless we are willing to implement a product from a competitor who is more willing to negotiate their prices and terms, we are locked into the ever-escalating subscription…at least until the software companies create a different model”
Organizations tried to mitigate this with standard structures in coding, change management processes, and rigorous testing (e.g., full regression testing against requirements and expected performance). This worked better, but there were still issues. We started looking for solutions while off-the-shelf software with configurable processes started making inroads. With this solution, we had to pay license fees, and fifteen to twenty percent of the license cost yearly for maintenance and upgrades. The license was perpetual and usually based on the number of employees who were actively using the software at one time (Concurrent User Based) or, less commonly, per server it was installed on.
Software companies soon realized they could sell more licenses if they moved to a “named user” license base where a license was assigned to a specific person who may use the software regardless of how much or how often they used it. For most companies, this resulted in a significant uptick in licenses since instead of worrying just about the number of people accessing the software at one time, they now had to purchase a license for anyone who would use it at any time.
Next, some large ERP software companies changed their licenses to be customer revenue based. Hence, as the revenues of an organization increased, so too did the revenues of the software companies. Most contracts did not have a provision for when an organization’s revenues went down.
Now, as I mentioned earlier, we have subscription-based licensing. Instead of a perpetual license, we have a license that is valid for the term of the contract, and we pay the subscription price every year. Software companies claim that they are charging less for the subscription, which I have found to be true if you are just looking at year-one costs. But in every case I have been involved in, the five-year Total Cost of Ownership (TCO) for my software has increased. Instead of a 100 percent one-time license cost and 15 – 20 percent yearly maintenance cost, the subscription cost seems to be around 70 percent of the license cost, and we pay it yearly.
This means that for a 5-year TCO on a $100,000 software package is $200,000 for the user-based model and $380,000 for the subscription model.
To combat these escalating costs, I have tried a few different methods. In one instance, I worked with other organizations in my industry and approached the software company with some strong examples of the revenue we all represented for them, and they worked with us as a group to provide some significant discounts. In other instances, we have worked with an organization that has experience in software contracts for many major software companies, and they use their expertise to help us negotiate more favorable terms. What makes it hard for organizations to negotiate is the reliance on the software and the lease we are now paying for it. Unless we are willing to implement a product from a competitor who is more willing to negotiate their prices and terms, we are locked into the ever-escalating subscription…at least until the software companies create a different model, but as history has shown us, the price never comes down when they do that.