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CIOs need to protect themselves against the unforeseen price increases that often accompany subscription licence deals. If customers aren't careful to negotiate protection against steep price jumps, they could end up with ballooning software costs

Software for Rent: The Appeal

Roughly 80 percent of software today is still sold as a perpetual licence, according to IDC. By 2008, however, IDC predicts that 34 percent of worldwide software licences will be sold as subscriptions. Anticipating this shift, Jason Maynard, a software analyst at Merrill Lynch, has come up with a new method for assessing and valuing software companies, taking into account the deferred revenue that comes with subscription sales. Maynard's Merrill Lynch On Demand Index shows a gradual shift toward on-demand or subscription licences, he says, reflecting a "radical shift" in vendor strategies.

The trend toward subscription licences, though moving at a slower pace than the hype originally suggested, is part of an overarching shift in the software industry. For years, CIOs complained about enterprise software's cost and complexity. For every dollar spent on a perpetual software licence, they could expect to pay another six to eight times that amount on services, according to Merrill Lynch. "In what industry can you charge a customer, and then have your product fail half the time?" asks Maynard.

At the height of the dotcom boom, a raft of hosted service providers, known as ASPs, popped up and promised to deliver on software services via the Internet. Poorly thought-out business plans and technical glitches scuttled most of these ASPs, but a few, including Salesforce.com, persevered to challenge large enterprise software vendors such as Siebel Systems. Siebel now has its own hosted subscription offering, joining software giants Computer Associates, IBM, Microsoft, Oracle and SAS. And Oracle's planned acquisition of Retek will give the software giant a stronger presence in this market.

Since the tech market collapsed four years ago, buyers have been gaining leverage in vendor negotiations. CIOs have limited budgets, and consequently, software sales have taken a nosedive. According to Gartner, software pricing will continue to shrink over the next three to five years due to the advent of Web-based subscription services and low-cost offshore development.

As a result, CIOs are in a good position to negotiate lower costs and licensing deals that favour the customer. But don't expect software vendors to roll over. CIOs and others negotiating subscription licences need to remain vigilant and push for the best deals. For example, Whole Foods' Clifford says he and Retek did some tough talking before they arrived at a consensus. They finally agreed to a fixed usage fee for each year Whole Foods uses the software, with maintenance bundled into the minimum usage fee. Clifford says he would have preferred no minimum usage fee at all and adds that the fee is "still too high". But he knows he can't single-handedly transform the way software vendors do business.

Indeed, the software-for-rent model will likely always coexist with the perpetual model. CIOs are sometimes reticent to try new licensing models because they are accustomed to the perpetual model and unsure about how to calculate benefits from subscription offerings. "In many ways, it's easier to stick with the traditional perpetual licence," Clifford says. "Alternatives such as subscription licensing take a lot more work, attention, financial acumen and modelling."

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