Subscribe Now, Pay Later?

Subscribe Now, Pay Later?

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

It's a Numbers Game

Whole Foods' Clifford contends that with his new subscription licence with Retek, he is able to better predict his software costs. To do so, he has analyzed his usage carefully and negotiated a system in which he pays a fixed fee for every user above the initial agreement. Clifford encourages CIOs, even those not interested in subscription licences for software, to explore all options and talk to vendors about pricing and licensing before they select a product. "You won't get the best deals if you talk about functionality before pricing," he says.

To convince his CFO that a subscription licence with Retek was the way to go, Clifford walked him through some real-life examples that highlighted the problems with perpetual licences. He explained how he could better manage risk by being able to walk away if the software wasn't producing value and how the arrangement would motivate the vendor to make it work. For the moment, Whole Foods' subscription licence with Retek is the first one for the grocery chain, but Clifford is on the lookout for new opportunities. For example, he is currently struggling with a PeopleSoft system for financials that he inherited. He considers the PeopleSoft licence "too expensive per user", especially since it includes "outrageous maintenance costs". If a good subscription offer comes along for financial software, he says, he is more than ready to jump ship and abandon PeopleSoft.

Jerry Dolinsky, senior vice president of worldwide sales at Retek, says he is in talks with several other customers who are considering moving to a subscription licence. But unlike his dealings with Whole Foods, much of the interest is coming from company CFOs, who are intrigued by the idea that they can move software expense from the capital to the operating expense side of the ledger and gain flexibility.

Dave Mahler is one of those CFOs. As head of finance for Jacobs Management, Mahler was looking for a replacement for payroll systems that served 5000 employees at sister company Genmar Holdings, a large boat manufacturer. He had been unhappy with poor service and a lack of reporting from a hosted provider. Working with his CIO, Mahler looked at a couple of hosted payroll services and also considered buying a perpetual licence and doing payroll in-house. In the end, Mahler chose a subscription hosted payroll service from Ultimate Software. With a very small IT department and decentralized systems, Mahler found that the cost of paying a subscription would be similar to buying a perpetual licence and paying maintenance costs. "But when I added up the headaches of doing it in-house, it became a no-brainer," he says, noting that a perpetual licence would have meant adding to his IT staff. Mahler figures that the $225,000 he paid to set up the system will be quickly covered by the $100,000 a year he will save by avoiding maintenance fees plus the money he has saved by changing providers. And even though he will be paying Ultimate roughly $300,000 a year for the hosted service, he won't be adding to his IT department. "From my perspective, there are fewer risks, internal costs and hassles," Mahler says.

Mahler believes that corporate executives have considerable leverage with software vendors right now, but they need to do the maths for themselves to see what works best for them.

For his part, Clifford hopes more software vendors will offer subscription licences. "Not many software vendors out there are enlightened," Clifford says. "I would say that those not open to the subscription option need to watch their backs because a lot of us CIOs want to do deals this way."

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