New Approaches to Software Pricing
Written By: Predrag Jakovljevic
Published On: December 23 2005
Enter Some Possible Software Pricing Thought Leaders
In the past customers have been disadvantaged in software contracts, facing numerous and expensive "fine print" clauses limiting their warranties. (See Is There a Panacea for Enterprise Software Pricing Yet?) However, in the new market, power is shifting from the vendor to the customer, and software negotiations are changing. Much to the delight of customers, some vendors are now differentiating their business strategy to accommodate administrative business needs and requirements. (See If Software Is A Commodity...Then What? and If Software Is A Commodity—Can You Still Win Some Competitive Advantage?.
Part three of the Is There a Panacea for Enterprise Software Pricing, Yet? series.
Vendors that are disadvantages because of their size, market clout, or brand recognition may want to differentiate themselves by designing and implementing a license agreement that incorporates the customer's priorities first. Rather than offering a traditional vendor-centric license that changes throughout the contract life cycle, at the customer's expense, this a kind of "all encompassing-license" captures most (if not all) of the customer's needs.
One stellar example is HarrisData (http://www.harrisdata.com), a privately-held Brookfield, Wisconsin-based (US) provider of integrated enterprise applications for medium discrete manufacturing enterprises in North America. The vendor has chosen a new methodology to administer its software by creating the Omni License approach. Customers obtain five years of maintenance and support, source code, upgrade and transfer capabilities, an unlimited number of users in a ninety-nine year perpetual license that is owned by the customer. This complete package ensures no unpleasant surprises for the user business and determines the total cost of ownership (TCO) up front. Moreover, the costs associated with the Omni License are generally the same, and in some cases, even less than the cost of a one year license from many of its competitors.
Because pricing information is given up front, this mid-market manufacturing vendor's approach has intrigued us. Payments are either in one lump sum, or in installments and covers virtually everything one could think of, including software, consulting, installation, service, upgrades, etc., for all available modules and for any number of users—without hidden surprises or contract clauses. After five years, if the user enterprise wants an ongoing service and maintenance contract, it will be available annually at a competitive price. The current cost is based on 10 percent of what the price of Omni License software was per year (which is still far less that the industry average). Like buying a car or furniture on credit, the vendor simply considers the transaction as completed after five years.
This is Part Three of a three-part note. Part One presented a problem analysis. Part Two discussed ERP Software service and maintenance alternatives.
Software Customer's Bill of Rights
Long and painful negotiations may provide some protection for customers, but today's software licenses still fundamentally protect the vendor's rights, and offer little protection of the customer's rights. To further differentiate itself, HarrisData has suggested a Software Customer's Bill of Rights to fundamentally alter the balance of power between software customers and vendors. The Bill of Rights is a result of over thirty years of experience, and is based on detailed surveys and discussions that discerned what customer value the most. The Bill thus revolves around the following nine items:
- Right to Affordable Quality Software. Software that works as promised and that is delivered with a cost certainty.
- Right to a Well-defined Implementation. An implementation timeframe that users can live with, with clearly stated objectives and project parameters, and with helpful advice by the vendor on how to avoid additional customizations and modifications.
- Right to Unlimited Quality Support. Unhampered access to a qualified vendor's expertise, unlimited hotline and on-line inquiries, for the timely resolution of defects and bugs
- Right to be Free of Vendor Control. No unwanted vendor interference in ongoing business. Access to source code if necessary, with the ability to extend the system for unique business requirements, and to contribute to the vendor product's enhancement process
- Right to Business Growth. Reasonably rapid re-implementation when the user's business changes and with cost certainty during potential mergers and acquisitions.
- Right to Prevent Software Obsolescence. Entitled to available software upgrades to meet changing business requirements, compliance, and regulatory updates mandated by regulatory bodies, and continuously evolve software architecture to leverage ever-changing technology
- Right to Deploy Software without Restrictions. Unlimited number of client users, with high-availability and disaster recovery
- Right to Improve Technology Infrastructure. The ability to facilitate and leverage infrastructure improvements)
- Right to Quality Documentation. The availability of well-written, easy to understand documentation and duplication rights for legitimate uses
Based on these rights, the Standard HarrisData Omni-license, includes
- Ninety-nine year server-based license with the unlimited number of users
- Source code rights
- Disaster recovery rights
- Preset ownership transfer plan with cost certainty
- High availability rights (redundant central processing unit), and
- A complimentary developer copy.
In other words, for a reasonable price, a typical mid-market manufacturing customer can obtain wall-to-wall product functionality (as will be described later) without the usual limitations on hotline inquiries, upgrades, etc. for five years. This is at no additional annual service and maintenance payments, and the price includes the implementation and all other related costs.
After the five year period, the user enterprise can be on its own if preferred, or it could pay a relatively small annual subscription for typical ongoing service and maintenance (of course, this is contingent on whether the user has seriously changed the source code. Before the contract's execution, HarrisData pledges to provide a Memorandum of Understanding (MOU), to reduce business risk, increase user satisfaction, and ensure that complete control of the implementation process is securely in the user's hands. MOU identifies the user's requirements, suggests appropriate solutions, and identifies expected outcomes for the business.
Implications of This Trend
As the nature of enterprise applications evolves into services or hosted models, the market might be experiencing the beginning of the end of user-based licensing. The Internet use is the driving force behind this licensing shift, since it makes software accessible to a new realm of casual users, like trading partners or even casual visitors to a company's Web site. Another mid-market vendor, 3i Infotech (formerly ICICI Infotech) employs processor-based pricing for its ORION product (see ICICI-Infotech's North American Strategy for Success).
While traditionally reserved for hardware manufacturers, under the processor pricing algorithm, the customer and 3i Infotech jointly determine the size of the server hardware needed to satisfy the processing requirements of the business over a four to five year period. Accordingly, using a software pricing model grounded in a per-processor basis is simpler than pricing on a per-user basis, since vendors and customers do not have to constantly track how many employees, partners, and customers are using their software or whether there are concurrent users.
Because the India-based vendor is trying to gain a foothold in North America, it can get very creative concerning the pricing of its software and services. User companies that invest in 3i Infotech now during its infancy in North America, might reap the rewards for many years to come, provided there is a functional fit.
The idea hereby is not to portray HarrisData (or any other vendor for that matter) as the ideal vendor for all situations. Many users are not going to have a good functional or technological fit with the vendor because it supports only the IBM eServer iSeries platform, its presence is primarily in North America, and its software currently supports only English. Even if there is a feature/functions fit, some prospective users might not find the Omni License contract beneficial. At this stage, these users may still fancy user- and module-based pricing models where they pay only for what they use—especially if they are not sure of whether they will expand their number of users or their functional footprint. The "frequent product upgrades" clause may even deter some customers, because "frequent" may refer to product quality issues, upgrades from its incredibly prolific development team, or upgrades at customer's discretion. However it is useful to see what the Omni License covers. Here is a brief overview of HarrisData's functional footprint.
HarrisData's Functional Footprint
HarrisData is as comprehensive and functional as many of its peer products. Indeed, when it comes to HarrisData ERP enterprise resource planning (ERP) for manufacturing, distribution, and financial management, one finds most of the features necessary for a classic manufacturing resource planning (MRP II) environment and some lean manufacturing techniques. Some of these capabilities include the activity based costing (ABC) feature that is enabled through unlimited user-defined cost elements and flexible allocation calculations, paperless shop floor (which would include shop floor scheduling, dispatch, on-line job reporting, bar code control, and data collection in real-time), standard or actual costing ability, variance analysis, and so on.
The integrated HarrisData Human Resources Information Systems (HRIS) might come in handy maintaining the typical administrative functions of personnel management by having a single point of entry for the human resources (HR), payroll, and time attendance administration. The system allows users to access new Web-based technologies such as employee and manager self-service, so that the user enterprise can stay current with the latest HR trends, maintain compliance with state and federal requirements, and streamline reporting and information management.
Further, HarrisData Customer Relationship Management (CRM) features a contact management module that provides a central repository of contacts, events, and activities that allow employees to interact with customers as one company. Customer self-service provides customers access to information about their orders bought from Web browsers anywhere in the world. The e-commerce functionality lets customers purchases items from on-line catalogs, buyer's guides, or product searches. The user enterprise can invoice customers or accept credit cards. Additionally, when HarrisData CRM is integrated with the rest of HarrisData ERP, users should be able to get near real time product availability and order commitments, minimizing any unexpected "out of stock" conditions.
HarrisData Supplier Relationship Management (SRM) features analogous supplier-related contact management and supplier self-service capabilities. Suppliers can access information from a Web browser, from virtually anywhere, anytime (24x7x365). They have secure access to the user enterprise's forecasts, purchase orders, receipts, and even payments. Suppliers can management customer's parts inventory through the vendor managed inventory (VMI) functionality. From this secure environment, suppliers can validate inventory, check forecasted consumption or kanban usage, and better plan supply orders. The supplier can validate contract pricing and terms, and can even place suggested purchase orders on the customer's behalf, enabling the customer to focus on getting quality supplies at the right time and the right price, skipping time-consuming paperwork. HarrisData SRM solution is also designed to be self-branded. When a supplier visits the user enterprise's site, they are "greeted with the user company's branding (e.g., the corporate colors, artwork, style, etc.).
Thus, while broad, well rounded, and with native integration, HarrisData's functional footprint is not necessarily unique. However, HarrisData does have some functional and technical differences. For one, HarrisData Manufacturing Execution Systems (MES) delivers on the promise of continually improving and controlling shop floor functions to help businesses achieve the next level of performance improvement and execution. Fully integrated with the HarrisData ERP Manufacturing suite, the MES should insure smoother, automated information flow throughout the organization. HarrisData MES supports kanban replenishment systems designed to operate a lean manufacturing environment through just-in-time (JIT) production techniques. All this contributes to virtual real time connections that move information between the customer order and the shop floor to improve customer service. At the same time, it allows management to realize more and better control over the manufacturing process. For more related information, see Manufacturer's Nirvana—Real-Time Actionable Information.
To that end, the shop floor scheduling functionality identifies key work centers by using finite forward loading to ensure optimum production performance. The schedule simulation mode allows management to instantaneously evaluate, simulate, and analyze proposed changes to schedules then commit those changes with instant results. Management can manage schedules and redirect shop floor activities in a controlled and automated environment, by using the on-line/electronic dispatch capabilities. Prioritized tasks are dispatched to specific work centers on-line as they are approved, delivering real-time, on-line capability.
Schedule information from the plant is communicated to management in near real time through the shop floor data collection functionality. Since employees can "clock off" or "clock on" from a terminal, scanner, or an external clock, the module captures work order status and labor usage as it occurs, giving management the flexibility to adjust to unplanned shortages or surpluses. Beside individual work orders, multiple jobs (group orders) can also be accommodated, while routine transactions can be automated to reduce employee clock activity.
Further, since efficient shop floor management requires near real time knowledge of employee availability, tracking within the time and attendance capability provides a basis for unreported time accounting. The ability to know which employees are scheduled and which are available on a current moment's notice can drastically affect the efficiency of a day's schedule. Accordingly, the system enables flexible grace periods, can monitor long lunches and breaks to enforce the company policies, and document tardiness and early departures. It can track groups and individual employees, perform on-line reviews/approval process, determine automatic attendance points, feed information direct to payroll, etc.
The software is compatible with employee badges and can aid compliance with union rules. It provides detailed expense management that can be posted directly to the general ledger. Detailed information can also be captured, for example, information by job/work order, labor hours/expense, completed/scrap quantities, productive versus unproductive time, etc. Last but not least, the shop floor labor management module handles direct labor costs associated with the production of the product, which directly affect costing and ledger systems. Detailed accounting for the employee's full day, including work time, break time, and down time (or no-show) is recorded and shared with the HR system for a more accurate picture of the productivity of employees (e.g., by department, by supervisor, salaried versus hourly, etc. ), as well as the effectiveness of shop floor management.
An enriched UI is regarded by many users as a nice extra, but, in the long run it is the integration on the server side that is of paramount importance. The HarrisData's combination of UI and integrated footprint allows users to "drill down" to virtually any level of their business management processes to retrieve information that is not easily obtained in traditional competitor's systems.
Addressing Different Pricing Strategies
Possibly the best way to deal with all the different pricing strategies is to convert them into TCO calculations over a certain period of time (e.g., five years), with the hopes of understanding all that is imponderable. HarrisData helps with this regard by providing the five-year TCO upfront.
Yet, the problem with any fixed price deal that manages anything complex, such as a manufacturing enterprise operations, is that some users might end up paying the premium unnecessarily, because the vendor has to price it high enough so that it can deal with possible problems. While HarrisData contends that its costs are well within the market value, user enterprises that have few problems or are good at controlling them, may still pay too much.
The main concern of the corporate management team is whether it is possible to maintain a completely user-friendly and intuitive interface that can significantly simplify business processes through automation and drill down functionalities. Also, increased efficiencies and streamlined processes should be achieved for most businesses in a completely integrated system that is 95 percent or so out-of-the-box. To that end, HarrisData believes that mid-sized North American companies with over $20 million in annual revenues (USD, with some going to over a billion in annual revenue) using the iSeries platform, and are within some mixed-mode ("to stock" and "to order") discrete manufacturing industries, such as fabrication and assembly, furniture, automotive parts, rocks, gravel and dirt, and so on, should be served well with their value proposition.
Still, some users may need to extend the system to meet their unique needs, while they believe they can find better, more cost effective support from an alternate vendor. Others may simply need a means to help direct their software vendor with futures enhancement of the product. Thus, access to source code, published application programming interfaces (API), and the product management team (even through an active user group), should all help software customers control their own destiny.
As for those customers that opt for the source code rights and subsequent system modifications, HarrisData tries to encourage significant software alterations to be done jointly through the HarrisData Co-Development Program, which should ensure that these changes will be supported on future upgrades. If this cannot be done, the vendor tries to work with the user's development, so that changes will have the least effect on support. Admittedly, there have been some small issues with a few customers in the past, but on the whole, this has not been a major problem.
Conclusion and Recommendations
The takeaway of this article is not for users to mercilessly beat up on their vendors when it comes to license pricing contracts. After all, they should want their vendor to thrive and to keep their products abreast of the latest developments. But, by keeping these pricing alternatives in mind, existing and prospective software customers should be able to better (re)assess the likely relationship with their software vendors.
There is hardly any valid reason why everyone should not challenge software vendors to better address some of these customer "bill of rights" requirements as part of the administration and deployment of their applications. There is no "one size fits all" solution to the problem, but, as with any long-term contract, prospective clients should carefully review the fine print to understand the implications that the licensing contract will have on their future expenses.
Furthermore, since fewer than one in four enterprise applications projects deliver workable solutions that last six years or more, clients are increasingly wary of committing huge sums of money before they obtain measurable return on investment (ROI). Recently, enterprises have begun to analyze the viability of IT investments in a quantified manner, in addition to feasibility studies, which would consider only whether the implementation of a system is possible, but not whether it makes viable business sense.
ROI is not a new concept and it is quite a straightforward one—it is the ratio of the benefits of a project, initiative, or purchase versus the associated costs and investment (see Whose ROI Is It Anyway?). While doing the ROI calculations might be easy, deciding what figures to use in the calculations can be particularly daunting, given there are both tangible benefits (e.g., order fulfillment increase, lead-time decrease, labor, or overhead cost decrease) and intangible, non-quantifiable benefits (e.g., employees' satisfaction, smoother processes).
The licensing of enterprise software products is undergoing a fundamental shift from traditional up front fees to incremental "pay-as-you-grow" or success-based pricing . The latter is a popular alternative, especially for small businesses and startups that lack the IT budgets of larger, established companies, as it allows smaller companies to acquire software at a lower entry cost and pay more only as their business expands. Yet, though often touted as cheap and convenient, these models can bring unexpected IT costs down the road. For instance, pay per transactions may appear cheap at a few dollars, but detailed growth projections that factor in per-transaction increases, milestone increases, as well as other contract attributes must be fully grasped by companies if they are to understand the magnitude of future payments. Also, without a fixed upfront price, planning yearly IT budgets might become much more difficult.
This concludes Part Three of a three-part note. Part One presented a problem analysis. Part Two discussed ERP Software service and maintenance alternatives.