• November 29, 2007
  • By Marshall Lager, founder and managing principal, Third Idea Consulting; contributor, CRM magazine

Installed Software Strikes Back

One of the central arguments for the value of software-as-a-service (SaaS) may be losing at least some of its potency. In a research note published earlier this month, research firm Gartner outlined several trends that will, among other things, reduce software license fees over the next decade. The average applications vendor will find technology buyers looking to reduce software costs in the same way they have with hardware and services costs. Software vendors must therefore establish more realistic margins to guarantee long-term survival in what will become an increasingly competitive market, according to the document. "Up until now the unique nature of the software market has meant that buyers had very little negotiating power after the initial purchase of a software license," said William Snyder, research vice president at Gartner, and report author, in a statement. "We expect those dynamics to change considerably over the next five to 10 years giving chief information officers and software procurement officers more bargaining power while potentially reducing software vendor profit margins." Several factors play into Gartner's prediction. Low-cost development sites in China and India, coupled with burgeoning software demand in those countries and equally price-sensitive Brazil, combine to make a major dent in pricing. The emergence of services-oriented architecture (SOA) as a means of extending the usefulness of existing software deployments is another. Third-party maintenance services are on the rise, allowing an open, competitive market for upgrades, services, and support, which was previously impossible when software vendors monopolized the maintenance. Furthermore, growing interest in open-source software (OSS) enables the possibility higher-quality software at lower costs. "OSS solutions will compete directly with closed-sourced products in all software markets although their influence will vary significantly one from technology market to another," Snyder said. "Although it is never going to destroy industry giants such as IBM and Microsoft, it will put pressure on traditional software margin structures as these and other large vendors endeavor to counter this competitive threat." Gartner predicts significant interest in OSS in areas such as server, operating systems, development tools, and database technologies, but much less maturity in technologies such as ERP and CRM. As if in response, business newspaper Barron's reported in its Tech Trader Daily blog that Goldman Sachs had downgraded its view of the software sector. The writer, Eric Savitz, posited that more power was likely to wind up in the hands of CIOs as they would likely hold off their purchasing decisions until later in 2008. "Software buyers need to realize that the pendulum is beginning to swing in their favor and there are an increasing number of alternatives in today's software market," Snyder said. "We would advise IT organizations to use BPO and open-source alternatives to improve their negotiating power with software suppliers as well as employing the emergence of third-party vendors as a means to reduce higher maintenance fees on older versions of software. Costing out the possibility of using offshore skills to build application functionality as Web services will also help negotiations with vendors." Related articles:
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