The price of enterprise software is only a portion of its total cost to the end customer. In the early debates between hosted and premises, I used to argue that a chief benefit of purchasing solutions was that eventually one owns it, whereas in hosted, the monthly cost never ends. We have all run into extremely old platforms that just chug away--with zero or low recurring costs. But those days are disappearing because the premises-based solutions increasingly require ongoing maintenance charges.
In conjunction with Google, MIT research scientist Andrew McAfee conducted a study to understand the comparative costs of a business moving its computing resources to the cloud versus owning traditional on-premise systems. In this comparative cost model, McAfee found that the typical small- to medium-business (SMB) will significantly reduce its IT costs by doing away with its on-premise technology and moving to the cloud.
There are two primary incentives luring organizations to the cloud: financial drivers and general outsourcing.
Financially, the cloud looks great. Premises-based systems have multiple cost components that need to be compared against the single monthly fee that Unified Communications-as-a-Service (UCaaS) providers offer. Premise-based solutions include the following costs:
1. Upfront Licenses
2. Circuits and Usage
3. Operations Staff
4. Software Maintenance
5. Facilities--space, power, HVAC
Not only is the cloud financially simpler to comprehend, but it also often gets preferential treatment from the enterprise CFO, because hosted services get paid with expense dollars instead of capital dollars. Some arbitrary accounting practices, defined a long time ago, are a big part of that sucking sound to the cloud.
The other big draw has to do with the general trend toward outsourcing. But outsourcing comes in degrees. Managed services is a step toward outsourcing. There are various forms of managed services including on-prem or in the (private) cloud.
The point here is that the premises vs. cloud debate actually has little to do with where the software lives. Sure, the notion of reducing HVAC and other premise costs do come up, but rarely as the primary driver.
The premises vendors need to change the conversation to stay relevant, and here's how: Give the software away, and charge for mandatory maintenance.
Historically, communications software didn't have maintenance; instead it resided on proprietary hardware. New updates meant new hardware. Once the warranty ended, optional plans could be purchased (usually referred to as maintenance contracts). There was no requirement to upgrade, and many customers didn't.
We now live in a software defined world--software that increasingly runs on industry standard or virtualized hardware. In the software paradigm, maintenance is common and often mandatory. Modern software doesn't have bug fixes any more--just new releases, available to any and all customers that have maintenance.
Free enterprise communications software makes perfect sense when combined with mandatory maintenance. Maintenance reduces the risk of becoming legacy software because of continuous updates (at least in theory). By decreasing the initial barrier to adoption and implementation, the expanded penetration and subsequent increases in maintenance revenue could prove to be lucrative for the vendor. Maintenance dollars are considered expense, thus effectively neutralizing the financial attraction of hosted services for the customer.
However, it is a bitter pill to swallow, as many vendor organizations rely on current product revenues. The operative word is "many," as not all products are enjoying vibrant recurring sales revenue. New products, or products with relatively low sales, could be good candidates for free software.
This is exactly what Microsoft did with Lync. As a standalone solution, it had less market penetration. When Microsoft made it free with required maintenance, it became compelling for many organizations. Microsoft included rights to usage of Lync with its enterprise software maintenance programs. Many CIOs felt a fiduciary obligation to evaluate the licenses before spending on alternative upgrades and purchases.
Free enterprise software with mandatory maintenance aligns with several key forces the industry is experiencing. Consider:
1. Products are becoming services
2. High tech is moving from hardware to software
3. Software maintenance is now common
Hosted services aren't for everyone. For a variety of reasons, some customers will want to keep control over their implementations. These organizations are generally pushed to capital expenditures and expensive initial cash outlays. It also separates the key issues of outsourced and offsite hosting, which should be separate decisions.
Free enterprise software also changes the broader relationship and expectations by forcing the following:
1. Shorter release periods
2. Stronger focus on customer retention as sunk-cost incentive is reduced
3. Changes solution from product to recurring service
4. Blurs the boundaries between private cloud, managed services, and public cloud
5. Simplifies and encourages try before-you-buy and/or pilots
6. Significant channel changes
Something has to give. UC product revenue is decreasing. By eliminating a huge portion of the upfront cost of implementation and adoption, market expansion could be improved.
There are a lot of great companies that won't make it out of this decade, and the fallout will start in earnest by the end of next year. Re-invent, merge, or acquire--but don't stand still.
Dave Michels is Contributing Editor and Independent Analyst at TalkingPointz.
