In the heyday of the hype over application service providers (ASPs), many industry watchers predicted that the way most companies acquired and paid for their software was about to change dramatically, as they turned to renting, rather than buying, their major applications. This change may still come, of course, but the message from the big application vendors is that it certainly won’t happen in the short term.
However, Tony Locke, senior analyst with Bloor Research, points out that the ASP model, which involves companies paying a monthly fee based on software rented as a service, rather than a one-off lump sum for a software license, is, in some ways, a return for the IT sector to its starting point in the mainframe era.
“There has always been a flexible element in the way software applications have been bought by companies. If you go back to the mainframe days, software companies used to have a license component, based on some combination of central processor unit size and the number of concurrent or named users.
But they also had what they called an MUF, or monthly usage fee, which could be a significant portion of the payment,” he says.
With the advent of Unix and Windows, the MUF transformed into an annual maintenance fee, usually set in the 15% to 20% mark. “What we are seeing is vendors attempting to secure a more even cash flow by shifting increasing numbers of clients to a monthly service fee,” Lock says. “The ultimate here is the fully outsourced ASP service, where the vendor provides everything, including hardware, in exchange for a single monthly or quarterly payment.
As yet though, this model is mainly targeted at small-to-medium-sized businesses.”
This focus on small companies is sensible given the complexities of installation at a large company, believes Jan Dornbach, head of ASP services for SAP.
“The service model is best suited to simple deals, where there is not a big bespoke or consultancy element,” he says.
Kevin Beard, SAP commercial director for EMEA, says SAP still sells the bulk of its financial and enterprise resource management software to large companies via the traditional “up-front payment, plus 17% annual maintenance” model. But he adds that SAP will offer considerable flexibility within this model. “We would typically allow a customer to pay for the license over a year. We would look to get some significant payment up-front and stagger the rest as a monthly payment,” he says. SAP also helps companies finance purchases, working either through IBM Global Finance or through the bank Dresdner Kleinwort Wasserstein.
Nevertheless, major vendors are still keen on the ASP model. Norman Green, finance director at Oracle reckons that software as a service will continue to be a focal point for the company. “We have been at the forefront of internet-enabling software so that it could be delivered in this way, as a managed service,” he says.
One of the major stumbling blocks with this approach is that it can be very difficult for an FD to see how much of a premium a monthly rental fee is costing his or her company, as against the traditional up-front payment. Green says that Oracle’s approach to this problem is to work with the customer to establish what the real ROI is likely to be in each instance.
Alasdair Young, FD of British American Racing, a medium-sized company with 400 employees, says that the main problem for FDs with software purchases at present is the lack of visibility of costs. The big vendors don’t keep an open price list and they like to negotiate every deal on a bespoke basis. This makes it very hard to see if one is paying over the odds, whatever payment methodology one chooses.
Young adds that he was still open to a leasing option at the start of negotiations for the acquisition of one recent major business system.
However, discussions about leasing were abandoned at an early stage when it became impossible to resolve questions over the ultimate ownership of the software.
For Young, a software-as-service deal, with a monthly payment that accounts for everything, including the hardware platform, is in theory feasible – provided he could see exactly what he was paying for. “As it stands today, the software industry is a long way from, say, the position in the leased car market, where some vendors maintain an open-book charging policy,” he says. “You can see exactly what the components of their charge are and what their profit is. You know what you are paying for. With software at present there is no such visibility. When the industry finally matures to the point where it gets this kind of clarity we’ll all be better off.”