By Peter Bernstein, Senior Editor
It is a rare pleasure that I get to speak with true industry influencers regarding major industry trends. And, when it comes to enterprise software, there are few people who command more respect than R. “Ray” Wang, principal analyst and CEO of Constellation Research.
Changes are roiling markets as Independent Software Vendors (ISVs) of all sizes race to keep up with the ways in which customers receive, consume, secure, monitor and comply with mandates, regarding their software licenses. How can ISVs best monetize their intellectual property in this fast-changing world? I recently had the opportunity to speak with Wang about the future of enterprise computing and what lies ahead given the impacts of the cloud and mobility.
TMCnet: Thanks for taking the time to chat. A good place to start is with your views on how enterprise software users’ expectations have changed because of cloud computing.
Wang: The cloud is actually a great place to start. We have become truly immersed in an “always on mentality,” and thanks to the consumerization of how we all buy software/content—be it from Netflix, Amazon, and from the various antimalware vendors, just to name a few in the enterprise—the expectations are the same. IT and individual users want to buy what they need without thinking. The cloud has made that possible, practical and convenient.
We have gotten used to going to the app store for what we want. The cloud has had a profound impact in that it has shortened the thought process and revolutionized how we look at enterprise software. Now, it is simple to “try and buy.” Where it gets complicated is that we expect our enterprise software to work as advertised from day one, and that there’s no longer a need to constantly call IT for help.
This does not mean adult supervision is not required. It absolutely is. After all, security is a top concern, and IT having visibility into who has access, who is using what and if they are using it correctly is huge. There are also issues from a financial perspective that licenses can now be managed properly; i.e. customers no longer face over-paying for what they purchase, and that when used on multiple devices, they are not just in compliance but there is an audit trail. This is good for the enterprise and particularly valuable for ISVs.
TMCnet: Let’s talk about ISVs. Their worlds really are in the midst of a major transformation. What challenges in particular do established ISVs face as they try to adapt to the next-generation of enterprise software users?
Wang: It would be a mild understatement to say large ISVs are in a quandary. The big public ones are being forced to change their pricing models as more and more of their customers move to the cloud and subscription models and away from perpetual licenses. The move changes the nature of how they account for revenues and the issue they have is making sure investors don’t freak out as a result of when revenues are recognized.
The other part of this is that as a result of the cloud, customers are a lot more demanding. They expect faster updates, new features and help keeping up with regulatory and security issues. Plus, as a result, integration and analytics are becoming critical. The history of enterprise software in the past few years has been that we’ve had great reporting but not great analytics. There is a growing requirement for more contextual information since the goal is to be proactive as well as reactive.
Further complicating the landscape for everyone is that 73 percent of end users are going to be using information from outside their walls. This means that visibility must be expanded and analytics are applied for such things as customer success management, looking at post-sale activities, figuring out what new features should added based on customer behavior, etc. And, the time frames for being responsive have shrunk dramatically, as has access to alternatives.
TMCnet: What are some of the creative business models that you are seeing being implemented today that you were not seeing even one to two years ago?
Wang: There are a couple of major trends. The first is what I call the impact of “digital disruption.” There is a lot more data being generated and a lot more actionable business intelligence to be gained from the proper analysis of that data.
The second is the rapid change of business models. We are seeing the emergence of pricing by outcomes, and a push to use things like licensing to create more attractive bundles based on that contextual information I referred to previously. ISVs now have terrific insights that can be gleaned from the cloud and hence can create better KPIs and do valuable benchmarking.
The third is closely related to the above and it involves demand-based pricing. This is context and outcomes-based. It is probabilistic and not based on rules. As we all know, the definition of insanity is going the same thing over and over again and expecting different outcomes. Using data to anticipate user behavior based on outcomes rather than rules is certainly a better approach with a lot of promise. It is why enterprises are so interested in big data and sophisticated analytics.
TMCnet: How does implementation of these new business models impact business and technology choices for ISVs?
Wang: The short answer is that customers are providing a lot of input. They have a larger say in how things are priced and how the ISVs must slice and dice things to please a demanding and fickle customer base.
TMCnet: How are ISVs with only on-premises solutions meeting the emerging demand for the benefits of cloud-connected software?
Wang: This is going to sound mean, but in essence they have been faking it. The true benefits of cloud are undeniable. They include such things as timely updates, faster innovation, not having to pay for infrastructure. Plus, management of entitlements is easier and on-premise solutions do not scale. This is one of the reasons why the leading-edge vendors such as SafeNet (News - Alert) – by giving visibility into legacy premise-based solutions along with the cloud – are helping ISVs give customers what they want now, along with a smooth path to the future. Options are important since behavior and corporate imperatives do not change as quickly as technology.
TMCnet: We have spent time on the big guys, but what are the most important elements of software monetization for small start-up software vendors?
Wang: My advice to small ISVs is they should not be worrying about this. They need to embrace the cloud and new business models, not just because that is what customers are demanding, but also because of the added benefits that accrue to them in terms of knowing more about how their intellectual property is used. What they need to concentrate on is making sure monetization is natural and seamless. Automation and the cloud are their natural friends to be leveraged.
TMCnet: Back to the large ISVs for a moment, what are the most important elements of monetization for established ISVs?
Wang: Along with the challenges we discussed, the biggest one they face is in dealing with installed bases. This is mostly about marketing and education issues and not one of technology per se. They need to explain the value of the shift to different pricing models. They need to figure out how to convert legacy customers to the new way of doing things, and at the same time allow for those conversions – which can be complex – to be non-disruptive. This means a culture change for the ISVs in that they are going to have to be much more flexible, which is an internal culture change that will take time.
TMCnet: I can’t let you go without a prediction about what is in store for the software market and the software licensing environment for the rest of 2014 and beyond.
Wang: We are going to see every software company become a big data business. They have to do so or risk some severe consequences. This means monetizing on insights and outcomes. It also means they have to do a better job of keeping their brand promises. Upgrades need to be sensible and frequent. New features need to be frequent and – as with upgrades – need to be delivered on time and work flawlessly. And, watch how more and more focus is going to be on monitoring, measuring and acting on outcomes. The good news is, if you are watching closely, this is already happening and the use cases are emerging as testament to the value being created.
Learn about these core elements to a complete software monetization strategy: