Business Technology: Software Vendors Gamble On Fee Hikes - InformationWeek
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10/24/2003
10:05 PM
Bob Evans
Bob Evans
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Business Technology: Software Vendors Gamble On Fee Hikes

Lee Trevino, the colorful professional golfer, once told a story about his days as an unproven player trying to cover his expenses by hustling people whose pockets were full of cash even if their brains weren't full of common sense. He said he'd approach people on a putting green and bet them $20 that he could make any 20-foot putt they'd care to pick. Gee, said the guy interviewing Trevino, that must've taken a lotta guts to bet the last $20 you had in your pocket--that's real pressure! But Trevino scoffed and said no, you've got it all wrong--that'd be a piece of cake. Pressure, corrected Trevino, is making that bet when you don't have a cent to your name.

I think some software companies are making exactly that kind of bet these days, as described in this week's excellent cover story, "Price-hike Surprise". As that story describes, some software companies, desperate to increase revenue through means other than straight product sales, are quietly but aggressively jacking up their fees for licensing, maintenance, and professional services. Their rationale--if indeed they have one--is that these are legitimate increases because, for the past few years, buyers have been brutally vigilant in forcing software vendors to cut their prices and fees. Now that the market is turning around, these software companies figure it's time to recoup some lost revenue.

Well, maybe it is. Maybe some of those companies will have a credible story to tell their customers along the lines of, "Hey, all I'm asking is that we get our pricing back to where it was three years ago--and I'll toss in some extra services to boot." Maybe some of those companies will be able to clearly articulate that over the past three years they've increased reliability and security and ease of use, but they're still charging only what they did in 2000, so this 22% increase that's being written into your contract for the next two years should really be looked at as just over 4% per year over five years, with lots of new capabilities and services as part of the package. Maybe some of those companies will be able to say, "Remember back in 2000 when we signed that share-the-risks-and-share-the-rewards deal that said I, your software vendor, will take far less than the going rates for the first three years, but if your business three years hence has achieved certain performance goals due in part to quantifiable contributions driven by our software, then we re-establish fees to above-market rates?" Or maybe some of those software companies can say, "Hey, in 2001 and 2002, when your company was staggering from the recession and couldn't meet the payment terms spelled out in our contract, my company said, 'We're with you for the long haul--we'll rewrite the contract with you at lower rates.' And now that you, our valued customer, have regained your financial health, we'd like to reset the terms of our deal back to what they were before your difficulties." Maybe.


Other Voices
Senate Appropriations Committee Chairman Ted Stevens, R-Alaska, said it was a mistake to call it a pay raise, and that lawmakers were merely receiving a cost-of-living increase being given to other federal workers and military personnel. "This increase is required by law," he said..

-- Oct. 23 AP news story on the U.S. Senate voting itself a pay raise for the fifth straight year

But I'd bet there also are some software companies out there that are trying to crank up the fees not because they've earned the right to do so but because they think they can get away with it. I guess if they pull that off, they deserve some credit. But that's a dangerous bet to make, particularly if those companies have as little leverage as did the penniless Lee Trevino back on the hustle tour. When customers call their bluff, what's the response going to be? "Oh, I was reading the wrong contract--I meant to say your fees are going DOWN another 40%, not up!"

It would be very dangerous to confuse the improving economy with a brand-new climate in which software purchases are once more huge in scope and light on scrutiny. The balance of power remains firmly in the clutches of the buyers, and a software vendor looking to raise fees 25% had surely better be ready to demonstrate a minimum of 25% more value delivered in return. Because if they're not, then they'll soon come to know firsthand what pressure is all about.

Bob Evans,
Editor in Chief
bevans@cmp.com

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