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12/3/2004
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Share The Load

The tried-and-true approach to software sales is changing as companies demand more accountability from vendors.

THE FUTURE OF SOFTWARE


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The Future Of Software homepage

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Ray Lane: What's In Store For Software Companies

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Industry In Flux

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Apps To Die For

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Industry Leaders Look To Software's Future

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What's The Next Killer App?

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In The Fast (Growth) Lane

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A Windows World?

Illustration by Brian StaufferSilicon Valley heavy hitter Ray Lane, the former Oracle executive turned venture capitalist, has been warning software executives lately that, in the future, they may not get paid until CIOs have proof that their products work. Tony Scott, a chief technology officer at General Motors Corp., which spends nearly $3 billion a year on IT, has informed GM's software suppliers they may have to bear more responsibility when their products don't perform as promised. And Mike Lawrie, the new CEO at Siebel Systems Inc., has spent his first few months on the job telling customers Siebel needs to do a better job helping them achieve better "business outcomes"--a stark contrast to founder Tom Siebel's take-no-prisoners style.

Sounds logical. After all, in industries from retail to manufacturing to consulting, suppliers don't get fully paid unless they deliver goods that work or services that satisfy. But the idea has been practically anathema in the software industry, where the tried-and-true approach--pound out code for two years, ship a feature-packed new release, and then watch the revenue roll in--is still a growth engine for many companies.

"I see a business model that's outgrown its usefulness," says Lane, now a general partner at the venture-capital firm Kleiner Perkins Caufield & Byers. "Your friendly SAP or Oracle salesman would show up and say, 'How much do you want to buy today?' You'd buy a discounted perpetual license, and the company says, 'Good. Let us know if it doesn't work.'"

Maybe not for much longer. Some industry leaders, disenchanted with the outsize claims and subpar results of many of the business applications they bought in the 1990s and early 2000s, see a day coming when software vendors' payments are tied to meeting project milestones, IT performance targets, or monetary business goals.

"If you make mechanical parts for GM and those parts are defective and we have to do a recall, as a supplier you're going to have to participate in the economic consequences of that activity," Scott says. "The same should be true for software." When GM puts all of its IT contracts out for bid in 2006, it plans to include stipulations that tie back-office software vendors' licensing fees to whether their systems deliver guaranteed uptime, transaction performance, and quality goals. "If you're a systems integrator putting in SAP, we've always said at GM that you have to meet certain project deadlines and deliverables," Scott says. "Historically, we haven't gone after SAP itself and said, 'You have to bear responsibility for your software as well.' The most we would do is say, 'We won't buy any more if you mess up.' But that's shifting."

And in more ways than that. As more software becomes the lifeblood of electronic systems that control cars' and trucks' engine behavior, heating and air conditioning, navigation systems, and safety features, GM is starting to write contracts with the suppliers of those systems that require them to help pay for warranted repairs when bad software is to blame. Many cars contain 10 million to 20 million lines of code, and by 2010, that number could reach 100 million. Software and electronics contribute more than a third of a vehicle's cost today, Scott says, more than labor or steel.

Scott isn't alone in moving to hold software vendors accountable. "There's a push among the end-user community, particularly CIOs at large companies, who very much would like to have performance-based pricing," says Bill McSpadden, president of Plant-Wide Research Group, a consulting company that advises IT departments and technology vendors about the manufacturing software market. "The end user has doggedly, for years, discussed this as an option," he says. "Vendors are claiming serious ROI, and customers are laying out serious money. If that ROI isn't met, the CIO is going to end up with egg on his face."

Software vendors aren't signing many performance-based contracts yet. The top applications companies--Oracle, PeopleSoft, SAP, and Siebel--have lots of incentive to maintain the status quo, in which they pocket tens of millions of dollars in up-front fees for making a sale, then collect annual maintenance fees to provide customers with tech support and bug fixes. And Microsoft has steadfastly avoided any agreements that tie payment to performance; the company says it doesn't make much sense for packaged software that isn't customized.

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