Software Licensing & Master Service Agreements : Chicago Software Licensing Lawyer & Attorney : Sam Conforti Law Firm : Master Service Agreements, Negotiations, Outsourcing : Cook County, Illinois

There are many items to consider before deciding to adopt a SaaS approach to your IT operation.  Marcia Gulesian, a software developer, project manager, CTO, CIO, and author of numerous feature articles on IT, has captured the salient points in her article SaaS: Financial, Legal & Negotiation Issues.  As the title to her article suggests, the financial implications should be addressed first.  Gulesian has a very descriptive section on the differences between buying the software application and leasing it.  She discusses the differences of owning an asset and its tax advantages of the deductibility of depreciation as opposed to the leasing option.  There is a brief explanation of cash flows between the two alternatives, finding your opportunity cost, and making your determination on the comparison of the present values of the cash flows from the cost of owning versus the cash flows from the cost of leasing.  Before we go too far afield, my readers can attest to the fact that I always try to define our terms before delving into the nuances that the subject line suggests.

Wikipedia’s definition of SaaS is very complete yet succinct:

“Short for Software as a Service, SaaS is a software delivery method that provides access to software and its functions remotely as a Web-based service. SaaS allows organizations to access business functionality at a cost typically less than paying for licensed applications since SaaS pricing is based on a monthly fee. Also, because the software is hosted remotely, users don't need to invest in additional hardware. SaaS removes the need for organizations to handle the installation, set-up and often daily upkeep and maintenance. Software as a Service may also be referred to as simply hosted applications.”

I also have a posting in this blog, which I must admit has become quite popular based on the number of hits registered to it, entitled SaaS is the Future.  In it I discuss how a Managed Service Provider (“MSP”) can help software developers get their product to the market faster since the infrastructure barriers and capital expenditures are significantly lessened.  In another posting about Unified Communications I have quoted Mat Taylor, a senior software architect with British Telecom, regarding the benefits of SaaS:

"The ability to get things done faster, get workers more engaged in a business scenario, provide better customer service, are all big productivity wins that benefit the bottom line"

In light of the above discussion surrounding “lower total cost of ownership and quicker time-to-value”, Gulesian cautions us that the other factors to include in the financial calculation is the maintenance and support fees that come with ownership as compared to the SaaS fees which includes these items.

SO WHAT DO I INCLUDE IN THE SAAS CONTRACT?

Gulesian points out three areas that must be addressed in the contract:

·         Integration with your non-SaaS systems

·         Loss of control of data

·         Dependence on the provider for security

The CIO and his or her team are the main players to address the integration issue.  Although the next two points also require the IT organization’s participation and input, these are matters that must be addressed upfront in the agreement itself.

Risk of loss of your data is paramount.  In the event that the SaaS provider is unable to provide the support anticipated, it is essential that you have access to the applications as well as your proprietary data.  Inability of the provider to provide support may happen for a myriad of reasons such as bankruptcy of the provider or a real or threatened patent infringement claim and subsequent injunction.  The preferred approach to protect against such loss is to insist that the provider place its code into an ESCROW account.  Language can be drafted which will instruct the trustee  of the escrow ( an independent and trusted third party) to release the code to the beneficiary (i.e. you) upon the happening of certain events which are defined in the escrow language in your SaaS agreement.  One shortcoming to this occurrence is the downtime that may be involved in getting your systems up and running, but this is a necessary protection that you must include in your contract.

Transition assistance is another item to consider.  In the future you may wish to change the SaaS application currently in use.  Language should be included to require the provider’s assistance in developing the data migration strategies and the procedures to be followed so you can move your data to another application.

Since the SaaS model is economical by nature (see Wikipedia definition above), traditional discounting expectations are not available.  Pricing is based on users or seats.  The more users subscribed, the more likely the cost per user can be discounted.  So plan accordingly and try to build in volume discounting per blocks of users.

Other items Gulesian notes for inclusion in the agreement are:

·         Service Level Agreements (SLAs) regarding

§  Availability

§  Response times

§  Notifications of outages

·         Regulatory compliance

·         Data integrity

·         Data Privacy

·         Frequency of backups

·         Disaster Recovery

Gulesian’s article hits the main points and I highly recommend it to my readers.

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It is important to note that Oracle does not have the familiar 12/31 year end, but rather a 5/31 fiscal year end.  Ahead of their conference “Oracle OpenWorld 2008” held in San Francisco this year, Oracle released a wave of glowing financial successes for its first quarter for 2009.

·         Net Income increased 28% to $1.1 Billion

·         Revenues increased 18% to $5.3 Billion

The second quarter is more in question.

·         Non-GAAP revenues could fluctuate anywhere between a 12-15% increase or drop as low as only a 9% increase due to currency fluctuations

·         Non-GAAP EPS should be around 26¢ due to earnings split between higher and lower tax jurisdictions.

The forecast for new software license revenues are also susceptible to the fluctuating currency markets with estimates at 5% - 15% without fluctuations and 2% to 12% if fluctuations are taken into account.  Kenneth Chin, and analyst for Gartner, focused on this broad range and stated:

"Foreign currency had a plus seven percent impact on earnings this quarter, and they see a minus three percent impact for the next quarter, which can be fairly significant.  There's nothing to say that, if the dollar moves more quickly and becomes stronger, that the negative impact wouldn't hit five percent or more."

Fifty percent (50%) of Oracle’s business is license revenue and maintenance fees.  The fastest growing part of their business is middleware.  Larry Ellison, Oracle CEO, is confident that they have or soon will replace IBM in this market space.  For a more complete commentary on the second quarter’s outlook and beyond see Richard Adhikari’s article Oracle Sees Tougher Days Ahead. 

With a broader portfolio of software products to bring to the market the emphasis this week at the San Francisco conference will be on the $8.5 billion purchase of BEA.  The BEA middleware products “are key to Oracle's service oriented architecture (“SOA”) strategy.”

Oracle’s next major release will be 11g, expected by the end of the 2009 fiscal year.  BEA will be an integral part of its latest Web and SOA platforms release. 

Also of note is Oracle’s Green Program and its virtualization initiative.  To read the details on the tremendous increase in savings on these two programs and the Integration of the BEA software products into Oracle’s latest offerings see Oracle's Big Show will be BEA's Coming Out Party.

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Shashikant Chaudhary is the current Vice President of GlobalLogic (formerly known as IndusLogic).  He recounts his journey from founder of Lambent Technologies, a provider of mobile solutions, through his trials and tribulations as the company grew, to the eventual sale of his company in an opinion article in SandHill.com entitled Growing a Software Company on a Shoestring.   Along the way he developed what he considers the 4 most important points that any software entrepreneur should keep in mind on his/her way to financial success.  Isn’t this everyone’s dream?  Doesn’t everyone wish they could start a software business, watch as it builds to a crescendo and then sell it on the upswing?  Bet you thought all you’d have to do is read this posting, take note of a few tips and/or tricks, and soon you would be rolling in the money faster than you could count it.  Well they are no guarantees in life.  In fact I have this Blog loaded with disclaimers, but let me add just one more: the 4 tips included in this posting do not guarantee success.  These tips are merely a recounting of how one person did in fact start a company and helped it grow and then eventually cashed out.  I do admit that his story is quite compelling and his “Tips” although not groundbreaking theory, do provide any interesting twist to some age old formulas.  When writing this posting for this Blog I wasn’t quite sure which category to place it in because it is only tangentially related to software licensing and outsourcing.  The story of the business discussed and how it grew and was eventually sold has an element of Telecom, but I decided that it is most likely best considered as “Other Interesting Items” and so that is how this posting wound up here.

I like that Chaudhary starts off in his article by identifying the stakeholders in his business as the employees, investors, and customers.  Too many times business people center their efforts on the investors (usually shareholders in a publicly traded company) and relegate the employees to a second tier.  Customers are sometimes not even considered stakeholders.  They occupy some other category maybe on a par with stakeholders, but not quite the same.

Chaudhary wastes no time and dives right in with his 4 key success factors for the software services entrepreneur.  These 4 key success factors are:

·         Talent:  Putting together the right team is essential

·         Employee Loyalty:  One must be able to keep the talent.  Chaudhary used an innovative stock plan to keep his employees loyal.

·         Find your niche:  As a small company Chaudhary took some inspiration from Al Ries and Jack Trout, authors of “Marketing Warfare”, and sought to attack his bigger competitors at their weak points, hence “win battles” but not the whole war.

·         The CEO or Owner must be the sales leader.  This is too important a role to be left to anyone else.

He tells an interesting story on how he identified potential customers.  He describes his strategy of face to face meetings and the absence of email or the phone as part of that strategy.  He did target seven cities in the US and visited them on a regular schedule.  The word “frugal” does not even begin to describe his approach.  His strategy worked and he identified people of influence and companies who had a need for his services.  His article concludes with a very brief discussion on the pitfalls that can lead to failure.  It’s not an indepth discussion on pitfalls.  Perhaps it didn’t need to be since his company was merged long before any of the pitfalls he identifies had time to get a foothold.

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Gartner reports that worldwide sales for Smartphones topped 32 million units for the second quarter of 2008.  It seems that the North American consumer shrugged off any thoughts of a downturn in the economy.  This market experienced an annual increase of over 78%.  Even with new competitors and the new touch screen technology, Nokia kept its leading worldwide market share, although its growth rate was half the market average.  Nokia will address this sluggish growth by introducing its own touch screen Smartphone later this year.

On the other hand, Research in Motion (“RIM”), the maker of the Blackberry, came in with a stalwart performance for 2008 topping 126% growth from last year.  Gartner reports:

“RIM continued to execute well at the consumer level, increasing its global market reach. In the second half of the year, the company is expected to launch smartphones based on new form factors, which are necessary to keep pace with the competition at the consumer level”

The apparent lackluster sales for the Apple iPhone was due to inventory troubles on the initial sales of the iPhone, but we should expect record sales numbers for the second half of this year.

Read the complete story as reported by Judy Mottl of InternetNews.com in her article Smartphones Show No Signs of Slowing.

Speaking of RIM and its latest clamshell BlackBerry …

Research in Motion announced its latest entrant into the consumer market with the BlackBerry Pearl Flip 8220.  This model is aimed at Apple’s iPhone consumer based market and not the conventional RIM enterprise user.  The usual full keyboard has been reduced to a 20 button keyboard which favors the web surfing of consumers over the text entry preference of the enterprise user.  Competition in this space can be fierce with such competitors as Apple’s iPhone, Nokia’s Symbian OS, and the soon to be released Google Android.

AR Communications analyst, Carmi Levy, commented on RIM’s strategy,

"RIM's ability to get all of its next-generation devices out the door and into the channel by year's end as originally planned is critical to its continued market and revenue growth,"

This latest 8220 Flip open Smartphone boosts 2 LCD screens.  When closed, the outside LCD allows the user to preview calls, emails, and text messages.  Also available on the 8220 will be AOL AIM and ICQ instant messaging services, and AOL Mail.

Read RIM's BlackBerry 'Flips' Out to Woo Consumers for a more complete story.

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Richard Adhikari reports in InternetNews.com that SAP plans to move aggressively forward with its SaaS offering, Business ByDesign, and is targeting the SMB customer in his article SAP to Innovate Heavily in SMB On-Demand Suite - updated - Business intelligence to pervade enterprise software giant's forthcoming products.  It appears from some of the comments quoted from the SAP executive suite that the word “aggressive” is only the tip of the iceberg:

Henning Kagermann, co-CEO stated:

“When you come to challenging times, you have to take risks. Business ByDesign is not just about product, we also want to focus on profitability, and in the volume business you have to do a lot of innovation to make the business profitable”

Jim Snabe, head of SAP's business solutions and technology, stated further:

“You can look at it from two angles. One is how to convert money into ideas; the other is how to convert ideas into money”

In addition to the predicted new innovation of this SaaS offering which includes CRM, SAP will integrate its Business Intelligence (“BI”) technology into the business suite as a direct result of its purchase of Business Objects last year.  This will bring the analytics portion into the new offering.  Customers will be able to analyze their historical projections as well as future projections.

So when should we expect this new business suite to be rolled out.  SAP says to look for it by next year.  Just exactly when next year isn’t quite clear.

In related SAP news:  In a move to emphasize its focus on profitability and a bid to match the pricing of Oracle, its chief competitor, SAP customers are none-too-happy with the recent price increase for its enhanced maintenance “Enterprise Support”.  For the full story see SAP CEO Defends Price Hikes as Customers Gripe - In its drive to become more profitable, has the enterprise software vendor stirred up a hornet's nest?  Kagermann defended his company’s actions by stating:

"We're offering a new service which is much larger than before, has a certain value and a certain price. The cost for us is higher, and so we believe it's a fair price."

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