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

There is an episode in Seinfeld where Jerry and Kramer are having a disagreement on an accounting issue. Kramer claims that the Post Office can just “Write Off” an insurance claim as a loss. Jerry implies that Kramer doesn’t even know what a write off is. When Kramer retorts, “Well do you?”, Jerry confidently states in a tone of honesty “No, I don’t”. That’s when Kramer comes in and seals the deal with the irrefutable line, “Well they do, and they’re the ones writing it off”.

Well, my friends, I am afraid that there is a bit of accounting “know-how” required to fully comprehend the latest opinion from Gartner analyst Robert DeSisto. As Richard Adhikari reports in his article for InternetNews.com entitled Gartner Warns on SaaS’s Hidden Costs, the Total Cost of Ownership (“TCO”) may be great for the first 2 years since SaaS does not require an initial capital outlay for hardware and the licensing model is pay-as-you-go. However the accounting for on-premises applications flips this advantage since the large capital outlay eschewed by SaaS proponents comes into play in later years. You see the larger expense for infrastructure in the non-SaaS model can be capitalized and any self-respecting accountant will tell you that means this “Capitalized Expense” can be depreciated. In essence the depreciation expense becomes a “Write-Off” against revenues. Oh dear, if I have confused you either see Kramer’s explanation above (or) the September 29, 2008 posting in this Blog, SaaS Contracting: Tips Leading to the Decision and What to Include in the Agreement.

Adhikari includes a rebuttal to DeSisto’s capital expense argument from Raju Vegesna. Vegesna comes back with the fact that SaaS pricing includes maintenance, support, and upgrades. Other SaaS proponents tout the ease of implementation and the favorable pricing model. On the flip side, DeSisto cautions that enterprises requiring tight integration with existing systems might not have the quick roll-out as promised. In addition, although the SaaS pricing model is advertised as a pay for the computing resources used, a significant number of SaaS Vendors have opted for other pricing models. In particular, DeSisto points to Salesforce.com whose pricing requires the customer to purchase subscriptions for a period of time regardless of use. 

I think the jury may still be out on this one. What isn’t discussed at length in this article, but is only hinted at, is the fact that the SaaS model should be attractive to the smaller enterprise and/or the start-up, while the larger enterprises might well be served with the traditional on-premises model.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Michael Markulec, COO of Lumeta Corporation, writes in CIO Update that the Obama Administration has appointed Melisa Hathaway as Advisor to the President on National Cyber Security. For a more comprehensive review of the appointee and her relationship to the Bush Administration see Siobhan Gorman’s article in the Wall Street Journal, Hathaway to Head Cybersecurity Post. Markulec is all for the newly created position. He points to the disconnect between the federal government and the private sector when it comes to our infrastructure and the necessary control systems in these most important industries. He states the obvious that their connection to the internet leaves us open to a cyber-attack. He also touts Hathaway’s concern that simple hand-held devices can be used to conduct foreign and industrial espionage.

I’m sorry but I just don’t see anything new or any quantum leap towards more effective cyber security from this newly created position. But one only needs to read further and the newness becomes apparent. Markulec predicts, and I agree with him, that new regulations are on the way. He compares the coming new regulations for the IT community and the CIO to the Sarbanes-Oxley legislation aimed at corporate CFO’s. Well, I guess we all know how that went. Do we really need more regulations or do we just need enforcement of the existing laws? If we are using our latest string of financial debacles as our guide, I guess arguments can be made for both sides. Some might say if the Congress didn’t block the creation of regulations for Freddie Mac and Fannie Mae we might not have had the subprime mortgage meltdown. Others might argue if the SEC had only investigated and enforced its own existing regulations the Bernie Madoff Ponzi Scheme would have been discovered much sooner with less devastating financial losses for investors.

I think the Obama Administration may have tipped their hand at what may or may not be coming down the pike as it relates to cyber security, and that I am afraid is more of the same. Gorman reports that James Jones, National Security Advisor, has requested a further study on cyber security. Hathaway is tasked with conducting this 60 day study. And so the end result will be a study that will collect and discuss issues that are apparently known. Will the ends justify the means? Will we have tougher regulations for CIO’s as Markulec predicts, and if we do, will they be enforced and make any difference? That remains to be seen.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

• There has been a plethora of news stories regarding the future of outsourcing and IT jobs. In my research I came across a Blog that is maintained by the Staff at the Ubikwiti website. The Blog entitled Stemming the Outsourcing of IT Jobs cites freelance writer Rachael King for BusinessWeek.com. King reports that speaking to Ohio workers President Barak Obama stated, “We’re not looking to create just any kind of jobs here; we’re looking to create good jobs that pay well and can’t be shipped overseas.” The Blog posting on the Ubikwiti website goes on to make some interesting claims, such as:
• 140,000 more jobs will be moved offshore by 2010 (Hackett Group December 2008 report).
• 25% of all IT jobs at the largest global corporations will be outsourced by 2010.
• The posting then touts some of the spending items in the current stimulus package:
• $20 Billion for health information technology and the building of its infrastructure.
• $6 Billion to improve broadband internet access.
• $11 Billion for modernizing the power grid.

The above statement by Barak Obama and the planned spending as stated above, with the intended purpose of creating jobs here at home that cannot be “shipped overseas”, does not comport very well with his newest appointment to his National Economic Council. David Sirota reports in his Blog Article, More to Promote Outsourcing Than Anyone Else In America, on an Op-Ed piece by Ron Hira, a professor at Rochester Institute of Technology and a progressive.  President Obama has appointed Diana Farrell of McKinsey & Co. to his inner circle of economic advisors. As Hira states, “Farrell's firm made millions of dollars consulting with companies, advising them to accelerate their offshoring.  And she publicly made the rounds to convince policymakers and the public that offshoring was good for them and the country.” She is also the co-author of a study entitled Offshoring: Is it a Win-Win Game?, which Hira claims did more to mislead the American public on the impact of offshoring than any other debate.

The inconsistency of the above has to give one pause. On one hand Obama states he does not want to ship jobs overseas and on the other hand he appoints, arguably, one of the most pro-outsourcing executives in this country to a top economic post. Now we throw into the mix an article in Financial 24 entitled Outsourcing Gets Crimped by Recession and its report of the troubles in India and the outsourcing field is wide open. Financial 24 reports on the convergence of several factors that may bust the Indian market for outsourcing. These factors converging at once are:

·         The global recession – no more needs to be said on this one

·         The Mumbai Terror Attacks of November 2008. This caused great concern regarding India’s ability to provide adequate security, especially for US Companies.

·         The financial scandal of India's fourth-largest outsourcing provider, Satyam. There are many questions whether there is enough regulatory oversight of India-based outsourcing providers.

In light of the serious situation facing the Indian outsourcing market, here is a list of the next emerging outsourcing destinations:

1. Cebu City, Philippines
2. Shanghai, China
3. Beijing, China
4. Ho Chi Minh City, Vietnam
5. Krakow, Poland
6. Kolkata, India
7. Cairo, Egypt
8. Sao Paulo, Brazil,
9. Buenos Aires, Argentina
10. Shenzen, China
11. Hanoi, Vietnam
12. Chandigarh, India
13. Curituba, Brazil
14. Prague, Czech Republic
15. Pasig City, Philippines
16. Dalian, China
17. Coimbatore, India
18. Santiago, Chile
19. Colombo, Sri Lanka
20. Johannesburg, South Africa

"20 emerging outsourcing destinations" by Sriram Vadlamani.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

The recession is upon us and from all reports it looks as though it is going to be a long one. I will leave to others to discuss and argue if the current proposed stimulus package is indeed a real stimulus package or just a spending bill that will do little to nothing in the short term. In my practice I am beginning to receive an inordinate number of requests from software licensee’s to either cancel maintenance or reduce user counts in an effort to lessen the annual expense. Chris Dowse and Ben Galison have written a very important Op-Ed piece for SandHill.com entitled Software’s Clear and Present Danger. They begin their article with a no nonsense approach to the subject of maintenance revenues:

“… the software industry’s cash cow, maintenance and support revenue provides high margins that are the funding engine for new product research and development. The maintenance revenue stream is also used as a basis for company valuations in mergers and acquisitions and financing arrangements.”

Dowse and Galison have identified three major reasons placing downward pressure on the maintenance stream:

1.       The customer’s perception of value has affected pricing, the basis for the maintenance calculation.

2.       The recession has caused customers to postpone purchases and upgrades.

3.       End User Monitoring (“EUM”) has created a new view into usage and so under-used applications are being targeted as a drain on ROI.

The approach that Dowse and Galison suggest as a remedy to the threat on the maintenance stream might seem simplistic at first blush. They suggest the Independent Software Vendor (“ISV”) become more customer-centric and strive to have a successful adoption of the software suite as opposed to the traditional implementation services. I suggest you read further and examine their three step approach and follow it in the sequence they suggest. It may be a bit of a paradigm shift for some ISVs, but at the very least it will take a lot of effort. I will try to summarize the three step approach, but please read their whole article to get the full impact. The three step approach is as follows:

1.       Create a Positive Customer Experience: This enhances customer loyalty which is the first step in protecting the maintenance stream. However, more importantly, Support and Services must concentrate on an effective adoption of the applications. A significantly improved customer interaction of the delivered applications can have a direct and positive impact on the customer’s ROI. This should also eliminate the fragmentation that occurs when their customer information gets locked in silos. An effective adoption of the software suite should enable delivery of this customer information across the enterprise. The ISV must encourage cross-functional dialog and empower their employees to identify their Customer problems.

2.       Understand Customer Usage: This has to be a proactive approach, hence my comment above that “at the very least it will take a lot of effort”. The ISV must strive to understand usage patterns and barriers to adoption. This is where the ISV should take advantage of the new EUM technology and use it to get past the reasons for downward pressure on maintenance. Once usage rates are indentified the ISV should intervene with perhaps more training or services. This activity could lead to new products and services to increase usage and eventually ROI.

3.       Deliver Business Value, Not Just Technical Service: Customers want and will pay for services that will lead to effective adoption. Traditional implementation services do not go far enough. Placing the focus on user adoption yields tremendous benefits. Dowse and Galison state it best: “Effective user adoption increases customer switching costs, enables value-based pricing that prevents price erosion, produces visible ROI for customer success stories to drive other sales, and provides a platform for upselling and cross-selling.” Another by-product of this approach is a lower amount of the lower margin traditional implementation services required.   The ISV’s service profitability should go up.

For another perspective on this topic see my November 24, 2008 post in this Blog: How to increase revenue in an Economic Downturn.

• Email This
• Print
• Comments
• Trackbacks
• Share Link