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

Nobby Akiha reports in SandHill.com on Gartner’s Top Ten “HOT” technologies for 2009. Included in this top 10 list is Business Intelligence (“BI”). Akiha lists the 10 predictions for BI and how BI will surge in 2009 and they include the usual suspects, “The Recession” and “Going Green”; however, the list also gives us some insight into the other salient issues that will cause the use of BI to swell in 2009. For the complete story read Nobby Akiha’s article 10 Predictions For Business Intelligence. Here is a short-hand version of the list:

1.       More Open Source Collaboration: Blogs, online communities, and social networking will help spur the development and use of BI tools.

2.       Rich Internet Applications (“RIA”) for consumers influence the Enterprise:  Workers start to demand the same web applications used at home for the workplace.

3.       The Cycle Goes from Applications – to – Users – to - Better Applications:  It becomes a self-fulfilling prophecy.

4.       A Recession Fighter: BI provides the competitive advantage to analyze costs, margins, and channels to better gauge profitability.

5.       Green: BI assists in the allocation of resources. “Plus, ‘going green’ fits with consumer sentiment and conserving resources conserves cash.”

6.       Regulations are coming: In light of the financial melt-down on Wall Street, it is a foregone conclusion that the Feds will be writing more regulations and these regs will most assuredly require companies to retain and disclose data. BI will help with the data management.

7.       Globalization Increases Competition: BI makes it possible for business decisions to be more informed and in real time.

8.       Wider Access to the Analysis: Decision makers are enterprise wide and as BI gains wider adoption these decisions makers will have access to the informed analysis.

9.       Flexible Reporting: Siloed data isn’t much help to the enterprise at large. BI makes it possible for data to be scalable and viewable in various formats.

10.   More Open Source Deployments: These solutions will be customizable for business decisions.

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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.

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Bahan Sadegh, CEO and co-founder of NETtime Solutions and a veteran of the on-demand software industry, has written an article with the SMB Customer in mind.  Sadegh has created a list of questions for the SMB to consider before choosing its SaaS Vendor entitled 10 Questions To Ask A Potential SaaS Vendor.  His list is very informative and it would be wise to keep handy when considering which SaaS Vendor to select.  I cannot attest to the fact that this is an inclusive list, but I will tell you that his discussion of the points he has identified gives the reader enough information to perform their due diligence and ask more questions and there really are more than 10 points to know if one includes all the “sub-points” Sadegh includes.  I will try to provide a brief synopsis of his 10 Questions below:

1.     Billing should be pay-as-you-go: We all know there is a business cycle and your invoice should reflect this cycle.  Also, there should never be any maintenance fee on your invoice.

2.     Security:  Sadegh has a very good list of questions to ask in this very important area.  Instead of trying to paraphrase his words, I think it best to directly quote him on this matter:

“Ask your potential SaaS vendor:

-       Does the data center that is housing the servers have physical security 24/7?

-       Is the perimeter of the data center secured (do guards walk the perimeter at least once per 24 hours)?

-       Who has permission to the access these servers (only internal employees or do contractors also have access)?

-       Is there a log that captures who came in and when they left? If so then how often are those logs audited?

-       Does the application use industry standard 128-bit encryption?

-       If multiple customers are housed on the same server then are they logically/physically separated to ensure your data is not viewed by unauthorized eyes?

-       Has the staff of the SaaS vendor who has access to your data gone through a criminal background check? It’s important to know whether or not convicted felons have access to your sensitive personal data.

-       Does the vendor have a formal BCP (Business Continuity Plan)? Is the vendor willing to share it with you and does it satisfy your concerns?”

3.     Solution must be web based:  There should be no requirement to install an application on any computer.     Also any SaaS application should be able to run on any platform and any browser.  In the event of a computer crash, you must have access to your application.

4.     An experienced vendor:  Make sure the vendor has experience in hosting.  A vendor experienced in hosting has already addressed such issues as scalability and security and is not merely repackaging their application as SaaS. (NOTE:  See point 8 below regarding MSP’s).

5.     Upgrades should be automatic:  You want to be on the latest version and have the most current functionality.  There should be no need to retrain your users.  The upgrades should be seamless.

6.     Integration:  You should have the ability to transfer between the web based applications and any on-premise applications.

7.     Data must be backed up regularly:  Nightly onsite back-ups and weekly offsite back-ups should be the minimum.  Does the vendor test how to restore their database?

8.     Who is hosting the solution:  Is this an in-house hosting arrangement or has the SaaS vendor contracted out with a Managed Service Provider (“MSP”)?  Get a SAS 70 report and verify that in the data center every system has at least one independent backup to ensure availability in the event of system failure; this is known as N+1 configuration.

9.     Scalabilty:  Can the SaaS vendor grow as your company grows?  Ask about their largest customer and ask them about their plans for growth.

10.  Is the SaaS system monitored:  An easily overlooked question.  Do they have monitoring software and do they test their firewalls?

Sadegh concludes his checklist by suggesting that the SaaS Customer perform a bi-annual review of their service with the above checklist in mind.

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The SaaS story remains the same, but now the approach must shift.  SaaS is cheaper to implement and the enterprise can avoid the upfront capital expenditures for hardware.  Since it is a service, the pricing is based on per seat use and so there is no initial cash outlay for the software suite.  You pay for what you use.  In this current economic crisis enterprises are ripe for a way to lower costs and so the approach the SaaS vendor should take needs to adjust to the times and the SaaS vendor must highlight the advantages in their marketing approach.  Demian Entrekin, founder and Chief Technology Officer of Innotas, has written an Op Ed piece for SandHill entitled 10 Predictions for Software as a Service.  In it he cites a Gartner study that predicts the $6.4 billion in SaaS sales for 2008 will grow to over $14.8 billion by 2012.  In his article Entrekin discusses the 10 key trends that the SaaS vendor should consider in order to expand their market share by encouraging acceptance of their application.  I will provide a brief synopsis of these trends below, but I strongly suggest his article to my readers for the full story.

10 Key Trends to Growth and Acceptance:

1.     Sell the product features:  Abandon the traditional approach of selling the whole product and emphasis the individual product features that address the individual business processes desired.

2.     The application is seamless:  SaaS is not restricted to the enterprise and more directed toward user networks.  This should lead to easier adoption.

3.     Have an Elevator Speech:  Just when marketing yourself for a job, one needs to be able to sell oneself in the first few moments of the interview, Entrekin suggests the SaaS Vendor be able to demonstrate added value in the first minutes of meeting the prospect.

4.     A Deming Approach:  W. Edwards Deming would emphasis “the ability to support a reliable, scale-able service at a low cost.”

5.     Emphasis Tier 1 Support:  Stress the capability of your Tier 1 Support and suggest the enterprise eschew the need for high priced consultants to answer what become high priced questions.

6.     Product Alliances are key to growth:  Make alliances with other SaaS vendors as a means to growing market share.

7.     Video rules the day:  Use video for training and support.  It is cheaper and much more interesting than the traditional text tools.

8.     Consider a full service Hosting Provider:  This is the point of most interest to me.  Entrekin points out that the SaaS Vendor obtains the same leverage from an outsourcer that they provide to their own customers.  This has the added benefit of leading to aggregation of applications and partnerships.

9.     Grid Computing:  SaaS vendors should build their applications so they are “cloud compatible”.  It remains to be seen if grid computing becomes cost efficient, but the SaaS vendor should be ready to take advantage if such is the case.

10.  Your approach can shift from the technology hurdles to a marketing strategy: Entrekin believes the hurdles getting the application to market are slowly but surely being overcome and now is the time to shift to a viable marketing strategy.

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Due to the differences between traditional “on premise” software licensing and the newer software as a service (“SaaS”) offering, there were bound to be required adjustments on how the software customer contracted for these services.  We owe a debt of gratitude to Gene Landy with the law firm of Ruberto, Israel & Weiner, P.C. in Boston, MA.   Landy has put together a list of 8 items in his article 8 Legal Tips for SaaS Vendors that should be considered by the SaaS Vendor while developing their SaaS offering.  Including some or all of these tips in your contract may be a smart decision.  Here is a brief summary of those legal tips:

1.     Look for restrictions in your own software licenses:  As you develop your offering, do your licenses prohibit use as a service bureau or are there restrictions on remote access or use as an Application Service Provider.  You wouldn’t want your SaaS application to be in violation of any of these restrictions.

2.     Has your contract model evolved:  Initially the SaaS offering came in a 2 part form - first a software license and then a hosting agreement.  Today the more common contract model is to view this as a subscription and not mention licensing in the agreement.

3.     The Tax Man:  Your customers may be interested to know that most states do not levy a tax on services as they do for the sale of a license.

4.     Trials:  The SaaS Vendor could include a trial period bundled into the subscription agreement.

5.     Required upgrades limit the SaaS vendor’s maintenance costs:  Require customers to upgrade and eliminate having to maintain prior releases.

6.     Security:  It is fine to tout your security measures, but never promise 100% guaranteed data protection.  This is IT after all and you are using the internet.

7.     Consider SAS 70 as a selling feature:  You can provide your customers with an extra level of comfort and some of your customers may actually require a SAS 70 certification.  This is a certification performed by an outside accounting firm which attests to the accuracy and security a vendor provides.  The certification states that the controls are adequate.

8.     Data Breach Notification:  In the event of a data breach most states require a notification be sent out to the subjects of such a breach.  Make sure that your customers do not attempt to place such obligation upon you.  The costs could be prohibitive.

This is by no means an inclusive list, but Landy has hit some key issues. I found it very informative and helpful.

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Software vendors can increase their revenues during this prolonged recession.  How do these vendors make lemonade out of this lemon of a global economy?  They must look to their installed customer base.  Mike Smerklo, President & CEO of ServiceSource, has written an OpEd piece for SandHill entitled Delivering Predictable Revenue Streams.  ServiceSource is in the Service Performance Management business which aims to increase their clients’ service revenues by increasing the number of customers on maintenance and increasing the dollars spent on maintenance.

In economic downturns, such as we are now experiencing, customers defer new product purchases.  Although this is not a positive for software sales, it does increase the value that can be placed on enhanced maintenance and support services.  Software companies must continue to invest for the next generation of products, but enhanced maintenance today can drive revenue and provide the reliability that customers need.

Smerklo cites a Gartner study that the potential market for maintenance and support is over $180 billion annually and that only $150 billion is spent on maintenance every year.  It is easy to see that there is another $30 billion in potential maintenance and support not being tapped.  He increases our lexicon from the more familiar term “market share” to a new term he labels “service share”.  This is the total maintenance revenues available from the installed base.  And he lays out for us a complete 4 part service management strategy as follows:

1.     Technology Platform:  The vendor’s CRM must measure transaction data on the maintenance side down to the granular level.

2.     Business intelligence:  The analytical capabilities of the vendor must be able to show what the customers are buying and why some are saying no.

3.     Customer contact:  Must have the ability to help the customer extract the most out of their solutions.  This will enhance the relationship and could pay dividends down the road on renewals and purchases of new product.

4.     Benchmark against the competition:  Need to know your specific service metrics in comparison to the industry overall.

The Service Performance Management alternatives are as follows:

1.     Do Nothing:  All focus on product revenue and market share can come back to bite you especially on renewals.

2.     Build your own service management platform:  This could be costly.

3.     Partner with a Service Management Performance provider:  They have the expertise and the capabilities to manage on a global basis.

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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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I have reported on several new technologies as they have entered the market, such as SaaS and SOA, and also the newest devices powered by the latest applications.  Jim Hemmer, an experienced CEO in the hi-tech and communications industries, brings this altogether in his cutting-edge Op-Ed for SandHill.com entitled The Mobile Bang Theory.  I highly recommend this article to my readers and it is a must read for the IT managers trying to get a handle on the security and control issues that mobile computing presents.  Hemmer begins his article by announcing the new shift in the archetype and identifying its 3 components:

“a mobile renaissance is afoot as a result of more powerful devices, faster wireless networks and broader use and acceptance of Web services and SOA”

Hemmer’s insight begins by recognizing the catalyst for enterprise mobility.  He labels this the “outside-in demand” phenomenon.  Consumer’s personal use of mobile services on mobile devices has forced enterprises to rethink their approach.  With this new approach come the challenges of providing access to the data and applications so the employee/user can optimize their efficiency.

For the enterprise the competitive advantage comes from the ability of the mobile user being able to enter data once into a mobile device which results in not one response but puts in motion a multitude of real-time business processes.  Hemmer identifies the trends in mobile computing and how the applications perform.  He then provides some real-life examples of how this approach works and the higher returns the innovative enterprises have experienced.

Hemmer’s advice to the IT managers is to develop a mobile strategy that supports multiple devices and multiple solutions.  The old siloed approach does not fit into this model. Its inflexibility is too costly.  He puts it succinctly by stating:

“The real game-changer is to mobilize diverse business processes, applications and data from a variety of internal and external sources — from one unified, cohesive platform.”

 

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