Rent to own: Software vendors can break the licensing logjam

Tom Cook, Director, Enterprise Applications

Guest Commentary
Rent to own: Software vendors can break the licensing logjam

The days of easy money for enterprise application vendors are now history. No longer do the vendors have the luxury to cherry pick the engagements they feel are their best opportunities. As we are all too aware, the economic uncertainties that we now face has slowed capital spending on the part of most companies to a trickle, with each and every sales opportunity becoming a very emotional and competitive engagement for the vendors as well as the purchasing organization.

Software vendors are not only battling one another to be the preferred supplier to the end-users, but also face an uphill battle to have the money allocated to the project by the capital appropriations committee. In speaking with a number of vendors, they find their sales executives burning a lot of time and effort chasing down individuals that can, or are willing, to step up to the plate and go to bat on behalf of the vendor in order to consummate the deal. Money is tight and will remain so for the foreseeable future.

So, what can be done to break the logjam? Unlike other economic downturns vendors and end-users report the interest level for the purchase of applications remains keen.

THE HURWITZ TAKE: Sales pipelines are robust. Vendors are working with the end-user organizations to quantify the payback in improved business

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processes by deploying the applications, yet the software industry remains stagnant. Now is the time for vendors to get creative to obtain the funding for projects. The first wave of creative financing was the deployment of applications though the ASP model where the software was hosted by a third-party, or in some instances by the application vendor itself. We all know this model, although sound, has seen a slower than anticipated uptake by organizations, for varying reasons.

One vendor that is delivering its product via a creative financing option is Newport Beach, CA-based webplan. The supply chain vendor has been able to break through the inertia experienced by the application vendor community through a rent-to-own option for its applications. Companies are given an option to purchase the applications through a standard perpetual licensing agreement up front, or rent the software for a period of 30 months with ownership of the applications at the end of the agreement. This model has been successful for webplan in the short time it has been available to the market. Companies implement the software with a 90-day out clause with no financial penalty if not satisfied. By offering the software under this program webplan has condensed the sales cycle in many instances. The project team isn't required to wait for approval of the capital outlay for a large value contract as many companies are able to expense the software through their operating budgets. webplan has also simplified the legal documentation and minimized the involvement of the legal groups, and the delays that are imminent with that negotiating process.

Not all software vendors are able to pull off this change in their business models. Such a change in the sales and revenue model is difficult, if not impossible for public companies as they cannot replace the large revenues associated with seat sales in a timely manner with rental revenues. But for those software vendors that are nimble enough to make this switch, the rent-to-own model could very well equate increased market share in a very trying market.

Copyright 2002 Hurwitz Group Inc. This article is excerpted from TrendWatch, a weekly publication of Hurwitz Group Inc. - an analyst, research, and consulting firm. To register for a free email subscription, click here.

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