Is this an anomaly or an interesting market trend in the enterprise software?
In case you missed it this past week, Lawson released their latest financial results.
The bad news is the dramatic drop in license revenue. The souring of the economy is reflected by the reduction of new implementations. I know a number of organizations that are either putting off the system selection process, or have made a selection but are delaying the contract execution and their implementation, until the economy recovers. In the meantime, customers continue paying maintenance fees to their existing vendor. Which is how the model may be changing.
Software vendors generate revenue from three primary sources:
- Licenses on new product sales,
- Consulting services, which are often associated with implementations, and
- Vendor-provided support and software maintenance
The first and second categories are driven by new implementations, which are adversely affected by the economy. So it’s in the third category where the vendors are redefining their operations.
Typically, vendors charge their customers roughly about 20% of the license fee for annual maintenance, which is used to provide support and fund on-going development and enhancement to the product. So, a company that licenses their enterprise software for $500K can expect an annual bill for around $100K in order to continue receiving support and upgrades from their vendor.
It’s what the
vendors are doing (and not doing with these maintenance fees that is the story. By shaving their operating costs (e.g., moving to offshore development and support operations) as well as–in some cases–skimping on new development, vendors are able to translate these fees into handsome profits.
Consider
Oracle’s most-recent results.
New license revenue fell 13 percent, yet Oracle’s operating margin was a stunning 51 percent, largely due to growth in maintenance revenue, which rose 8 percent from the prior year. Oracle’s claim is that are able to harness the combined maintenance fees from their various “legacy” acquisitions (e.g., Peoplesoft and JD Edwards) while focusing on their future, single “Fusion” product set.
Likewise, lower operating expenses–reduced by 15 percent–enabled Lawson to report a profit of $18.9 million, despite a decline in revenue of 11 percent from the previous year.
So, while the majority of the economy struggles, software vendors (and their shareholders) are doing quite well, and will be retooled–with leaner operating models and new products–and ready for the rebound.
