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LawsonGuru Blog

Thought-Provoking Commentary for the Lawson Software Community

The Morphing of the Enterprise Software Vendor Revenue Model


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.

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4 responses to “The Morphing of the Enterprise Software Vendor Revenue Model

  1. tboehm30 July 11, 2009 at 1:21 pm

    It’s a shame that people have the attitude to delay their implementation. Now is the time to take on that type of project, while people aren’t too busy.

    As soon as the economy picks up, those companies will be too busy to focus on a new software system. It’s the ones who are preparing today who will win tomorrow.

  2. Phil Simon July 21, 2009 at 12:36 pm

    I understand Tim’s point of view but people are (in my recent experience) too busy to take on additional work. Layoffs have cut into the bone of many organizations–way past the fat. Both of my recent upgrades had resource issues; people are wearing quite a few hats these days.

  3. MTFF July 27, 2009 at 6:00 am

    I have read this posting a few times trying to formulate my though. I am skeptical on how the software vendors are able to reduce their operation expenses and still service their customers well. Like most corporations that’s listed on the US Stock exchanges, there is a short-term profit focus rather than long term viability.

    I have worked in the SW industry for the last 20 years, I have not seen any revolutionary improvements in the ERP market, only incremental improvement driven from the “PC” side (browser, Excel, ….etc).

    US SW vendors need to focus on the long terms, otherwise, they will all end up like the GM and Chrysler. Will Oracle be “too big to fail” and will require a Govt. bail out? or perhaps “National Security” will be used because our databases runs on Oracle databases.

    If we learn one thing from this “recession” is we need to focus on the LONG TERM. I hope Oracle’s Fusion will be a, revolutionary, market changing product like the iPod!

  4. nls4209 August 19, 2009 at 9:45 am

    All three prior responses have touched upon a familiar theme; a heightened emphasis on the short term needs of an organization. From a Wall Street point of view this is understandable.

    However, the problems in the ERP industry didn’t begin with the recession. Regardless of the economic conditions we ERP professionals have to provide products and services that are valued by the customer.

    Obviously. However, it needs to be repeated. We all intuitively know of the need for value but (insert any vendor name here) has to put the obvious words into action to ensure future viability.

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