Tech recovery underway, new software buying models emerge

12 Mar 2010

The buying indicators used to measure the health of the technology industry have bottomed out and are started to reflect an extended period of growth, says IDC, which has also revealed pay-per-use is proving to be an emerging. software buying model.

The IDC FutureScan indicators for March rebounded nicely from February’s slight drop, extending the gains that have been made over the last year in both the Buyer Intent metric and the Market Indicators.

“Both indicators bottomed out in the spring of 2009, so the historical graphics are really starting to reflect an extended period of growth,” said John Gantz, IDC’s Chief Research Officer.

“Of course, a quick glance at the y-axis is all that’s needed to remind us that we’re still climbing out from last year’s deep spending cuts. But the trends are encouraging. This is the fifth consecutive month the Buyer Intent metric has been in positive territory (above 1000). We are officially in recovery.”

The Buyer Intent metric for March is 1026, which is up from 1003 in February and slightly ahead of the 1023 from January. Both the line of business executives and the CIOs surveyed by IDC raised their outlook for the year ahead.

Buyer Intent reflects market demand for IT products and services over the next 12 months.

The Market Indicators number for March, which combines input from economic and IT industry revenue forecasts, was 1074, ahead of the 1055 in February but slightly less than the 1083 from January.

The macroeconomic indicator jumped back ahead of the revenue indicator, buoyed by improving GDP and profit forecasts for the US.

FutureScan is a set of market metrics that measure supply and demand in the IT industry based on leading indicators and customer surveys. Values reflect expectations of future growth, with an index value of 1000 indicating zero growth and each additional 10 points representing roughly 1pc of expected growth or contraction.

Return of pay-per-use software?

IDC also pointed to the re-emergence of pay-per-use as a popular way of buying software. While customer interest in pay-per-use (PPU) pricing is not a new phenomenon, the expansion of software as a service (SaaS) offerings and the advent of cloud computing are accelerating this trend.

A recent software pricing survey by IDC shows that customers want software pricing models that allow them to pay only for what they use while maintaining an even distribution of costs over time. To achieve this, vendors and customers will have to work together to redefine the software value framework.

“IDC believes that the software industry must move from a position where value is equal to the product to a model where real value lies in the ease, intuitiveness, and seamlessness of the experience,” said Amy Konary research director, Software Pricing, Licensing, and Delivery.

“Licensing models that provide customers with access to positive experiences must also take into account the heterogeneous nature of the customer base as well as the role of the individual in value creation. For this reason, software packaging and pricing constructs must provide a level of granularity that enables the customers to participate in the value-creation process.”

To enable this type of value creation, software vendors must immerse themselves in the activities of their customers to determine what they are hoping to achieve with the software. Once the vendor understands how the customer is using its software, it will be easier to determine the metric that is most appropriate for per-use measurement.

But the move toward greater granularity and flexibility in pricing presents vendors and customers with a series of challenges, including: increased complexity in the applications; the need for tools to measure use; concerns about revenue and cost impact; and the fate of the partner ecosystem based on traditional notions of value.

“As customers continue to press for more flexible licensing approaches, IDC expects that some of the predominant practices that represent the status quo in the software industry will need to break down,” Konary continued.

“Most existing systems, on both the customer and the vendor side, simply do not meet the requirements and complexities of a pay-per-use model.”

It is not yet clear what impact usage-based pricing models will have on the economics of the software industry as a whole. In the meantime, software vendors need to focus on a series of issues to prepare the way for PPU and utility licensing options:

  • Selecting resource utilisation metrics that make sense in the context of software business value is one of the first challenges that a software vendor will face in moving to a PPU model. Vendors will need to work closely with their customers to determine what makes the most sense.
  • Vendors must also be able to provide complete and detailed billing summaries that eliminate the customer need to collect usage information. The ability to provide accurate and timely resource utilization information will be crucial to winning customer acceptance of any new pricing structure.
  • In addition to PPU pricing and tracking, the software architecture and delivery methodology must enable fast and flexible deployment of software resources to meet customers’ changing business needs.
  • Because customer preferences vary, vendors need to be prepared to offer a portfolio of licensing and delivery approaches.

By John Kennedy

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years