My colleague, friend and fellow cheapskate Vinnie Mirchandani recently posted a thought provoking entry over on his blog, Deal Architect, about price rollbacks we've seen across categories of late. With gas prices at less than 3 bucks a gallon, with airline and transportation carriers lowering surcharges and retailers instituting the best known "roll-backs" of all, you'd think that this type of cost cutting would make its way into the technology and outsourcing world. But guess again. Vinnie notes that "with the rupee down, Indian vendors should be rolling back prices. For years now, software vendors and outsourcers have been offshoring a bulk of their staff and not rolling back prices. Or consolidating and not rolling back their savings in SG&A. Other vendors are using open source components and automation to become leaner but not passing along savings."
This has translated to continued obscene gross margins on enterprise software maintenance and related revenues (i.e., a SaaS contract once a company has written down the customer acquisition costs). I agree with Vinnie that cost cutting would be a good gesture. But as SAP raises maintenance prices to Oracle 20%+ levels, we're seeing anything but this. What will it take to really see price roll-backs in enterprise software? As low-cost competitors introduce new products into the market, we'll eventually see the big guys come down in certain areas (at least in non-core products to a get a foot in the door). If you want to play a roll in accelerating this trend, invite companies like Ketera (for sourcing) and Coupa (for eProcurement) to the table in your selections. And then either give them a shot or use them to beat up the larger providers about why they can charge 10x, 20x or even 100x more for what amounts to essentially a similar product (or at least 60-80% of it).
So Vinnie, don't blame vendors and outsourcers for not proactively cutting costs. The blame rests with the fact that there's not enough low-cost competition in the market. Personally, I'd love to see an Indian or Chinese software company eat the lunch of a Western organization by coming out with radically low price points for something that we've paid a fortune for over the years. It's going to happen. The question is when. And when they do, will the incumbent Western (read Bay and 128 area) application providers react quickly enough? If not, I know of one gentleman who might have to trade his $25 million dollar racing yacht for a Sunfish and his Gulfstream for a Cesna. After all, the trappings of software maintenance gross margins aren't going to last forever …
- Jason Busch