Businesses are paying "tolls to nowhere" when they pay software maintenance fees and should be seeking to end them.
That's according to Salesforce CEO Marc Benioff, scarcely a disinterested observer when it comes to assessing software companies. In an internal email to his management team, Benioff described a conversation he had with an Oracle Siebel CRM (customer relationship management) user at a recent event.
"This customer currently uses Siebel software to run her call centre. She pays more than $15 million a year for the privilege of having to implement the updates that Siebel sends her," he wrote in the email. "That does not include backup. Or disaster recovery. And of course, it does not guarantee that she will be using the latest technology. The maintenance agreement only assures her that her outdated software will continue to work."
The unnamed Siebel customer, Benioff said, "is paying tolls on a road to nowhere."
Salesforce.com's on-demand CRM model can provide that customer and others "much more for a fraction of what they currently pay in maintenance," Benioff added.
While at heart, Benioff's remarks aren't radically different from Salesforce's long-time marketing mantra, "the end of software," the mail comes at a time when enterprises around the world are looking to pare back wherever possible on IT spending, with reducing maintenance costs a top priority.
Meanwhile, rival vendor Oracle and its customers are currently in the throes of end-of-fiscal year contract renewals. And SAP, which announced a richer-featured but more expensive maintenance service last year to outcry from many customers, has been working with user groups on a set of KPIs (key performance indicators) meant to document the new service's value.
In his mail, Benioff characterised traditional maintenance, paid as a percentage of total license costs, as far inferior to SaaS like Salesforce.
"Maintenance fees cover updates that are mostly patches and fixes, but they stop far short of the kind of innovation every that enterprise needs to survive," he wrote. "We sell our customers a service and every customer is able to use the latest. Innovations are included. Upgrades are automatic and invisible. ... The service gets better, not just less buggy."
Benioff's remarks may not contain many new talking points but they do signal Salesforce's intentions to attack on-premise vendors' enterprise installed bases, according to 451 Group analyst China Martens.
"How do they grow to the next billion [in revenue], that's what everyone keeps asking. I don't know if he thinks this kind of grandstanding is one way to do it," Martens said.
And Benioff's critiques should be taken in the proper context, said Forrester Research analyst Ray Wang.
First of all, Salesforce's prices take the cost of customer support into account, he said. Second, while in some cases, SaaS may be cheaper for customers than on-premise software, it may not be in all, according to Wang. "It depends on how much you use it, how many people are using it."
SaaS is "really a lifestyle decision" for companies that don't want to deal with the hassle of maintaining infrastructure, he added.
Also, while SaaS vendors have been able to deliver on the promise of easier upgrades and faster innovation, there's no guarantee that this will be the case uniformly or forever, according to Wang. "We could be in the same boat one day, where SaaS vendors' margins are squeezed, and instead of doing four releases a year, they do one."
Overall, however, companies like Salesforce ought to offer compelling savings over on-premise software because of their built-in cost advantage, said Frank Scavo, managing partner of the Irvine, California, consulting firm Strativa.
"A large part of the so-called investment that traditional on-premise software vendors, such as SAP and Oracle, make in product development does not go toward new products or new functionality," he said. "Rather, it goes into porting and regression testing every product change against myriad combinations of databases, versions, server and desktop OS releases, middleware, and third-party products."
SaaS vendors can avoid many of these costs because they only need to write to their own platforms, and "therefore, they ought to be able to deliver the same functionality for lower cost," he said.