Embracing The Software Service Economy

A quiet, complex revolution is underway in the software world. The changes and new models of development and delivery are percolating up from the consumer Internet into the corporate environment, and they’re already having profound effects on the data center and the role of the CIO. Rather than considering them a threat, CIOs need to embrace and lead the charge to the new software models. That’s the logical next step in creating IT business value, according to Timothy Chou.

Chou knows enterprise software–its past, present and, very likely, its future. As the president of Oracle’s On Demand business from its formation in 1999 until 2005, he was thinking about, and creating, new models of software delivery. Chou also sits on several corporate boards, teaches at Stanford University and speaks frequently about software trends. He most recently co-founded Openwater Networks, and his latest class at Stanford is about software as a service.

The End of Software (Sams, 2004), Chou’s first book, was considered a primer to the on-demand model of software delivery and its benefits. The just-released sequel, Seven, expands on this topic and provides a roadmap for success–and pitfalls– in the ever-changing software business.

From Chou’s perspective, every business is a software company–whether managers realize it or not. As such, CIOs are in an ideal position to lead the next-generation businesses that can result from embracing new software service models.

Once they offload the burden and costs of software development and maintenance, Chou says, businesses can focus resources on their core competency–being best at their market strengths. They don’t have to reinvent the software wheel for transaction-based systems, such as human resources and customer relationship management (CRM), or back-office functions.

CIO Insight contributor Paula Klein recently spoke with Chou. What follows is an edited, condensed transcript of their conversation.

CIO Insight: Discuss your second book relative to the first. What’s changed for CIOs?

Timothy Chou: The first book was written to convince people that this movement to software as a service and on-demand software was going to happen. Now we’re there, and a lot has changed. When The End of Software was published, Salesforce.com, RightNow Technologies and Netsuite were all privately held companies. The new book starts by talking about nine public software companies, which all issued IPOs after 2000. These nine (Concur, DealerTrack, Kenexa, Omniture, RightNow, Salesforce.com, Taleo, Vocus and Webex) have a combined market cap of over $15 billion.

Seven was written to help current and future software companies understand the fundamental business models, and it asks them to choose which one (or more than one) they will operate in. It’s critical for CIOs to understand their new options and the software industry overall.

The book outlines seven models: from current traditional licensing [model one] to Internet software businesses like Amazon and Google [model seven]. Model two is the open-source approach, three is outsourcing, four and five are hybrid on-demand pricing models, and six is software as a service. [See list on last page.]

For CIOs, it’s equally urgent to understand the financial and service implications of each model. Most CIOs realize that their budgets are dominated by spending on managing and maintaining traditional [model one] hardware and software, leaving little money for new programs and projects. While the steady revenue stream is good for the software company, it’s not necessarily in the best interests of the buyer.

On the other hand, while buyers will pay less–or nothing, in the case of open-source software–with the new models, they might not be assured of support, updates and the viability of the vendor going forward. They have to understand what’s driving the market and also what’s best for their business and customers.