Customers are drawn to software subscriptions because these plans limit large upfront expenditures and don't lock them into costly long-term relationships with vendors. But there is one caveat: Software purchased in any way other than as a perpetual license is viewed as a business cost, as opposed to a depreciable capital expense, and must be accounted for on profit-and-loss statements. For projects with big price tags and high consultant fees, many companies prefer the depreciation route; if taken as an expense, the software costs would weigh on earnings. For more routine software initiatives, however, company executives say that the accounting difference is negligible and more than made up for by the benefits of subscriptions.

For instance, in subscription arrangements, software vendors typically provide updates as part of the plan, so companies don't have to worry about whether or not they should purchase new versions of software to replace a large number of perpetual licenses. In addition, many CIOs feel that, because they re-evaluate their use of the software every time they renew, it is fairly easy to monitor how many software subscriptions they've purchased and whether it meets their organization's needs, which, of course, mitigates the expensive problem of orphaned perpetual licenses. Perhaps most important, and something that even vendors admit, is that subscriptions force them to pay more attention to customer needs on a daily basis—in maintaining the software and making sure it keeps up with the state of the art, for instance—because they can lose customers at any time.

The subscription approach is winning over software vendors as well, because, as opposed to the choppy sales generated by one-time licensing, it gives them steady revenue—and sometimes more of it. Subscriptions over a five-year period, for instance, are usually more expensive than perpetual programs, and, with customers at a premium, this is more and more critical.

"To sustain our business model, we have to have a constant stream of new customers and existing customers rolling out into new areas," says Kuljit Bawa, CEO of Americas for Staffware, a manufacturer of business-process-management software based in the U.K. Until recently, Staffware resisted offering a subscription-licensing program, but under a new arrangement with ADP Brokerage Services Group, Staffware's programs will be offered by the month, quarter or year. "Software companies estimate that they can forecast 52 percent of their revenue using the subscription model, compared to only 2 percent when they're solely selling perpetual licenses," says Bawa.

This article was originally published on 02-01-2004
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