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Posted By:  ECT News Network on 03/23/2018 in Consulting

A Modern Approach to Software Audits

A Modern Approach to Software Audits

Markets and companies change as industries grow and as a disruptive innovation commoditizes. Generally, prices come down because the innovation becomes commonplace and competitors fight for every scrap causing margin erosion.

Eventually markets equilibrate, and a monopoly or small oligopoly sets in. Typically, as Geoffrey Moore pointed out, mature markets have three competitors: the leader that gets most of the business, a fast-following challenger, and one or more niche players.

We can see this playing out right now. Mature industries like databases have an oligopoly set up with Oracle and IBM leading. SAP, with Sybase, is one of several niche players along with MySQL and SQLServer.

This column was originally published on CRM Buyer as part of  Denis Pombriant's Insights series.

Recently new approaches to data storage have come to market, such as NoSQL databases that offer a different approach. Amazon has developed an in-house product that has been a discussion topic for people thinking of dethroning Oracle, but that's not likely. More likely is that Oracle and IBM will be the database leaders until the planet no longer needs databases. It could happen.

Software Audit Anxiety

On the way to oligopoly, we see vendors making mistakes that could cost them their leadership positions. Mature market leaders have figured out how to put customers in the forefront, and their solutions look more like a broad array of services than products. That's because they have come to understand the role of whole product, and they are willing to do whatever makes sense to keep customers happily engaged.

There's one practice, though, that flies in the face of whole product and keeping the customer satisfied. It's the software audit. Essentially, a vendor builds into its contracts the right to periodically inspect a customer's systems to understand use patterns and to ensure adherence to the terms of its licenses. Typically, a contract for so many seats, or applications, or gigabytes should not go over a preset limit. For any overage, the customer would owe a higher license fee.

All of this seems fair in the abstract, but in practice customers resent the intrusion of an audit -- especially when the audit does not turn up a flagrant violation but instead identifies the possibility of one. Vendors have been known to bill on the possibility. That can cause, shall we say, disharmony in the customer base.

In the future, the software audit likely will be seen as an artifact of the licensed software era. Subscription vendors and their customers don't have the same issues, because it's clearer when the customer needs more seats and they make a purchase.

However, the software audit is here today, and in my mind it represents a mistaken approach to revenue generation by mature market vendors. It also opens a legitimate seam for the competition to exploit.

Flexible Licensing Policies

Markets trend toward commoditization, and features and functions tend to converge on a market ideal. The cost of attrition declines over time, even in a licensed software situation. So, the risk of customer attrition over some aspect of the whole product -- that is, policies and procedures -- increases.

You can see this scenario playing out in the document management space as Nitro, a document management company with a focus on whole product, does battle with the leaders. Nitro is not a small upstart. It is well over 10 years old and has a customer base of roughly 650,000. Nitro differentiates itself on a user interface that's very Windows-like and on price.

However, it doesn't simply offer a lower cost approach to document management. Its flexible licensing policy avoids the software audit process. This seems to matter to its customers, who want to deploy technology to all members of the company freely -- without obsessively checking license allocation or fretting about fines each time a new hire comes on board. For them, the audit can be a show stopper.


Regardless of the size of the market or its installed base, a company needs to grow, preferably faster than its organic rate. When customers grow their business, they buy more licenses -- but growth is a zero-sum game in mature markets. For one company to grow, it has to take customers away from competitors; usually that means taking from the market leaders that have a majority of the customers.

So the software audit, as useful as it might be for generating incremental revenue, has a downside. It is not the face of whole product that a company in a mature market ought to present, because it can easily prompt a rush for the exits. That's why so many vendors avoid such contention and focus on product line extension and new product development. Those activities are harder to pull off than swooping in with auditors, but they are ultimately better ways to hold onto customers and grow markets.

Finally, you might say that cloud computing with its per-seat pricing can avoid all of this, but that's not the point. A vendor that can adopt audits also can find ways to throttle use and charge dearly for increasing use. The real point is developing modern approaches to customers that generate revenue on actual products and services delivered rather than gotcha gimmicks.

Denis Pombriant is an author of two books and a thought leader in CRM. He is also a leader in the emerging field of sustainability and the author of "The Age of Sustainability." His CRM writings are collected here and his sustainability writings here. Pombriant lives in the Boston area and is working on a new book. Email Denis.

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