Confusing Expenditure and Investment

@jpmorgenthal offers A Better Metric for Analyzing the Value of the Cloud.

I agree that the concepts of ROI (return on investment) and TCO (total cost of ownership) don't really work. One reason is that they confuse expenditure with investment, and ownership with use.

Proper investment is what people like Warren Buffett do - buy a railroad in the hope that it will increase in value. Real estate investors may buy a plot of land, build something on the land, and then hope to get their money back by selling or renting the units.

Buying a car isn't an investment, even if the car salesman says it is, unless you are buying a rare antique vehicle that will appreciate in value. Buying IT is like buying a car - you want a car because it's going to be faster than walking and more convenient than taking the bus. You think about the purchase cost and the running cost, and you consider how much you can afford.

Depending on your lifestyle, you might decide that it works out cheaper to rent a car when you need one, than to own and pay parking charges for a car that sits idle most of the time. Alternatively, if you drive to work every day, it might be a lot cheaper to own your own car. In this context, the purchase of a car might count as an "investment", justified in terms of cost-saving.

Using The Cloud is like having a fantastically good public transport system, so you don't need to buy your own car. The city authority invests in public transport so you don't have to. The private citizen doesn't invest in public transport, just spends money when he uses it. Isn't this what the Cloud is like?

The End of the Maintenance Endgame

When Marc Benioff (Salesforce CEO) calls for the end of maintenance payments (ComputerWorld, PCWorld), he obviously wants to draw attention to one of the apparent advantages of the Software-as-a-Service (SaaS) model of software consumption.

As Judith Hurwitz points out, this advantage is more apparent than real. SaaS vendors like Salesforce still need to maintain their software assets, and to pass the costs of this maintenance to their customers, one way or another.

A significant fraction of software maintenance is required simply to keep up with the latest platforms and standards without delivering any new features or other innovation, and this is especially true for companies that have large portfolios of fragmented software assets.

Companies that fail to innovate may still retain a high percentage of their customers, at least in the short term, because of the high switching costs. This is not just a factor with traditional software products, but can be true of SaaS as well.

One key differentiator here is not between SaaS and more traditional software delivery and pricing, but between software companies that maintain their software assets intelligently and effectively and those that don't. Another key differentiator is between products and services with high switching costs (vendor lock-in) and those with very low switching costs (open market).

As Judith also points out, "many software companies have become increasingly dependent on maintenance revenue to keep revenue growing". In addition, there has been a trend in the software industry of companies acquiring mature software products in order to milk the maintenance revenues, with no real intention of innovation. (See my post on Innovation or Refinement.) This can be regarded as similar to securitization - treating a software product as a financial product, based on its expected income stream.

To the extent that open market SaaS exists, this represents a major challenge to this endgame, and this could possibly mean much quicker termination of declining products and services. But only a chess player would dare to predict how this will play out over time.

Poorly Paid Job?

Marco Seiriö (RuleCore) has found an advertisement for a Poorly paid Tibco CEP job. (At least Marco thinks it's poorly paid.)

I'd have thought there was an inverse relationship between the quality and ease-of-use of software and the amount you have to pay someone to get it to work properly.

• Hard-to-use software ~ large numbers of expensive consultants.
• Easy-to-use software ~ a few cheap contractors.

Okay Marco, here's a friendly question for you. How much is the going rate for a consultant to work with your software?