The software distribution model has gone through numerous iterations over the years. First, going from a fixed price for on-premises software to, later, a fixed price subscription for a cloud service, and now, usage-based pricing.
This has turned the CIO’s role on its head, transforming how they procure technology for a company and how the CIO thinks about technology expenses and company resources over time.
But how did the model get here, and more importantly, how should the CIO’s role adjust to this new normal?
Let’s quickly take a look at each model and the changes each begat.
The evolution of the distribution model
Think back to the days of CDs and DVDs, where vendors developed software, then CIOs bought the software. This fixed-price model gave CIOs physical ownership over the product, making their teams responsible for installing the software and running it on their own servers. Once the software was sold, a vendor’s job was essentially done, only releasing patches as needed to fix any bugs that may have emerged from their software.
And for years, this model prevailed…until the cloud came along.
The cloud enabled a new model: software as a service (SaaS). Although SaaS has been around since 1999, it took on new life with the cloud. With the SaaS model, a software vendor could continuously provide its service via the cloud through a yearly or monthly fixed-price subscription, enabling customers to access applications at any time and anywhere.
Although this took ownership away from CIOs and their teams, in exchange, they didn’t have to worry about running software, having the right infrastructure or budgeting for upgrades; this fell on software vendors instead, simplifying the process. And this allowed software vendors to benefit from economies of scale due to not having to produce physical copies of software, instead focusing on innovating and updating their products through the cloud.
With subscription businesses growing more than 300% from 2012–2018, the SaaS distribution model has been the standard for over a decade. But we’ve recently entered a new era — one where how much a CIO’s team uses a software determines how much they pay for it. And more software providers are in favor of it. According to OpenView Venture Partner’s State of Usage-Based Pricing Report, 61% of providers were actively making the shift last year.
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This shift to a usage-based model has fundamentally changed how CIOs must approach their role. Here are some ways CIOs can remain agile amidst these changes:
Determine where to use software based on business needs
A usage-based model has transformed how a CIO approaches procuring new software. When the industry operated on the fixed-price model, CIOs asked questions like, “How do I get the best deal for this piece of software?” Or “How do I negotiate with procurement to get a better deal?” The usage-based model has made this process look different, since the expense of the software can now vary widely over time based on a number of factors.
It’s up to CIOs to go back to their business and understand what it’s trying to do with the software. The focus has shifted from cost being the main deciding factor of getting the software to CIOs knowing the benefits the business needs to get from this software — it must align with business needs.
This requires CIOs to evaluate the business with a fine-toothed comb to see where a need is and determine how software fits into that need. For example, if a CIO is buying CRM software, they must have conversations with the sales team to understand where the need is and how the software can address it. If the need is to generate more sales, CIOs now have a jumping off point with software providers to decide how they’ll use their software, such as paying them based on the number of new leads.
Manage executive expectations with usage-based model
Once the usage-based software is procured, a CIO’s job still isn’t finished. They must continue to show the value the software brings to the organization. This is especially important because not everyone within an organization is on board with a usage-based model, namely CEOs and finance teams.
CEOs and finance teams want predictability; they want to know what to expect — which the usage-based model doesn’t lend itself to. It’s up to the CIO to manage the CEO’s and the finance team’s expectations, helping them see the value in the software. For example, if a company uses software that depends on the number of users, it’s up to the CIO to align with the CEO to ensure that employee size won’t triple because that will impact the cost of the software. So CIOs need to ensure they’re more aligned with the rest of the company.
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Be aware of all factors that could influence usage-based distribution model
Lastly, CIOs must be aware of factors that could influence the usage-based distribution model since cost varies based on how much it’s used. Some usage-based model software providers will charge based on the number of employees, an employee’s location or how many employees are exempt versus non-exempt.
All these factors can drive up the cost of the model’s estimated contract value, which means CIOs need to be mindful of their budget and work within its parameters. CIOs must become intimately aligned with the details of the organization, such as how many people are being hired and where they are located, in order to monitor usage more closely.
The distribution model looks different today than it did 25 years ago, and it continues to evolve with the usage-based model. This means CIOs must also evolve to meet the needs of the business. Each time the distribution model changes due to technology, the CIO must be a step ahead of where the tech is going, know how that changes the distribution model and relate it back to the business.
They can do this by determining where the business needs usage-based software, managing leadership’s expectations about the software and being aware of factors that could influence the usage-based model. Because the business wants software for a reason, it’s the CIO’s job to get the most value out of that software, and by following these tips, they can.
