Why recurring revenues and long-term contracts are incompatible

You know you’re selling a commodity product when the only way to inspire loyalty is via a pair of contractual handcuffs. My energy company just offered to fix my bills for the next two years if I sign up for three. Where’s the added value and innovation in a kilowatt-hour?

Despite IT moving away from hardware-based sales to more ‘as a service’ consumption models, the practice of long-term contracts for enterprise technology looks set to endure. The thinking goes that because vendors and resellers have invested in making their deals, they need to guarantee their returns, and the only way to do that is by making the client sign on the dotted line.

At face value, all this makes hard-nosed business sense. But what does the client think? Sure, we can all convince ourselves that customers also feel benefited from this long-term certainty. After all, the solution is being delivered against an agreed SLA, any necessary upgrades over time have been factored in, and they have no interest in fighting their way through another procurement process any time soon. This contract gives them valuable peace of mind.

Personally I think we should all face up to this being complete rubbish!

Customers can’t want this. As a buyer and user of IT, would your business? If the contract were 30 days instead of three years, there would still be an SLA. In fact, the SLA would be more relevant to the capabilities of the technology and the needs of the customer.

As for upgrades, these would be standard whatever the contract duration. The client expects the latest version, so the point of negotiation becomes the price paid rather than the included features or the contract term.

And let’s address this idea of re-procurement. Customers go out to tender because they have a need. If you continue to meet that need then the customer doesn’t go away – unless you are selling a commodity and offering no value.

All customers are also individual IT users in their own right, and it won’t have escaped any of them that the social subscription economy we now live in affords them maximum flexibility in their IT behaviour. They don’t have a contract with Skype, WhatsApp, Facebook or Dropbox. Whatever enterprise IT they need it’s all becoming just another application, and they don’t want a contract for that either.

Take Netflix as another user driven technology consumption example. Here there is a contract, and it’s 30 days. The SLA is clear, and all the latest features are constantly included. And still Netflix can count on recurring revenues from the same customers month after month after month.

Resellers do themselves and their customers a disservice by taking a wrong-headed approach to contracts. Contracts are the last resort for loyalty and the idea that they protect against churn is a fallacy. If you want low churn then get your product right and get away from anything longer than a rolling monthly contract.

Rami Houbby is managing director of nconnect