Software Thinking

Software has all the attributes of thought - odorless, tasteless, invisible. Much like thought, software is indispensable to modern business, even if it has nowhere near the value. Though thinking is a much greater corporate asset than software, it has no place on the balance sheet. Software is not so easy for accountants to ignore. So how exactly do you determine software's worth?

Assigning a dollar value to software may seem of interest only to obscure accounting standards bodies like FASB, yet it directly impacts every person in technology. The current software revenue recognition rules made Larry Ellison the richest man in California, and Bill Gates the richest man in the world. Now the foundation of all that wealth is shifting. First accounted for as a service, software became a product, and now is beginning to be valued as a utility. As the recovery takes hold, this change in accounting practice will help determine who gets hired in technology, what tasks they do, and how much compensation they receive.

Software as a Service

When computers were first introduced into business in the 1960's and 1970's, they were isolated, heavy, capital intensive machines maintained by highly specialized technicians. Software was either given away by the hardware companies to push "iron" or it was custom developed on site by the technicians tasked with maintaining the hardware. Information Technology (IT)departments were responsible for developing applications as well as maintaining systems in production. Consultants were hired as technicians and software sales did not exist. When it was considered at all, software was accounted as a service, based on the number of hours a technician spent developing code. Because they were highly skilled, technicians were typically paid at a little higher rate than most of their co-workers, but their wages were still based on some sort of scale. Yet unlike most services, the software could be copied and moved.

Software as a Product

Starting in the mid 1970's, companies began to take software developed by technicians as a service and market it as a product. Software licenses were granted in perpetuity and revenue recognized the moment a copy left the loading dock. Once the initial development costs were sunk in, software was so cheap to produce it made an enormously profitable product. Great fortunes were created, and high wages were paid by software companies going public. Software developers began to work for vendors. IT departments began to focus more on maintaining networks and less on developing software. Consultants began to travel around marketing their experience integrating packages together. Software sales representatives became technology's most highly compensated employees. Selling software as a product made software companies' revenue unpredictable and employment volatile.

Software as a Utility

Now all that is changing. The universal adoption of the Internet is causing the value of software to align with the value of the vast physical network of computers, devices, and cables that provide the physical foundation for the Net. Too expensive for any one individual, organization or government to own, like the electricity grid, the Net is maintained by the small contributions made each month by each user. This particular type of revenue can not be recognized at any one time and must be valued over the lifetime of the customer. By hosting the application themselves and charging users a monthly fee, software vendors such as Siebel (CRM On-Demand), Salesforce.com, and NetSuite have begun to price their software like a utility - an industry sector not noted for paying high wages. What employees can expect from future employers will depend on their business model.

Perpetual Model

Just as in any buy-rent decision, licensing software in perpetuity and running it in-house is often less expensive than paying someone else to run it. Because of this financial consideration, some software will always be sold as a product. With millions invested in their existing information systems, large corporations in particular will continue to value software this way. A million dollar deal will be recognized in the quarter the product ships, no matter how many years the customer gets value out of it. Employees of companies following this business model exclusively can expect high compensation but low job security.

Subscription Model

At the other extreme some companies will follow a subscription-based model exclusively. They will charge customers every month, utility style. A million dollar order under this model will have to be recognized over the term of the contract - say 5 years - making the company's revenues less profitable in the short run, but more predictable. Employees working for these vendors can expect lower compensation but higher job security.

Hybrid Model

The best of both worlds may be a hybrid model based on both subscription and perpetual licensing model. Given the mutable nature of software, the same company can sell it as service, product, or utility simultaneously. Companies like Mercury Interactive are championing this model. The hybrid model may offer employees the best chance of combining high compensation with longer term job security.

Setting a new standard for the founders of software firms, Bill Gates, founder of Microsoft, has been awarded a Knighthood by Her Majesty the Queen. The honor is in recognition of his contribution to enterprise, employment, education and philanthropic work in the United Kingdom. Bill will become an honorary Knight Commander of the Most Excellent Order of the British Empire(KBE).

"Microsoft technology has transformed business practices," said Foreign Minister Jack Straw. "I am delighted that Bill Gates has been awarded this honour."

Can a Sir Larry Ellison be very far behind?