Ray Lane: VC Talks About What's In Store For Software CompaniesRay Lane: VC Talks About What's In Store For Software Companies

information: What would compel a software company to do business any differently? This model of collecting an up-front fee and annual maintenance charges seems to have worked pretty well for many of them. Is there any evidence that software companies would tie their fees to whether a CIO is successful?

Lane: I'm taking the customer's side of it, obviously. The issue gets very muddled because of [Salesforce.com CEO] Marc [Benioff's] promoting ability. He's basically an ASP. You have to do many other things to be a service company, and he's doing some of them now. But you can ship your software to a customer and still be a service vendor.

The outcome is specified as in, "I have 500 salespeople using Oracle CRM and getting these kinds of results. So I'm going to be paid ratably toward that target." If it's a $50 million project, $5 million is in software, there's some service revenue, and some support revenue. And as a software vendor, you'll be paid over time--not up front. And you're going to be involved.

Two things prevent that now: The legacy size of the software company--that you were so big last quarter that you have to be bigger this quarter or the analysts will kill you. And it's harder to recognize license revenue if you're consulting as part of a project. It's difficult for existing public companies to change, but I see a business model that's outgrown its usefulness. And shareholders are seeing a fraction of the incomes they deserve. These companies need to think about how to create earnings year in and year out over the course of a decade, like General Electric or General Motors.

information: This notion of "outcome-based" pricing, where fees are tied to hitting milestones or business goals, has been around in different incarnations for a while. How is what you're proposing different?

Lane: I'm kind of talking about a holistic view of being involved in a project. One of my portfolio companies, Visible Path Corp., is in the category of social networking for companies. But it's not public, like Friendster or LinkedIn. The software can help them sell more, recruit better, and gather more knowledge. How do you sell this stuff? You could say, "The software costs $1 million. Good luck with your social networking." But hardly anyone knows what social networking is--it's not like Oracle. But customers want to look at metrics--how many deals did we create, what's the average selling price of our product, and what's our win rate against the competition. The software lets anyone sit at their PC and ask, "How many people do I know at GM? And what's my strongest pathway to their CEO?"

What we're going to do is say to customers is that they can try the pilot for free, and use a detailed document that describes the metrics they're trying to change, and then grow their network. When Visible Path created this document, I really thought that was it.

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Illustration by Brian Stauffer