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But performance-based pricing is starting to influence the way consulting firms such as IBM Global Services and Accenture resell software, and it's affecting how software companies such as Siebel commission their sales staff, analysts say. IBM in April signed a $300 million consulting deal with Philips Consumer Electronics to redesign its customer-service operations; Philips pays for the IT and services involved based on their cost savings, IBM director Mike Riegel says. And Siebel has tied sales commissions to the success of its customers' IT projects, preventing reps from overselling and holding them responsible for dealing with problems that arise during a project, Forrester Research analyst John Ragsdale says. Siebel declined to comment for this article.

Software companies, under pressure from falling prices and less differentiation between products, need to have a stake in IT projects' outcome and prove they can change a company's business processes, Lane says. "If you're a software company, you'll be paid over time--not up front. And you're going to be involved."

The traditional model for selling business software is "flawed and broken," says Jason Maynard, a software analyst at Merrill Lynch, and customers no longer want to pay tens of millions of dollars up front for software, plus annual maintenance fees during the years it takes to install. For the past year, Maynard has valued the shares of some software companies partly based on the amount of software they sell via monthly or annual subscriptions.

Performance-based pricing contracts can specify a schedule for when pieces of a big enterprise-resource-planning system need to be installed or whether a software product pays back its cost, and base payment on whether those milestones are met, says analyst McSpadden, who's seen such contracts. Customers need to be aware, though, that vendors build allowances into their prices as a hedge against not meeting those goals. "Under performance-based pricing, you're not necessarily getting the best price," he says.

Yet there may be something even more important to some customers than price: peace of mind. "We're not so naive as to believe that this isn't going to get priced into the equation," GM's Scott says. But in the current legal environment that's compelling tech companies to indemnify customers against lawsuits arising from use of their code, Scott says, "it's a small leap to say, 'Who provides contractual guarantees about how software performs?'"

Is there any reason to believe software vendors will voluntarily move toward contracts that peg their fees to customers' success? In a recent interview with information, Siebel CEO Lawrie said the company needs to break its products into smaller components so they're easier to install and give customers more hand-holding. But he stops short of saying vendors' fees will be withheld if those results aren't achieved.

Some business-technology buyers have reservations themselves. Mike Green, CIO at United Pipe & Supply, two years ago passed up a deal that would have pegged a software vendor's fee to the company's cost savings. "You don't want to get into a dispute about how much of your gain was attributable to the software," he says. On the other side of the table, Lane says, customers approached him "all the time" during his years at Oracle asking for outcome-based prices, but not one took the deal in the end. "If you [as the CIO] fail, it's a good deal. If you succeed, it's a bad idea," he says.

If software companies can come up with models that work, though, the trend could influence how commercial software is bought and sold. Markets penalize companies that produce slipshod products and half-baked ideas and reward great results. Why not build in more accountability for software?

Continue to the sidebars:
In The Fast (Growth) Lane and
Q&A With Ray Lane: VC Talks About What's In Store For Software Companies

Illustration by Brian Stauffer