Today’s IT executives have a full plate as they ponder crucial IT decisions on whether to buy new or upgraded software or fly into the cloud and opt for on-demand, pay-as-you-go applications and platforms.
Software firms, by the same token, also have much to consider, mainly involving how they’ll react and influence the decision-making of those IT executives and the new dynamics of virtualized infrastructure and cloud computing.
Software companies must invest heavily to develop cutting-edge algorithms and solutions that address the latest practices and customer needs. They make money from the initial sale of the software, including after-sale integration and implementation, maintenance agreements and consulting.
The customer spends a lot of money up front on the software with no real guarantee of success, or even that they really understand how to use the software properly and how it fits into the customer’s business and infrastructure. If things don’t go smoothly, the software company often recommends that additional modules are needed which the customer initially skimped on buying. They also recommend additional integration consulting or that the company “up skill” those complaining employees and get ones who can understand the algorithms and run the software.
This is not necessarily a hypothetical example or anecdotal scenario. One can see how frustration and hard feelings can result. Finger-pointing prevails.
All those modules, integration headaches, and complaining employees are the ends to the mean; what the company really wanted was, for instance, higher inventory turns, product out the door, deeper business intelligence and reduced cycle time.
There is a better way to forge a software deal. At the heart of the discussion and buying decision should be the value that companies derive from their software solutions. What exactly does a company “get” for its money?
Whether operating in the cloud or not, one thing both sides should consider is a shift in the way they deal with each other – a shift to value-based discussions.
One approach that software companies can leverage is a concept known as Vested Outsourcing, which is raising eyebrows in the outsourcing world. When Vested thinking is applied properly – either in outsourcing or in the context of software sales – it creates a solid, cooperative foundation between the parties for communicating and sharing value, which can deliver transformational results.
Vested Outsourcing is a new hybrid business model that leverages outcome-based and shared-value principles. It is best used when a company and supplier want to move beyond commodity thinking and transaction-based approaches to an environment where the provider has skin in the game and is on the hook for driving results and real value for the buying company.
The term Vested Outsourcing was coined by University of Tennessee researchers who found that some of the world’s best supplier agreements are the result of a company and its supplier creating a commercial agreement where both parties have a vested interest in each other’s success and work collaboratively to develop solutions that achieve mutually created “Desired Outcomes.”
The Vested Outsourcing approach shifts the economics of how companies pay their supplier to an outcome-based approach, moving from paying for a transaction to paying for results. After all – what the customer really wants is the results, right?
Vested solutions are designed to create incentives for service providers as the supplier achieves cost, service or performance objectives. When properly constructed, the incentive-based approach creates an environment where both parties have a vested interest in each other’s success by working together to achieve mutually desired goals.
What Vested Means for Software Firms
A Vested Outsourcing agreement – or a Vested software sales agreement – is based on specific Desired Outcomes that form the basis of the relationship. A Desired Outcome is a measurable business objective that focuses on what will be accomplished as a result of the work performed.
Desired Outcomes are generally categorized as an improvement to cost, schedule, market share, revenue, customer service levels or performance.
Those Desired Outcomes must have supporting metrics that, as much as possible, objectively indicate whether the outcomes are achieved. These metrics are not about task-oriented service-level agreements (SLAs) but rather an agreed-upon objective and a measurable deliverable for which the supplier is accountable.
A better way to forge a software deal is to keep in mind that the deal is a relationship: the software vendor provides the software, but the customer provides the business that makes the software possible. This is obvious, but it’s surprising how this mutual dependency gets lost in the shuffle of self-interested mindsets seeking the most advantageous deal possible.
From this mindset, if the software is not adequate, too hard to understand, too clunky, full of gotchas and mystery and too expensive to produce desired results, then it’s not useful and the relationship is in jeopardy from the start.
Also, as software solutions become more complex and cloud-based, buyers need solutions that are tailored to their specific needs, but software sellers want their money up front.
A Vested relationship will avoid those pitfalls and that disconnect between the sale and what the customer ultimately does with the software. If both parties collaborate and communicate openly about what is needed and achieved, finger-pointing will be avoided.
For example, selling software in a Vested manner could entail a low up-front price; and if the software produces the desired results, the customer then pays for that performance. In short, software companies would have “skin in the game” to deliver on the promise of their software. A Vested approach would assure the buyer that the software firm is problem solving rather than merely selling, or upselling additional modules in the case of poor performance.
How can software firms leverage a Vested approach? Start by reflecting on the Five Rules outlined in the book “Vested Outsourcing: Five Rules that Will Transform Outsourcing”. Having a candid discussion on each of the following Five Rules may open up a perspective never before seen.
Shaping the Software Sales Discussion through Five Rules
We recommend software companies sit down with their clients and go over the following Five Rules to begin a more strategic, value-based discussion to learn what success for the client looks like.
Rule 1: Are you focusing on outcomes and results? Or has your head been buried in the sand around the buying and selling transaction?
Rule 2: Does your agreement focus too deeply on the HOW, ignoring the WHAT? We find companies fall into the trap of tightly defined SOWs spelling out the HOW rather than focusing on the WHAT – or the objectives they are trying to accomplish
Rule 3: Do you have clearly defined and measurable results based on collaboration and understanding at the start of the relationship?
Rule 4: Does your pricing model have incentives based on performance rather than making a sale?
Rule 5: Does your agreement include a governance structure that provides insight into the nature of the relationship and its objectives and that clearly delineates the transition, management protocols and incentives to implement continuous improvement and Desired Outcomes.
The software industry should consider the innovative approach of Vested Outsourcing. Applying vested thinking in the software world can provide a clear path to collaborative success in customer relations. Moving to value and results not only works in the conventional software world but is just as pertinent as cloud-computing applications become more widespread.
Obviously a Vested, or outcome-based approach is harder than “selling” software by scrolling through a menu of software applications and bickering over the hourly rate for the integrators. It requires trust and cooperation for both parties to strike a deal based on a relationship that delivers real business value and results.
But the results are worth the effort.
Kate Vitasek is a faculty member at the University of Tennessee’s Center for Executive Education and is author of “Vested Outsourcing: Five Rules That Will Transform Outsourcing” and the upcoming “The Vested Outsourcing Manual,” which will be published in June 2011 by Palgrave Macmillan.