Cloud

Software Industry Facing Growing Pains

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We’re in a period of exciting growth, according to the findings in Sand Hill Group’s Software CEO/CFO 2011 survey. The surveyed executives predict the pace of growth in 2011 will be dramatically better than that of the past year. In fact, many say they underestimated the headcount they would need to support their current rate of business expansion.

During February-March, 2011, Sand Hill Group conducted a research study to gauge software CEOs’ and CFOs’ outlooks for the coming year. The study utilized an online survey to gather executives’ impressions on the direction of the industry and their companies. A total of 119 software CEOs and CFOs responded and provided insight into the future state of the software industry; 41 percent were CEOs. In addition, Sand Hill Group conducted in-depth follow-up telephone interviews with several respondents to gain more insight.

The survey findings detailed in the report (Software CEO/CFO Outlook 2011: The Gains and Pains of Growth) paint a portrait of software industry evolution: new technologies, models and vendors are taking hold as enterprise customers increase their demands for flexibility, innovation and anytime/any place access to software solutions. Executives participating in the survey cited three primary factors driving the growth they predict for the next 12 months:

  • Proactive spending as companies move out of their recession mindset
  • Acceleration of enterprise migration to the cloud
  • Enterprise need for mobile solutions

The overall outlook among surveyed executives for the software industry’s performance in the next 12 months, as well as that of their companies, is positive. In Sand Hill’s 2010 survey, executives were optimistic and hopeful. In 2011, they definitely see much opportunity for growth, including in areas that had not been a focus for their companies prior to 2011. Businesses are out of their recession hunker-down mode and a top spending driver will be new initiatives and growth, rather than the spending driver to reduce costs over the past two years.

Business for more than half of the companies participating in the survey has already returned to pre-recession levels, and the outlook for revenue growth in the next 12 months is high – 50 percent or more in some companies.

In a Webinar last week, organized by the study’s underwriters, Intacct and Adaptive Planning, a panel of software CEOs and CFOs discussed the implications of the research findings. Echoing the survey’s bullish respondents reporting their companies are growing at rapid rates, Rob Reid, CEO of Intacct, stated:

“We did very well in 2010 because customers were looking to lower costs. We’re seeing a whole different tone today; the majority of our customers are now looking to automate their growth goals. In addition, we anticipate growing even faster in 2011 with customer acquisition.”

Rob Hull, CFO of Adaptive Planning, described his company’s outlook to Webinar participants:

“2011 is shaping up to be strong. In 2010 we saw a lot of activity around customers’ need to forecast frequently because of the economic uncertainty and their associated focus on control and expense. What we’re now seeing this year is demand shifting more into the pipeline. So it’s more of a focus on our applications for sales planning, sales forecasting and analytics.”

The talent war and how software companies plan to grow

The Sand Hill survey shows that budgeted net profit at the participating companies is significantly higher than the profit range anticipated last year. Developing new products is the number-one goal of most of the firms participating in the survey, and cloud/Saas/on-demand solutions are only part of the picture. Some believe that mobile solutions are their biggest opportunity for growth in the next 12 months. In fact, 60 percent predicted that mobile projects will drive software spending as anywhere, anytime, any-device access is critical.

Executives reported that acquiring new customers organically and entering new geographies will also propel their growth.

The survey revealed that headcount will also increase at many firms this year in order to support the growth.

A significant finding in the survey is the current war on talent, especially with companies such as Facebook, Twitter, and Google vying for engineers and developers. The Webinar presented insights in how companies are effectively attracting top talent in this highly competitive environment. Brian Gentile at Jaspersoft commented that it takes more a competitive compensation and benefits package.

“We need to provide a compelling opportunity and place to work. Ultimately people want to get hold of something that’s bigger than them, that’s powerful and important and in some way changes the world.”

Rob Reid at Intaact agrees that the workplace environment is key.

“We look at creating wins not only for our customers but also for our employees. Candidates coming through our interview process comment that they see our team pull together and really work together and have respect for each other.”

Black Duck Software has already grown its headcount by 20 percent in Q1. Ken Goldman shared with Webinar attendees that the job has to be interesting.

“It’s not unusual for developers coming to interview with us and having two or three job offers already in hand. So they’re not comparing compensation and benefits. They’re comparing: will I be developing using Agile methods; will I be part of a team that’s working on a particular project where I can measure success; will I have some degree of independence in my approach to how I work so that I’m not one of 26,000 developers working in a large organization. We’ve found that we can be very successful in competing against the Googles and Facebooks by giving people interesting opportunities so they’re excited about their work.”

Changing business models and pricing models compels growth

The objectives executives ranked “maintaining company growth” as a top objective – and an issue that keeps them awake at night. They reported that a significant aspect of growth is the need to flexibly adapt to users’ needs. The survey revealed that a major component of that objective over the past few months and coming 12 months is changing business models and pricing models. Executives reported an increasing use of multi-tenant models, an increase in subscription-based pricing, and an increasing interest in value-based pricing models. Several stated that the newer models are significant enablers of entering new markets and new geographies.

In the Webinar, Brian Gentile, CFO of Jaspersoft, shared that his company now has 100 – 150 customers embedding the company’s reporting and analytics tool as a BI layer inside their SaaS and/or cloud offerings.

“We’ve seen enormous growth in this section of our customer base. I think that this is testimony that the cloud is becoming mature; it’s seen as a very capable, low-cost, scalable mechanism for delivery. Certainly customers are betting with their wallets and using the cloud’s low-cost infrastructure to expand their operations much more quickly. We expect more of this to occur as we go through this year.”

Kenneth Goldman, CFO of Black Duck Software, reported similar results in the Webinar, regarding his company’s customers among the Global 2000.

“Despite the fact that these are companies that, in some cases, have 10,000, 20,000, or 30,000 software developers who are using our solutions, and despite the fact that these companies have very large IT infrastructures, they’re asked to deliver it either via a hosted solution or via the cloud. Most of these companies are saying, ‘We don’t want to buy one more server’ or ‘We don’t want to be responsible for one more service contract from a server provider’ either for their own offerings or in terms of what they’re using. It’s cloud at this point, or it’s SaaS.”

Software firms realizing huge returns by transitioning from enterprise to cloud/SaaS models

Indeed, the survey revealed that software firms are achieving significant return on their investment for moving from the enterprise model to the cloud model. Several executive reported that the cloud, SaaS/on-demand models are a significant enabler for entering new vertical markets and new geographies.

The survey revealed that software vendors have increased their use of cloud deployment options and decreased their use of on-premise options. In addition, a clear majority of the surveyed executives stated that SaaS hosted in a public cloud via a subscription license is the type of offering that will be most desirable for new customers during the next 12 months.

Revenue recognition is challenging

The majority of survey respondents ranked revenue as the key metric they use in tracking their business. Profitability and time to implement customers are other important metrics. Revenue recognition is a financial tracking process that carries significant risk.

The survey found that revenue recognition is increasingly important – yet increasingly complex – in acquisitions, in international firms, and in the new subscription-based pricing models.

The survey also showed that committed monthly recurring revenue (CMRR) and monthly recurring revenue (MRR) are financial tracking key performance indicators (KPIs). These metrics came up from almost nowhere in the past to being top KPIs today because of the industry transitioning to the SaaS and cloud models.

In ranking methods for how to improve their ability to financially track their business, cloud computing solutions were at the top. Even so, within their internal operations, few of the surveyed executives stated their companies have moved internal processes to the cloud, but several have cloud initiatives planned for the end of the year.

The Webinar discussion around financial tracking methods focused heavily on cash flow as a metric and how much cash companies are willing to go through to fund their growth initiatives. Ken Goldman at Black Duck Software observed:

“One of the problems with the SaaS subscription model is that you can get upside-down on cash. It’s a difficult model to begin with from the standpoint that, unlike traditional on-premise solutions where you’re getting a larger chunk of cash up front, you’re getting a smaller amount on a recurring basis over a longer period of time. You can find the cost of building your organization – from a sales, marketing, and customer-acquisition cost perspective, not to mention that you’re going to continue to invest in innovation – is a big problem.”

The Webinar panel executives agreed that there is a constant struggle and fine line in the SaaS model between growth (and the cash-burn model) and remaining cash-flow positive. This makes the customer-acquisition cost and how quickly a software company covers that cost with revenue coming in another important metric in planning how quickly a company can grow.

Click here to find out about accessing the “Software CEO Outlook 2011: The Gains and Pains of Growth” with additional findings from the survey. Click here to hear a replay of the Webinar sponsored by Intacct and Adaptive Planning discussing some of the study’s findings.

M.R. Rangaswami is founder and CEO of Sand Hill Group and publisher of SandHill.com.

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